introduction - ACCOUNTING Introduction 1 BALANCE SHEET...

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Unformatted text preview: ACCOUNTING Introduction 1 BALANCE SHEET ASSETS LIABILITIES/EQUITY The things of economic value that are in the business Who provided those things into the business (creditors or owners) 2 BALANCE SHEET ASSETS LIABILITIES/EQUITY Cash Accounts Receivable Inventory Equipment Buildings Land Accounts Payable Salaries Payable Notes Payable Bonds Payable Owner’s Equity 3 BALANCE SHEET There are only two entities which provide assets into a business: creditors and owners Between the two, they claim 100% of the assets in a business The right side (creditors & owners) claims 100% of the left side (assets), so the two sides are equal in amount 4 BALANCE SHEET ASSETS Cash Accounts Receivable Inventory Equipment Buildings Land Total LIABILITIES/EQUITY 20% 30% 20% 10% 10% 10% 100% Accounts Payable Salaries Payable Notes Payable Bonds Payable 10% 10% 20% 20% Owner’s Equity 40% Total 100% 5 BALANCE SHEET ASSETS LIABILITIES/EQUITY Things which have enduring economic value to the company Liabilities Value transcends today, extending into the future ( future value) Money we have borrowed that we have to pay back (debt) Creditors’ claim to assets Equity Owner’s claim to assets 6 BALANCE SHEET ASSETS Cash Car Boat Plane Total 100,000 200,000 400,000 300,000 LIABILITIES/EQUITY How could we fill in the right side of the Balance Sheet so that the company is not nearly as well off as the left side would indicate? 1,000,000 7 BALANCE SHEET ASSETS Cash Car Boat Plane 100,000 200,000 400,000 300,000 LIABILITIES/EQUITY Car Loan Payable 200,000 Boat Loan Payable 400,000 Plane Loan Payable 300,000 Owner’s Equity Total 1,000,000 Total 100,000 1,000,000 8 BALANCE SHEET Let’s say the company falls behind in the payments on the car loan, and the bank requires that it pay back the entire balance of the loan immediately The only choice would be to sell the car If it sells the car, the new Balance Sheet would be….. 9 BALANCE SHEET ASSETS Cash Boat Plane LIABILITIES/EQUITY 300,000 400,000 300,000 Car Loan Payable 200,000 Boat Loan Payable 400,000 Plane Loan Payable 300,000 Owner’s Equity Total 1,000,000 Total 100,000 1,000,000 10 BALANCE SHEET The company then pays the bank New Balance Sheet is….. 11 BALANCE SHEET ASSETS Cash 100,000 Boat Plane 400,000 300,000 LIABILITIES/EQUITY Boat Loan Payable 400,000 Plane Loan Payable 300,000 Owner’s Equity Total 800,000 100,000 Total 800,000 12 BALANCE SHEET Let’s say the company falls behind in the payments on the boat loan, and the bank requires that it pay back the entire balance of the loan immediately The only choice would be to sell the boat If it sells the boat, the new Balance Sheet would be….. 13 BALANCE SHEET ASSETS Cash Plane LIABILITIES/EQUITY 500,000 300,000 Boat Loan Payable 400,000 Plane Loan Payable 300,000 Owner’s Equity Total 800,000 100,000 Total 800,000 14 BALANCE SHEET The company then pays the bank The new Balance Sheet is….. 15 BALANCE SHEET ASSETS Cash 100,000 Plane 300,000 LIABILITIES/EQUITY Plane Loan Payable 300,000 Owner’s Equity Total 400,000 100,000 Total 400,000 16 BALANCE SHEET Let’s say the company falls behind in the payments on the plane loan, and the bank requires that it pay back the entire balance of the loan immediately The only choice would be to sell the plane If it sells the plane, the new Balance Sheet would be….. 17 BALANCE SHEET ASSETS Cash LIABILITIES/EQUITY 400,000 Plane Loan Payable 300,000 Owner’s Equity Total 400,000 100,000 Total 400,000 18 BALANCE SHEET The company pays the bank The new Balance Sheet is….. 19 BALANCE SHEET ASSETS Cash LIABILITIES/EQUITY 100,000 Owner’s Equity Total 100,000 100,000 Total 100,000 20 INCOME STATEMENT The Income Statement reports on how a company fared during the year doing the things it is in business to do It displays the revenues and expenses of the operations of the company, and at the bottom reveals either “Net Income” (the company is better off than before) or “Net Loss” (the company is worse off than before) Its kind of like a report card 21 INCOME STATEMENT Revenues Expenses Net Income (Loss) 22 INCOME STATEMENT Consulting Revenue Rental Revenue Interest Revenue Telephone Expense Travel Expense Entertainment Expense Net Income (Loss) 23 INCOME STATEMENT Revenue: Money we have earned that we get to keep Expense: Payments for things which do not have future value Net Income / Net Loss: Reported back to Owners Equity/Retained Earnings on the Balance Sheet 24 COMPARISONS REVENUE LIABILITY Money we have earned that we get to keep Money we have borrowed that we have to pay back EXPENSE ASSET Payments for things which do not have future value Payments for things which do have future value 25 INTERRELATIONSHIPS There is a relationship between the left and right sides of the Balance Sheet Creditors and owners share a 100% claim to the assets There is also a relationship between the Balance Sheet and the Income Statement At the end of each year, the Income Statement updates the Balance Sheet (Retained Earnings) with the results