Discuss Accounting Discuss Accounting Concepts of Assets Concepts of Assets 1. 1. Asset Asset -- a resource that has -- a resource that has a potential future economic a potential future economic benefit. benefit. 2. 2. Asset Valuation Asset Valuation -- the monetary -- the monetary amount assigned to an asset. amount assigned to an asset. 3. 3. Asset Classification Asset Classification -- assets are -- assets are grouped into like categories. grouped into like categories. www.paperhint.com www.paperhint.com
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Discuss Accounting Concepts of Discuss Accounting Concepts of AssetsAssets
1. 1. AssetAsset -- a resource that has a -- a resource that has a potential future economic benefit.potential future economic benefit.
2. 2. Asset ValuationAsset Valuation -- the monetary -- the monetary amount assigned to an asset.amount assigned to an asset.
3. 3. Asset ClassificationAsset Classification -- assets are -- assets are grouped into like categories.grouped into like categories.
1. 1. AssetAsset -- a resource that has a -- a resource that has a potential future economic benefit.potential future economic benefit.
2. 2. Asset ValuationAsset Valuation -- the monetary -- the monetary amount assigned to an asset.amount assigned to an asset.
3. 3. Asset ClassificationAsset Classification -- assets are -- assets are grouped into like categories.grouped into like categories.
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Asset RecognitionAsset Recognition
Recognize a resource as an asset only if:Recognize a resource as an asset only if:
1. The firm has acquired rights to its use 1. The firm has acquired rights to its use in the future as a result of a past in the future as a result of a past transaction or exchange, and transaction or exchange, and
2. The firm can measure or quantify the 2. The firm can measure or quantify the future benefits with a reasonable future benefits with a reasonable degree of precision.degree of precision.
All assets are future benefits but not all All assets are future benefits but not all future benefits are recognized as assets.future benefits are recognized as assets.
Recognize a resource as an asset only if:Recognize a resource as an asset only if:
1. The firm has acquired rights to its use 1. The firm has acquired rights to its use in the future as a result of a past in the future as a result of a past transaction or exchange, and transaction or exchange, and
2. The firm can measure or quantify the 2. The firm can measure or quantify the future benefits with a reasonable future benefits with a reasonable degree of precision.degree of precision.
All assets are future benefits but not all All assets are future benefits but not all future benefits are recognized as assets.future benefits are recognized as assets.
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Asset ValuationAsset Valuation
Valuation -- the assignment of a Valuation -- the assignment of a monetary amount to an assetmonetary amount to an asset
Several methods of assignment:Several methods of assignment:
1. Acquisition or historical cost1. Acquisition or historical cost
2. Current replacement cost2. Current replacement cost
3. Net realizable value3. Net realizable value
4. Present value of future net cash 4. Present value of future net cash flowsflows
Valuation -- the assignment of a Valuation -- the assignment of a monetary amount to an assetmonetary amount to an asset
Several methods of assignment:Several methods of assignment:
1. Acquisition or historical cost1. Acquisition or historical cost
2. Current replacement cost2. Current replacement cost
3. Net realizable value3. Net realizable value
4. Present value of future net cash 4. Present value of future net cash flowsflows
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Historical Cost
Current Replacement Cost
Current Net Realizable Value
The amount of cash a firm would currently receive if it sold an asset
The amount of cash paid in acquiring an asset
The discounted value of future cash flows generated by an asset
Present Value of Future Net Cash Flows
Assets might appear at the current cost of replacing it.
Similar assets are grouped together Similar assets are grouped together in financial statements into classesin financial statements into classes..
Examples of common classes of Examples of common classes of assets:assets:
– Current assetsCurrent assets
– InvestmentsInvestments
– Property, plant and equipmentProperty, plant and equipment
– Intangible assetsIntangible assets
Similar assets are grouped together Similar assets are grouped together in financial statements into classesin financial statements into classes..
