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					   Generally Accepted Accounting
             Principles
Financial accounting practice is governed by
concepts and rules known as generally accepted
accounting principles (GAAP).


         Relevant          Affects the decision of
       Information                its users.

   Reliable Information         Is trusted by
                                    users.

       Comparable            Used in comparisons
       Information        across years & companies.

                                                      1-1
           Principles and Assumptions
                  of Accounting
Measurement principle (also called       Going-concern assumption means
cost principle) means that accounting    that accounting information reflects a
information is based on actual cost.     presumption the business will
                                         continue operating.
Revenue recognition principle
provides guidance on when a              Monetary unit assumption means we
company must recognize revenue.          can express transactions in money.

Matching principle (expense              Time period assumption presumes
recognition) prescribes that a           that the life of a company can be
company must record its expenses         divided into time periods, such as
incurred to generate the revenue.        months and years.

Full disclosure principle requires a     Business entity assumption means
company to report the details behind     that a business is accounted for
financial statements that would impact   separately from its owner or other
users’ decisions.                        business entities.
                                                                                  1-2
         Accounting Equation

Assets    =    Liabilities     +     Equity




                       Liabilities
           Assets       + Equity


                                              1-3
              Assets

                Cash
Accounts                     Notes
Receivable                 Receivable
              Resources
              owned or
Vehicles      controlled
                 by a           Land
               company

    Store                  Buildings
   Supplies
               Equipment
                                        1-4
           Liabilities

Accounts                  Notes
 Payable                 Payable

           Creditors’
           claims on
             assets
 Taxes                   Wages
Payable                  Payable


                                   1-5
              Equity

Contributed                Retained
  Capital                  Earnings


              Owner’s
              claim on
               assets


               Dividends
                                      1-6
      Expanded Accounting Equation

 Assets
 Assets       =
              =     Liabilities
                    Liabilities        +
                                       +       Equity
                                               Equity



Contributed   _                                _ Expenses
  Capital
                  Dividends
                                +   Revenues



                              Retained Earnings

                                                            1-7
        Transaction Analysis

Business activities can be described in terms of
transactions and events. External transactions
are exchanges of value between two entities,
which yield changes in the accounting equation.
Internal transactions are exchanges within any
entity; they can also affect the accounting
equation. Events refer to happenings that affect
an entity’s accounting equation and can be
reliably measured. Transaction analysis is
defined as the process used to analyze
transactions and events.
                                                   1-8
             Transaction Analysis

J. Scott invests $20,000 cash to start the
business in return for stock.
                Assets            =       Liabilities       +    Equity
                                      Accounts     Notes        Common
      Cash   Supplies Equipment       Payable Payable            Stock
(1) $ 20,000                                                    $ 20,000




   $ 20,000 $      -     $   -        $    -   $      -         $ 20,000

            $ 20,000              =            $   20,000
                                                                           1-9
              Transaction Analysis

  Purchased supplies paying $1,000 cash.
               Assets               =       Liabilities       +    Equity
                                        Accounts     Notes        Common
      Cash     Supplies Equipment       Payable Payable            Stock
(1) $ 20,000                                                      $ 20,000
(2)    (1,000) $ 1,000




   $ 19,000 $ 1,000 $        -          $    -   $      -         $ 20,000

             $ 20,000               =            $   20,000

                                                                         1-10
              Transaction Analysis

   Purchased equipment for $15,000 cash.
               Assets               =       Liabilities       +    Equity
                                        Accounts     Notes        Common
      Cash     Supplies Equipment       Payable Payable            Stock
(1) $ 20,000                                                      $ 20,000
(2)    (1,000) $ 1,000
(3)  (15,000)           $ 15,000


   $   4,000 $ 1,000 $    15,000        $    -   $      -         $ 20,000

             $ 20,000               =            $   20,000

                                                                         1-11
              Transaction Analysis

   Purchased Supplies of $200 and
   Equipment of $1,000 on account.
               Assets                =       Liabilities        +    Equity
                                         Accounts     Notes         Common
      Cash     Supplies Equipment        Payable Payable             Stock
(1) $ 20,000                                                        $ 20,000
(2)    (1,000) $ 1,000
(3)  (15,000)           $ 15,000
(4)                200       1,000       $ 1,200

   $   4,000 $ 1,200 $     16,000        $ 1,200 $        -         $ 20,000

              $ 21,200               =             $   21,200

                                                                           1-12
              Transaction Analysis

Borrowed $4,000 from 1st American Bank.
               Assets                =       Liabilities        +    Equity
                                         Accounts     Notes         Common
      Cash     Supplies Equipment        Payable Payable             Stock
(1) $ 20,000                                                        $ 20,000
(2)    (1,000) $ 1,000
(3)  (15,000)           $ 15,000
(4)                200       1,000       $ 1,200
(5)     4,000                                    $      4,000
    $ 8,000 $ 1,200 $ 16,000             $ 1,200 $      4,000       $ 20,000

