Accounting II Count Harder. Where do the Numbers Come From?? Professor Ray Wilson & edited by Professor Nelia Newell for Summer 2013 SM299

Transcription

1 Accounting II Count Harder Where do the Numbers Come From?? Professor Ray Wilson & edited by Professor Nelia Newell for Summer 2013 SM299

2 Financial Statements Track All Activities of the Business Operating: selling goods and services Operating Investing Investing: acquisition and sale of assets Financing Financing: capital from outsiders

3 Financial Statements Answer 2 Important Questions Where Are You?? Balance Sheet How Did You Get Here?? Income Statement Statement of Cash Flow

4 Balance Sheet shows where I was Cash Assets Income Statement shows what happened Balance Sheet shows where I am now Cash Assets Income Statement Liabilities & Equity Liabilities & Equity

5 In Case you Already Forgot Assets (what you own) minus Liabilities (what you owe) = Equity (what you are worth ) A L+E if: A L = E then: A = L + E At any single point in time

6 Financial Statements Track All Activities of the Business Operating: selling goods and services Operating Investing Investing: acquisition and sale of assets Financing Financing: capital from outsiders

7 Business Balance Sheet Shows Results of All Investing and Financing Activities up to A Specific Point In Time Operating A Investing L + E Financing Investing: acquisition and sale of assets Financing: capital from outsiders Assets = Liabilities + Equity

8 Business Balance Sheet Shows Results of All Activities up to a Point In Time Where Are You?? Assets: economic resources of a business that are expected to be used in future operations Liabilities: obligations of the business (monetary or nonmonetary) to non-owners Stockholders Equity: claims of the owners after creditor claims. Assets = Liabilities + Equity At a specific point in time

9 The Balance Sheet Equation What you own = How you paid for it Assets = Liabilities + Equity Investments in Non-owner Owner the business financing financing Stuff Purchased by the company $$ Borrowed by the company $$ Invested by owners or $$ Earned by the company At a Specific Point in Time

10 Income Statement Tells the Story for a Certain Period Revenue (what you sold to customers) Expenses (what it cost to run the company) = Net Income (what's left over for you!) The Important Part Tells what happened to the company over a certain period of time

11 Business Income Statement Focuses Primarily on Operating Results Over a Certain Period of Time Operating Investing Operating: selling goods and services Financing Revenue Expenses = Net Income

12 Statement of Cash Flow Tells the Same Story Another Way Cousin to the Income Statement Inflows and outflows of cash over a certain period of time Operating, investing and financing activities

13 When Are Business Events Recorded on the Financial Statements?? Operating Cycle Buy materials Pay for materials Produce goods Ship goods to customer Customer receives goods Receive payment from customer

14 Two Methods to Answer WHEN?? Cash Basis Accrual Basis

15 Cash-Based Accounting is Simple Revenues when cash is received Expenses when cash is paid. Simplest method but not very helpful in understanding the business

16 Accrual Accounting Looks at Business as TRADE Assets, liabilities, revenues, and expenses put on financial statements when the transaction that causes them occurs, not when cash is paid or received Required by GAAP / IFRS

17 Accrual Accounting Looks at Business as TRADE Revenue: value of what the company gives to the customer. Customer gives back Cash or Accounts Receivable (cash later) Expenses: value of the resources used to produce whatever it is that was traded

18 Accrual Basis Revenues recorded when goods or services are provided to customers Expenses recorded when resources are used to create goods and services provided to the customer Matching principle requires expenses be recorded in the same period as the associated revenue

19 OK, but How do you keep track of all this?? Where do the numbers come from??

20 Hey kids, let s open a hair salon Your parents agree to be partners with you. They borrow $50,000 and invest it in your business. The business gets a $20,000 loan from a bank to cover the rest of the costs. You use the money to get your Supercuts hair salon up and running: Select a rental location Renovate the space Buy furniture and salon equipment Buy a computer and software Buy shampoos and supplies

21 Analyzing Transactions Examples Purchased hair spray supplies for cash Duality of Effects Supercuts gives Cash Every transaction has at Supercuts takes Supplies least two effects on the basic accounting equation. A = A = L+ SE Cash (asset) decreases The Universe MUST stay in Supplies (asset) increases balance after we have tracked the transaction Assets = Liabilities + Stockholders' Equity - Cash No change No change + Supplies A = L + E