of the company’s operations (Net Income or Net Loss, meaning the owner is either better off or worse off) 26 BALANCE SHEET ASSETS Cash LIABILITIES/EQUITY 10,000 Accounts Payable 5,000 Owner’s Equity Total 10,000 5,000 Total 10,000 27 INCOME STATEMENT Net Income 0 28 INTERRELATIONSHIPS The company earns 5,000 in rental revenue 29 BALANCE SHEET ASSETS Cash LIABILITIES/EQUITY 15,000 Accounts Payable 5,000 Owner’s Equity 5,000 30 INCOME STATEMENT Rental Revenue 5,000 31 INTERRELATIONSHIPS It pays 3,000 for travel expense 32 BALANCE SHEET ASSETS Cash LIABILITIES/EQUITY 12,000 Accounts Payable 5,000 Owner’s Equity 5,000 33 INCOME STATEMENT Rental Revenue 5,000 Travel Expense 3,000 Net Income 2,000 34 INTERRELATIONSHIPS The year began with 10,000 total assets and ended with 12,000 total assets The company is better off at the end of the year than at the beginning That is indicated in the Income Statement which reveals 2,000 net income 35 INTERRELATIONSHIPS The owner takes the risk and is responsible for running a profitable or unprofitable operation Therefore, the owner is entitled to claim the additional assets that result from the successful operations So the owners equity account is increased by the amount of increased wealth (net income)…or, if it were a bad year, it would be decreased by the amount of decreased wealth (net loss) 36 INTERRELATIONSHP BALANCE SHEET Assets Liabilities INCOME STATEMENT Revenue Expense Owners Equity Net Income (Loss) 37 INTERRELATIONSHIPS In other words, the bottom line of the Income Statement is reported back to the Balance Sheet The 2,000 of net income goes to Owner’s Equity 38 BALANCE SHEET ASSETS Cash LIABILITIES/EQUITY 12,000 Accounts Payable 5,000 Beginning OE Net Income Ending OE Total 12,000 5,000 +2,000 7,000 Total 12,000 39 INCOME STATEMENT Rental Revenue 5,000 Travel Expense 3,000 Net Income 2,000 40 INTERRELATIONSHIPS Next example….. 41 BALANCE SHEET ASSETS Cash LIABILITIES/EQUITY 10,000 Accounts Payable 5,000 Owner’s Equity Total 10,000 5,000 Total 10,000 42 INCOME STATEMENT Net Income 0 43 INTERRELATIONSHIPS The company earns 8,000 in consulting revenue 44 BALANCE SHEET ASSETS Cash LIABILITIES/EQUITY 18,000 Accounts Payable 5,000 Owner’s Equity 5,000 45 INCOME STATEMENT Consulting Revenue 8,000 46 INTERRELATIONSHIPS It pays 12,000 in legal fees 47 BALANCE SHEET ASSETS Cash LIABILITIES/EQUITY 6,000 Accounts Payable 5,000 Owner’s Equity 5,000 48 INCOME STATEMENT Consulting Revenue 8,000 Legal Expense 12,000 Net Loss (4,000) 49 INTERRELATIONSHIPS The year began with 10,000 total assets and ended with 6,000 total assets The company is worse off at the end of the year than at the beginning That is indicated in the Income Statement which reveals 4,000 net loss 50 INTERRELATIONSHIPS The owner takes the risk and is responsible for running a profitable or unprofitable operation Therefore, the owner must also suffer a reduced claim to assets that result from unsuccessful operations So the owners equity account is decreased by the amount of decreased wealth (net loss) 51 INTERRELATIONSHP BALANCE SHEET Assets Liabilities INCOME STATEMENT Revenue Expense Owners Equity Net Income (Loss) 52 INTERRELATIONSHIPS In other words, the bottom line of the Income Statement is reported back to the Balance Sheet The 4,000 of net loss goes to Owner’s Equity 53 BALANCE SHEET ASSETS Cash LIABILITIES/EQUITY 6,000 Accounts Payable Beginning OE Net Loss Ending OE Total 6,000 Total 5,000 5,000 (4,000) 1,000 6,000 54 INCOME STATEMENT Consulting Revenue 8,000 Legal Expense 12,000 Net Loss (4,000) 55 THE PROCESS The order of events in the accounting process….. 56 PROCESS DAILY DAILY DAILY MONTHLY MONTHLY Economic Event General Journal General Ledger Trial Balance Financial Statements An event Sequentially Storehouse of Lists all which impacts records all of accounts accounts and the company the economic which keep balances from (make a sale, events which detailed the General borrow occur records of Ledger money, etc) activity Must be a real, not imagined event Sends (posts) Receives numbers to (posts) the General numbers from Ledger the General Journal Data is used to prepare Financial Statements Balance Sheet and Income Statement Prepared using data from the Trial Balance 57 DOUBLE ENTRY SYSTEM Rules of the road Debit = left side of an account Credit = right side of an account When assets or expenses go up you debit the account When assets or expenses go down you credit the account When liabilities, equity or revenues go up you credit the account When liabilities, equity or revenues go down you debit the account These are rules, they are not intuitive 58 ACCRUAL ACCOUNTING The accrual (not “a cruel”) basis of accounting recognizes revenues when they are earned and expenses when they are incurred The timing of cash flows is inconsequential to this method In other words, it does not matter when cash comes in or goes out when recording revenue and expense 59 60 61 62 63 ...
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introduction - ACCOUNTING Introduction 1 BALANCE SHEET...

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