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

©CourseCollege.com

1

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

2

Objective 2.1:The accounting equation

The following slides use Jack & Jill Enterprises to

demonstrate the fundamental accounting equation

O2.1

©CourseCollege.com

3

Jack and Jill Enterprises

Hey Jill!Lets fetch water and

make some money

O2.1

You fetchI’ll

supervise

©CourseCollege.com

4


We receive $1 for each

pail of water we

fetch

And we pay $1 to replace

each shoe we wear

out

O2.1

©CourseCollege.com

5

Cash

Pails 2

3

5Total

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

O2.1

©CourseCollege.com

6

Assets

Cash

Pails

Mom payable

Jack & Jill, CapitalEquity

2

23

5

3

5Total Total

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

The red box has two parts,

creditors and owners.

O2.1

Liabilities

©CourseCollege.com

7

Assets

Cash

Pails

Liabilities

Mom payable

Jack & Jill, CapitalEquity

2

23

5

3

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

O2.1

©CourseCollege.com

8This is the BALANCE SHEET

©CourseCollege.com

9

O2.1

Now lets see how this system works for J & J

Enterprises. (Remember, Assets must always equal

Liabilities Plus Owner’s Equity.

©CourseCollege.com

10

Assets

Cash

Pails

Liabilities

Mom payable

J&J, Capital

Equity

2

3

5

3

2

Total assets Total Liab. + Equity

5


4

4

66

6

8

6

8

7

9

7

9

5

7

5

7

8

10

8

10

7

9

7

9

Fetch 1 PailFetch 2 Pails

Fetch 1 PailBuy 2 ShoesFetch 3 Pails

Buy 1 Shoe

O2.1

©CourseCollege.com

11

O2.1

We increased Equity with each sale

We decreased Equity for each expense.

The system stayed in balance

©CourseCollege.com

12

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

the total sales.

O2.1

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

far?

Sales ?

©CourseCollege.com

13

Assets

Cash

Pails

Liabilities

Mom payable

J&J, Capital

Equity

2

3

5

3

2

Total assets Total Liab. + Equity

5


4

4

66

6

8

6

8

7

9

7

9

5

7

5

7

8

10

8

10

7

9

7

9

I wish I could

remember what

our sales were.

O2.1

©CourseCollege.com

14

Solution: The Income Statement

O2.1

BALANCE SHEET INCOME STATEMENT

We need a better method to keep track of

salessales and expensesexpenses for each time period

©CourseCollege.com

15

O2.1

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

16

O2.1

The Sales and Expenses are collectedon the Income Statement

BALANCE SHEET

INCOME STATEMENT

Assets Liabilities

Equity Expenses

Sales

©CourseCollege.com

17

O2.1

The resulting Profit or Loss is calculated

BALANCE SHEET

INCOME STATEMENT

Assets Liabilities

Equity Expenses

Sales

Profit

Loss

©CourseCollege.com

18

O2.1

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

BALANCE SHEET

INCOME STATEMENT

Assets Liabilities

Equity Expenses

Sales

Profit

Loss

Let’s try it

©CourseCollege.com

19

Cash

Pails

Total assets

Assets

Mom payable

J&J, Capital

Total Liab & Equity

Liabilities + Equity

Balance Sheet

Revenue

Income Statement

Shoe Expense

OR

23

2

5

3

5


1

1

0

4

6

6

8

3

3

7

9

4

4

5

7

2

2

8

10

7

5

7

9

3

4

Fetch 1 PailFetch 2 Pails

Fetch 1 PailBuy 2 ShoesFetch 3 Pails

Buy 1 Shoe

O2.1

©CourseCollege.com

20

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

-for example a month or a year.

O2.1

This is a big improvement. The Income Statement

allows us to tell at a glance what the sales and

expense totals are.

