CH1 Accounting in Action Black-White

Accounting in Action
ACCT-115
Learning Points
1. Accounting & users of accounting information (review) 2. Three major forms of business organizations 3. Accounting terms & the accounting equation 4. Transaction analysis (effects on the accounting equation) 5. Four basic financial statements (contents, purposes, and interrelationships)
Chapter 1
ACCT115_WX_CH1_ACCOUNTING IN ACTION
What is Accounting ?
Wei Xus Definition (absolutely NOT Acceptable in an exam):
Learning Point 1
Accounting & Users of Accounting Information
Accounting is a system that helps to generate information about MONEY it counts monetary items; records monetary transactions; and tells people about the monetary info. of a company Textbook Definition: Accounting is an information system that identifies, records, and communicates economic events of an organization to interested users.
Users of Accounting Info.
Users of Accounting Info.
External Users
Stockholders (owners) Creditors (e.g. banks) Government Agencies Competitors Suppliers/Customers
Internal Users
Managers Executives Employees
External Users Information Needs

Satisfied by
Internal Users Information Needs

Satisfied by
Financial Accounting
All of them need information to make economic decisions
Managerial Accounting
(Internal Reports)
(Annual & Quarterly Reports)
ACCT115_WX_CH1
Three Forms of Businesses

There are three major forms of business organizations
Learning Point 2
Three Major Forms of Businesses
Proprietorship Partnership Corporation

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ACCT115 ACCT116

A proprietorship is owned by one individual

A partnership is owned by two or more individuals; they are co-owners for profit
Characteristics
Bobs
Owner controlled Often small service-type businesses Owner receives any profits, and suffers any losses Owner personally liable for all debts (unlimited liability)
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Characteristics
Bob & Mays
More financial resources Often retail or servicetype businesses Owners share in any profits and losses based on agreements Generally unlimited personal liability
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A corporation is a legal entity separate from its owners (stockholders); Its ownership is divided into transferable shares of stocks

In United States,
15%
Total number of companies

85%
Proprietorship & Partnership Corporation
B & M Inc.
Ability to obtain a large amount of financial resources by issuing stocks Ease to transfer ownership Limited liability: owners (stockholders) only risk their initial investments
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Characteristics
11%
Total revenues (income) earned

89%
Proprietorship & Partnership Corporation
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ACCT115_WX_CH1
Basic Accounting Terms

Assets
Learning Point 3
Liabilities
The most basic accounting terms you need to know
Accounting Terms & Accounting Equation
Owners Equity (for Proprietorship, Partnership)

1) Investments 2) Drawings 3) Revenues 4) Expenses
Net Income (Loss)
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Assets are resources owned by a business and will provide future benefits to the business
Examples of Assets:
The Accounting Equation
_______________________ _______________________ _______________________ _______________________ _______________________ _______________________

What are assets?
Assets
Claims (Rights) against Assets
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The Accounting Equation

The Accounting Equation MUST Always Balance!!

Liabilities are debts & obligations of the business (whatever the business owes); they represent creditors claims on business assets
Examples of Liabilities:
Assets
Liabilities
Owners Equity
What are liabilities?
The claims of creditors
The (residual) claims of owners
Note: Claims of creditors must be satisfied before owners.

_______________________ _______________________ _______________________ _______________________ _______________________ _______________________

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ACCT115_WX_CH1

Attention!
Other than money, a business can owe others goods or services! Thats also liabilities a business should account for!! e.g. customer paid in advance for show tickets

Owners Equity ownership interest of a business; represents owners claim on the business total assets; often referred to as residual equity.
Called:
Unearned Revenue
The size ($) of Owners Equity shows the true value of a business.
Then, what is Owners equity?
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Revenues are the inflow of assets (not necessarily in cash; can be other assets) from selling goods or services.
Revenues are often named according to their sources, such as sales revenue, service revenue, rent revenue...
Assets = Liab. +
O.E.
What are revenues?
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Expenses are costs incurred (costs of assets or services used) to generate revenues during a period
Can you think of some examples? _____________________ _____________________ _____________________ _____________________ _____________________

Cars, computers, are classified as assets, but I think theyre also costs to the business, right? Why they are not classified as expenses?
What are expenses?
Question!
______________________ ______________________
______________________ ______________________ ______________________ ______________________

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ACCT115_WX_CH1

Revenues (-) Expenses

4 factors affect O.E.
Assets = Liab. +
Owners Equity
Revenue Expense
Net Income (Loss)

(1). Net Income (Loss) belongs to Owners ! (2). Earning Net Income does NOT mean youll have CASH in bank, WHY?
Owners Investment Owners Drawing
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The Accounting Equation - Revisit

