Date post: | 14-Apr-2018 |
Category: |
Documents |
Upload: | subashini-paniselvam |
View: | 230 times |
Download: | 0 times |
of 47
7/30/2019 DDT - Chapter 1
1/47
LECTURE 1
INTRODUCTION TO DOUBLE ENTRY
7/30/2019 DDT - Chapter 1
2/47
Explain what is accounting about Briefly describe the history of accounting
Explain the relationship between bookeepingand accounting
List the users of accounting information Present and explain the accounting equation Explain the terms asset,liability and equity Describe how accounting transactions affect
the items in the accounting equation
7/30/2019 DDT - Chapter 1
3/47
Luca Pacioli, who in 1494 first described thesystem of double-entry bookkeeping .
Pacioli who was the first to describe the systemof debits and credits injournals and ledgers that
is still the basis of today's accounting systems.
http://www.investopedia.com/terms/d/debit.asphttp://www.investopedia.com/terms/c/credit.asphttp://www.investopedia.com/terms/j/journal.asphttp://www.investopedia.com/terms/g/generalledger.asphttp://www.investopedia.com/terms/g/generalledger.asphttp://www.investopedia.com/terms/j/journal.asphttp://www.investopedia.com/terms/c/credit.asphttp://www.investopedia.com/terms/d/debit.asp7/30/2019 DDT - Chapter 1
4/47
Accounting - a process of identifying, recording,summarizing, and reporting economicinformation to decision makers in the form of
financial statements Financial accounting - focuses on the specific
needs of decision makers external to theorganization, such as stockholders, suppliers,banks, and government agencies
7/30/2019 DDT - Chapter 1
5/47
7/30/2019 DDT - Chapter 1
6/47
The art of recording business transactions inbooks in a regular and systematic manner.
7/30/2019 DDT - Chapter 1
7/47
The accounting system is a series of stepsperformed to analyze, record, quantify,accumulate, summarize, classify, report, andinterpret economic events and their effects onan organization and to prepare the financialstatements.
7/30/2019 DDT - Chapter 1
8/47
Internal users
External users
Ethics in financial
reporting
Forms of Business
Organization
Users and Uses of
Financial
Information
Business ActivitiesCommunicating
with Users
Sole
proprietorship
Partnership
Corporation
Financing
Investing
Operating
Income statement
Retained earnings
statement
Balance sheet
Statement of cash
flows
Interrelationshipsof statements
Other elements of
an annual report
Introduction to Financial Statements
7/30/2019 DDT - Chapter 1
9/47
PartnershipBusiness organization owned by
two or more people. Each partneris personally liable for all debts of
the business.
Corporation
A separate entity from both a legal
and accounting perspective.Owners of corporations
(stockholders) are not personallyresponsible for debts of the
corporation.
SoleProprietorship
Business organization owned by oneperson. The owner is personally liable
for all debts of the business.
1-
7/30/2019 DDT - Chapter 1
10/47
Management
Human
ResourcesTaxing
Authorities
Labor Unions
Regulatory
Agencies
Marketing
Finance
Investors
Creditors
Customers
Internal
Users
External
Users
Who Uses Accounting Data
Users and Uses of Financial Information
7/30/2019 DDT - Chapter 1
11/47
All businesses are involved in three types of activity
financing,
investing,
and operating.
The accounting information system keeps track of the
results of each of these business activities.
7/30/2019 DDT - Chapter 1
12/47
Two primary sources of outside funds are:
1. Borrowing money
Amounts owed are called liabilities.
Party to whom amounts are owed are creditors.
Notes payable and bonds payable are different type
of liabilities.
2. Issuing shares of stock for cash.
Payments to stockholders are called dividends.
Financing Activities
7/30/2019 DDT - Chapter 1
13/47
Investing Activities
Purchase of resources a company needs to
operate.
Computers, delivery trucks, furniture, buildings, etc.
Resources owned by a business are called assets.
7/30/2019 DDT - Chapter 1
14/47
Operating Activities
Once a business has the assets it needs, it
can begin its operations.
Revenues - Amounts earned from the sale of products
(sales revenue, service revenue, and interest revenue).