Examples of common classes of Examples of common classes of assets:assets:
– Current assetsCurrent assets
– InvestmentsInvestments
– Property, plant and equipmentProperty, plant and equipment
– Intangible assetsIntangible assets
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Discuss Accounting Concepts of Discuss Accounting Concepts of LiabilitiesLiabilities
1.1. LiabilityLiability -- arises when a firm receives -- arises when a firm receives benefits or services and in exchange benefits or services and in exchange promises to pay for these at a definite promises to pay for these at a definite future timefuture time
2. 2. Liability ValuationLiability Valuation -- the monetary -- the monetary amount assigned to the liabilityamount assigned to the liability
3. 3. Liability ClassificationLiability Classification -- liabilities are -- liabilities are grouped into like categoriesgrouped into like categories
1.1. LiabilityLiability -- arises when a firm receives -- arises when a firm receives benefits or services and in exchange benefits or services and in exchange promises to pay for these at a definite promises to pay for these at a definite future timefuture time
2. 2. Liability ValuationLiability Valuation -- the monetary -- the monetary amount assigned to the liabilityamount assigned to the liability
3. 3. Liability ClassificationLiability Classification -- liabilities are -- liabilities are grouped into like categoriesgrouped into like categories
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Going Concern
Reliability
Plant or Fixed Assets
Ability of a measure to faithfully represent what it purports to measure
Tangible long-lived asset a firm uses in its operations
Accounting assumes a firm will remain in operation long enough to carry out all of its current plans.
Recognize an obligation as a liability Recognize an obligation as a liability when:when:
1. The firm has received benefits, and1. The firm has received benefits, and
2. In exchange, promised to pay the 2. In exchange, promised to pay the provider, andprovider, and
3. The payment will occur at a definite 3. The payment will occur at a definite future time.future time.
All liabilities are obligations but not all All liabilities are obligations but not all obligations are recognized as liabilities.obligations are recognized as liabilities.
Recognize an obligation as a liability Recognize an obligation as a liability when:when:
1. The firm has received benefits, and1. The firm has received benefits, and
2. In exchange, promised to pay the 2. In exchange, promised to pay the provider, andprovider, and
3. The payment will occur at a definite 3. The payment will occur at a definite future time.future time.
All liabilities are obligations but not all All liabilities are obligations but not all obligations are recognized as liabilities.obligations are recognized as liabilities.
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What is liability valuation?What is liability valuation?
Valuation -- assignment of a monetary Valuation -- assignment of a monetary amount to a liability.amount to a liability.
Two main methods of assignment:Two main methods of assignment:
1. Liabilities due within a year or less 1. Liabilities due within a year or less are generally valued at amount of are generally valued at amount of the cash payment.the cash payment.
2. Liabilities due after one year are 2. Liabilities due after one year are generally valued at the net present generally valued at the net present value of the future cash payments.value of the future cash payments.
Valuation -- assignment of a monetary Valuation -- assignment of a monetary amount to a liability.amount to a liability.
Two main methods of assignment:Two main methods of assignment:
1. Liabilities due within a year or less 1. Liabilities due within a year or less are generally valued at amount of are generally valued at amount of the cash payment.the cash payment.
2. Liabilities due after one year are 2. Liabilities due after one year are generally valued at the net present generally valued at the net present value of the future cash payments.value of the future cash payments.
Similar liabilities are grouped together Similar liabilities are grouped together in the financial statements into classes:in the financial statements into classes:
Examples of common classes of Examples of common classes of liabilities:liabilities:
– Current liabilitiesCurrent liabilities
– Long-term debtLong-term debt
– Other long-term liabilitiesOther long-term liabilities
Similar liabilities are grouped together Similar liabilities are grouped together in the financial statements into classes:in the financial statements into classes:
Examples of common classes of Examples of common classes of liabilities:liabilities:
– Current liabilitiesCurrent liabilities
– Long-term debtLong-term debt
– Other long-term liabilitiesOther long-term liabilities
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Shareholders’ EquityShareholders’ Equity
Shareholders’ equityShareholders’ equity -- residual -- residual interest in the firm, all assets above interest in the firm, all assets above those required to satisfy the those required to satisfy the liabilities. liabilities.