Assets = Liab.
+
Practice
Ex-1: As of 1/1/2009 (at a point of time!), Example Corp. had assets of $3,500 and owners equity of $2,000. What were the liabilities as of 1/1/2009?
O.E.
Every year, Changes in O.E. include:
Prior Year Balance ( + ) New Investment ( ) Drawings ( + ) Revenues ( ) Expenses

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Owners Activity
Ex-2: (contd) If in year 2009, total assets increased by $1,300, total liabilities decreased by $500, owner invested $1,200 and withdrew $400, what was the net income for year 2009?
Net Income (Loss)
Results from Operation
Try it
Shall We Record it ?
Criterion: Is the financial position (assets, liabilities, owners equity) of the company changed?
Learning Point 4
Pai d
Transaction Analysis
A/L/OE Changed? Record?
Purchase computer
Answer Phone calls
Pay utilities
______
______
______
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ACCT115_WX_CH1
Transactions are economic events that would change a business financial position (i.e. A, L, OE) NOT all activities represent transactions to be recorded. May be external or internal. Each transaction has a Dual Effect on the accounting equation.
Assets
Borrowed bank loan Paid off debt Owner made new investment Earned revenues (How to earn Rev. ?) Paid for expenses (salaries, utilities..) Withdrew cash for personal use
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Liab.
O.E.
Try it
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Transaction 1
Mr. Rabbit decided to open a small home designing business to be organized as a proprietorship. He name it Cool-Home On 1/1/2009, Mr. Rabbit invested $15,000 cash as the initial operation fund.
Rabbit
Now, lets make it more REAL
Cool Home
(numerical examples)
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Transaction 1 - Analysis
Assets
Cash
1/1 $15,000 =
Transaction 2
On 1/5/2009, Cool-Home, Inc. purchased office equipments by issuing a $7,000 check
Liab.
O.E.
Rabbit, Capital
$15,000 (Investment)
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ACCT115_WX_CH1
Assets
Cash $15,000 1/5 ($7,000) + $15,000 $7,000 $7,000
Rab
Transaction 3
On 1/12/2009, Cool-Home, Inc. purchased computer paper and other supplies expected to last several months from Sunny Supply Co. for $1,600; Sunny Supply allows Cool-Home to pay this bill in Feb, the next month NOTE: such transaction is often referred to as a purchase on account or a credit purchase.
Liab.
O.E.
Rabbit, Capital $15,000
Office Equipment
New Bal. $ 8,000
Sunny Supply
$15,000
Cool-Home
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Assets
Cash Old Bal. $8,000 1/12 Supplies Office Equipment $7,000
Transaction 4
O.E.
=
=
Liab.
On 1/18/2009, Cool-Home provided designing services to Prof. Owl totaled $3,500. $1,500 cash was received from Prof. Owl, the balance of $2,000 was billed to him on account.
Ill pay my bill, I promise
Accounts Payable
$1,600 $7,000 =
$1,600 $1,600 + $15,000

Rab
New Bal. $8,000 + $1,600 +
C-H
$16,600
$16,600 Bill
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Assets
Jan 1 5 12
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Transaction 5
On 1/23/2009, Cool-Home received $5,000 cash from Dr. Bear in advance for designing services to be provided one month later.
=
Office Equip $7,000 $1,600
Liab.
Accounts Payable
O.E.
Rabbit, Capital $15,000 Investment
Cash $15,000 ($7,000)
Accounts Receivable Supplies
$1,600 $3,500 Service Rev

Rab
$1,500
$2,000
C-H
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ACCT115_WX_CH1
Assets
Jan 1 5 12 18
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Transaction 6
On 1/26/09 Cool-Home paid $1,000 for office rent; $1,200 for employees salaries and $300 for utilities. All payments were made in cash.
Investment
=
Supplies Office Equip $7,000 $1,600
Liab.
A/P
O.E.
Cash $15,000
($7,000)
A/R
Unearned Revenue
$1,600 $3,500 $5,000

C-H
$1,500 $5,000
$2,000
Service Rev
$1,000
Rab
$1,200 $300
NOTE: Once services are provided, unearned revenue (liability) will become earned revenue What would be the effects on accounting equation?
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Try it
Transaction 7
On 1/28/09, The sum of $600 in cash was received from Prof. Owl who has previously been billed for services (He owes the company $2,000, remember?)
Assets
Jan 1 5 12 18 23 26 $1,500 $5,000 $2,000 Cash $15,000
($7,000)
=
Office Equip $7,000
Liab.
A/P
O.E.
A/R
Supplies
Unearned Revenue
$1,600
$1,600 $3,500 $5,000 Service Rev