Inventory - Goods available for sale to customers.
Accounts receivable - Right to receive money from acustomer,in the future, as the result of a sale.
7/30/2019 DDT - Chapter 1
15/47
Operating Activities
Expenses - cost of assets consumed or services used.
(cost of goods sold, selling, marketing, administrative,
interest, and income taxes expense).
Liabilities arising from expenses include accounts
payable, interest payable, wages payable, sales taxes
payable, and income taxes payable.
Net income when revenues exceed expenses.
Net loss when expenses exceed revenues.
7/30/2019 DDT - Chapter 1
16/47
IncomeStatement
Statement of
RetainedEarnings
Balance
Sheet
Statement of
Cash Flows
Financial statements
are typically preparedin this order.
1-16
7/30/2019 DDT - Chapter 1
17/47
The accounting profession has developed acommon set of standards and procedures
known as Generally Accepted AccountingPrinciples (GAAP). These principles serve as ageneral guide to the accounting practitionerin accumulating and reporting the financialinformation of a business enterprise.
7/30/2019 DDT - Chapter 1
18/47
Assets = Liabilities + Owners Equity
7/30/2019 DDT - Chapter 1
19/47
Resources controlled by thecompany that have measurable
value and are expected to
provide future benefits to the
company.
Cash
Supplies Furniture
Equipment
1-1
7/30/2019 DDT - Chapter 1
20/47
Amounts owed by thebusiness to creditors.
NotesPayable
AccountsPayable
1-20
7/30/2019 DDT - Chapter 1
21/47
Owners claim to the
business resources.
Stock Certificate
ContributedCapital
RetainedEarnings
1-21
7/30/2019 DDT - Chapter 1
22/47
On December 31, the ChristopherCorporation's assets were $150,000 and itsliabilities were $80,000. Determine the dollar
amount of the Christopher Corporation'sDecember 31, stockholders' equity.
7/30/2019 DDT - Chapter 1
23/47
Assets = Liabilities + Stockholders' Equity
$150,000 = $80,000 + stockholders' equity
Stockholders' equity = $70,000
7/30/2019 DDT - Chapter 1
24/47
Revenues
Sales of goods or services
to customers. They are
measured at the
amount the business
charges the customer.
Expenses
The costs of business
necessary to earn
revenues, including
wages to employees,
advertising, insurance,and utilities.
Revenues Expenses = Net Income
1-2
7/30/2019 DDT - Chapter 1
25/47
Distributions of a companysearnings to its stockholders
as a return on their
investment.
Dividends are not an expense.1-2
7/30/2019 DDT - Chapter 1
26/47
Revenues
Pizza Revenue 11,000$
Total Revenue 11,000
ExpensesSupplies Expense 4,000
Wages Expense 2,000
Rent Expense 1,500
Utilities Expense 600
Insurance Expense 300Advertising Expense 100
Income Tax Expense 500
Total Expenses 9,000
Net Income 2,000$
For the Month Ended September 30, 2010Income Statement
PIZZA AROMA, INC.
Reports theamount ofrevenues
lessexpenses for
a period of
time.
The unit ofmeasure
assumptionstates that
results ofbusinessactivities
should be
reported in anappropriate
monetary unit.
1-26
7/30/2019 DDT - Chapter 1
27/47
Retained Earnings, Sept. 1, 2010 -$
Add: Net Income 2,000
Subtract: Dividends (1,000)
Retained Earnings, Sept. 30, 2010 1,000$
For the Month Ended September 30, 2010
PIZZA AROMA, INC.Statement of Retained Earnings
Reports the way that net income and the
distribution of dividends affected the financialposition of the company during the period.
1-2
7/30/2019 DDT - Chapter 1
28/47
Reports at a point in time:
1. What a business owns(assets).
2. What it owes to creditors
(liabilities).
3. What is left over for theowners of the companys
stock (stockholders
equity).