              $ 25,200               =             $   25,200

                                                                           1-13
           Transaction Analysis
  The balances so far appear below. Note that the
  Balance Sheet Equation is still in balance.
                Assets              =        Liabilities       +    Equity

                                        Accounts Notes             Common
      Cash   Supplies Equipment         Payable Payable             Stock
Bal. $ 8,000 $ 1,200 $ 16,000           $ 1,200 $ 4,000            $ 20,000




    $ 8,000 $    1,200 $   16,000       $   1,200 $    4,000       $ 20,000

             $ 25,200               =              $ 25,200


                                                                              1-14
 Transaction Analysis


Now, let’s look at transactions
involving revenue, expenses and
            dividends.




                                  1-15
                 Transaction Analysis

 Provided consulting services receiving
 $3,000 cash.
                 Assets              =      Liabilities      +        Equity
                                         Accounts Notes          Common
      Cash   Supplies Equipment          Payable Payable          Stock   Revenue
Bal. $ 8,000 $ 1,200 $ 16,000            $ 1,200 $ 4,000         $ 20,000
(6)    3,000                                                              $ 3,000


    $ 11,000 $    1,200 $   16,000       $ 1,200 $ 4,000         $ 20,000 $ 3,000

             $ 28,200                =            $ 28,200



                                                                               1-16
                    Transaction Analysis

     Paid salaries of $800 to employees.
                 Assets              =      Liabilities       +             Equity
                                         Accounts Notes           Common
      Cash    Supplies Equipment         Payable Payable           Stock   Revenue Expenses
Bal. $ 8,000 $ 1,200 $ 16,000            $ 1,200 $ 4,000          $ 20,000
(6)    3,000                                                               $ 3,000
(7)     (800)                                                                      $    (800)

    $ 10,200 $    1,200 $   16,000       $ 1,200 $    4,000       $ 20,000 $ 3,000 $     (800)

              $ 27,400               =            $ 27,400


  Remember that expenses decrease equity.
                                                                                           1-17
                         Transaction Analysis
  Dividends of $500 are paid to shareholders.
               Assets              =      Liabilities       +                  Equity
                                       Accounts Notes           Common
      Cash    Supplies Equipment       Payable Payable           Stock   Dividends Revenue Expenses
Bal. $ 8,000 $ 1,200 $ 16,000          $ 1,200 $ 4,000          $ 20,000
(6)    3,000                                                                         $ 3,000
(7)     (800)                                                                                $  (800)
(8)     (500)                                                            $     (500)
     $ 9,700 $ 1,200 $ 16,000          $ 1,200 $    4,000       $ 20,000 $     (500) $ 3,000 $  (800)

              $ 26,900             =            $ 26,900




  Remember that dividends decrease equity.
                                                                                                  1-18
      Financial Statements
Let’s prepare the Financial Statements
reflecting the transactions we have
recorded.
               1. Income Statement
               2. Statement of Retained Earnings
               3. Balance Sheet
               4. Statement of Cash Flows




                                                   1-19
                 Income Statement
          Scott Company
        Income Statement            Net income is the
For Month Ended December 31, 2011
                                       difference
Revenues:                                between
   Consulting revenue   $   3,000    Revenues and
Expenses:
   Salaries expense           800      Expenses.
Net income              $   2,200


     The income statement describes a
     company’s revenues and expenses along
     with the resulting net income or loss over a
     period of time due to earnings activities.
                                                        1-20
                        Balance Sheet
                                                          Scott Company
  The Balance Sheet describes
                                                  Statement of Retained Earnings
  a company’s financial position                For Month Ended December 31, 2011
  at a point in time.
                                            Retained Earnings, Dec. 1, 2011    $     -
                                            Plus: Net income                       2,200
                                            Less: Dividends                          500
                         Scott Company
                                            Retained Earnings, Dec. 31, 2011   $   1,700
                         Balance Sheet
                        December 31, 2011

          Assets                             Liabilities
Cash           $    9,700   Accounts payable               $    1,200
Supplies            1,200   Notes payable                       4,000
Equipment          16,000   Total liabilities                   5,200
                                               Equity
                            Common stock                       20,000
                            Retained earnings                   1,700
Total assets   $   26,900   Total liabilities and equity   $   26,900
                                                                                     1-21
 T-Account
     Tool to analyze and determine
      the balance in a given account

            Account Name

       (Left Side)   (Right Side)
         Debit         Credit



22
          Rules of Debit and Credit

 Assets             =   Liabilities      +    Equity
Debit      Credit       Debit   Credit       Debit   Credit
 +          -            -       +            -       +




