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

         Relevant
          Relevant        Affects the decision of
                          Affects the decision of
       Information
        Information              its users.
                                  its users.

   Reliable Information
   Reliable Information        Is trusted by
                                Is trusted by
                                   users.
                                    users.

       Comparable
       Comparable            Used in comparisons
                              Used in comparisons
       Information        across years & companies.
                           across years & companies.
        Information
                                                       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
Assets    =    Liabilities
               Liabilities    +     Equity
                                    Equity




                      Liabilities
           Assets      + Equity


                                             1-3
               Assets

                  Cash
                 Cash
  Accounts
Accounts                          Notes
                                Notes
  Receivable
Receivable                      Receivable
                              Receivable
               Resources
               Resources
               owned or
                owned or
 Vehicles      controlled
               controlled
Vehicles                            Land
                  by a
                  by a             Land
                company
                company
     Store
    Store                      Buildings
                              Buildings
    Supplies
   Supplies       Equipment
                 Equipment
                                             1-4
                 Liabilities

    Accounts
  Accounts                      Notes Payable
                               Notes Payable
     Payable
   Payable

                 Creditors’
                 Creditors’
                 claims on
                 claims on
                   assets
                   assets
 Taxes Payable
Taxes Payable                   Wages Payable
                               Wages Payable


                                                1-5
                Equity

  Contributed
Contributed                      Retained
                               Retained
    Capital
  Capital                        Earnings
                               Earnings


                Owner’s
                 Owner’s
                claim on
                claim on
                 assets
                  assets


                   Dividends
                 Dividends
                                            1-6
      Expanded Accounting Equation

 Assets
 Assets
 Assets
 Assets       =
              =     Liabilities
                    Liabilities
                    Liabilities
                    Liabilities      +
                                     +       Equity
                                             Equity
                                             Equity
                                             Equity


Contributed
Contributed   _   Dividends                  _ Expenses
  Capital
  Capital
                  Dividends
                              +   Revenues
                                  Revenues     Expenses




                          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.




                                             1-9
      Transaction Analysis

Purchased supplies paying $1,000 cash.




                                         1-10
      Transaction Analysis

Purchased equipment for $15,000 cash.




                                        1-11
      Transaction Analysis

Purchased Supplies of $200 and
Equipment of $1,000 on account.




                                  1-12
        Transaction Analysis

Borrowed $4,000 from 1st American Bank.




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




                                                  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.




                                         1-16
        Transaction Analysis

 Paid salaries of $800 to employees.




Remember that expenses decrease equity.
                                          1-17
         Transaction Analysis
Dividends of $500 are paid to shareholders.




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




                                                  1-19
        Income Statement

                            Net income is the
                                difference
                                 between
                             Revenues and
                               Expenses.


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

The Balance Sheet describes
 The Balance Sheet describes
a company’s financial position
 a company’s financial position
at a point in time.
 at a point in time.




                                   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                _ Expenses
  Capital     Withdrawals + Revenues
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

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

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


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

n    Debits are ALWAYS entered 1st.
n    Credits are INDENTED and listed after
     the debit accounts or accounts.
n    Do not use dollar signs.
n    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    3,000
                                         and total credits to
Bal.     900                                       Aug 17 2,100
                                       determine the balance
                                                            Bal. 5,100
                                         in each account. If
                                      debits are greater than
          Supplies                          Rent Expense
                                        credits, the account
Aug 2          200                  Aug 31 a 500 balance
                                         has debit
                                            and vice versa
         Building                            Salary Expense
Aug 4    50, 000
         30
                                    Aug 31     1,200
 Revenue Principle

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

n    How much revenue is recognized?
     ¡   Cash value of item transferred to
         customer

31
     The Matching Principle

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



32
 Adjusting Entries

n    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?

n    If “No”, prepare an adjusting entry

33
 Adjusting Entries

n    Prepared at end of an accounting
     period
n    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
              Prepaid Asset



Used up portion =
Used up portion =       Unused portion =
                        Unused portion =
    Expense
    Expense                 Prepaid
                            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

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

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

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

37
     Tips

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



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