1 © Copyrright Doug Hillman 1997 The System of Accounting.
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Transcript of 1 © Copyrright Doug Hillman 1997 The System of Accounting.
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1© Copyrright Doug Hillman 1997
The System of Accounting
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2© Copyrright Doug Hillman 1997
The Entity Concept
Any organizational unit
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3© Copyrright Doug Hillman 1997
The Entity Concept
Any organizational unit for which we
want
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4© Copyrright Doug Hillman 1997
The Entity Concept
Any organizational unit for which we
want financial information
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5© Copyrright Doug Hillman 1997
Assets
Anything of value held by an organization
Assets have
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6© Copyrright Doug Hillman 1997
Assets
Anything of value held by an organization
Assets have
» Potential usefulness
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7© Copyrright Doug Hillman 1997
Assets
Anything of value held by an organization
Assets have
» Potential usefulness
» Future usefulness
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8© Copyrright Doug Hillman 1997
Assets
Anything of value held by an organization
Assets have
» Potential usefulness
» Future usefulness
» Economic Value
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9© Copyrright Doug Hillman 1997
Equities
Claims against the total assets of an organization
Liabilities
» Claims of nonowners Owner's Equity
» Claims of owners
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10© Copyrright Doug Hillman 1997
Revenues
Inflows of assets that result from performing services or selling goods
Revenues are realized when
» the service is performed or
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11© Copyrright Doug Hillman 1997
Revenues
Inflows of assets that result from performing services or selling goods
Revenues are realized when
» the service is performed or
» the goods are delivered
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12© Copyrright Doug Hillman 1997
Expenses
Outflows of assets or incurrence of liabilities while earning revenues
A business incurrs expenses to earn revenues
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13© Copyrright Doug Hillman 1997
The Accounting Equation
Things of Value = Claims Assets = Equities Assets = Liabilities + Owner's Equity
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14© Copyrright Doug Hillman 1997
The Account
Account Title
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15© Copyrright Doug Hillman 1997
The Account
Left sideLeft side
Account Title
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16© Copyrright Doug Hillman 1997
The Account
Left sideLeft side RightRight sideside
Account Title
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17© Copyrright Doug Hillman 1997
The Account
Left sideLeft side RightRight sideside
the debit sidethe debit side
Account Title
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18© Copyrright Doug Hillman 1997
The Account
Left sideLeft side RightRight sideside
the debit sidethe debit side the credit sidethe credit side
Account Title
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19© Copyrright Doug Hillman 1997
Summary of the Debit/Credit Rules
Assets
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20© Copyrright Doug Hillman 1997
Summary of the Debit/Credit Rules
Assets
» Appear on the left (debit) side of the equation
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21© Copyrright Doug Hillman 1997
Summary of the Debit/Credit Rules
Assets
» Appear on the left (debit) side of the equation
» Therefore we:
–Increase them with debits
–Decrease them with credits
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22© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Liabilities
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23© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Liabilities
» Appear on the right (credit) side of the equation
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24© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Liabilities
» Appear on the right (credit) side of the equation
» Therefore we:
–Increase them with credits
–Decrease them with debits
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25© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Owners' Equity
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26© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Owners' Equity
» Appear on the right (credit) side of the equation
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27© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Owners' Equity
» Appear on the right (credit) side of the equation
» Therefore:
–Increase them with credits
–Decrease them with debits
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28© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Changes in owners' equity Issuances of common stock
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29© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Changes in owners' equity Issuances of common stock
» Causes increase in owners' equity
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30© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Changes in owners' equity Issuances of common stock
» Causes increase in owners' equity
» Recorded by regular owners' equity rules
–Increased with credits
–Decreased with debits
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31© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Changes in owners' equity Dividends
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32© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Changes in owners' equity Dividends
» Cause decreases in owners' equity
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33© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Changes in owners' equity Dividends
» Cause decreases in owners' equity
» Recorded opposite as regular owners' equity
–Increased with debits
–Decreased with credits
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34© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Changes in owners' equity Revenues
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35© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Changes in owners' equity Revenues
» Cause increases in owners' equity
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36© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Changes in owners' equity Revenues
» Cause increases in owners' equity
» Recorded by regular owners' equity rules
–Increased with credits
–Decreased with debits
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37© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Changes in owners' equity Expenses
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38© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Changes in owners' equity Expenses
» Cause decreases in owners' equity
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39© Copyrright Doug Hillman 1997
Summary of Debit/Credit Rules
Changes in owners' equity Expenses
» Cause decreases in owners' equity
» Recorded opposite as regular owners' equity
–Increase with debits
–Decreased with credits
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40© Copyrright Doug Hillman 1997
Records in the Accounting System
Journal
» Book of original entry
» Chronological record of events Ledger
» Book of final entry
» Categorical record of events
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41© Copyrright Doug Hillman 1997
Journal Entries
What information do we need to record?
