2. balance sheet & p&l

BASIC ACCOUNTING CONCEPTSBASIC ACCOUNTING CONCEPTS

Dual - Aspect Concept

For Every Debit, there is

a Credit

Every transaction should Every transaction should have a two- sided effect to have a two- sided effect to the extent of same amountthe extent of same amount

This Concept has resulted in

THE THE ACCOUNTING ACCOUNTING

EQUATIONEQUATION

ACCOUNTING EQUATION

OWNER’S CAPITAL + LIABILITIES + RETAINED EARNINGS

=

ASSETS

CLAIMS

=

ECONOMIC RESOURCES

THE BALANCE SHEETTHE BALANCE SHEET

The financial position of an accounting entity as of a specified moment of time based on generally accepted accounting principles is shown by a ‘BALANCE SHEET.’

Balance sheet reports the ‘ASSETS’ and ‘LIABILITIES’.The basic balance sheet is ASSETS = LIABILITIES + OWNERS EQUITY orRESOURCES = CREDITORS + OWNERS CLAIM ON RESOURCES

Otherwise called as statement of financial position.

THE BALANCE SHEETTHE BALANCE SHEETSpecific moment of time

Reports assets and liabilities

ASSETS:Economic resources that are controlled by an entity and whose cost at the time of acquisition could be objectively measured.

A resource is an economic resource if it provides future benefits to the entity. Resource provides future benefits if:1)They are cash or can be converted to cash. (Eg. Shares)2)They are goods that are expected to be sold and cash received. (Eg. Stock)3)They are items expected to be used in future activities that will generate cash inflows to the entity. (Eg. Machinery)


ASSETS:Customarily grouped into two categories:1)CURRENT ASSETS2)NON CURRENT ASSETS

Current assets are assets that are expected to be realised in cash or sold or consumed during the normal operating cycle or within one year, whichever is longer.

Common current assets: Cash, Cash equivalent like treasury bills,CP etc, Marketable securities, Accounts receivable (Sundry debtors), Inventories (Stock), Prepaid expenses


ASSETS:Customarily grouped into two categories:1)CURRENT ASSETS2)NON CURRENT ASSETS

Non current assets consists of assets that are tangible and relatively long lived. Also referred to as fixed assets. The entity has acquired these assets in order to use them to produce goods and service that will generate future cash inflows. Investments are also non-current assets to the extent they are not classified as marketable securities.

Eg. Plant, Land, Building, Copyright, Patent, Trademark


LIABILITIES

Liabilities are claims against the entity’s assets. Liability is reported at the amount that would be required to satisfy the obligation as of the balance sheet date.


LIABILITIES

Customarily classified into three categories:1)CURRENT LIABILITY2)NON-CURRENT LIABILITY3)OWNERS EQUITY

Current liabilityLiabilities that are expected to be satisfied or extinguished during normal operating cycle or within one year whichever is longer are called current liabilities. Common current liability: Sundry creditors, Taxes payable, Accrued expenses, Current portion of long term debt, dividend payable.


LIABILITIES


Non-current liabilityObligations that do not met the criteria for being classified as current liability are simply called non-current or long term LiabilityEg. Debentures, Bank loan, Bonds


LIABILITIES


Owner’s equity shows the amount the owners have invested in the entity. Owner’s equity in the balance sheet is divided into two parts1)CAPITALThe amount the owners have invested directly in the business by purchasing shares 2)RESERVES AND SURPLUS (RETAINED EARNINGS)


LIABILITIES


Owner’s equity shows the amount the owners have invested in the entity. Owner’s equity in the balance sheet is divided into two parts1)CAPITAL2)RESERVES AND SURPLUS (RETAINED EARNINGS)Total earnings that has been retained for use in business (reinvested in business), usually total earnings from inception less dividend paid). Account is referred as accumulated losses when aggregate earnings of the company is negative.


Income statement provides a measure of the operating performance of a firm by presenting the entity’s revenues, expenses, gains, losses and net income for a period of time.

