Summary Introduction to Accounting

Class: B and F

BASIC ACCOUNTING EQUATION

STUDY OBJECTIVE 6
Assets

Liabilities

Owners Equity

Assets Liabilities Cash Notes payable Petty cash Account payable Short term investment Tax payable Account receivable Salaries payable Notes receivable Other payable Other receivable Inventories Supplies Prepaid insurance Prepaid rent Land Office building Less: Accumulated Depreciation office building Office equipment Less: Accumulated Depreciation office equipment

Owner's Equity Owner, Capital

Accounting Equation
STUDY OBJECTIVE 6
Assets

Liabilities

Owners Equity

INCREASES AND DECREASES IN OWNERS EQUITY

INCREASES

DECREASES

Investments by Owner

Owners Equity

Withdrawals by Owner

Revenues

Expenses

Revenues-Expenses=Net Income (Income Statement Items)

BASIC FORM OF ACCOUNT

The simplest form an account consists of 1 the title of the account 2 a left or debit side 3 a right or credit side The alignment of these parts resembles the letter T = T account
Title of Account Left or debit side Debit balance Right or credit side Credit balance

DEBITING AN ACCOUNT
Cash

Debits
15,000

Credits

Example: 1. The owner makes an initial investment of $15,000 to start the business. Cash is debited as the owners Capital is credited.

DEBITING / CREDITING AN ACCOUNT

Cash Debits 15,000 8,000
Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.

Credits 7,000

DOUBLE-ENTRY SYSTEM

equal debits and credits made accounts for each transaction total debits always equal the total credits accounting equation always stays in balance

Assets

Liabilities

Equity

EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND EFFECTS

Assets = Liabilities + Owners Equity
Owners Capital Dr. Cr. + Owners Drawing Dr. + Cr. -

Assets Dr. + Cr. -

Liabilities Dr. Cr. +

Revenues Dr. Cr. +

Expenses Dr. + Cr. -

SUMMARY DEBIT-CREDIT
Assets/aset Liabilities/Kewajiban Equity/Modal Revenues/Pendapatan Expenses/Beban Debits Increase Decrease Decrease Decrease Increase Credits Decrease Increase Increase Increase Decrease

Journal Entries---- Example

If an entry involves only two accounts, one debit and one credit, it is considered a simple entry.
GENERAL JOURNAL
Date 2005 July 1 Account Titles and Explanation Cash K. Browne, Capital (Invested cash in the business) Ref. Debit 20,000 20,000 J1 Credit

When three or more accounts are required in one journal entry, the entry is referred to as a compound entry.
GENERAL JOURNAL
Date 2005 July 1 Account Titles and Explanation Delivery Equipment Cash Accounts Payable (Purchased truck for cash with balance on account) Ref. Debit 14,000 8,000 6,000 J1 Credit

1 2 3

POSTING A JOURNAL ENTRY

GENERAL JOURNAL
Date Account Titles and Explanation 2005 Sept. 1 Cash R. Neal, Capital (invested cash in business) Ref. 10 25 Debit 15,000 15,000 Credit J1

GENERAL LEDGER CASH

Date 2005 Sept. 1 Explanation Ref. Debit J1 15,000

NO. 10 Credit Balance 15,000

NO. 25 Credit Balance 15,000 15,000

R. NEAL, CAPITAL
Date 2005 Sept. 1 Explanation Ref. J1 Debit

In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal.

THE TRIAL BALANCE

STUDY OBJECTIVE 7

The primary purpose of a trial balance is to prove debits = credits after posting. If debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting.

The Steps in preparing the Trial Balance are:

1. 2. 3.

List the account titles and balances Total the debit and credit columns Prove the equality of the two columns

A TRIAL BALANCE
PIONEER ADVERTISING AGENCY Trial Balance October 31, 2005
Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Fees C. R. Byrd, Capital C. R. Byrd, Drawing Fees Earned Salaries Expense Rent Expense Debit $ 15,200 2,500 600 5,000 Credit

The total debits must equal the total credits.