Assets
Cash 14,000$
Accounts Receivable 1,000
Supplies 3,000
Equipment 40,000
Total Assets 58,000$
Liabilities
Accounts Payable 7,000$
Notes Payable 20,000
Total Liabilities 27,000
Stockholders' Equity
Contributed Capital 30,000
Retained Earnings 1,000Total Stockholders' Equity 31,000
Total Liabilities and Stockholders' Equity 58,000$
PIZZA AROMA, INC.
Balance Sheet
At September 30, 2010
BASIC ACCOUNTING EQUATION
Assets = Liabilities + Stockholders Equity
1-28
7/30/2019 DDT - Chapter 1
29/47
Cash Flows from Operating Activities
Cash collected from customers 10,000$
Cash paid to suppliers and employees (5,000)
Cash Provided by Operating Activities 5,000Cash Flows from Investing Activities
Cash paid to buy equipment (40,000)
Cash Used in Investing Activities (40,000)
Cash Flows from Financing Activities
Capital contributed by stockholders 30,000
Cash dividends paid to stockholders (1,000)
Cash borrowed from the bank 20,000
Cash Provided by Financing Activities 49,000
Change in Cash 14,000
Beginning Cash Balance, Sept. 1, 2010 -
Ending Cash Balance, Sept. 30, 2010 14,000$
PIZZA AROMA, INC.Statement of Cash Flows
For the Month Ended September 30, 2010
Summarizes howa businesss
operating,
investing, and
financingactivities caused
its cash balance
to change over a
particular periodof time.
1-2
7/30/2019 DDT - Chapter 1
30/47
Notes help financial statement users
understand how the amounts werederived and what other information mayaffect their decisions.
1- 0
7/30/2019 DDT - Chapter 1
31/47
Net incomeflows from the
IncomeStatement to
the Statementof Retained
Earnings.Retained Earnings, Sept. 1, 2010 -$
Add: Net Income 2,000
Subtract: Dividends (1,000)
Retained Earnings, Sept. 30, 2010 1,000$
For the Month Ended September 30, 2010
PIZZA AROMA, INC.Statement of Retained Earnings
1
RevenuesPizza Revenue 11,000$
Total Revenue 11,000
Expenses
Supplies Expense 4,000
Wages Expense 2,000
Rent Expense 1,500
Utilities Expense 600Insurance Expense 300
Advertising Expense 100
Income Tax Expense 500
Total Expenses 9,000
Net Income 2,000$
For the Month Ended September 30, 2010
Income Statement
PIZZA AROMA, INC.
1- 1
7/30/2019 DDT - Chapter 1
32/47
Retained Earnings, Sept. 1, 2010 -$
Add: Net Income 2,000
Subtract: Dividends (1,000)
Retained Earnings, Sept. 30, 2010 1,000$
For the Month Ended September 30, 2010
PIZZA AROMA, INC.Statement of Retained Earnings
Ending RetainedEarnings flows from the
Statement of RetainedEarnings to the BalanceSheet.
Assets
Cash 14,000$
Accounts Receivable 1,000
Supplies 3,000
Equipment 40,000
Total Assets 58,000$
LiabilitiesAccounts Payable 7,000$
Notes Payable 20,000
Total Liabilities 27,000
Stockholders' Equity
Contributed Capital 30,000
Retained Earnings 1,000
Total Stockholders' Equity 31,000
Total Liabilities and Stockholders' Equity 58,000$
PIZZA AROMA, INC.
Balance Sheet
At September 30, 2010
2
1- 2
7/30/2019 DDT - Chapter 1
33/47
Cash on the Balance Sheet and Cash at End of
Year on the Statement of Cash Flows agree.
Assets
Cash 14,000$
Accounts Receivable 1,000
Supplies 3,000
Equipment 40,000
Total Assets 58,000$
LiabilitiesAccounts Payable 7,000$
Notes Payable 20,000
Total Liabilities 27,000
Stockholders' Equity
Contributed Capital 30,000
Retained Earnings 1,000
Total Stockholders' Equity 31,000
Total Liabilities and Stockholders' Equity 58,000$
PIZZA AROMA, INC.
