acct 2310 accounting principles i chapter 2
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DESCRIPTIONACCT 2310 Accounting Principles I Chapter 2. Dr. Robert R. Oliva Professor and Chairperson Department of Accounting University of Arkansas at Little Rock. Questions:. How do you find out the answer to the following questions? - PowerPoint PPT Presentation
ACCT 2310 Accounting Principles I Chapter 2Dr. Robert R. OlivaProfessor and ChairpersonDepartment of AccountingUniversity of Arkansas at Little Rock
Questions: How do you find out the answer to the following questions?
Does the business have enough cash to buy a $5000 piece of equipment?Why was a $750 check written on March 28?How much have you spent on salaries so far this month?How much did you spend for an ad placed in the Arkansas Democrat Gazette during the first week in July?
You need to have an appropriate accounting system in place JOURNAL: Records daily transactions, describing date, amount, brief explanation. Pages 62-64.LEDGER: Keeps a running balance showing increases and decreases of each financial statement item in a separate record, e.g., Balance sheet: Cash, accounts receivable, etc.Income Statement: Revenues and expenses.Pages 65-68
Each business transaction must be recordedRecording involves a 3-step approach:Determine which accounts are affected.As the Accounting Equation requires constant balancing, one account increases while other account decreases.Double-entry accountingTranslate each increase and decrease into a debit or a credit transaction.Initial recording done in a JournalThe book of original entryLedger: After all business transactions are recorded (journalized) then they are posted in the Ledger
Flow of business transactionsExhibit 2, page 56
Will proper recording prevent fraud?Bottom of page 54
But before we can record in a journal or post to a ledgerWe need to know what to call each business transactionWe need to separate business transactions into Accounts
Account classificationClassification depends on the business transaction and the type of business.Business transactions may be classified as affecting AssetsLiabilitiesOwners EquityRevenuesExpenses
Chapter 1: Lawn Mowing exampleMany transactions were recorded in Owners EquityHard to separate and analyzeOK for a very small business. But in reality not very efficient. More efficient approach: Separate Owners Equity into various accounts.
Owners Equity is separated into four (4) separate accounts:
CapitalTo record owners investmentsDrawingTo record owners withdrawalsRevenueTo record revenues from customersExpenseTo record expenses incurred in business
Examples of other accounts:CashSuppliesAccounts Payable
Accounts Organization Chart of AccountsAccounts can be classified/organized into 5 major groups/categories:AssetsLiabilitiesOwners EquityRevenuesExpensesAll business have these types, but names and/or numbers given to them will vary.Unique: The Chart reflects the business transactions.
In-class exercise: Create a Chart of Accounts for Larry Sharp, M.D.Consider Dr. Sharps practice and divide business transactions among the followingAssetsLiabilitiesOwners EquityRevenuesExpenses
Larry Sharp, M.D. (a sole proprietorship)
Dr. Sharps practice has a bank account, supplies, and equipment.He buys supplies on credit and pays in 30 daysHis patients either pay same day or get bills He rents the office and pays for utilitiesHe has malpractice insurance which he pays on on 1/1/xxHe has 2 employees and buys them flowers on their birthdaysHe attends medical seminars to keep current in his practice.
Larry Sharp, M.D. Chart of AccountsAssets: # 1x10: Cash11: Accounts Receivable12:Supplies13: Prepaid Insurance14: Medical equipmentLiabilities: # 2x21: Accounts PayableOwners Equity: # 3x31: Larry Sharp, Capital32: Larry Sharp, DrawingRevenues: # 4x 41: Fees earnedExpenses; # 5x51: Wage expenses52: Rent expenses53: Utilities expenses54: Medical Seminars expenses55: Supplies expenses56: Miscellaneous expenses
Later we will consider two other accounts: Insurance expense; Depreciation
Recall: Why are we classifying the accounts?To record the business transactions into a journalEach business transaction requires at least 2 entries to keep the Accounting Equation on balance.
What account increases and what account decreases?
