Basic Accounting Concepts, Techniques and Conventions
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Transcript of Basic Accounting Concepts, Techniques and Conventions
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8/3/2019 Basic Accounting Concepts, Techniques and Conventions
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2005 Prentice Hall Business Publishing,2005 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting13/e,13/e, Horngren/Sundem/StrattonHorngren/Sundem/Stratton 15 -15 - 11
Basic Accounting:Basic Accounting:
Concepts, Techniques,Concepts, Techniques,
and Conventionsand Conventions
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 2
The Need for AccountingThe Need for Accounting
Managers, investors, and other internal groupsManagers, investors, and other internal groupswant the answers to two important questions:want the answers to two important questions:
How well didHow well didthe organizationthe organization
perform?perform? Where doesWhere doesthe organizationthe organization
stand?stand?
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 3
The Need for AccountingThe Need for Accounting
Accountants answer these questionsAccountants answer these questionswith three major financial statements:with three major financial statements:
IncomeIncomestatementstatement
BalanceBalancesheetsheet
Statement ofStatement of
cash flowscash flows
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 4
The Need for AccountingThe Need for Accounting
AA transactiontransaction is any event that affects theis any event that affects the
financial position of an organizationfinancial position of an organization
and requires recording.and requires recording.
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 5
Balance SheetBalance Sheet
TheThe balance sheetbalance sheet(also called(also called statement ofstatement offinancial positionfinancial position ororstatement of financialstatement of financial
conditioncondition) is a snapshot of the financial) is a snapshot of the financialstatus of an organization at a point in time.status of an organization at a point in time.
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 6
Balance SheetBalance Sheet
AssetsAssets are economic resources thatare economic resources that
are expected to benefit futureare expected to benefit futureactivities of the organization.activities of the organization.
LiabilitiesLiabilities are the entitys economicare the entitys economic
obligations to nonowners.obligations to nonowners.
Owners equityOwners equityis the excessis the excessof the assets over the liabilities.of the assets over the liabilities.
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8/3/2019 Basic Accounting Concepts, Techniques and Conventions
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Balance SheetBalance Sheet
Shareholders equityShareholders equity
Paid-inPaid-incapitalcapital
RetainedRetainedearningsearnings
The owners equity of a corporationThe owners equity of a corporationis calledis called shareshareholders equityholders equity..
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8/3/2019 Basic Accounting Concepts, Techniques and Conventions
8/172005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 8
King Hardware TransactionsKing Hardware Transactions
Initial investment by owners: $100,000 cashInitial investment by owners: $100,000 cash
Acquisition of inventory: $75,000 cashAcquisition of inventory: $75,000 cash
Acquisition of inventory onAcquisition of inventory on
open account: $35,000open account: $35,000
Merchandise costing $100,000 wasMerchandise costing $100,000 was
sold on open account for $120,000.sold on open account for $120,000.
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8/3/2019 Basic Accounting Concepts, Techniques and Conventions
9/172005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 9
King Hardware TransactionsKing Hardware Transactions
1)1) CashCash +100,000+100,000 +100,000+100,000
2)2) CashCash 75,000 75,000InventoryInventory + 75,000+ 75,000
3)3) InventoryInventory + 35,000+ 35,000 + 35,000+ 35,0004a)4a) ReceivableReceivable +120,000+120,000 +120,000+120,0004b)4b) CostCost 100,000100,000 100,000100,000
SubtotalSubtotal +155,000+155,000 + 35,000+ 35,000 +120,000+120,000
AssetsAssets == LiabilitiesLiabilities ++StockholdersStockholders
equityequity
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8/3/2019 Basic Accounting Concepts, Techniques and Conventions
10/172005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 10
King Hardware TransactionsKing Hardware Transactions
Cash collections of accounts receivable: $15,000Cash collections of accounts receivable: $15,000
Cash payments of accounts payable: $20,000Cash payments of accounts payable: $20,000
On March 1, paid $3,000 cash for store rent forOn March 1, paid $3,000 cash for store rent for
March, April, and May. Rent is $1,000 per month.March, April, and May. Rent is $1,000 per month.
