©CourseCollege.com 1 2 Learning Objectives 1.Describe and use the fundamental accounting equation....

©CourseCollege.com

2Learning Objectives

1. Describe and use the fundamental accounting equation.

2. Identify five basic classes of accounts

3. Explain five essential accounting concepts

4. Analysis: Percentage of sales (common size income statements)

Unit 2

The Equation

©CourseCollege Publishing

Objective 2.1:The accounting equation

The following slides use Jack & Jill Enterprises to

demonstrate the fundamental accounting equation

©CourseCollege.com

Jack and Jill Enterprises

Hey Jill!Lets fetch water and

make some money

You fetchI’ll

supervise

©CourseCollege.com

We receive $1 for each

pail of water we

And we pay $1 to replace

each shoe we wear

©CourseCollege.com

Pails 2

5Total

AssetsFirst, we can list all of J & J’s assets in a blue box.

©CourseCollege.com

Assets

Mom payable

Jack & Jill, CapitalEquity

5Total Total

Next, list all the claims against the assets in a red box.

The red box has two parts,

creditors and owners.

Liabilities

©CourseCollege.com

Assets

Liabilities

Mom payable

Jack & Jill, CapitalEquity

5Total Total

The most important thing to remember is the

total in the blue box must always equal the

total in the red box. A = L + E

©CourseCollege.com

8This is the BALANCE SHEET

©CourseCollege.com

Now lets see how this system works for J & J

Enterprises. (Remember, Assets must always equal

Liabilities Plus Owner’s Equity.

©CourseCollege.com

Assets

Liabilities

Mom payable

J&J, Capital

Equity

Total assets Total Liab. + Equity

Fetch 1 PailFetch 2 Pails

Fetch 1 PailBuy 2 ShoesFetch 3 Pails

Buy 1 Shoe

©CourseCollege.com

We increased Equity with each sale

We decreased Equity for each expense.

The system stayed in balance

©CourseCollege.com

Answer: With this simplified system, you would have have to memorize

the total sales.

So what are the total sales earned by Jack and Jill so

Sales ?

©CourseCollege.com

Assets

Liabilities

Mom payable

J&J, Capital

Equity

Total assets Total Liab. + Equity

I wish I could

remember what

our sales were.

©CourseCollege.com

Solution: The Income Statement

BALANCE SHEET INCOME STATEMENT

We need a better method to keep track of

salessales and expensesexpenses for each time period

©CourseCollege.com

To keep track of sales and expenses for any given period.

BALANCE SHEET

INCOME

STATEMENT

Income Statement

A separate “temporary” list of Sales and Expenses

©CourseCollege.com

The Sales and Expenses are collectedon the Income Statement

BALANCE SHEET

INCOME STATEMENT

Assets Liabilities

Equity Expenses

©CourseCollege.com

The resulting Profit or Loss is calculated

BALANCE SHEET

INCOME STATEMENT

Assets Liabilities

Equity Expenses

Profit

©CourseCollege.com

At the end of the time period The Profit or Loss is moved to Equity

BALANCE SHEET

INCOME STATEMENT

Assets Liabilities

Equity Expenses

Profit

Let’s try it

©CourseCollege.com

Total assets

Assets

Mom payable

J&J, Capital

Total Liab & Equity

Liabilities + Equity

Balance Sheet

Revenue

Income Statement

Shoe Expense

Fetch 1 PailFetch 2 Pails

Fetch 1 PailBuy 2 ShoesFetch 3 Pails

Buy 1 Shoe

©CourseCollege.com

The Income Statement is used to collect sales and expenses for a given time period

-for example a month or a year.

This is a big improvement. The Income Statement

allows us to tell at a glance what the sales and

expense totals are.

©CourseCollege.com

Total assets

Assets

Mom payable

J&J, Capital

Total Liab & Equity

Balance Sheet

Revenue

Income Statement

Shoe Expense

The systems stays balanced –

you must consider the change in J&J Capital that is

being recorded in the Income StatementO2.1

©CourseCollege.com

Assets = Liabilities + Equity + Revenues - Expenses

Following are exercises using the fundamental accounting equation

©CourseCollege.com

Assets Liabilities

Equity

150 150Total Assets Total Liab & Equity

Total Liabilities

Total Equity ?72

What is Total

Equity?

©CourseCollege.com

Assets Liabilities

Equity

1750 1750Total Assets Total Liab & Equity

Total Liabilities

Total Equity

What are Total

Liabilities?

