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					     Introduction to Accounting
             & Business
                    By Rachelle Agatha, CPA, MBA


Slides by Rachelle Agatha, CPA,
with excerpts from Warren, Reeve,
Duchac
After studying this lecture material,
you should be able to:
1. Describe the nature of a business
  and the role of ethics and
  accounting in business.
2. Summarize the development of
   accounting principles and relate
   them to practice.
3. State the accounting equation and
   define each element of the
   equation.
                                        2
4. Describe and illustrate how business
  transactions can be recorded in
  terms of the resulting change in the
  basic elements of the accounting
  equation.

5. Describe the financial statements of
  a proprietorship and explain how
  they interrelate.

                                          3
      Objective 1


Describe the nature of a
business and the role of
ethics and accounting in
        business.

                           4
Common Forms of
Business Organizations

 Proprietorship
 Partnership
 Corporation
 Limited liability
  company
                         5
 Types of Businesses


 Service
 Merchandiser
 Manufacturing



                       6
A proprietorship is owned by
one individual and—


 Comprises 70% of business
  organizations in the United
  States.
 Requires low cost of organizing.
 Is limited to financial resources
  of the owner.
 Is used by small businesses.
                                      7
A partnership is similar to a
proprietorship except that it is
owned by two or more
individuals and—

 Comprises 10% of business
  organizations in the United
  States.
 Combines the skills and resources
  of more than one person.

                                      8
A corporation is organized under
state or federal statues as a separate
legal taxable entity and—


 Generates 90% of the total dollars of
  business receipts received.
 Comprises 20% of the businesses.
               Continued



                                          9
 Includes ownership divided into
  shares of stock, sold to
  shareholders (stockholders).

 Is able to obtain large amounts
  of resources by issuing stock.
 Is used by large businesses.


                                    10
A limited liability company (LLC)
combines attributes of a partnership
and a corporation in that it is
organized as a corporation.
However, a limited liability
corporation can elect to be taxed
as a partnership and—

  Is a popular alternative to a
   partnership.
  Has tax and liability advantages
   to the owners.
                                       11
A business stakeholder
  is a person or entity
 having an interest in
      the economic
performance and well-
 being of a business.



                          12
 Capital market stakeholders
 provide the major financing
for the business in order for the
      business to begin and
     continue its operations.




                                    13
Product or service market
   stakeholders include
 customers who purchase
the business’s products or
  services as well as the
vendors who supply inputs
      to the business.


                             14
 Government stakeholders
   have an interest in the
economic performance of a
business. City, county, state,
 and federal governments
collect taxes from businesses
   within their jurisdiction.

                                 15
Internal stakeholders include
 individuals employed by the
business. Managers have an
   incentive to maximize the
     economic value of the
  business. Employees have
    an interest because their
       jobs depend on it.
                                16
 The moral principles that
  guide the conduct of
   individuals are called
           ethics.

1. Individual character
2. Firm culture
3. Laws and enforcement
                             17
                              1-1

   Accounting can be
defined as an information
  system that provides
 reports to stakeholders
  about the economic
activities and condition of
         a business.


                              18
The process by which accounting
provides information to business
stakeholders is as follows:
   Identify stakeholders.
   Assess stakeholders’ information
    needs.
   Design the accounting information
    system to meet stakeholders’ needs.
   Record economic data about
    business activities and events.
   Prepare accounting reports for
    stakeholders.                         19
20
  Financial accounting is primarily
concerned with the recording and
 reporting of economic data and
      activities for a business.

  Managerial accounting uses both
financial accounting and estimated
data to aid management in running
    day-to-day operations and in
     planning future operations.
                                      21
Accountants employed by a business
 firm or a not-for-profit organization
 are said to be employed in private
             accounting.

  Accountants and their staff who
 provide services on a fee basis are
   said to be employed in public
            accounting.