Rab
My next pay day is Feb. 11
C-H
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Try it
Transaction 8
On 1/31/2009, Mr. Rabbit withdrew $500 cash from Cool-Home for a winter vacation to Forest Resort
Life is beautiful!
Rab
Assets
Jan 1 5 12 18 23 $1,500 $5,000 $2,000 Cash $15,000
($7,000)
=
Office Equip $7,000
Liab.
A/P
O.E.
A/R
Supplies
Unearned Revenue
$1,600
$1,600 $3,500 $5,000 ($1,000) Rent Exp ($1,200) Salaries Exp ($ 300) Utilities Exp Service Rev
C-H
26 ($2,500) 28
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ACCT115_WX_CH1
Try it
A Tabular Summary
Assets
Assets
Jan 1 5 12 18 23 $1,500 $5,000 $2,000 Cash $15,000
($7,000)
=
Office Equip $7,000
Liab.
A/P
O.E.
Rabbit, Capital $15,000 Investment Jan 1 5 12 18 $3,500 Service Rev 23 26 28 31 Cash $15,000
($7,000)
=
Office Equip $7,000
Liab.
A/P
O.E.
A/R
Supplies
Unearned Revenue
A/R
Supplies
Unearned Revenue
$1,600 $1,500 $5,000 ($2,500) $600 ($600) $2,000
$1,600 $3,500 $5,000 ($1,000) Rent Exp ($1,200) Salaries Exp ($ 300) Utilities Exp ($500) Drawings Service Rev
$1,600
$1,600 $5,000 ($1,000) Rent Exp ($1,200) Salaries Exp ($ 300) Utilities Exp
26 ($2,500) 28 31 $600 ($600)
31 ($500) $12,100 $1,400 $1,600 $7,000 $1,600 $5,000
$15,500
$22,100
$22,100
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Goal of Financial Accounting
Learning Point 5
The Four Basic Financial Statements
To provide interested users (esp. external users) with useful, relevant financial information about a business through annual reports, including
4 financial statements
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Types of Financial Statements

Type 1. To report the financial condition of a business at a point in time.
- Balance Sheet -
(1) Income Statement

Income Statement is a summary of the revenue and expenses for a specific period of time (month, quarter or year).
Its purpose is to report success or failure of the companys operation during that period
Type 2. To report changes in a business financial condition over a period of time.

- Income Stat. - Owners Equity Stat. - Stat. of Cash Flows ACCT115_WX_CH1_ACCOUNTING IN ACTION
Shows Net Income (or loss) earned during a period
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ACCT115_WX_CH1
(1) Income Statement

1. Head up the statement
(2) Owners Equity Statement

Owners Equity Statement indicates changes in ownership interest during an accounting period
(Review: Owners Equity is affected by 4 factors)
Cool-Home Income Statement

For the Month Ended January 31, 2009
Revenues: Service Revenue Expenses: Rent Expense Salaries Expense Utilities Expense Net income
Note the time period
2. List all revenue
$3,500 $1,000 1,200 300

4. Obtain the net income
3. List all expense
2,500 $ 1,000
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Shows changes in Owners E. during a period
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Cool-Home Owners Equity Statement

1. Head up the statement
Cool-Home Owners Equity Statement

Time period !
Rabbit, Capital, January 1, 2009 Add: Investment Net Income Less: Drawings Rabbit, Capital, January 31, 2009 $15,000 $1,000
2. Beg. balance 3. Adj. for: + Invest. + Net Inc. Drawing
Rabbit, Capital, January 1, 2009 Add: Investment Net Income Less: Drawings Rabbit, Capital, January 31, 2009
Remember: Drawings are NOT expenses they are not used to compute net income!
5. End. balance
$ $15,000 $1,000
16,000 500 $15,500
16,000 500 $15,500
Its from the Income Statement

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(3) Balance Sheet

Balance Sheet reports the financial condition
as of a point in time. Its prepared based on the accounting equation: Assets = Liab. + Owners Equity
1. Head up the statement 2. List & sum asset items
Cool-Home Balance Sheet

January 31, 2009
Stat. of C.F.
Assets
Note that the date is a specific point in time
Cash Accounts Receivable Supplies Office Equipments Total assets
$ 12,100 1,400 1,600 7,000 $22,100
Shows companys A, L, & OE at a point of time
Liabilities and Owners Equity Liabilities Accounts Payable 3. List & Sum Liab. and O.E. Unearned Revenue Total liabilities Owners Equity Rabbit, Capital, Jan 31 Total liabilities and stockholders equity
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$ 1,600 5,000 $ 6,600