Shareholders’ equity is equal to total Shareholders’ equity is equal to total assets less total liabilities.assets less total liabilities.
The valuation of assets and liabilities The valuation of assets and liabilities determines the valuation of determines the valuation of shareholders’ equity.shareholders’ equity.
Shareholders’ equityShareholders’ equity -- residual -- residual interest in the firm, all assets above interest in the firm, all assets above those required to satisfy the those required to satisfy the liabilities. liabilities.
Shareholders’ equity is equal to total Shareholders’ equity is equal to total assets less total liabilities.assets less total liabilities.
The valuation of assets and liabilities The valuation of assets and liabilities determines the valuation of determines the valuation of shareholders’ equity.shareholders’ equity.
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Review Classifications of Review Classifications of Shareholders’ EquityShareholders’ Equity
Shareholders’ equity is divided into:Shareholders’ equity is divided into:
1. 1. Contributed CapitalContributed Capital -- original -- original investment by ownersinvestment by owners
2. 2. Retained EarningsRetained Earnings -- amount of -- amount of earnings left in the firm after the earnings left in the firm after the payment of dividends to the ownerspayment of dividends to the owners
Shareholders’ equity is divided into:Shareholders’ equity is divided into:
1. 1. Contributed CapitalContributed Capital -- original -- original investment by ownersinvestment by owners
2. 2. Retained EarningsRetained Earnings -- amount of -- amount of earnings left in the firm after the earnings left in the firm after the payment of dividends to the ownerspayment of dividends to the owners
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Discuss Contributed CapitalDiscuss Contributed Capital
Contributed Capital is divided into:Contributed Capital is divided into:
1. A par or stated value of the shares 1. A par or stated value of the shares which has a legal definition, andwhich has a legal definition, and
2. The remaining amount called 2. The remaining amount called Additional Paid-In CapitalAdditional Paid-In Capital (A.P.I.C.).(A.P.I.C.).
This distinction is made for legal This distinction is made for legal reasons and may have no relationship reasons and may have no relationship to market value of the shares.to market value of the shares.
Contributed Capital is divided into:Contributed Capital is divided into:
1. A par or stated value of the shares 1. A par or stated value of the shares which has a legal definition, andwhich has a legal definition, and
2. The remaining amount called 2. The remaining amount called Additional Paid-In CapitalAdditional Paid-In Capital (A.P.I.C.).(A.P.I.C.).
This distinction is made for legal This distinction is made for legal reasons and may have no relationship reasons and may have no relationship to market value of the shares.to market value of the shares.
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What are Retained Earnings?What are Retained Earnings?
Retained earningsRetained earnings -- net -- net accumulation of earnings of the accumulation of earnings of the firm since its beginningfirm since its beginning
Increased by net incomeIncreased by net income
Reduced by losses, and by the Reduced by losses, and by the payment of dividends to the payment of dividends to the shareholders or ownersshareholders or owners
Retained earningsRetained earnings -- net -- net accumulation of earnings of the accumulation of earnings of the firm since its beginningfirm since its beginning
Increased by net incomeIncreased by net income
Reduced by losses, and by the Reduced by losses, and by the payment of dividends to the payment of dividends to the shareholders or ownersshareholders or owners
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Retained EarningsRetained Earnings
For any accounting period:For any accounting period:
Every economic event has two Every economic event has two sides, a give and a take.sides, a give and a take.
Accountants record both sides Accountants record both sides economic events as a economic events as a transactiontransaction..
The two sides of a transaction The two sides of a transaction must balance so that the basic must balance so that the basic accounting equation remains in accounting equation remains in balance.balance.
