Fundamentals of Financial Accounting

BA-603

Nature and Functions of Accounting

Describe the nature and types of business organizations

Types of Business Organizations

Service companies - provide services to customers Merchandise or retail companies sell products Manufacturing companies - make their own products

Types of Business Ownership

Proprietorships Partnerships Corporations

Role of accounting in business organizations

Organization Accountability

Legal obligation to manage the resources of an organization responsibly Stakeholders investors, creditors, suppliers, employees, customers and government agencies.

Business Activities
Operating Investing Financing

Accounting

Financial vs. Managerial Accounting

Financial Accounting - for those outside of the company

Reports are called Financial Statements Prepared according to GAAP

Managerial Accounting
Helps managers plan, control, and make decisions

GAAP

Generally Accepted Accounting Principles - established rules, principles, and concepts Formulated by Financial Accounting Standards Board (FASB)

GAAP

Primary objective of financial accounting provide information that is useful for making investment and taking decisions

Entity Concept

Accounting Entity organization that stands apart as a separate economic unit.

Reliability (Objectivity) Principle

Accounting information is based on the most reliable data available

Verifiable Free from bias Individuals would arrive at similar conclusions using same data

Cost Principle

Acquired assets and services should be recorded at their actual cost (historical cost)

Going Concern Concept

Assumes that the entity will remain in operation for the foreseeable future

S1-1
An organization that stands as a separate economic unit must not have its financial affairs confused with that of other entities. ____ 1. Cost principle a. ____ 2. Entity concept ____ 3. Going-concern concept ____ 4. Reliability principle
a.

S1-1
Data must be verifiable. c. The entity will remain in operation for the foreseeable future. ____ 1. Cost principle a. ____ 2. Entity concept c. ____ 3. Going-concern concept b. ____ 4. Reliability principle
b.

S1-1
Acquired assets and services should be recorded at their actual cost. d. ____ 1. Cost principle a. ____ 2. Entity concept c. ____ 3. Going-concern concept b. ____ 4. Reliability principle
d.

Use the accounting equation to analyze business transactions

Assets

Economic resources, expected to benefit the business in the future

Cash Accounts receivable Merchandise inventory Furniture Land

Liabilities

Liabilities economic obligations payable to an individual or organization outside the business

Accounts payable Notes payable Salary payable

Owners Equity

Owners Equity (capital) claim of business owner to the assets of the business

The Accounting Equation

Assets = Liabilities + Owners Equity

Economic Resources

Claims to Economic Resources

Revenues

Amounts earned by delivering goods or services to customers

Sales revenue Service revenue Interest revenue Dividend revenue

Expenses

Decrease in owners equity - occurs from using resources in the course of delivering goods or services to customers
Salary expense Rent expense Utilities expense Interest expense

Net Income (Loss)

Revenues Expenses

Components of Owners Equity

Revenues Expenses = Ending Owner + Net Income = Balance of Withdrawals (Net Loss) Owners Equity

Beginning Balance of Owners Equity + Owner Investments

Transaction

An event that affects the financial position of a particular entity and can be recorded reliably

S1-4
a. Debts that are owed to creditors b. Economic resources that are expected to be of benefit in the future c. Claims of the owner of the business b. _____ _____ a. c. _____ 1. Assets 2. Liabilities 3. Owners equity

S1-9
a. Assets b. Liabilities c. Owners Equity d. Revenues e. Expenses

e ____ a ____ c ____ a ____ e ____ e ____

1. Utilities Expense 2. Accounts Receivable 3. Gay Gillen, Capital 4. Office Supplies 5. Lease Expense, Computer 6. Salary Expense

S1-9
a. Assets b. Liabilities c. Owners Equity d. Revenues e. Expenses

a ____ e ____ d ____ b ____ a ____

7. Cash 8. Rent Expense, Office 9. Service Revenue 10. Accounts Payable 11. Land

Exercise 1-14
Assets Liabilities Owners Equity
$21,000

Gemstone

$82,800
72,000 ?

$?

$61,800

Sampson Hardware

34,000

38,000
Lundy Plumbing 102,700 79,800

22,900

Analyze this:
July 6: Hobt invested $60,000 in the business by opening a bank account in the name of K. Hobt, D.D.S.
What accounts are involved? Does the account increase or decrease?