©CourseCollege.com

Assets Liabilities

Equity

9,850Total Assets Total Liab & Equity

Total Liabilities

Total Equity

?3,430

What are Total

Assets? 6,420

©CourseCollege.com

Total assets

Assets

Total Liabilities

Owner, Capital (Beginning)

Total Liab & Equity

Balance Sheet

Revenue

Income Statement

Expenses

0What is the

total Owner, Capital?O2.1

©CourseCollege.com

Total assets

Assets

Total Liabilities

Owner, Capital (Beginning)

Total Liab & Equity

Balance Sheet

Revenue

Income Statement

Expenses

75What is the total Owner,

Capital? (consider the

Income Statement also)

Beg. Owner Capital 405 plus Revenue 100 minus Expenses 25 = 480 Ending Owner,

Capital

Objective 2.2:Account Classification

The following slides offer an expanded Balance Sheet and

Income Statement to help understand the 5 classes of

accounts

©CourseCollege.com

CashAccounts ReceivableSuppliesInventoryLandBuildingsEquipmentCopyrights

Assets

Accounts PayableWages PayableTaxes PayableUnearned RevenueNotes Payable

Owner’s, Capital

Balance Sheet

Revenue

Income Statement

Cost of Goods SoldWages ExpenseTaxes ExpenseRent ExpenseUtilities ExpenseInterest expense

Profit

There are 5 basic classes of

accounts

1.Assets 5.

Expenses

2. Liabilities

3. Equity

4. Revenue

©CourseCollege.com

Note the words on the following slide and the classification they indicate

There are a number of words used in account

descriptions that help us identify the classification.

©CourseCollege.com

Profitor

Expenses

Equity

BALANCE SHEET INCOME STATEMENTAssets Liabilities Revenue Remember

where these words

belong!

©CourseCollege.com

32Where does this account belong?

Profitor

Expenses

Equity

BALANCE SHEET INCOME STATEMENTAssets Liabilities Revenue

©CourseCollege.com

Profitor

Expenses

Equity

©CourseCollege.com

Profitor

Expenses

Equity

©CourseCollege.com

Profitor

Expenses

Equity

©CourseCollege.com

Profitor

Expenses

Equity

©CourseCollege.com

Profitor

Expenses

Equity

©CourseCollege.com

Profitor

Expenses

Equity

©CourseCollege.com

Profitor

Expenses

Equity

©CourseCollege.com

Profitor

Expenses

Equity

©CourseCollege.com

Profitor

Expenses

Equity

©CourseCollege.com

Profitor

Expenses

Equity

©CourseCollege.com

Profitor

Expenses

Equity

Profitor

Expenses

Equity

Profitor

Expenses

Equity

Profitor

Expenses

Equity

Profitor

Expenses

Equity

Profitor

Expenses

Equity

Objective 2.3:Concepts

The following slides present 6 important concepts that guide

many accounting practices and decisions.

50Concepts

Objectivity Concept Unit of Measure

(Monetary Unity) Concept

Periodicity Concept

Matching Concept

Cost Concept

Revenue Recognition

Concept

Unit of Measure (Monetary

Unity) Concept

Simply put, we must express accounts in

monetary units such as dollars.

The monetary unit used is specific to the country in

which business activity is conducted.

$ £ ¥ DM

Periodicity Concept

Accounting information should be separated into regular time periods such as months, quarters and

years.

Information collected intime periods allows

comparisons that helpus track financial

progress.

For any accounting time period, all expenses that

were incurred to earn revenues for that period

must be matched (recorded as an expense)

in that same time period.

This concept is one that guides a great dealof accounting activityin the production ofaccrual financial

statements

Matching Concept

Historical cost is used to record values in the

accounts (in most cases) rather than current market values or

replacement costs

This concept is part of theconservative approach tofinancial reporting that is

required by FASB

Cost Concept

When recording values where historical cost is not relevant, objective information is required rather than (subjective) values based on opinion

or educated guesses.

Objective information is providedby reliable, unbiased third parties,

generally from market data

Objectivity Concept

Revenue should be recorded when it is

earned and receivable.

Record revenue whenthe seller has completed

everything necessary to havethe right to receive payment

Revenue Recognition Concept

57What concept is involved?

Tom buys 12 new kayaks to add to his inventory paying $425 each from a dealer going out of business. Tom buys the same kayak from the manufacturer for $675.

What value should be recorded in the accounts for this purchase?

12 @ $425 each

Cost Concept

Thao wants to invest a 2 year old delivery van owned personally into her florist business. She saw two identical vans for sale at $36,000. She paid $47,000 for the van two years ago. Current published values for the van indicate a value of $31,000.

What value should be recorded in the accounts for this investment?

$31,000

Objectivity Concept

It is important to express accounting information in a common denominator of units that is simple, reliable, universally available and understandable.

