Professional Documents
Culture Documents
Problem 1b An Introduction
Annie and Marta formed KFC (Hungary), Inc. (KFC) to
operate a Kentucky Fried Chicken franchise in Budapest.
During Year 1, KFC engaged in the following transactions:
KFC spends $50,000 training the staff to operate the
store.
Is this an asset, an expense in Year 1, or an expense to be
recognized over time?
Problem 1b An Introduction
Annie and Marta formed KFC (Hungary), Inc. (KFC) to
operate a Kentucky Fried Chicken franchise in Budapest.
During Year 1, KFC engaged in the following transactions:
An expense in Year 1:
o TRAINING EXPENSE $50,000 +
o CASH $50,000 Problem 1c An Introduction
Annie and Marta formed KFC (Hungary), Inc. (KFC) to
operate a Kentucky Fried Chicken franchise in Budapest.
During Year 1, KFC engaged in the following transactions:
KFC bought equipment for $150,000. By the time the
equipment was delivered its market value had increased
to $180,000 (due to exchange rates & inflation).
Should the equipment be listed at $150 K or $180 K ?
Problem 1c An Introduction
Annie and Marta formed KFC (Hungary), Inc. (KFC) to
operate a Kentucky Fried Chicken franchise in Budapest.
During Year 1, KFC engaged in the following transactions:
At cost: $150,000
o EQUIPMENT $150,000
+
CASH $150,000
Problem 1d An Introduction
Annie and Marta formed KFC (Hungary), Inc. (KFC) to
operate a Kentucky Fried Chicken franchise in Budapest.
During Year 1, KFC engaged in the following transactions:
KFCs bank added $40,000 to KFCs bank account for
interest earned by KFC on the account.
Should the interest be reported as ordinary income or as
a special type of income?
Problem 1d An Introduction
Annie and Marta formed KFC (Hungary), Inc. (KFC) to
operate a Kentucky Fried Chicken franchise in Budapest.
During Year 1, KFC engaged in the following transactions:
Special type of income:
CASH $40,000
+
INTEREST INCOME $40,000
+
o Reliable
AssetsLiabilities=Equity
The
Income Statement
REVENUES (from delivering goods and services)
$ from selling sweaters or drafting wills
EXPENSES (from delivering goods and services)
Cost of sweaters sold, Secretarys salary, Rental cost of office
space
NET INCOME (Difference between Revenues and Expenses)
REVENUES EXPENSES = NET INCOME
DEFINITION OF ASSETS
What the Entity Owns
Formal Definition (according to FASB):
o Assets are resources with probable future economic
benefits obtained or controlled by an entity resulting from
past transactions or events.
DEFINITION OF LIABILITIES
What the Entity Owes
Formal Definition:
o Liabilities are probable future sacrifices of economic
benefits arising from present obligations to transfer assets
or render services in the future.
DEFINITION OF EQUITY
The residual interest in the assets of an entity after subtracting
its liabilities.
In a business enterprise, the equity is the ownership interest.
Equity is sometimes referred to as net assets or net
worth
THE FUNDAMENTAL EQUATION
Key Implication:
o Any change on one side of the equation must be matched
by a change on the other side.
o Otherwise, the equation wont hold and the balance sheet
wont balance.
o To keep the fundamental equation in balance: There must
be at least two entries for every transaction to be
accounted for.
What is
owed
What is
owed
Double-Entry Bookkeeping
Double-entry bookkeeping is implemented by two mechanisms:
debits and credits
Debit = left-side entry
Credit = right-side entry
KEY: For any transaction, the total $ amount of the debit
entries and the total $ amount of the credit entries must
be equal.
o i.e., the left-side entries always equal the right-side
entries;
Debits = Credits
T
ACCOUNTS
There is a ledger or T account for each asset, liability, and
equity.
Double-Entry Bookkeeping
To keep the fundamental equation in balance, there must
be at least two entries for every transaction to be
accounted for.
At least one entry must be a debit.
At least one entry must be a credit.
Types of Debits
o 1. Increase in an asset
o 2. Decrease in a liability
o 3. Decrease in equity
Types of Credits
o 1. Decrease in an asset
o 2. Increase in a liability
o 3. Increase in equity
KEY: For any transaction, the total $ amount of the debit
entries and the $ amount of the credit entries must be
equal.
o i.e., the left-side entries (debits) always equal the
right-side entries (credits)
Sequence
JOURNAL ENTRIES
THE JOURNAL (DAILY BOOK)
o First book in the accounting system
o First record of each transaction
THE ENTRY
o DEBIT (To the left)
3 Questions:
o What Happened?
(state the transaction)
o Which Accounts are Affected?
(type of asset , liability, equity)
o Which Direction do the Accounts Move?
(increase + or decrease -)
o Then use map of fundamental equation to make entries in
correct places.
5. The Firm gives Larry the $800 sofa for his personal use
at home.
8. The former client forgives the $500 the Firm owes her.
Sequence: Statements
Balance Sheet
Sample Balance Sheets -- Assets
Current Assets
Defintion
Assets that are cash or are reasonably expected to be converted
into cash within one year in the normal course of business.
Examples
Cash
Marketable Securities
Accounts Receivable (A/R)
Inventory
Prepaid Expenses
Noncurrent Assets
Defintion
Non-cash assets that are not reasonably expected to be
converted into cash within one year in the normal course of
business.
Examples
Real Estate
Equipment
Computers