$ 5,000 2,500 1,200 10,000 500 10,000 4,000 900 $ 28,700

$ 28,700

TIME-PERIOD ASSUMPTION

The time period (or periodicity) assumption assumes the economic life of a business can be divided into artificial time periods, generally month, a quarter, or a year (referred to as a fiscal year)

ACCRUAL BASIS OF ACCOUNTING

Cash basis accounting revenue is recorded when cash is received expenses are recorded when cash is paid Using accrual basis, we have 2 assumption:

Revenue recognition Revenue must be recognized in the accounting period in which it is earned, not just when money is exchanged. In a service business, revenue is earned at the time the service is
performed. Matching principles
Revenues earned this month are offset against.... Expenses incurred in earning the revenue

ADJUSTING ENTRIES
Adjusting entries are classified as
Prepayments (prepaid expenses and unearned

revenues)

Prepaid Expenses
Expenses paid in cash - recorded as assets before used or consumed

Unearned Revenues
Cash received - recorded as liabilities before the revenue is earned

Accruals (accrued revenues and accrued expenses)

Accrued Revenues
Revenues earned but not yet received in cash or recorded

Accrued Expenses
Expenses incurred but not yet paid in cash or recorded

ADJUSTING ENTRIES FOR PREPAYMENTS

Adjusting Entries
Prepaid Expenses
Asset Expense

Unadjusted Credit Balance Adjusting Entry (-)

Debit Adjusting Entry (+)

Unearned Revenues
Liability Debit Adjusting Entry (-) Unadjusted Balance Revenue Credit Adjusting Entry (+)

EXAMPLE: ADJUSTING ENTRIES FOR PREPAYMENTS SUPPLIES

ADJUSTMENT
October 31, an inventory count reveals that $1,000 of $2,500 of supplies are still on hand.

JOURNAL ENTRY
Date Oct. 31 Account Titles and Explanation Advertising Supplies Expense Advertising Supplies (To record supplies used) Debit Credit 1,500 1,500

POSTING
Advertising Supplies Oct. 5 2,500 Oct. 31 1,500 31 1,000

Advertising Supplies Expense Oct. 31 1,500

ADJUSTING ENTRIES FOR ACCRUALS

Adjusting Entries Accrued Revenues
Asset Debit Adjusting Entry (+) Revenue Credit Adjusting Entry (+)

Accrued Expenses
Expense
Debit Adjusting Entry (+)

Liability
Credit Adjusting Entry (+)

EXAMPLE: ADJUSTING ENTRIES FOR ACCRUALS ACCRUED INTEREST

ADJUSTMENT
October 31, the portion of the interest to be accrued on a 3-month note payable is calculated to be $50.

JOURNAL ENTRY
Date Oct. 31 Account Titles and Explanation Interest Expense Interest Payable (To accrue interest on notes payable) Debit Credit 50 50

POSTING
Interest Expense Oct. 31 50
Interest Payable Oct. 31 50

ADJUSTED TRIAL BALANCE

Adjusted Trial Balance

prepared

after all adjusting entries have been journalized and posted purpose is to prove equality of the total debit and credit balances in the ledger after adjustments have been made

Financial statements
prepared directly

from the adjusted trial balance

TRIAL BALANCE AND ADJUSTED TRIAL BALANCE COMPARED

PIONEER ADVERTISING AGENCY Adjusted Trial Balance October 31, 2005
Before Adjustment Debit Credit $ 15,200 2,500 600 5,000 $ 5,000 2,500 1,200 10,000 500 10,000 4,000 900 After Adjustment Debit Credit $ 15,200 200 1,000 550 5,000 $ 40 5,000 2,500 50 800 1,200 10,000 500 10,600 5,200 1,500 900 50 50 40 $ 30,190 $ 30,190

Cash Accounts Receivable Advertising Supplies Prepaid Insurance Office Equipment Accumulated Depreciation - Office Equipment Notes Payable Accounts Payable Interest Payable Unearned Revenue Salaries Payable C. R. Byrd, Capital C. R. Byrd, Drawing Service Revenue Salaries Expense Advertising Supplies Expense Rent Expense Insurance Expense Interest Expense Depreciation Expense