Every economic event has two Every economic event has two sides, a give and a take.sides, a give and a take.
Accountants record both sides Accountants record both sides economic events as a economic events as a transactiontransaction..
The two sides of a transaction The two sides of a transaction must balance so that the basic must balance so that the basic accounting equation remains in accounting equation remains in balance.balance.
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Dual Effect of a TransactionDual Effect of a Transaction
Recall the basic accounting equationRecall the basic accounting equation
Assets = Liabilities + Owners’ EquityAssets = Liabilities + Owners’ Equity Any transaction will effect one or more Any transaction will effect one or more
on the three classes of accounts. on the three classes of accounts. Remember that the transaction must Remember that the transaction must
balance, andbalance, and That the basic equation must balance.That the basic equation must balance. Remember the basic rule of math, you Remember the basic rule of math, you
can do whatever you want to an can do whatever you want to an equation as long as you do it to both equation as long as you do it to both sides of the equal sign.sides of the equal sign.
Recall the basic accounting equationRecall the basic accounting equation
Assets = Liabilities + Owners’ EquityAssets = Liabilities + Owners’ Equity Any transaction will effect one or more Any transaction will effect one or more
on the three classes of accounts. on the three classes of accounts. Remember that the transaction must Remember that the transaction must
balance, andbalance, and That the basic equation must balance.That the basic equation must balance. Remember the basic rule of math, you Remember the basic rule of math, you
can do whatever you want to an can do whatever you want to an equation as long as you do it to both equation as long as you do it to both sides of the equal sign.sides of the equal sign.
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Dual Effect of a EventDual Effect of a Event
Principal Financial
Statements
Individual Transactions and Events
Accounting Systems for
Accumulating Information
about Transactions and Events
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Effect on the EquationEffect on the Equation
There are four general combinations:There are four general combinations:
1. Increase an asset and a liability or 1. Increase an asset and a liability or owners’ equity by the same amount,owners’ equity by the same amount,
2. Decrease an asset and a liability or 2. Decrease an asset and a liability or owners’ equity by the same amount,owners’ equity by the same amount,
3. Increase an asset and decrease 3. Increase an asset and decrease another by the same amount, andanother by the same amount, and
4. Increase a liability or owners’ equity 4. Increase a liability or owners’ equity and decrease another liability or and decrease another liability or owners’ equity by the same amount.owners’ equity by the same amount.
There are four general combinations:There are four general combinations:
1. Increase an asset and a liability or 1. Increase an asset and a liability or owners’ equity by the same amount,owners’ equity by the same amount,
2. Decrease an asset and a liability or 2. Decrease an asset and a liability or owners’ equity by the same amount,owners’ equity by the same amount,
3. Increase an asset and decrease 3. Increase an asset and decrease another by the same amount, andanother by the same amount, and
4. Increase a liability or owners’ equity 4. Increase a liability or owners’ equity and decrease another liability or and decrease another liability or owners’ equity by the same amount.owners’ equity by the same amount.
2. Purchase equipment for2. Purchase equipment for $60,000 cash.$60,000 cash.
3. Purchase inventory for3. Purchase inventory for $15,000 on account.$15,000 on account.
4. Pay supplier $8,000 cash4. Pay supplier $8,000 cash of the $15,000 owned.of the $15,000 owned.
5. Issue 700 shares of stock 5. Issue 700 shares of stock to supplier for balance due.to supplier for balance due.
6. Pay for one year insurance6. Pay for one year insurance policy, $600 in cash.policy, $600 in cash.
7. Customer pays $3,000 for7. Customer pays $3,000 for merchandise to be deliveredmerchandise to be delivered in the future.in the future.
Complete Chart for Miller Corp.Complete Chart for Miller Corp.
+$100,000 +$100,000
+$60,000 -$60,000
+$15,000 +$15,000
-$8,000 -$8,000
-$7,000 +$7,000
+$600 -$600
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Debits and CreditsDebits and Credits
Increases do not always equal Increases do not always equal other increases, nor do they always other increases, nor do they always equal decreases.equal decreases.