     23
 Rules of Debit and Credit

                 Owner’s Equity
      Owner’s       Debit   Credit
                                       Owner’s
     Withdrawals      -       +        Capital
 Debit     Credit                    Debit Credit
     +       -                        -     +
      Expenses                        Revenues
 Debit     Credit                    Debit Credit
     +      -                         -      +
24
          Expanding the
          Rules of Debit and Credit

                Owner’s Equity
  Owner’s _    Owner’s                        _
  Capital     Withdrawals   +     Revenues        Expenses
Debit Credit Debit Credit       Debit   Credit Debit   Credit
 -        +     +    -           -       +        +     -


     25
                                                            The middle three
  Remember: Just ask ALICE!
     The first and the
    last are increased
                                                           are increased with
                                                                 credits
        with a debit

               Debit                                         Credit
                +             A = Assets                       -
                 -            L = Liabilities                  +
                 -            I = Income*                      +
                   -          C = Capital                       +
                   +          E = Expenses                      -


* Really, this is revenues, but “r” just doesn’t fit in!
                                                                                26
Journalizing Transactions

    Identify accounts affected and its type
    Determine whether each account is
     increased or decreased. Apply the
     rules of debit and credit
    Record transaction in journal.
        Debit side of entry is entered first
        Total debit $ must = Total credit $
27
     General Journal
    Transaction
       Date              Accounts Affected

                      Journal                Page 1
Date            Description            Debit Credit
Jul 1 Cash                            45,000
        Lange, Capital                       45,000
         Investment from owner


Optional: Explanation            Dollar amount of
    28
    of transaction               debits and credits
General Journal

    Debits are ALWAYS entered 1st.
    Credits are INDENTED and listed after
     the debit accounts or accounts.
    Do not use dollar signs.
    SKIP A LINE between each entry

29
                                         Accounts Payable
                   Cash
                                                 Aug 2    200
Exercise 2-19
Aug 1
Aug 6
              60,000 Aug 4 50,000
               3,000 Aug 9    100
                                    Aug 9    100
Aug 23         1,200 Aug 31 1,200                             Bal. 100
                     Aug 31   500       R. Woodward, Capital
Bal. 12,400
                                                       Aug 1 60,000

     Accounts Receivable                Take the difference
                                          Service Revenue
Aug 17 2,100                            between total debits
               Aug 23 1,200                         Aug 6
                                         and total credits to3,000
Bal.     900                                        Aug 17 2,100
                                      determine the balance
                                        in each account. If  Bal. 5,100
                                      debits are greater than
          Supplies                          Rent Expense
                                        credits, the account
Aug 2          200                      has 500
                                    Aug 31 a debit balance
                                           and vice versa
      Building                               Salary Expense
Aug 4 50, 000
         30
                                    Aug 31     1,200
 Revenue Principle

    When is revenue recognized (entered
     into the accounting records) ?
        When it is earned
        Not necessarily when cash is received

    How much revenue is recognized?
        Cash value of item transferred to
         customer

31
     The Matching Principle

    Measure all expenses incurred during
     the accounting period
    When are expenses recognized?
        Match the expenses against the
         revenues earned during the period



32
 Adjusting Entries

    At the end of an accounting period,
     ask yourself these questions:
        Have I recorded all revenues earned
         during this accounting period?
        Have I recognized all expenses incurred
         during this accounting period?

    If “No”, prepare an adjusting entry

33
 Adjusting Entries

    Prepared at end of an accounting
     period
    Recorded to bring an asset or liability
     account balance to its proper amount
        Recognize all revenues when earned
        Recognize all expenses incurred


34
  Adjusting Prepaid Expenses

 Resources paid for prior to receiving
 the actual benefits

              Prepaid Asset



Used up portion =       Unused portion =
    Expense                 Prepaid
                                           35
     Adjusting for Depreciation
 Depreciation - process of allocating the
   cost of a plant asset to expense over
   its expected useful life

        Straight-Line            Asset Cost
                             =
        Depreciation Expense     Useful Life

                                                Long term
                                               plant assets
                                                except for
                                                 land are
                                               depreciated
36
     Depreciation

    Depreciation, for accounting purposes, has
     NOTHING to do with market value, resale
     value or insurance value of an asset.

    It is a way to allocate the cost of the asset to
     each period that asset helps earn revenue

    Accumulated Depreciation
        A contra asset account … it is the amount of
         depreciation on that asset taken to date,

37
     Tips

    An adjusting entry will NEVER involve
     a debit or credit to Cash.
    Each adjusting entry will affect at least
     one balance sheet account and one
     income statement account



38

				
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