Unit of Measure (Monetary

Unity) Concept

$ £ ¥ DM

There would be limited value in accounting information that continuously accumulated sales and expenses month after month, year after year without interruption.

Periodicity Concept

Tom sells a kayak for $950 and records the revenue. What else should Tom record as a result of this sale?

Tom should record the expense (Cost of Goods Sold) for the cost incurred to acquire this inventory item.

Matching Concept

Mark’s Hydraulic Repair receives a repair job from a credit customer on May 15, completes the job on May 18 and bills the customer. The customer picks up the repair on May 22. When can Mark’s record the revenue?

Mark’s can record the revenue on the day the work

was completed, May 18

Revenue Recognition Concept

Objective 2.4:Common size income

statement

Useful information can be obtained by expressing

income statement items in terms of their percentage of

sales.

Tom's KayaksIncome StatementFor the year ending 12/31/08Revenue %

Kayak sales 268,000 100%

Expenses %

Cost of Goods Sold 147,400 55%

Rent expense 13,200 5%

Wages expense 45,000 17%

Utilities expense 16,000 6%

Total expenses 221,600

Profit 46,400 17%46,400/268,000

A standard common size percentage calculated is

net profit as a percentage of sales.

This allows comparison from

one period to the next

End of Unit 2

©CourseCollege.com 1 2 Learning Objectives 1.Describe and use the fundamental accounting equation....

Documents

Transcript of ©CourseCollege.com 1 2 Learning Objectives 1.Describe and use the fundamental accounting equation....

1 Basics of Wavelets - ISyE · 2004. 11. 8. · Resolution of Identity. ... This equation is called the scaling equation (or two-scale equation) and it is fundamental in constructing,

The Heat Equation4.1. Fundamental solution of heat equation As in Laplace’s equation case, we would like to nd some special solutions to the heat equation. The textbook gives one

A Solution to the Fundamental Linear Fractional Order ...This is then the transfer function of the fundamental linear fractional order differential equation. As such, it contains the

The Fundamental Radiometer Equation

Lecture Notes 5 ; Helmholtz Equation and High Frequency ... · Helmholtz Equation and High Frequency Approximations ... according to a fundamental theorem on elliptic operators ...

Fundamental Problems of the Electrodynamics of ...cdn.intechweb.org/pdfs/16303.pdf · Fundamental Problems of the Electrodynamics of Heterogeneous Media with ... Equation 16), we

Fundamental Equation of EconomicsFundamental Equation of Economics James J. Wayne jjwinterpretation@gmail.com October 10, 2013 Abstract Recent experience of the great recession of

A New Fundamental Bioheat Equation for Muscle Tissue ... · A New Fundamental Bioheat Equation for Muscle Tissue—Part II: Temperature of SAV Vessels In this study, a new theoretical

The fundamental solutions of the time-fractional …...The fundamental solutions of the time-fractional diffusion equation Francesco Mainardi * t Gianni Pagnini * 1. - Introduction

Unifying Fundamental Atoms? II- The Effect of the Structure · governed by one fundamental equation. Second, a unified background space-time for both realms emerges. Third the four

Holt McDougal Algebra 2 6-6 Fundamental Theorem of Algebra Use the Fundamental Theorem of Algebra and its corollary to write a polynomial equation of least.

The method of fundamental solutions for some direct and ...etheses.bham.ac.uk/4278/1/Reeve13PhD.pdf · direct one-dimensional heat equation, ... The method of fundamental solutions

Classical Fundamental Unique Solution for the ... · Fluid Mechanics, Navier-Stokes Equation, Fundamental Solutions 1. Introduction In this article, a well known model is to be investigated

Equation of state for 1,2-dichloroethane based on a hybrid ... · Equation of state for 1,2-dichloroethane based on a hybrid data set A fundamental equation of state in terms of the

Holt McDougal Algebra 2 3-6 Fundamental Theorem of Algebra Use the Fundamental Theorem of Algebra and its corollary to write a polynomial equation of least.

An International Standard Equation of State for ... · A fundamental equation of state for the Helmholtz free energy of R-32 ~diﬂuo-romethane! is presented which is valid from the

DEE-301 FUNDAMENTAL OF ELECTRONICSrafflesuniversity.edu.in/pdf/Diploma_EE_Syllabus_2016_19.pdf · of PN junction: Grown junction, ... Characteristics, diode equation. UNIT II: ...

Contentsjluk/NWnotes.pdf3. Linear wave equation via fundamental solution and representation formula 7 3.1. Review of distribution theory 8 3.2. Returning to fundamental solutions to

Momentum Heat Mass Transfer MHMT2 Fundamental balance equations. General transport equation, material derivative. Equation of continuity. Momentum balance.

A Third Fundamental Equation for Keynes’s