(1) Cash (asset) (2) Owners Equity (equity)

Exercise 1-18
Date July Cash Assets Dental Supplies Land Liabilities Accounts Payable Owners Equity K. Hobt, Capital Type of Transaction

60,000

60,000 Investment

Assets = $60,000

Liabilities & Owners Equity = $60,000

Analyze this:
July 9: The business paid $55,000 cash for land. Ken plans to build an office building on the land.
DoesWhat accounts are involved? the account increase or decrease?

(1) Cash (asset) (2) Land (asset)

Exercise 1-18
Date July Cash Assets Dental Supplies Land Liabilities Accounts Payable Owners Equity K. Hobt, Capital Type of Transaction

6 9 Bal

60,000 -55,000 5,000 55,000 55,000

60,000 Investment

60,000
Liabilities & Owners Equity = $60,000

Assets = $60,000

Analyze this:
July 12: The business purchased dental supplies for $2,000 on account.
DoesWhat accounts are involved? the account increase or decrease?

(1) Dental Supplies (asset) (2) Accounts Payable (liability)

Exercise 1-18
Date July Cash Assets Dental Supplies Land Liabilities Accounts Payable Owners Equity K. Hobt, Capital Type of Transaction

Bal 12 Bal

5,000 2,000 5,000

55,000 2,000 2,000

60,000

2,000 55,000

60,000

Assets = $62,000

Liabilities & Owners Equity = $62,000

Analyze This:
July 15: The business treated patients and earned service revenue of $7,000, receiving cash.
DoesWhat accounts are involved? the account increase or decrease?

(1) Cash (asset) (2) Revenues (equity)

When the owner completes work, his interest in the assets increases

Exercise 1-18
Date July Cash Assets Dental Supplies Land Liabilities Accounts Payable Owners Equity K. Hobt, Capital Type of Transaction

Bal
15

5,000 2,000 55,000 7,000 12,000 2,000 55,000

Assets = $69,000

2,000

60,000 7,000 Revenue 67,000

Bal

2,000

Liabilities & Owners Equity = $69,000

Analyze This:
July 17: The business paid office rent, $1,000. Does the account increase or decrease? What accounts are involved? (1) Cash (asset) (2) Expense (equity)
When an expense is incurred, owners equity decreases

Exercise 1-18
Date July Cash Assets Dental Supplies Land Liabilities Accounts Payable Owners Equity K. Hobt, Capital Type of Transaction

Bal

12,000 2,000 55,000

2,000

67,000 -1,000 Rent Exp

17 -1,000

Bal

11,000 2,000 55,000

2,000

66,000

Assets = $68,000

Liabilities & Owners Equity = $68,000

Analyze This:
July 28: The business sold supplies to another dentist for the cost of those supplies, $500. Does the account increase or decrease? What accounts are involved? (1) Cash (asset) (2) Medical Supplies (asset)

Exercise 1-18
Date July Cash Assets Dental Supplies Land Liabilities Accounts Payable Owners Equity K. Hobt, Capital Type of Transaction

Bal 28 Bal

11,000 2,000 55,000 500 -500

2,000

66,000

11,500 1,500 55,000

Assets = $68,000

2,000

66,000

Liabilities & Owners Equity = $68,000

Analyze This:
July 31: The business paid $1,500 on account related to the July 12 purchase. Does the account increase or decrease? What accounts are involved? (1) Cash (asset) (2) Accounts Payable (liability)

Exercise 1-18
Date July Cash Assets Dental Supplies Land Liabilities Accounts Payable Owners Equity K. Hobt, Capital Type of Transaction

Bal 11,500 1,500 55,000 2,000 31 -1,500 -1,500 Bal 10,000 1,500 55,000 500

66,000

66,000

Assets = $66,500

Liabilities & Owners Equity = $66,500

Accounting for Business Transactions

The equation always stays in balance Each transaction affects at least two accounts, sometimes more Some transactions affect only one side of the equation; some affect both sides

Financial Statements

Income statement Statement of owners equity Balance sheet Statement of cash flows

Income Statement

Summary of an entitys revenues, expenses, and net income or net loss for a specific period Revenues - Expenses
Net Income: Revenues > Expenses Net Loss: Expenses > Revenues

