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Transcript of Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Basic Accounting Concepts: The Balance...
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Basic Accounting Concepts: The Balance Sheet
© The McGraw-Hill Companies, Inc., 1999
2Part One: Financial Accounting
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
• Accounting period
• Conservatism
• Realization
• Matching
• Consistency
• Materiality
Basic Concepts
• Money measurement
• Entity
• Going concern
• Cost
• Dual aspect
Slide 2-1
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Owner
The Entity Concept
The owner of a clothing store removes $100 from the store’s cash register for personal use. Should the store’s accounting
records show that the owner took this cash?
Slide 2-2
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
The Entity Concept
Yes, because of the entity concept. This concept requires that the accounting records of the
clothing store show that the business has less cash than it had previously.
Slide 2-3
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
The Going -Concern Concept
A thriving blue jeans manufacturing firm has jeans in various stages of production.
If the firm had to cease operations and liquidate today, the jeans would have little, if any, value. If today is the last day of the
accounting period, should the jeans be shown at liquidation value?
Slide 2-4
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
The Going -Concern Concept
Because of the going-concern concept, the firm would not value
the jeans at what they are currently worth--the liquidation value.
Slide 2-5
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
The Cost Concept--Nonmonetary Assets
Land purchased last year for $250,000 has a current market value of $270,000. What amount should be shown in the
accounting records to reflect ownership of this land?
Slide 2-6
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
The Cost Concept--Nonmonetary Assets
The land should be shown at the original purchase price of $250,000 because of the cost concept.
Slide 2-7
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
The Cost Concept--Monetary Assets
A company invested surplus cash in 100,000 shares of the common stock of General Electric. The cost of per share was $60; therefore, the firm spent $6,000,000. By the end of the
fiscal period, the stock had a fair market value of $65 per share.
What amount should be shown on the balance sheet?
Slide 2-8
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
The Cost Concept--Monetary Assets
The fair value of the stocks is $6,500,000.
This is the amount that should be shown for this monetary asset.
Slide 2-9
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
The Dual-Aspect Concept Slide 2-10
Ms. Jones opens a bank account for the business by depositing $40,000.
Ms. Jones opens a bank account for the business by depositing $40,000.
Assets = Liabilities + Owners’ equity
Assets = Equities
+ $40,000 + $40,000=
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
The Dual-Aspect Concept Slide 2-11
The business borrows $15,000 from the bank.
The business borrows $15,000 from the bank.
+ $40,000 = $40,000
Assets = Liabilities + Owners’ equity
+ 15,000 + 15,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Assets = Liabilities + Owners’ equity
The Dual-Aspect Concept Slide 2-12
Assets = EquitiesAssets = Equities
+ $40,000 = $40,000
+ 15,000 + 15,000
$55,000 $15,000 $40,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Name of entityName of statementMoment of time
GARSDEN CORPORATIONBalance Sheet
As of December 31, 1998
The Balance Sheet--The Heading Slide 2-13
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Current assets:Cash $ 3,448,891Marketable securities 246,221Accounts receivable 5,954,588Inventories 12,623,412Prepaid expenses 377,960
Total current assets $22,651,072Property, plant, and equipment:
Land 642,367Building and equipment, at cost 26,303,481
Less: accumulated depreciation 13,534,069 12,769,412Other assets:
Investments 110,000Intangible assets 63,214 173,214
Total assets $36,236,065
The Balance Sheet--Assets Slide 2-14
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Slide 2-15The Balance Sheet--Liabilities and Shareholders’ Equity
Current liabilities:Accounts payable $ 6,301,442Taxes payable 1,672,000Accrued expenses 640,407Deferred revenues 205,240Current portion of long-term debt 300,000
Total current liabilities $ 9,119,089Long-term debt 3,000,000
Total liabilities 12,119,089Shareholders’ equity:
Paid-in capital 5,000,000Retained earnings 19,116,976
Total shareholders’ equity 24,116,976Total liabilities and shareholders’ equity $36,236,065
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
CashFunds that are readily available for
distributionMarketable securities
Investments that are both readily marketable and expected to be converted into cash withinone year
Accounts receivableAmounts owed to the entity by its