Match
from Owners Equity Stat.
$ 15,500 $ 22,100
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ACCT115_WX_CH1
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(4) Statement of Cash Flows

Statement of Cash Flows reports the cash effects of a companys operations during a period; it indicates net changes in cash as well as the ending cash balance.
(4) Statement of Cash Flows

Three categories on the statement of cash flows are:
1. Cash flows from operating activities
Shows changes in Cash during a period
2. Cash flows from investing activities 3. Cash flows from financing activities
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Cool-Home Statement of Cash Flows

Note the time period
Financial Stat. Interrelationships

4-step process
For year ended 12/31/09
Cash flows from operating activities: Cash receipts Cash payments (for expenses) Net cash provided by operating activities Cash flows from investing activities: Investments in equipments Net cash used in investing activities Cash flows from financing activities: Investments by owner Drawings by owner Net cash provided by financing activities Net increase in cash during Jan 2009 Cash as of January 1, 2009 Matches Bal. Sheet Cash as of January 31, 2009
$7,100 (2,500) $4,600 $(7,000) $(7,000) $15,000 (500) $14,500 $12,100 0 $12,100
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Another Example,
At the date of 12/31/08
4 Cash Flow Statement

Cash--Op. Act. $ 973,000 Cash--Inv. Act. (1,188,000) Cash--Fin. Act. 245,000 Net increase $ 30,000 Beg. cash 80,000 End. cash $ 110,000
At the date of 12/31/09
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Balance Sheet 12/31/09
Cash Other Total A $ 110,000 4,975,000 $5,085,000
Balance Sheet 12/31/08

Cash Other Total A. $ 80,000 4,550,000 $4,630,000
1 Income Statement
Revenues $12,443,000 Expenses 11,578,400 Net income $ 864,600 Owners Equity 2 Statement O/E 01/01/07 $1,660,000 Investment 100,000 Net income 864,600 Drawings (400,000) O/E 12/31/07 $2,224,600
Liabilities $2,970,000 Owners E 1,660,000 Total $4,630,000
Liabilities $2,860,400 Owners E $2,224,600 Total $5,085,000
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Homework CH1
HW-CH1. Accounting in Action
EXERCISE: E1-5, E1-10, E1-11 PROBLEM: P1-2A
Format Requirements: You may type or handwrite the work Please specify the following on TOP of your work: Name Section Number Class ID Number *
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End of CH1
1) 2)
See You !
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ACCT115_WX_CH1
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Accounting in Action

Accounting & Users of Accounting Information

Users of Accounting Info.

Users of Accounting Info.

External Users Information Needs

Internal Users Information Needs

(Annual & Quarterly Reports)

Three Forms of Businesses

Three Major Forms of Businesses

Proprietorship Partnership Corporation

Three Forms of Businesses

Three Forms of Businesses

Three Forms of Businesses

Three Forms of Businesses

Total number of companies

Proprietorship & Partnership Corporation

Total revenues (income) earned

Proprietorship & Partnership Corporation

Basic Accounting Terms

The most basic accounting terms you need to know

Accounting Terms & Accounting Equation

Owners Equity (for Proprietorship, Partnership)

Net Income (Loss)

Basic Accounting Terms

The Accounting Equation

_______________________ _______________________ _______________________ _______________________ _______________________ _______________________

What are assets?

Claims (Rights) against Assets

The Accounting Equation

Basic Accounting Terms

What are liabilities?

The claims of creditors

The (residual) claims of owners

Note: Claims of creditors must be satisfied before owners.

_______________________ _______________________ _______________________ _______________________ _______________________ _______________________

Basic Accounting Terms

Basic Accounting Terms

Then, what is Owners equity?

Basic Accounting Terms

Basic Accounting Terms

What are revenues?

Basic Accounting Terms

Basic Accounting Terms

What are expenses?

______________________ ______________________ ______________________ ______________________

Basic Accounting Terms

Basic Accounting Terms

Net Income (Loss)

Owners Investment Owners Drawing

The Accounting Equation - Revisit

Every year, Changes in O.E. include:

Prior Year Balance ( + ) New Investment ( ) Drawings ( + ) Revenues ( ) Expenses

Net Income (Loss)

Results from Operation

Answer Phone calls

Now, lets make it more REAL

New Bal. $ 8,000

$1,600 $1,600 + $15,000

New Bal. $8,000 + $1,600 +

Cash $15,000 ($7,000)

Accounts Receivable Supplies

$1,600 $3,500 Service Rev

___________ _ _ _ _ ___________

___________ _ _ _ _ ___________