22 Implementing the Theory: For EVERY Transaction First, Determine accounts and effects Identify the accounts affected. MUST BE AT LEAST TWO ACCOUNTS EFFECTED Classify each as an asset, liability or equity account. Determine the direction of the effect (increase or decrease) on each account. Then, track and organize the transactions

23 **write this down, put a next to it** Accounting goes through each and every business event and uses transaction analysis to track the event 1. Determine which (at least) 2 accounts are effected by the event 2. Determine how much $$ and which direction the accounts are effected (+ or -) 3. Use Debits and Credits to record the event 4. Use T Accounts to keep track of the Debits and Credits

24 Transaction Analysis: 4 steps 1. Determine which (at least) 2 accounts are effected by the event 2. Determine how much $$ and which direction the accounts are effected (+ or -) MAKE SURE THE UNIVERSE IS IN BALANCE!!

25 Analyzing Transactions Examples Purchased hair supplies on credit Duality of Effects Duality of Effects Every transaction has at Supercuts gives Accounts Payable least two Supercuts effects gets on Supplies the basic accounting equation. A = L+ SE A = L+ SE The Universe MUST stay in Accounts Payable (liability) increases balance Supplies after (asset) we have increases tracked the transaction Assets = Liabilities + Stockholders' Equity + Supplies + Accounts Payable No change

26 Analyzing Transactions Examples Paid the amount owed on accounts payable Duality of Effects Supercuts gives Cash Supercuts relieves Accounts Payable A = L+ SE Cash (asset) decreases. Accounts Payable (liability) decreases Assets = Liabilities + Stockholders' Equity - Cash - Accounts Payable No change

27 Transaction Analysis: 4 Steps 1. Determine which (at least) 2 accounts are effected by the event 2. Determine how much $$ and which direction the accounts are effected (+ or -) 3. Use Debits and Credits to record the event 4. Use T Accounts to keep track of the Debits and Credits

28 T Accounts come from the Balance Sheet Balance Sheet Assets Liabilities and Equity shaped like a T, otherwise the Giants fans would get confused

29 We set up T-Accounts for each item in the financials to track activity Cash Note Payable Accounts Receivable Revenue Contributed Capital Wage expense etc

30 Record the Debits and Credits on the T Accounts Cash Note Payable Accounts Receivable Revenue Contributed Capital Wage expense etc

31 ***KEY SLIDE ALERT*** Use Debits & Credits to track activity in each T account Debit = Left Credit = Right Assets = Liabilities + Stockholders' Equity + Increases Decreases - - Decreases Increases + - Decreases Increases + Debit Credit Debit Credit Debit Credit Asset accounts increase on the left or debit side and decrease on the right or credit side. Liability accounts increase on the right or credit side and decrease on the left or debit side. Stockholders equity accounts increase on the right or credit side and decrease on the left or debit side. In every transaction, the total dollar value of all debits must equal the total dollar value of all credits.

32 The Balance Sheet Equation What Uses you of $$$ own = How Sources you paid of $$$ for it Debit Accounts = Credit Accounts Assets = Liabilities + Equity Investments in Non-owner Owner the business financing financing Stuff Purchased by the company $$ Borrowed by the company $$ Invested by owners or $$ Earned by the company

33 Transaction Analysis: 4 Steps 1. Determine which (at least) 2 accounts are effected by the event 2. Determine how much $$ and which direction the accounts are effected (+ or -) 3. Use Debits and Credits to record the event

34 (a)you incorporate Supercuts Super Salon on August 1. The company issues stock to you and your parents in exchange for $50,000, which is deposited in the company s bank account. 1. Determine which (at least) 2 accounts are effected by the event 2. Determine how much $$ and which direction accounts are effected (+ or -) 3. Use Debits and Credits to record the event. Assets = Liabilities + Stockholders' Equity Cash Supplies Furnishings & Equipment Accounts Payable Notes Payable Contributed Capital (a) 50,000 50,000