Statement of Owners Equity

Summary of changes in an entitys owners equity during a specific period Beginning owners equity + Owners investments + Net income - Net loss - Owners withdrawals Ending owners equity

Balance Sheet

Reports the entitys assets, liabilities, and owners equity as of a specific date Assets = Liabilities + Owners Equity

Statement of Cash Flows

Reports cash receipts and cash payments during a period

Operating Investing Financing

S1-10
Income Statement (IS) Balance Sheet (BS) Statement of Owners Equity (OE)

_____1. BS _____2. BS _____3. IS IS _____4. OE _____5. BS _____6.

Accounts Receivable Notes Payable Advertising Expense Service Revenue J. P., Capital, June 1 Office Supplies

GUJJAR Corporations Income Statement For the Month Ended July 31, 2007 Revenue: Fees earned Expenses: Rent expense Net income
Double underline for your final answer Notice the proper heading

$7,000 1,000 $6,000

important to the reader of K. Hobt, capital, the financial reports

GUJJAR CORPORATIONS Statement of Owners Equity From income statement Dates are For the Month Ended July 31, 2007
$ 0 60,000 6,000 $66,000 0 $66,000

July 1, 2007 Add: Investment by owner Net income for the month Subtotal Less: Withdrawals by owner K. Hobt, capital, July 31, 2007

Details, Details

Note the headings for both of these statements Name of company Name of financial statement For the period ended . Both statements report activity over a period of time Final sums are double-underlined

Details, Details

Negative amounts are presented in parentheses Net income is computed first because you need that number to complete the ending balance in owners equity When preparing a financial statement, clearly label each line in the statement

Details, details

If you are using columnar paper, always start your number columns in the far right-hand column Numbers that are added or subtracted from each other should be in the same column

From statement GUJJAR CORPORATIONS equity of owners Balance Sheet July 31, 2007

Assets Cash $10,000 Medical supplies 1,500 Notice the Land 55,000 proper Total assets
heading

$ 66,500

Liabilities Accounts payable $500 Owners equity, M. Lange, capital 66,000 Total liabilities and owners equity $ 66,500

Details, Details

Note - heading for the balance sheet is different from other statements Name of company Name of financial statement Date This statement reports what the company owns and who has claims to the assets at a specific point in time

Exercise 1-20
Hawkins Graphic Design Balance Sheet November 30, 2009 Assets Cash Accounts receivable Supplies Equipment $2,000 6,900 600 15,500 Liabilities Accounts payable Note payable Total liabilities Owners Equity A. Samuel, capital Total Assets $25,000 14,500 $2,500 8,000 $10,500

Total liabilities and owners equity $25,000

Exercise 1-20
What type of business organization is Hawkins Graphic Design? You can tell what type of organization a company is by examining the owners equity section of the balance sheet. Since there is one owner capital account, it is a sole proprietorship 3. What does the balance sheet report? Financial position
1.

Exercise 1-21
Office Furniture Utilities Expense Accounts Payable T. Sullivan, Capital

Asset Expense Liability Owners Equity Revenue Asset Expense

Service Revenue Accounts Receivable

Supplies Expense

Exercise 1-21
Note Payable Rent Expense Cash Office Supplies Salary Expense Salaries Payable Property Tax Expense

Liability Expense Asset Asset Expense Liability Expense

Exercise 1-21
SYED, Architect Income Statement Year Ended December 31, 2009 Service revenue Expenses: Salary expense Rent expense Utilities expense Supplies expense Property tax expense Total expenses Net income $60,000 24,000 6,800 4,000 1,200 96,000 $65,200 $161,200

Exercise 1-21
SYED, Architect Statement of Owners Equity Year Ended December 31, 2009 Sullivan, capital, January 1, 2009 $ 0 Add: Net income 65,200 Investment by owner 15,000 Subtotal $80,200 53,100 Less: Owner withdrawal ? Sullivan, capital, December 31, 2009 $27,100

Explain the role of ethics in accounting and business

Ethics

The principles of right behavior that guide decision-making

Responsibility Fairness Trustworthiness Respect Caring Citizenship

Ethics

Audit
Examination of companys financial situation Performed by independent accountants (CPAs)

Standards of Professional Conduct

AICPA Code of Professional Conduct for Accountants IMA Standards of Ethical Conduct

THANK YOU for bearing me so long