» Date
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42© Copyrright Doug Hillman 1997
Journal Entries
What information do we need to record?
» Date
» Debit account
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43© Copyrright Doug Hillman 1997
Journal Entries
What information do we need to record?
» Date
» Debit account
» Debit amount
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44© Copyrright Doug Hillman 1997
Journal Entries
What information do we need to record?
» Date
» Debit account
» Debit amount
» Credit account
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45© Copyrright Doug Hillman 1997
Journal Entries
What information do we need to record?
» Date
» Debit account
» Debit amount
» Credit account
» Credit amount
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46© Copyrright Doug Hillman 1997
Journal Entries
What information do we need to record?
» Date
» Debit account
» Debit amount
» Credit account
» Credit amount
» Supplementary information
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47© Copyrright Doug Hillman 1997
Journal Entry
Dec. 1
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48© Copyrright Doug Hillman 1997
Journal Entry
Dec. 1 Cash
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49© Copyrright Doug Hillman 1997
Journal Entry
Dec. 1 Cash 25,000
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50© Copyrright Doug Hillman 1997
Journal Entry
Dec. 1 Cash 25,000
Common Stock
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51© Copyrright Doug Hillman 1997
Journal Entry
Dec. 1 Cash 25,000
Common Stock 25,000
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52© Copyrright Doug Hillman 1997
Journal Entry
Dec. 1 Cash 25,000
Common Stock 25,000
Issuance of
common stock
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53© Copyrright Doug Hillman 1997
Posting
Process of transferring
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54© Copyrright Doug Hillman 1997
Posting
Process of transferring the amounts in the journal
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55© Copyrright Doug Hillman 1997
Posting
Process of transferring the amounts in the journal to the ledger
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56© Copyrright Doug Hillman 1997
Posting Process
Locate the ledger account for the debit account
Enter the date, journal page number, and debit amount in the ledger
Enter the ledger account number in the journal entry
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57© Copyrright Doug Hillman 1997
Posting Process
Locate the ledger account for the credit account
Enter the date, journal page number, and credit amount in the ledger
Enter the ledger account number in the journal
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58© Copyrright Doug Hillman 1997
Trial Balance
A test of the accuracy of journalizing and posting process
Preparation
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59© Copyrright Doug Hillman 1997
Trial Balance
A test of the accuracy of journalizing and posting process
Preparation
» List each ledger account and place the ending account balance in the proper column
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60© Copyrright Doug Hillman 1997
Trial Balance
A test of the accuracy of journalizing and posting process
Preparation
» List each ledger account and place the ending account balance in the proper column
» Total the debit and credit columns
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61© Copyrright Doug Hillman 1997
Trial Balance
A test of the accuracy of journalizing and posting process
Preparation
» List each ledger account and place the ending account balance in the proper column
» Total the debit and credit columns
» Compare the totals
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62© Copyrright Doug Hillman 1997
Financial Statements
Prepared from the information contained in the trial balance
Four primary statements
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63© Copyrright Doug Hillman 1997
Financial Statements
Prepared from the information contained in the trial balance
Four primary statements
» Income Statement
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64© Copyrright Doug Hillman 1997
Financial Statements
Prepared from the information contained in the trial balance
Four primary statements
» Income Statement
» Statement of Owner's Equity
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65© Copyrright Doug Hillman 1997
Financial Statements
Prepared from the information contained in the trial balance