The hijacking receivablePage 53
Account Characteristics: pp. 49-50Form: The T accountTwo sides of the TLeft side: The debit sideRight side: The credit sideSome accounts increase by debit entriesSome account increase by credit entries
The top of the T Describes type of account
Based on the Accounting Equation: Assets = Liabilities + Owners EquityThe Accounting Equation determines the recording of an accounts increases and decreases, e.g., Debits and CreditsPage 52
Assets Accounts: Assets increase with debits, e.g., increases recorded on the left side of the T.AIDAssets decrease with credits, e.g., decreases recorded on the left side of the TADC
Liabilities AccountsLiabilities and Owners Equity increase with credits, e.g., increases recorded on the left side of the T.LICLiabilities and Owners Equity decrease with debits, e.g., decreases recorded on the left side of the TLDDNote: Rules mirror each otherMemorize only one
A different approachAfter eating dinner, lets read the comicsUsing the T:Left: After Eating Dinner: Accounts increasing with debits:AssetsExpensesDrawingsRight: Lets Read the Comics: Accounts increasing with credits:LiabilitiesRevenuesCapital
In-class Exercise: Posting entries into T accounts(a) Dr. Sharp deposits $7000 cash in business account(b) Buys $5700 in medical equipment on account.(c) Pays $500 cash for ad in newspaper(d) Pays $75 for supplies.(e) Receives $1000 from patients(f) Pays for the $5700 in equipment.(g) Patients are billed $300(h) Paid employee $150(i) Patients in (g) send $300 check in payment.(j) Dr. Sharp withdraws $575 for personal use
SolutionLeft: After Eating Dinner: Accounts increasing with debits:AssetsExpensesDrawingsRight: Lets Read the Comics: Accounts increasing with credits:LiabilitiesRevenuesCapital
Solution: Assets:Cash accountDebit: (a), (e); and (i)Credit: (c); (d); (f); (h); (j)Account receivableDebit: (g)Credit: (i)Supplies:Debit: (d)Equipment:Debit: (b)
Solution: LiabilitiesAccounts PayableCredit: (b)Debit: (f)
Solution: Capital, Revenues, ExpensesCapital AccountM. Gordon, Capital:Credit: (a)M. Gordon, Drawing: Debit: (j)RevenuesFees earned: Credit: (e); (g)Expenses:WagesDebit: (h)Advertising Debit; (c)
But many times proper recoding requires through analysisPayments in advance
Pre-payments paidDifference between paying for 2-year in advance v. 1-month in advance: Page 56: Pre-payment of a 2-year policy on December 1st.Credit cashDebit an assetPage 58: Pre-payment of 1-month rent on December 1st.Credit cashDebit an expense
Pre-payments received Receiving $360 for prepaid rent 3-months in advancePage 58Debit receipt of $360 cashCredit a liability: Unearned RevenueEach month Debit the liabilityCredit revenues
Answers to Earlier Questions: How do you know whether the business has enough cash to buy the equipment?Ledger: Current balance in the CASH ACCOUNT.Why was a $750 check written on March 28?Journal: The journal will show a brief description as to why the check was written.How much have you spent on salaries so far this month?Ledger: WAGE EXPENSE ACCOUNT shows balance to date.How much did you spend for an ad placed in the Arkansas Democrat Gazette during the first week in July? Journal: Look for entries during the first week in July and look for description indicating the Arkansas Democrat Gazette.
TRIAL BALANCEReports the balance of each ledger accountAim: TO show that Debits = Credits
In-Class ExerciseTrial balance for Dr. Sharp
Dr. Larry Sharp, M.D. Trail Balance May 31, 20xx
Cash 1300Supplies.. 75Equipment. 5700Dr. L Sharp, Capital 7000Dr. L. Sharp, Drawing 575Fees earned 1300Wages Expense 150Advertising Expense 500 _______ ______ 8300 8300
Possible errors Exhibit 6TranspositionSlide
Error CorrectionExhibit 7
Errors undetected by a Trial BalanceFailing to record or post a transactionRecording the same erroneous amounts as debits and creditsRecording the same transaction more than onceCorrect debit accompanied by crediting wrong accountWould the trial balance be off if you record a $500 sale on account as follows?Debited Cash for $500Credited Fees earned for $500Answer: No!
FINANCIAL ANALYSISHorizontal analysisComparing time periodsExhibit 8