$ 28,700

$ 28,700

PREPARING FINANCIAL STATEMENTS

Financial statements are prepared directly from the
adjusted trial balance

Income statement
use the revenue and expense accounts

Owners Equity Statement

use the owners capital and drawing accounts and the net income (or net loss) from the Income Statement

Balance sheet
use asset and liability accounts and ending owners capital balance reported in Owners Equity Statement

PREPARATION OF THE INCOME STATEMENT AND THE OWNERS EQUITY STATEMENT FROM THE ADJUSTED TRIAL BALANCE PIONEER ADVERTISING AGENCY Income Statement For the Month Ended October 31, 2005
Revenues Fees earned $ 10,600

Expenses Salaries expense Advertising supplies expense Rent expense Insurance expense Interest expense Depreciation expense Total expenses Net income

$ 5,200 1,500 900 50 50 40 7,740 $ 2,860

The income statement is prepared from the revenue and expense accounts.

PREPARATION OF THE INCOME STATEMENT AND THE OWNERS EQUITY STATEMENT FROM THE ADJUSTED TRIAL BALANCE

PIONEER ADVERTISING AGENCY Owners Equity Statement For the Month Ended October 31, 2005
C.R. Byrd, Capital, October 1 Add: Investments Net income Less: Drawings C.R . Byrd, Capital, October 31 $ $ 10,000 2,860 -0-

12,860 12,860 500 $ 12,360

The owners equity statement is prepared from the owners capital and drawing accounts and the net income (or net loss) shown in the income statement.

PREPARATION OF THE BALANCE SHEET FROM THE ADJUSTED TRIAL BALANCE

PIONEER ADVERTISING AGENCY Balance Sheet
October 31, 2005
Assets Cash Accounts receivable Advertising supplies Prepaid insurance Office equipment Less: Accumulated depreciation $ 15,200 200 1,000 550 $ 5,000 40 4,960 Liabilities and Owners Equity Liabilities Notes payable Accounts payable Interest payable Unearned fees Salaries payable Total liabilities Owners equity C.R. Byrd, Capital Total liabilities and owners equity

$ 5,000 2,500 50 800 1,200 9,550 12,360 $ 21,910

Total assets

$ 21,910

The balance sheet is then prepared from the asset and liability accounts and the ending owners capital balance as reported in the owners equity statement.

SUMMARY OF BASIC RELATIONSHIPS FOR PREPAYMENTS

Type of Adjustment Account Relationship Reason for Adjustment Account Balances before Adjustment Adjusting Entry

1 Prepaid Expenses

Assets and Expenses

2 Unearned Revenues

Liabilities and Revenues

a Prepaid expenses Assets overstated Dr Expenses initially recorded in Expenses understated Cr Assets asset accounts have been used. b Prepaid expenses Assets understated Dr Assets initially recorded in Expenses overstated Cr Expenses expense accounts have not been used. a Unearned revenues Liabilities overstated Dr Liabilities initially recorded in Revenues understated Cr Revenues liability accounts have been earned. b Unearned revenues Liabilities understated Dr Revenues initially recorded in Revenues overstated Cr Liabilities revenue accounts have not been earned.

FORM AND PROCEDURE FOR A WORK SHEET

PREPARING A WORK SHEET

1 PREPARING A TRIAL BALANCE
PIONEER ADVERTISING AGENCY Work Sheet For the Month Ended October 31, 200 5
Trial Balance Dr. Cr. Adjustments Dr. Cr.
Adjusted Trial Balance Dr. Cr.