customers
CashFunds that are readily available for
distributionMarketable securities
Investments that are both readily marketable and expected to be converted into cash withinone year
Accounts receivableAmounts owed to the entity by its
customers
Account Categories--Current Assets Slide 2-16
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
InventoriesAggregate of items either held for sale in the ordinary course of the business, inprocess of production for such sale, orsoon to be consumed in production
Prepaid expensesAssets, usually of an intangible nature, whose usefulness will expire in the near future
InventoriesAggregate of items either held for sale in the ordinary course of the business, inprocess of production for such sale, orsoon to be consumed in production
Prepaid expensesAssets, usually of an intangible nature, whose usefulness will expire in the near future
Slide 2-17Account Categories--Current Assets
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Accounts payableClaims of suppliers arising from
their furnishing goods or services to the entity for which they have not been paid
Taxes payableAmount the entity owes
governmental agencies
Accounts payableClaims of suppliers arising from
their furnishing goods or services to the entity for which they have not been paid
Taxes payableAmount the entity owes
governmental agencies
Account Categories--Current Liabilities Slide 2-18
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Accrued expensesAmounts earned by outside parties buthave not been paid by the entity
Deferred revenuesLiabilities that arise because the entityreceives advanced payments for servicesthe entity has agreed to render in the future
Current portion of long-term debt
Accrued expensesAmounts earned by outside parties buthave not been paid by the entity
Deferred revenuesLiabilities that arise because the entityreceives advanced payments for servicesthe entity has agreed to render in the future
Current portion of long-term debt
Account Categories--Current Liabilities Slide 2-19
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Music Mart Slide 2-20
On January 1, John Smith starts an incorporated CD and tape store called Music Mart, Inc. He deposits $25,000 of his own funds in a bank account that he opened in the name of the entity. In return, he takes $25,000 of stock certificates.
On January 1, John Smith starts an incorporated CD and tape store called Music Mart, Inc. He deposits $25,000 of his own funds in a bank account that he opened in the name of the entity. In return, he takes $25,000 of stock certificates.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Music Mart Slide 2-21
On January 1, John Smith starts an incorporated CD and tape store called Music Mart, Inc. He deposits $25,000 of his own funds in a bank account that he opened in the name of the entity. In return, he takes $25,000 of stock certificates.
On January 1, John Smith starts an incorporated CD and tape store called Music Mart, Inc. He deposits $25,000 of his own funds in a bank account that he opened in the name of the entity. In return, he takes $25,000 of stock certificates.
MUSIC MARTBalance Sheet
As of January 1
Assets Liabilities and Owners’ Equity
Cash $25,000 Paid-in capital $25,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Music Mart Slide 2-22
On January 2, Music Mart borrows $12,500 from a bank; the loan is evidence by a legal document called a note.
On January 2, Music Mart borrows $12,500 from a bank; the loan is evidence by a legal document called a note.
MUSIC MARTBalance Sheet
As of January 1
Assets Liabilities and Owners’ Equity
Cash $25,000 Paid-in capital $25,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Cash $37,500 Notes payable $12,500Paid-in capital 25,000
Total $37,500 Total $37,500
Music Mart Slide 2-23
On January 2, Music Mart borrows $12,500 from a bank; the loan is evidence by a legal document called a note.
On January 2, Music Mart borrows $12,500 from a bank; the loan is evidence by a legal document called a note.
MUSIC MARTBalance Sheet
As of January 1
Assets Liabilities and Owners’ Equity
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Cash $32,500 Notes payable $12,500Inventory 5,000 Paid-in capital 25,000Total $37,500 Total $37,500
Music Mart Slide 2-24
On January 3, the business buys inventory in the amount of $5,000, paying cash.
On January 3, the business buys inventory in the amount of $5,000, paying cash.
MUSIC MARTBalance Sheet
As of January 1
Assets Liabilities and Owners’ Equity
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Cash $33,250 Notes payable $12,500Inventory 4,500 Paid-in capital 25,000
Retained earnings 250Total $37,750 Total $37,750
Music Mart Slide 2-25
On January 4, the business sells merchandise that cost $500 for $750. Cash was received.
On January 4, the business sells merchandise that cost $500 for $750. Cash was received.
MUSIC MARTBalance Sheet
As of January 1
Assets Liabilities and Owners’ Equity