Balance Sheet
At September 30, 2010
Cash Flows from Operating ActivitiesCash collected from customers 10,000$
Cash paid to suppliers and employees (5,000)
Cash Provided by Operating Activities 5,000
Cash Flows from Investing Activities
Cash paid to buy equipment (40,000)
Cash Used in Investing Activities (40,000)Cash Flows from Financing Activities
Capital contributed by stockholders 30,000
Cash dividends paid to stockholders (1,000)
Cash borrowed from the bank 20,000
Cash Provided by Financing Activities 49,000
Change in Cash 14,000
Beginning Cash Balance, Sept. 1, 2010 -
Ending Cash Balance, Sept. 30, 2010 14,000$
PIZZA AROMA, INC.
Statement of Cash Flows
For the Month Ended September 30, 2010
3
1-
7/30/2019 DDT - Chapter 1
34/47
Main Goal: Provide usefulfinancial information to externalusers for decision making.
Relevant
Useful
Faithful
Representation
Faithful
Representation
Relevant
1-
7/30/2019 DDT - Chapter 1
35/47
7/30/2019 DDT - Chapter 1
36/47
Illustration: 1. On October 1, cash of $10,000 is invested in Sierra
Corporation by investors in exchange for $10,000 of common stock.
1. +10,000 +10,000
7/30/2019 DDT - Chapter 1
37/47
2. On October 1, Sierra borrowed $5,000 from Castle Bank by signing
a 3-month, 12%, $5,000 note payable.
1. +10,000 +10,000
2. +5,000 +5,000
7/30/2019 DDT - Chapter 1
38/47
3. On October 2, Sierra purchased equipment by paying $5,000 cash
to Superior Equipment Sales Co.
3. -5,000 +5,000
1. +10,000 +10,000
2. +5,000 +5,000
7/30/2019 DDT - Chapter 1
39/47
4. On October 2, Sierra received a $1,200 cash advance from R.
Knox, a client.
4. +1,200 +1,200
3. -5,000 +5,000
1. +10,000 +10,000
2. +5,000 +5,000
7/30/2019 DDT - Chapter 1
40/47
5. On October 3, Sierra received $10,000 in cash from Copa Company
for guide services performed.
4. +1,200 +1,200
5. +10,000 +10,000
3. -5,000 +5,000
1. +10,000 +10,000
2. +5,000 +5,000
7/30/2019 DDT - Chapter 1
41/47
6. On October 3, Sierra Corporation paid its office rent for the month
of October in cash, $900.
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
3. -5,000 +5,000
1. +10,000 +10,000
2. +5,000 +5,000
7/30/2019 DDT - Chapter 1
42/47
7. On October 4, Sierra paid $600 for a one-year insurance policy that
will expire next year on September 30.
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
3. -5,000 +5,000
1. +10,000 +10,000
2. +5,000 +5,000
7/30/2019 DDT - Chapter 1
43/47
8. On October 5, Sierra purchased supplies on account from Aero
Supply for $2,500.
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500
3. -5,000 +5,000
1. +10,000 +10,000
2. +5,000 +5,000
7/30/2019 DDT - Chapter 1
44/47
10. On October 20, Sierra paid a $500 dividend.
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500
10. -500 -500
3. -5,000 +5,000
1. +10,000 +10,000
2. +5,000 +5,000
7/30/2019 DDT - Chapter 1
45/47
11. Employees have worked two weeks, earning $4,000 in salaries,
which were paid on October 26.
4. +1,200 +1,200
5. +10,000 +10,000
6. -900 -900
7. -600 +600
8. +2,500 +2,500
10. -500 -500
11. -4,000 -4,000
3. -5,000 +5,000
1. +10,000 +10,000
2. +5,000 +5,000
7/30/2019 DDT - Chapter 1
46/47
Cash
Temporary investments
Accounts receivable
Merchandise inventory
Office supplies
Buildings Common Shares
Property&equipment
Patents
Goodwill
Accounts payable
Rent payable
Salaries payable
Estimated warranty liability
Dividends payable
Long term liabilities
Discount on bonds payable
Owners equity
Owners withdrawal
Preferred shares
Retained earnings
Dividends
7/30/2019 DDT - Chapter 1
47/47