Account Titles

Cash Advertising Supplies Prepaid Insurance

Office Equipment Notes Payable Accounts Payable Unearned Revenue C.R. Byrd, Capital C.R. Byrd, Drawing Service Revenue Salaries Expense Rent Expense Totals 0015,200 0002,500 0000600 0005,000 5,000 2,500 1,200 000010,000 0000500 10,000 0004,000 0000900 0028,700

quipment

28,700

ADJUSTING ENTRIES JOURNALIZED

Date 2005 Oct. 31 Account Titles and Explanation GENERAL JOURNAL a Ref. Debit Credit

31

31

31

31

31

31

Advertising Supplies Expense Advertising Supplies b Insurance Expense Prepaid Insurance c Depreciation Expense Accumulated Expense d Unearned Fees Fees Earned e Accounts Receivable Fees Earned f Interest Expense Interest Payable g Salaries Expense Salaries Payable

1,500 1,500

50
50 40 40 400 400 200 200 50 50 1,200 1,200

PREPARING A WORK SHEET

2 ENTER THE ADJUSTMENTS
PIONEER ADVERTISING AGENCY Work Sheet For the Month Ended October 31, 2005
Account Titles Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue C.R. Byrd, Capital C.R. Byrd, Drawing Service Revenue
Salaries Expense Rent Expense Totals Advertising Supplies Expense Insurance Expense Accum. Depr Off Equip Depreciation Expense Accounts Receivable Interest Expense Interest Payable Salaries Payable Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 15,200 a 1,500 2,500 b 50 600 5,000 5,000 2,500 1,200 d 400 10,000 500 d 400 10,000 e 200 g 1,200 4,000 900 28,700 28,700 a 1,500 b 50 c c e f 40 200 50 f 50 g 1,200 3,440 3,440 40 Adjusted Trial Balance Dr. Cr.

PREPARING A WORK SHEET

3 ENTER ADJUSTED BALANCES
PIONEER ADVERTISING AGENCY Work Sheet For the Month Ended October 31, 2005
Trial Balance Dr. Cr. 15,200 2,500 600 5,000 5,000 2,500 1,200 10,000 500 10,000 4,000 900 28,700 Adjustments Dr. Cr. a 1,500 b 50 Adjusted Trial Balance Dr. Cr. 15,200 1,000 550 5,000 5,000 2,500 800 10,000 500 d 400 e 200 g 1,200 28,700 a 1,500 b 50 c c 40 f 50 e 200 f 50 g 1,200 3,440 40 1,500 50 40 40 50 200 50 1,200 30,190 30,190 5,200 900 10,600

Account Titles Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue C.R. Byrd, Capital C.R. Byrd, Drawing Service Revenue Sa laries Expense Rent Expense Totals Advertising Supplies Expense Insurance Expense Accum. Depr Off Equip Depre ciation Expense Interest Expense Accounts Receivable Interest Payable Salaries Payable Totals

d 400

3,440

PREPARING A WORK SHEET 4 EXTEND ADJUSTED BALANCES

PIONEER ADVERTISING AGENCY Work Sheet For the Month Ended October 31, 200 5
Adjusted Trial Balance Dr. Cr. 15,200 1,000 550 5,000 5,000 2,500 800 10,000 500 10,600 5,200 90 0 1,500 50 40 40 50 200 50 1,20 0 30,190 30,190 Income Statement Dr. Cr. Balance Sheet Dr. Cr.

Account Titles Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue C.R. Byrd, Capital C.R. Byrd, Drawing Service Revenue Salaries Expense Rent Expense Advertising Supplies Expense Insurance Expense Accum. Depr. Office Equip. Depreciation Expense Interest Expense Accounts Receivable Interest Payable Salaries Payable Totals Net Income Totals

10,600.0 5,200.0 0000000 900.00000000 1,500.000000000 50.0000000 40 50

7,740
2,860 10,600

10,600
10,600

PREPARING A WORK SHEET 4 EXTEND ADJUSTED BALANCES

PIONEER ADVERTISING AGENCY Work Sheet For the Month Ended October 31, 2005
Adjusted Trial Balance Dr. Cr. 15,200 1,000 5 50 5,000 5,000 2,500 800 10,000 500 10,600 5,200 900 1,500 50 40 40 50 200 50 1,200 30,190 30,190 Income Statement Dr. Cr. Balance Sheet Dr. Cr.
15,200

Account Titles Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue C.R. Byrd, Capital C.R. Byrd, Drawing Service Revenue Salaries Expense Rent Expense Advertising Supplies Expense Insurance Expense Accum. Depr. Office Equip. Depreciation Expense Interest Expense Accounts Receivable Interest Payable Salaries Payable Totals Net Income Totals