Basic income statement equation:

REVENUE – EXPENSES = NET INCOME

THE INCOME STATEMENTTHE INCOME STATEMENT

Revenue - Inflows during the period from selling goods, rendering services or other activities that constitute the entity’s ongoing operation.Common components of revenueSales, Interest, dividend, Professional fees from service etc

Expenses- Outflows during the period for selling goods, rendering services or other activities that constitute the entity’s ongoing operation.Common components of expensesCost of goods sold, administration expenses, selling expenses, financial expenses, taxes, dividend paid



Time period

Using The Basic Accounting EquationUsing The Basic Accounting EquationUsing The Basic Accounting EquationUsing The Basic Accounting Equation

Transactions are a business’s economic events recorded by

accountants.

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the accounting equation.

Are the following events recorded in the accounting records?

EventSupplies are purchased for cash.

Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed?

An employee is hired.

Owner withdraws cash for personal use.

Record/ Don’t Record

Transactions (Question?)Transactions (Question?)Transactions (Question?)Transactions (Question?)

A Co was started on May 1 by B. Prepare a tabular analysis of the following transactions for the month of May.

Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)

+10,000

1. +10,000

CashAccounts Receivable Equipme

nt

Accounts Payable

B, Capital+ + = +

1. Invested Rs 10,000 cash to start the repair shop.

Investment

Assets Liabilities Equity


+10,000

1. +10,000


nt

Accounts Payable

B, Capital

2. Purchased equipment for Rs 5,000 cash.

-5,0002. +5,000

+ + = +

Investment



+10,000

1. +10,000


nt

Accounts Payable

3. Paid Rs 400 cash for May office rent.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

B, Capital

Investment



+10,000

1. +10,000


nt

Accounts Payable

4. Received Rs 5,100 from customers for repair service.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu

e

B, Capital

Investment



+10,000

1. +10,000


nt

Accounts Payable

5. Withdrew Rs 1,000 cash for personal use.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu

e-1,0005. -1,000 Drawings

B, Capital

Investment



+10,000

1. +10,000


nt

Accounts Payable

6. Paid part-time employee salaries of Rs 2,000.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu

e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense

B, Capital

Investment



+10,000

1. +10,000


nt

Accounts Payable

7. Incurred Rs 250 of advertising costs, on account.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu


+2507. -250 Expense

B, Capital

Investment



+10,000

1. +10,000


nt

Accounts Payable

8. Provided Rs 750 of repair services on account.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu


+2507. -250 Expense+7508. +750 Revenu

e

B, Capital

Investment



+10,000

1. +10,000


nt

Accounts Payable

9. Collected Rs 120 cash for services previously billed.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu


+2507. -250 Expense+7508. +750 Revenu

e+1209. -120

B, Capital

Investment


6,820 + 630 + 5,000 = 250 + 12,200

List of Transactions for the months of December 2005 & January 2006

Illustration

Marie Collins invested 100,000 of her own money into her new pet shop on January 1, 2015. The store will be named “Love thy Pet.”

On January 1, 2015, Marie paid 1,350 rent on the pet shop. (For December last year)

For January 2, 2015, Marie borrowed 50,000 by signing a 4-month, 10% note payable.

For January 5, 2015, Marie purchased pet store equipment for 7,500 in cash.

For January 6, 2015, Marie hired two salespeople to begin work on the 9th of January in the shop for a bi-weekly wage of 800 each.

This was not a transaction; therefore, it requires no journal entries because assets were not exchanged at the time of this event.

For January 8, 2015, Marie receives a cash advance of 1,200 from a customer for an Irish sheep dog that will not arrive from the breeder until March 7, 2015.

For January 10, 2015, Marie received 5,500 in cash for two bulldogs sold to a customer.

For January 14, 2015, Marie purchased 2-months of pet supplies on account from Morrison pet supply store for 500.