                                         22
    Objective 2

   Summarize the
  development of
accounting principles
 and relate them to
     practice.
                        23
    The business entity
 concept or principle limits
the economic data in the
accounting system to data
  related directly to the
 activities of the business.



                               24
The cost concept or principle
 is the basis for entering the
exchange price, or cost of an
acquisition in the accounting
           records.




                                 25
The objectivity concept or
principle requires that the
 accounting records and
  reports be based upon
    objective evidence.



                              26
  The unit of measure
  concept or principle
requires that economic
  data be recorded in
         dollars.




                         27
On March 1, Smith's Repair Service extended an
offer of $115,000 for land that had been priced for
sale at $135,000. On March 15, Smith's Repair
Service accepted the seller’s counter-offer of
$125,000. On April 1, the land was assessed at a
value of $100,000 for property tax purposes. On
May 1, Smith's Repair Service was offered $150,000
for the land by a national retail chain. At what
value should the land be recorded in Smith Repair
Service’s books (general ledger)?

$125,000. Under the cost concept, the land should
be recorded at the cost to Smith's Repair Service.


                                                      28
    Objective 3


State the accounting
equation and define
each element of the
      equation.
                       29
      ASSETS = LIABILITIES + OWNERS EQUITY


                                ASSETS          LIAB +
                                                  OE




                                 ACCOUNTING EQUATION



Slide by Rachelle Agatha, CPA
                                          1-3
The Accounting Equation

  Assets = Liabilities + Owner’s Equity


The resources
 owned by a
  business




                                           31
                                            1-3
The Accounting Equation


    Assets = Liabilities + Owner’s Equity


              The rights of
             the creditors,
                 which
               represent
              debts of the
                business
                                             32
                                            1-3
The Accounting Equation


    Assets = Liabilities + Owner’s Equity


                          The rights of
                          the owners




                                             33
   Assets = Liabilities + Owner’s Equity
                                                      1-3


At the end of 12/31/08, Smith's Repair Service had
Assets of $850,000 and Liabilities of $250,000. How
much equity did Smith's Repair Service have?

                                         OWNERS
  ASSETS       = LIABILITIES        +     EQUITY
 $ 850,000     = $ 250,000          +       ?
 $ (250,000)   = $ (250,000)        +
 $ 600,000     = $        -         +         ?

 $ 850,000     = $      250,000    +    $   600,000
                                                       34
                                1-4


        Objective 4

 Describe and illustrate how
business transactions can be
   recorded in terms of the
resulting change in the basic
 elements of the accounting
           equation.
                                 35
                                  1-4



A business transaction is an
     economic event or
   condition that directly
    changes an entity’s
   financial condition or
directly affects its results of
        operations.

                                   36
                                                                                                 1-4



                     Assets                  = Liab        +               Owner's Equity
                    Accts.            Accts.           .       Gilmore,    Gilmore   Fees       All
            Cash + Rec. + Supplies = Payable                    Capital - Drawing + Earned - Exp.
Bal.      $ 24,620 $ 2,250 $ 380     $ 550                     $ 25,000   $ (1,000) $ 6,750  $ (4,050)

                                       27,250 =       550 +     26,700




       Slide by Rachelle Agatha, CPA



                                                                                                  37
                                                             1-4



                                Owner's Equity
                                           .
                      +         Initial Capital Investment
                      +         Revenue
                      -         Expense
                      -         Withdrawls
                      =         Ending Equity



Slide by Rachelle Agatha, CPA



                                                              38
                                            1-4


            Owner’s Equity

Increased by            Decreased
                           by

Owner’s investments   Owner’s withdrawals
    Revenues               Expenses




                                             55
                                             39
On January 1, 2008, Chris
 Smith begins a business
  that will be known as
  Smith’s Repair Service




                            40
Chris Smith invests $25,000
     into the business
  Assets     =     Owner’s Equity

                      Chris Clark,
  Cash                      Capital
 25,000      =    25,000 Investment
                         by Chris
                         Clark


                                    41
                         1-5


    Objective 5

Describe the financial
   statements of a
 proprietorship and
  explain how they
      interrelate.
                          42
                      1-5



Accounting reports,
   called financial
statements, provide
    summarized
 information to the
        owner.