1,000 5 550 5,000 5,000 2,500 800 10,000 5500 10,600 5,200 900 1,500 50 40 50

40

200
50 1,200

7,740 2,860 10,600

10,600 10,600

22,450 22,450

19,590 2,860 22,450

PREPARATION OF FINANCIAL STATEMENTS INCOME STATEMENT

PIONEER ADVERTISING AGENCY Income Statement For the Month Ended October 31, 2005
Revenues Service revenue Expenses Salaries expense Advertising supplies expense Rent expense Insurance expense Interest expense Depreciation expense Total expenses Net income

$10,600
$5,200 1,500 900 50 50 40 7,740 $ 2,860

The income statement is prepared from the income statement columns of the work sheet.

PREPARATION OF FINANCIAL STATEMENTS

OWNERS EQUITY STATEMENT

PIONEER ADVERTISING AGENCY Owners Equity Statement For the Month Ended October 31, 2005

C.R. Byrd, Capital, October 1 Add: Investments Net income Less: Drawings C.R. Byrd, Capital, October 31

-0-

The owners equity statement is prepared from the balance sheet columns of the work sheet.

$10,000 2,860

12,860 12,860 500 $12,360

PREPARATION OF FINANCIAL STATEMENTS

BALANCE SHEET
PIONEER ADVERTISING AGENCY Balance Sheet October 31, 2005

Assets Cash Accounts receivable Advertising supplies Prepaid insurance Office equipment Less: Accumulated depreciation
$ 15,200 200 1,000 550 $5,000

Liabilities and Owners Equity Liabilities Notes payable Accounts payable Interest payable Unearned revenue Salaries payable Total liabilities Owners equity C.R. Byrd, Capital Total liabilities and owners equity
$ 5,000 2,500 50 800 1,200 9,550 12,360 $21,910

40

4,960

$21,910

Total assets

The balance sheet is prepared from the balance sheet columns of the work sheet.

MERCHANDISING COMPANY
A merchandising company buys and sells goods to earn a profit.
1) Wholesalers sell to retailers 2) Retailers sell to consumers

Primary source of revenue is Sales MEASURING NET INCOME FOR

MERCHANDISING COMPANY

Expenses for a merchandiser are divided into two categories:

1. Cost of goods sold The total cost of merchandise sold during the period 2. Operating expenses Expenses incurred in the process of earning sales revenue (Examples: sales salaries and insurance expense)

Gross profit is equal to Sales Revenue less Cost of Goods Sold

INCOME MEASUREMENT PROCESS FOR A MERCHANDISING COMPANY

PERPETUAL VS. PERIODIC

Page 220 General Journal Perpetual vs Periodic

Date
4 6 8

Transaction
Purchase of merchandise on credit Freight cost on purchases Purchase returns and allowances

Perpetual Inventory System

General Journal as Buyer Merchandise Inventory 3,800 Account Payable Merchandise Inventory 150 Cash Account Payable 300 Merchandise Inventory Account Payable 3,500 Cash Merchandise Inventory General Journal as Seller Account Receivable 3,800 Sales Revenue Cost of goods sold 2,400 Merchandise Inventory Sales Return and allowances 300 Account Receivable Merchandise Inventory 140 Cost of goods sold Cash 3,430 Sales discount 70 Account Receivable 3,800 150 300

Periodic Inventory System

Purchase Account Payable Freight-in Cash Account Payable Purchase return and allowances Account Payable Cash Purchase discount Account Receivable Sales Revenue 3,800 3,800 150 150 300 300 3,500 3,430 70 3,800 3,800

14

Payment on account with a discount

3,430 70

Sale of merchandise on credit

3,800 2,400

No entry for cost of goods sold 300 300

Return of Merchandise sold

Sales Return and allowances 300 Account Receivable 140 No entry

14

Cash received on account with a discount

Cash Sales discount 3,500 Account Receivable

3,430 70 3,500

Determining Cost of Goods Sold Periodic