35 (a)you incorporate Supercuts Super Salon on August 1. The company issues stock to you and your parents in exchange for $50,000, which is deposited in the company s bank account. 1. Determine which (at least) 2 accounts are effected by the event 2. Determine Cash how much is an $$ Asset, and which so direction DEBIT accounts to increase are effected (+ or -) 3. Use Debits and Credits to record the event Contributed Capital is EQUITY, so CREDIT to increase Assets = Liabilities + Stockholders' Equity Cash Supplies Furnishings & Equipment Accounts Payable Notes Payable Contributed Capital (a) 50,000 50,000 Accounts Debit Credit DR Cash 50,000 CR Contributed Capital 50,000 Journal Entry

36 Transaction Analysis: 4 Steps 1. Determine which (at least) 2 accounts are effected by the event 2. Determine how much $$ and which direction the accounts are effected (+ or -) 3. Use Debits and Credits to record the event 4. Use T Accounts to keep track of the Debits and Credits

37 (a)you incorporate Supercuts Super Salon on August 1. The company issues stock to you and your parents in exchange for $50,000, which is deposited in the company s bank account. 1. Determine which (at least) 2 accounts are effected by the event 2. Determine how much $$ and which direction accounts are effected (+ or -) 3. Use Debits and Credits to record the event 4. Use T Accounts to keep track of the Debits and Credits Assets = Liabilities + Stockholders' Equity Cash Supplies Furnishings & Equipment Accounts Payable Notes Payable Contributed Capital (a) 50,000 50,000 Accounts Debit Credit DR Cash 50,000 CR Contributed Capital 50,000

38 (a)you incorporate Supercuts Super Salon on August 1. The company issues stock to you and your parents in exchange for $50,000, which is deposited in the company s bank account. 1. Determine which (at least) 2 accounts are effected by the event 2. Determine how much $$ and which direction accounts are effected (+ or -) 3. Use Debits and Credits to record the event 4. Use T Accounts to keep track of the Debits and Credits Assets = Liabilities + Stockholders' Equity Cash Supplies Furnishings & Equipment Accounts Payable Notes Payable Contributed Capital (a) 50,000 50,000 Accounts Debit Credit DR Cash 50,000 CR Contributed Capital 50,000 Cash Beg. Bal. - (a) 50,000 Contributed Capital - Beg. Bal. 50,000 (a)

39 (b) A construction company renovates your store space at a cost of $42,000, which your company pays in cash. 1. Determine which (at least) 2 accounts are effected by the event 2. Determine how much $$ and which direction accounts are effected (+ or -) 3. Use Debits and Credits to record the event 4. Use T Accounts to keep track of the Debits and Credits Assets = Liabilities + Stockholders' Equity Cash Supplies Furnishings & Equipment (b) (42,000) 42,000 Accounts Debit DR Furnishings & Equipment 42,000 Credit CR Cash 42,000 Cash Beg. Bal. - (a) 50,000 42,000 (b) Accounts Payable Notes Payable Furnishings & Equipment Beg. Bal. - (b) 42,000 Contributed Capital

40 (c.)your company installs $10,000 of equipment in the salon, paying $8,000 in cash and promising to pay the remaining $2,000 at the end of the month. 1. Determine which (at least) 2 accounts are effected by the event 2. Determine how much $$ and which direction accounts are effected (+ or -) 3. Use Debits and Credits to record the event 4. Use T Accounts to keep track of the Debits and Credits Accounts Debit Credit DR Furnishings & Equipment 10,000 CR Cash 8,000 CR Accounts Payable 2,000 Cash Beg. Bal. - (a) 50,000 42,000 (b) 8,000 (c) Furnishings & Equipment Beg. Bal. - (b) 42,000 (c) 10,000 Accounts Payable - Beg. Bal. 2,000 (c)

41 (d) Your company borrows $20,000 from a bank, depositing those funds in its bank account and signing a formal agreement to repay the loan in two years. 1. Determine which (at least) 2 accounts are effected by the event 2. Determine how much $$ and which direction accounts are effected (+ or -) 3. Use Debits and Credits to record the event 4. Use T Accounts to keep track of the Debits and Credits Accounts Debit Credit DR Cash 20,000 CR Notes Payable 20,000 Cash Beg. Bal. - (a) 50,000 42,000 (b) (d) 20,000 8,000 (c) Notes Payable - Beg. Bal. 20,000 (d)