©CourseCollege.com

21

Cash

Pails

Total assets

Assets

Mom payable

J&J, Capital

Total Liab & Equity


Balance Sheet

Revenue

Income Statement

Shoe Expense

OR

23

2

5

3

5


1

1

0

4

6

6

8

3

3

7

9

4

4

5

7

2

2

8

10

7

5

7

9

3

4

The systems stays balanced –

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

being recorded in the Income StatementO2.1

©CourseCollege.com

22

Assets = Liabilities + Equity + Revenues - Expenses

O2.1

Following are exercises using the fundamental accounting equation

©CourseCollege.com

23

Assets Liabilities

Equity

78

150 150Total Assets Total Liab & Equity

O2.1

Total Liabilities

Total Equity ?72

What is Total

Equity?

©CourseCollege.com

24

Assets Liabilities

Equity

1750 1750Total Assets Total Liab & Equity

O2.1

Total Liabilities

Total Equity

?

658

What are Total

Liabilities?

1092

©CourseCollege.com

25

Assets Liabilities

Equity

9,850Total Assets Total Liab & Equity

O2.1

Total Liabilities

Total Equity

?3,430

What are Total

Assets? 6,420

9,850

©CourseCollege.com

26

Total assets

Assets

Total Liabilities

Owner, Capital (Beginning)

Total Liab & Equity


Balance Sheet

Revenue

Income Statement

Expenses

OR

870

?

5

1

1

0

68

3

3

9

4

4

7

2

2

10

0

5

1,275

0

0What is the

total Owner, Capital?O2.1

405

1,275

©CourseCollege.com

27

Total assets

Assets

Total Liabilities

Owner, Capital (Beginning)

Total Liab & Equity


Balance Sheet

Revenue

Income Statement

Expenses

OR

870

?

5

1

1

0

68

3

3

9

4

4

7

2

2

10

100

5

1,350

25

75What is the total Owner,

Capital? (consider the

Income Statement also)

O2.1

405

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

Capital


28

Objective 2.2:Account Classification

The following slides offer an expanded Balance Sheet and

Income Statement to help understand the 5 classes of

accounts

O2.2

©CourseCollege.com

29

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

Loss

OR

There are 5 basic classes of

accounts

1.Assets 5.

Expenses

2. Liabilities

3. Equity

4. Revenue

O2.2

©CourseCollege.com

30

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

O2.2

There are a number of words used in account

descriptions that help us identify the classification.

©CourseCollege.com

31

Profitor

Loss

Expenses

Equity

BALANCE SHEET INCOME STATEMENTAssets Liabilities Revenue Remember

where these words

belong!

O2.2

©CourseCollege.com

32Where does this account belong?

Profitor

Loss

Expenses

Equity

BALANCE SHEET INCOME STATEMENTAssets Liabilities Revenue

O2.2

©CourseCollege.com


Profitor

Loss

Expenses

Equity


O2.2


49

Objective 2.3:Concepts

The following slides present 6 important concepts that guide

many accounting practices and decisions.

O2.3

©CourseCollege.com

50Concepts

Objectivity Concept Unit of Measure

(Monetary Unity) Concept

Periodicity Concept

Matching Concept

Cost Concept

O2.3

Revenue Recognition

Concept

©CourseCollege.com

51

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

O2.3

©CourseCollege.com

52

O2.3

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.

©CourseCollege.com

53

O2.3

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

©CourseCollege.com

54

O2.3

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

©CourseCollege.com

55

O2.3

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

©CourseCollege.com

56

O2.3

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

©CourseCollege.com

57What concept is involved?

O2.3

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

©CourseCollege.com


O2.3

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

©CourseCollege.com


O2.3

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

©CourseCollege.com


O2.3

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

Periodicity Concept

©CourseCollege.com


O2.3

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

©CourseCollege.com


O2.3

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


63

Objective 2.4:Common size income

statement

Useful information can be obtained by expressing

income statement items in terms of their percentage of

sales.

O2.4

©CourseCollege.com

64

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

= 17%

A standard common size percentage calculated is

net profit as a percentage of sales.

This allows comparison from

one period to the next

O2.4

©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....