Accountants use the definitions of Accountants use the definitions of debit and credit to describe the debit and credit to describe the requirement to balance the two requirement to balance the two sides of a transaction and to keep sides of a transaction and to keep the basic equation in balance.the basic equation in balance.
Increases do not always equal Increases do not always equal other increases, nor do they always other increases, nor do they always equal decreases.equal decreases.
Accountants use the definitions of Accountants use the definitions of debit and credit to describe the debit and credit to describe the requirement to balance the two requirement to balance the two sides of a transaction and to keep sides of a transaction and to keep the basic equation in balance.the basic equation in balance.
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Debits and CreditsDebits and Credits Debits are defined as increases to asset Debits are defined as increases to asset
accounts (the right side of the basic accounts (the right side of the basic equation) or decreases to liabilities or equation) or decreases to liabilities or owners’ equity (the left side).owners’ equity (the left side).
Credits are defined as increases to to Credits are defined as increases to to liabilities or owners’ equity (the left liabilities or owners’ equity (the left side of the basic equation) or decreases side of the basic equation) or decreases to asset accounts (the right side).to asset accounts (the right side).
Debits = CreditsDebits = Credits for all transactions and for all transactions and for the basic equation at any time. for the basic equation at any time.
Debits are defined as increases to asset Debits are defined as increases to asset accounts (the right side of the basic accounts (the right side of the basic equation) or decreases to liabilities or equation) or decreases to liabilities or owners’ equity (the left side).owners’ equity (the left side).
Credits are defined as increases to to Credits are defined as increases to to liabilities or owners’ equity (the left liabilities or owners’ equity (the left side of the basic equation) or decreases side of the basic equation) or decreases to asset accounts (the right side).to asset accounts (the right side).
Debits = CreditsDebits = Credits for all transactions and for all transactions and for the basic equation at any time. for the basic equation at any time.
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Journal EntriesJournal Entries
Accountants recognize an economic Accountants recognize an economic transaction by recording a transaction by recording a journal entryjournal entry..
A journal entry shows both sides of the A journal entry shows both sides of the transaction with the name of the accounts transaction with the name of the accounts and their respective debit or credit.and their respective debit or credit.
For example, transaction 1 from the Miller For example, transaction 1 from the Miller Corporation Example would be:Corporation Example would be:
Accountants recognize an economic Accountants recognize an economic transaction by recording a transaction by recording a journal entryjournal entry..
A journal entry shows both sides of the A journal entry shows both sides of the transaction with the name of the accounts transaction with the name of the accounts and their respective debit or credit.and their respective debit or credit.
For example, transaction 1 from the Miller For example, transaction 1 from the Miller Corporation Example would be:Corporation Example would be:
Jan 1 Cash 100,000 Common Stock 100,000
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The LedgerThe Ledger
The journal entry records both sides The journal entry records both sides to a transaction, butto a transaction, but
The The LedgerLedger summarizes changes to summarizes changes to individual accounts which may be individual accounts which may be one side of several transactions.one side of several transactions.
Accountants often use a shorthand Accountants often use a shorthand notation for the ledger called a notation for the ledger called a T-T-Account.Account.
The journal entry records both sides The journal entry records both sides to a transaction, butto a transaction, but
The The LedgerLedger summarizes changes to summarizes changes to individual accounts which may be individual accounts which may be one side of several transactions.one side of several transactions.
Accountants often use a shorthand Accountants often use a shorthand notation for the ledger called a notation for the ledger called a T-T-Account.Account.
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T-AccountsT-Accounts
A A T-AccountT-Account summarizes debits and summarizes debits and credits to a specific account, for credits to a specific account, for example cash.example cash.
A A T-AccountT-Account summarizes debits and summarizes debits and credits to a specific account, for credits to a specific account, for example cash.example cash.