                       43
The income statement is a
 summary of the revenue
    and expenses for a
  specific period of time,
   such as a month or a
           year.




                             44
                              1-5



 A statement of owner’s
equity is a summary of the
 changes in the owner’s
equity that have occurred
during a specific period of
            time.



                               45
       San Diego Designer Puppy Store and Couture
                           Income Statement                            1-5
                 For the Year Ended December 31, 2008

Revenue                                                   $ 153,750
Expenses:
      Wages                                $    20,775
      Rent                                      48,000
      Depreciation                              10,800
      Supplies                                   9,375
      Utilities                                  1,065
      Insurance                                  1,800
      Miscellaneous                                705        92,520
Net income                                                $   61,230


       San Diego Designer Puppy Store and Couture
                      Statement of Owner's Equity
                 For the Year Ended December 31, 2008

J. Terrier Capital, January 1, 2008                       $   75,000
Net income                                      61,230
Less: Drawing                                  (15,000)
Increase in owner's equity                                   46,230
J Terrier Capital, December 31, 2008                      $ 121,230

                                                                        46
                               1-5




A balance sheet is a list
 of the assets, liabilities,
 and owner’s equity as
   of a specific date.




                                47
     San Diego Designer Puppy Store and Couture
                    Statement of Owner's Equity
               For the Year Ended December 31, 2008
                                                                                 1-5
J. Terrier Capital, January 1, 2008                     $   75,000
Net income                                    61,230
Less: Drawing                                (15,000)
Increase in owner's equity                                 46,230
J Terrier Capital, December 31, 2008                    $ 121,230

     San Diego Designer Puppy Store and Couture
                           Balance Sheet
                         December 31, 2008

Assets                                 Liabilities
 Cash                     $12,000        Accounts payable             $15,000
 Supplies                   1,300        Wages payable                  4,500
 Prepaid insurance            900         Current Liabilities         $19,500
 Inventory                 16,000
   Current assets         $30,200      Notes Payable                 $ 25,000

 Equipment               $182,865       Total Liabilities             $44,500
 Acc. Depreciation         47,335
  Fixed assets           $135,530      J. Terrier Capital            $ 121,230

                                       Total Liabilities and
Total assets             $165,730       Owner's Equity               $165,730


                                                                                  48
                        1-5


A statement of cash
flows is a summary of
   the cash receipts
 and payments for a
   specific period of
          time.



                         49
Income Statement                    1-5


    The income statement reports
  the revenues and expenses for a
     period of time based on the
  matching concept. This concept
      is applied by matching the
      expenses with the revenue
    generated during a period by
            those expenses.

                                     50
                           1-5



 The excess of revenue
  over the expenses is
called net income or net
 profit. If the expenses
exceed the revenue, the
   excess is a net loss.


                            51
Statement of Owner’s Equity        1-5




     The statement of owner’s
          equity reports the
       changes in the owner’s
        equity for a period of
      time. It is prepared after
       the income statement.

                                    52
Balance Sheet                      1-5




           The balance sheet
       reports the amounts of
              a firm’s assets,
        liabilities, and owner’s
        equity at the end of a
             specific period.


                                    53
Interrelationships Among Financial Statements   1-5




        The income statement and the
         statement of owner’s equity are
         interrelated.
               Net income or net loss
                 appears on both
                     statements.


                                                 54
                                     1-5


   The statement of owner’s
    equity and the balance sheet
    are interrelated.

    The owner’s capital at the end
    of the period on the statement
    of owner’s equity also appears
        on the balance sheet as
            owner’s capital.

                                      55
                                  1-5



   The balance sheet and the
    statement of cash flows are
    interrelated.

The cash on the balance sheet
  also appears as the end-of-
period cash on the statement of
          cash flows.

                                   56

				
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