accounting 1a class notes chapter 1 introduction to ... · accounting 1a class notes chapter 1 –...

Accounting 1A

Class Notes

Chapter 1 – Introduction to Accounting and Business

S. Aviles

Types of Business

• Service Business - Lawyer, Consultant, Doctor

• Merchandiser – Best Buy, Wal-Mart

• Manufacturer - Mattel, Coca Cola

Purpose of Accounting

• Provide Financial Information for decision making to:

External Users - Investors and Creditors (Financial Accounting)

Internal Users - Management (Managerial Accounting)

Regulators - IRS & SEC

• Guided by Generally Accepted Accounting Principles (USA) GAAP

• Professional Ethics- Fraud Triangle

Careers In Accounting

• Public Accounting

a) Tax, Audit, Consulting Services

• CPA Private Accounting

a) Bookkeeper / Accounting Clerk

b) Supervisor / Manager / Director

c) Controller

d) CFO / VP of Finance

• Government and Not For Profit

a) City County State Federal

b) Colleges

c) Charitable Organizations

Accounting 1A

Class Notes


S. Aviles

All accounting is based on one simple formula

ASSETS = LIABILITIES + OWNERS EQUITY

(Owned) (owed)

3 WAYS A COMPANY GETS ASSETS

1. Contributed

2. Borrowed

3. Earned

ASSETS = items OWNED by a business that will provide FUTURE BENEFIT

Examples: Money, merchandise, furniture, fixtures, machinery, buildings, land

LIABILITIES = DEBTS or obligations of a business OWED to others that can be paid with cash, goods,

or services. Examples: Accounts Payable, Notes Payable

OWNERS EQUITY (a.k.a. NET WORTH or CAPITAL) = Represents the amount by which the

businesses ASSETS EXCEED their LIABILITIES.

It TRACKS that which was:

CONTRIBUTED TO and DRAWN FROM the business by owners

Added to or subtracted from the business through historical EARNINGS/LOSS ACTIVITY

In BUSA100, you used proprietorships as the form of business, in this class we use corporations. The

major difference between the two for our purposes is in the Owner’s Equity section.

Expanding the Accounting Equation

REVENUE = Amount the business charges customers for the products or services it sells. Revenues

increase Assets and OE

EXPENSES = Amount expended as a result of the efforts made to produce revenues. Expenses will either

decrease assets or increase in liabilities. Expenses always reduce OE.

(expenses do not always reduce cash - rent expense/rent payable)

NET INCOME = REVENUE Greater Than EXPENSES (increases OE)

NET LOSS = REVENUE Less Than EXPENSES (decreases OE)

Accounting keeps track of where your funds

came from

(Contributed, Borrowed or Earned)

And

Where your funds went.

(Asset Purchases, Expenses)

Accounting 1A

Class Notes


S. Aviles

Net Income or Loss is always determined OVER A DEFINED SPAN OF TIME

Example: Net Income for the 12 months ended December 31, 2017.

DIVIDENDS & WITHDRAWALS (a.k.a. DRAWING) = Reduction in OE as a result of cash or other

assets being distributed to the owners for their personal use. (the opposite of Owner Investment)

ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY

ITEMS OWNED AMOUNTS OWED OWNERS INVESTMENT + RETAINED EARNINGS

Cash, Trucks Accts Payable Capital Stock Net Income

Less: Dividends

Revenue - recognized when earned. Regardless if customer pays now or later.

Expense - recognized when incurred, even if cash has not been paid

Indicate whether each of the following is identified with (1) an asset, (2) a liability, or (3) stockholders'

equity:

a) accounts payable

b) cash

c) fees earned

d) land

e) supplies

f) wages expense

Analyzing Business Transactions

1. What Happened

2. Which Accounts Are Affected

3. How is the Accounting Equation kept in balance

Examples:

1. Owner contributes a building valued at $90,000 and Cash of $10,000 to the business

2. Bought a PC for $5,000

3. Financed a truck through the bank for $20,000

4. Made his first Truck payment to the bank for $500

5. The Owner Withdrew $1,000 from the business for personal use

Accounting 1A

Class Notes


S. Aviles

Accounting 1A

Class Notes


S. Aviles

Financial Statements

• After transactions have been recorded and summarized, reports are prepared for users.

The. accounting reports providing this information are called financial statements

• The primary financial statements of a corporation are the:

- Income statement

- Retained earnings statement

- Balance sheet

- Statement of cash flows

Indicate in the space provided by each item whether it would appear on the income statement

(IS), balance sheet (BS), or retained earnings statement (RE):

a. _____ Service Revenue g. ___ Accounts Receivable

b. _____ Utilities Expense h. ___ Common Stock

c. _____ Cash i. ___ Equipment

d. _____ Accounts Payable j. ___ Advertising Expense

e. _____ Supplies k. ___ Dividends

f. _____ Salaries and Wages Expense l. ___ Notes Payable

Accounting 1A

Class Notes


S. Aviles

On October 1, Ebony Ernst organized Ernst Consulting;

on October 3, the owner contributed $84,000 in assets

in exchange for its common stock to launch the

business. On October 31, the company’s records show

the following items and amounts. Use this information

to prepare an October income statement, retained

earnings statement, and balance sheet for the business.

Income Statement

Expenses:

Total expenses

Net income

Retained Earnings Statement

Retained earnings, Retained earnings,

Accounting 1A

Class Notes


S. Aviles

Balance Sheet

Assets Liabilities

Stockholders' Equity

Total stockholders' equity

Total assets Total liabilities and stockholders' equity

Accounting 1A

Class Notes


S. Aviles

Rivera Roofing Company, owned by Reyna Rivera, began operations in July and completed these transactions during that first month of operations.

July 1 Reyna Rivera invested $80,000 cash in the company in exchange for its common stock.

2 The company rented office space and paid $700 cash for the July rent.

3

The company purchased roofing equipment for $5,000 by paying $1,000 cash and agreeing to pay the

$4,000 balance in 30 days.

6 The company purchased office supplies for $600 cash.

8 The company completed work for a customer and immediately collected $7,600 cash for the work.

10 The company purchased $2,300 of office equipment on credit.

15 The company completed work for a customer on credit in the amount of $8,200.

17 The company purchased $3,100 of office supplies on credit.

23 The company paid $2,300 cash for the office equipment purchased on July 10.

25 The company billed a customer $5,000 for work completed; the balance is due in 30 days.

28 The company received $8,200 cash for the work completed on July 15.

30 The company paid an assistant’s salary of $1,560 cash for this month.

31 The company paid $295 cash for this month’s utility bill.

31 The company paid $1,800 cash in dividends to the owner (sole shareholder).

1. Use additions and subtractions within the table to show the dollar effects of each transaction

on individual items of the accounting equation. Show new balances after each transaction.

2. Prepare an income statement for the month ended July 31.

3. Prepare a retained earnings statement for the month ended July 31.

4. Prepare a balance sheet as of July 31.

5. What item appears on both the income statement and retained earnings statement

Accounting 1A

Class Notes


S. Aviles

Assets = Liabilities + Equity

Date Cash + Accounts

Receivable +

Office

Supplies +

Office

Equipment + Roofing

Equipment =

Accounts

Payable +

Common

Stock - Dividends + Revenues - Expenses

Accounting 1A

Class Notes


S. Aviles

Income Statement

Expenses:

Total expenses Net income

Retained Earnings Statement

Retained earnings, Retained earnings,

Balance Sheet

Assets Liabilities

Stockholders' Equity

Total stockholders' equity

Total assets Total liabilities and stockholders' equity

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