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11/172005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 11
King Hardware TransactionsKing Hardware Transactions
5)5) CashCash + 15,000+ 15,000ReceivableReceivable 15,000 15,000
6)6) CashCash 20,000 20,000 20,000 20,0007)7) CashCash 3,000 3,000
7a)7a) PrepaidPrepaid + 3,000+ 3,000
7b)7b) ExpenseExpense 1,000 1,000 1,000 1,000TotalTotal 21,000 21,000 20,000 20,000 1,000 1,000
Totals (1-4)Totals (1-4) +155,000+155,000 + 35,000+ 35,000 +120,000+120,000
AssetsAssets == LiabilitiesLiabilities ++StockholdersStockholders
equityequity
134,000134,000 134,000134,000
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 12
Revenues and ExpensesRevenues and Expenses
Revenues are increases in ownershipRevenues are increases in ownership
claims arising from the deliveryclaims arising from the delivery
of goods or services.of goods or services.
Expenses are decreases in ownershipExpenses are decreases in ownership
claims arising from delivering goodsclaims arising from delivering goodsor services or using up assets.or services or using up assets.
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 13
Relationship Between BalanceRelationship Between Balance
Sheet and Income StatementSheet and Income Statement
The income statement measures theThe income statement measures the
performance of an organization byperformance of an organization bymatching its accomplishmentsmatching its accomplishments
(revenue from customers, which is(revenue from customers, which is
usually calledusually called
salessales
) and its efforts) and its efforts
((cost of goods soldcost of goods soldand other expenses.)and other expenses.)
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 14
Relationship Between BalanceRelationship Between Balance
Sheet and Income StatementSheet and Income Statement
BalanceBalancesheetsheet
Feb. 28Feb. 2820xx20xx
BalanceBalancesheetsheet
March 31March 3120xx20xx
BalanceBalancesheetsheet
April 30April 3020xx20xx
BalanceBalancesheetsheet
May 31May 3120xx20xx
IncomeIncome
statementstatement
for Marchfor March
IncomeIncome
statementstatement
for Aprilfor AprilTimeTime TimeTime
IncomeIncome
statementstatement
for Mayfor May
Income statement for quarter ended May 31, 20xxIncome statement for quarter ended May 31, 20xx
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 15
The Analytical Power of theThe Analytical Power of the
Balance Sheet EquationBalance Sheet Equation
The balance sheet equation can highlight the linkThe balance sheet equation can highlight the linkbetween the income statement and balance sheet.between the income statement and balance sheet.
Assets (A) = Liabilities (L) + Stockholders equity (SE)Assets (A) = Liabilities (L) + Stockholders equity (SE)
A = L + Paid-in capital + Retained incomeA = L + Paid-in capital + Retained income
A = L + Paid-in capital + Revenue ExpensesA = L + Paid-in capital + Revenue Expenses
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 16
Accrual Basis and Cash BasisAccrual Basis and Cash Basis
TheThe accrualaccrualbasisbasisof accountingof accountingrecognizes revenues and expensesrecognizes revenues and expenses
when they occur regardless of whenwhen they occur regardless of whencash is received or disbursed.cash is received or disbursed.
TheThe cash basiscash basisof accounting recognizesof accounting recognizesrevenue and expense when cash isrevenue and expense when cash isreceived and disbursed.received and disbursed.
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 17
Accrual Basis and Cash BasisAccrual Basis and Cash Basis
The major deficiency of the cash basisThe major deficiency of the cash basis
of accounting is that it is incomplete.of accounting is that it is incomplete.
It fails to match efforts and accomplishmentsIt fails to match efforts and accomplishments
in a manner that properly measures economicin a manner that properly measures economicperformance and financial position.performance and financial position.