For January 15,2015, Marie declared and paid a dividend to stockholders of 400.

For January 31, 2015, Marie paid the salespeople their bi-weekly wages 1600.

Transaction IllustrationsTransaction Illustrations

44

a. Sachin deposits RS 25,000 in a bank account for ABC Ltd

ASSETS

=

Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions

OWNER’S EQUITY

LIABILITIES

45

a. Sachin deposits RS 25,000 in a bank account for ABC Ltd.

ASSETS

=


OWNER’S EQUITY

Cash Cash 25,00025,000

LIABILITIES

46

a. Sachin deposits RS 25,000 in a bank account for ABC Ltd.

ASSETS

=


OWNER’S EQUITY

Cash Cash 25,00025,000

LIABILITIES

Sachin, Capital Sachin, Capital 25,00025,000

47


b. ABC Ltd. buys land for Rs 20,000.

ASSETS

=OWNER’S EQUITY

LIABILITIES

48


b. ABC Ltd. buys land for Rs 20,000.

ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (20,000)(20,000)

49


b. ABC Ltd buys land for RS 20,000.

ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (20,000)(20,000)

Land Land 20,00020,000

50


ASSETS

=OWNER’S EQUITY

LIABILITIES

c. ABC Ltd buys goods for RS1,350, agreeing to pay the supplier in the near future.

51


ASSETS

=OWNER’S EQUITY

LIABILITIES

c. ABC Ltd buys goods for RS1,350, agreeing to pay the supplier in the near future.

Accounts PayableAccounts Payable1,3501,350

Purchases Purchases 1,3501,350

52


ASSETS

=OWNER’S EQUITY

LIABILITIES

e. ABC Ltd paid: wages Rs 2,125; rent, Rs 800; utilities, Rs 450; and miscellaneous, Rs 275.

53


ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (3,650)(3,650)


54


ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (3,650)(3,650)

ExpensesExpenses(3,650)(3,650)


55


ASSETS

=OWNER’S EQUITY

LIABILITIES

f. ABC Ltd pays Rs 950 to creditors on account.

56


ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (950)(950)


57


ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (950)(950)

Accounts PayableAccounts Payable(950)(950)


58


ASSETS

=OWNER’S EQUITY

LIABILITIES

g. ABC Ltd receives fees Rs 7,500 in cash

59


ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash 75007500

g. ABC Ltd receives fees Rs 7,500 in cash.

60


ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash 75007500

Fees 7,500Fees 7,500

g. ABC Ltd receives fees Rs 7,500 in cash.

61


ASSETS

=OWNER’S EQUITY

LIABILITIES

h. Sachin withdraws Rs 2,000 in cash.

62


ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (2,000)(2,000)


63


ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (2,000)(2,000)

Sachin’s, DrawingSachin’s, Drawing(2,000)(2,000)


64

Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary

ASSETS

= OWNER’S EQUITY

LIABILITIES

CashCash 5,9005,900PurchasesPurchases 1,3501,350LandLand 20,00020,000

65


ASSETS

= OWNER’S EQUITY

LIABILITIES

CashCash 5,8005,800Purchases Purchases 1,3501,350LandLand 20,00020,000

Accts. PayableAccts. Payable 400400

66


ASSETS

= OWNER’S EQUITY

LIABILITIES

CashCash 5,9005,900PurchasesPurchases 1,3501,350LandLand 20,00020,000

Accts. PayableAccts. Payable 400400

Sachin, CapitalSachin, Capital 25,00025,000Sachin, DrawingSachin, Drawing (2,000)(2,000)Fees EarnedFees Earned 7,5007,500Wages ExpenseWages Expense (2,125)(2,125)Rent ExpenseRent Expense (800)(800)Commission (450)Commission (450)Misc. ExpenseMisc. Expense (275)(275)

2. balance sheet & p&l

Documents

current liabilities

noncurrent assets

common current assets

common current liability

entitys assets

fixed assets

basic balance sheet

future cash inflows