42 (e) Your company signs a contract to purchase $3,000 of supplies from Pantene. Because the contract obligates you to take all these supplies over the next three months, they agree to give you a 50% discount. What is the correct debit to the Supplies Signing a account contract is an for important this month?? event, but not an accounting event A) $1,500 First accounting event is when services are provided B) $3,000 C)$0 D)$5000

43 (f) Your company buys $8,000 of furniture, paying the full amount in cash. NOTE: No cash involved, but there is a business transaction, so Accrual rules say Accounts it goes on the Financial Debit Statements Credit (g) Your company pays the $2,000 owed to the Furnishings & Equipment (+A) 8,000 (h) Your company receives Cash (-A) equipment $630 supplier (after discount) of supplies 8,000 from Pantene Cash and promises to pay for Furnishings them & next Equipment month. Accounts Beg. Bal. Debit - Credit (a) 50,000 Accounts 42,000 Payable (b) (-L) (b) 42,000 (d) 20,000 8,000 (c) (c) 10,000 Cash 8,000 (-A) Accounts (f) (f) Debit 8,000 Credit 2,000 DR Supplies Cash Accounts 630 Payable CR Accounts Payable 630 Beg. Bal. - Beg. Bal. - (a) 50,000 42,000 (b) (d) 20,000 8,000 (c) Accounts Payable 8,000 (f) 2,000 (g) - Beg. Bal. (g) 2,000 2,000 (c) 630 (h) - Beg. Bal. (g) 2,000 2,000 (c) Supplies Beg. Bal. - (h) 630

44 T-Account Balances Cash Beg. Bal. - (a) 50,000 42,000 (b) (d) 20,000 8,000 (c) 8,000 (f) 2,000 (g) End. Bal. 10,000 Accounts Payable - Beg. Bal. (g) 2,000 2,000 (c) 630 (h) 630 End. Bal. To compute the balance in T-accounts, draw a single line through each T- account below the amounts you wish to total. Then, calculate the ending balance by converting each T-account into equation form, as shown here for Cash and Accounts Payable. Cash Accounts Payable Beg. Bal. $ - $ - Add: "+" side 70,000 2,630 Minus: "-" side (60,000) (2,000) End. Bal. $ 10,000 $ 630

45 Supercuts Super Salon Balance Sheet at August 31, 2012 Assets Liabilities Cash $ 10,000 Accounts Payable $ 630 Supplies $ 630 Notes Payable $ 20,000 Current Assets $ 10,630 Total Liabilities $ 20,630 Equity Long Term Assets $ 60,000 Contributed Capital $ 50,000 Total Assets $ 70,630 Total Liabilities & Equity $ 70,630

46 *** ANOTHER KEY SLIDE ALERT*** Income Statement T Accounts Debit = Left Credit = Right Revenue Expenses - Decreases Increases + +Increases Decreases - Debit Credit Debit Credit Revenue accounts increase on the right or credit side and decrease on the left or debit side. Expense accounts increase on the left or debit side and decrease on the right or credit side. In every transaction, the total dollar value of all debits must equal the total dollar value of all credits.

47 Income Statement T Accounts Debit = Left Credit = Right Revenue Expenses - Decreases Increases + +Increases Decreases - Debit Credit Debit Credit Revenue accounts increase on the right or credit side and decrease on the left or debit side. Expense accounts increase on the left DEBIT or debit side and decrease on the right or credit side. Expenses are USES of $$ Revenue is SOURCE of $$ from Customers CREDIT In every transaction, the total dollar value of all debits must equal the total dollar value of all credits.

48 Debits = Uses, Credits = Sources DEBIT Accounts are USES of $$$ USED either today (expenses) or Will be USED in the future (assets) CREDIT Accounts are SOURCES of $$ From Non-Owners (liabilities) From Owners (equity) From Customers (revenue)

49 Now Where Are We?? Balance Sheet A= L + E Income Statement: R E = NI Debits and Credit rules Using T accounts to track events and build statements