Four primary statements
» Income Statement
» Statement of Owner's Equity
» Balance Sheet
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66© Copyrright Doug Hillman 1997
Financial Statements
Prepared from the information contained in the trial balance
Four primary statements
» Income Statement
» Statement of Owner's Equity
» Balance Sheet
» Statement of Cash Flows
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67© Copyrright Doug Hillman 1997
Financial Statements
Title
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68© Copyrright Doug Hillman 1997
Income statement
Title
» Company name
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69© Copyrright Doug Hillman 1997
Income statement
Title
» Company name
» Statement name
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70© Copyrright Doug Hillman 1997
Income statement
Title
» Company name
» Statement name
» For the period ending date or date
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71© Copyrright Doug Hillman 1997
Income statement
Title - For the period ending date List revenues and subtotal List expenses and subtotal Subtract expenses from revenues
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72© Copyrright Doug Hillman 1997
Statement of Owners' Equity
Title» For the period ending date
List the beginning balance in common stock
Add issuances of common stock Subtotal ending common stock
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73© Copyrright Doug Hillman 1997
Statement of Owner's Equity
List beginning balance in retained earnings
Add net income Deduct dividends Subtotal ending retained earnings Total common stock and retained
earnings
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74© Copyrright Doug Hillman 1997
Balance Sheet
Title
» Date Assets
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75© Copyrright Doug Hillman 1997
Balance Sheet
Title
» Date Assets
» First list and subtotal current assets
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76© Copyrright Doug Hillman 1997
Balance Sheet
Title
» Date Assets
» First list and subtotal current assets
» Then list and subtotal property, plant, and equipment
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77© Copyrright Doug Hillman 1997
Balance Sheet
Title
» Date Assets
» First list and subtotal current assets
» Then list and subtotal property, plant, and equipment
» Determine total assets
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78© Copyrright Doug Hillman 1997
Balance Sheet
Liabilities
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79© Copyrright Doug Hillman 1997
Balance Sheet
Liabilities
» First list and subtotal current liabilities
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80© Copyrright Doug Hillman 1997
Balance Sheet
Liabilities
» First list and subtotal current liabilities
» Then list and subtotal long-term liabilities
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81© Copyrright Doug Hillman 1997
Balance Sheet
Liabilities
» First list and subtotal current liabilities
» Then list and subtotal long-term liabilities
Total all liabilities
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82© Copyrright Doug Hillman 1997
Balance Sheet
Owners’ Equity
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83© Copyrright Doug Hillman 1997
Balance Sheet
Owners’ Equity
» Enter ending common stock and retained earnings from Statement of Owners’ Equity
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84© Copyrright Doug Hillman 1997
Balance Sheet
Owners’ Equity
» Enter ending common stock and retained earnings from Statement of Owners’ Equity
Total liabilities and owners' equity
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85© Copyrright Doug Hillman 1997
Statement of Cash Flows
Title
» For the period ending Three sections
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86© Copyrright Doug Hillman 1997
Statement of Cash Flows
Title
» For the period ending Three sections
» Cash Flows from Operating Activities
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87© Copyrright Doug Hillman 1997
Statement of Cash Flows
Title
» For the period ending Three sections
» Cash Flows from Operating Activities
» Cash Flows from Investing Activities
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88© Copyrright Doug Hillman 1997
Statement of Cash Flows
Title
» For the period ending Three sections
» Cash Flows from Operating Activities
» Cash Flows from Investing Activities
» Cash Flows from Financing Activities
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