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Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems 1-1 Lecture 2 Accounting Equation

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Various users need financial information The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Financial Statements Balance Sheet Income Statement Statement of Owners Equity Statement of Cash Flows Note Disclosure Financial Statements Balance Sheet Income Statement Statement of Owners Equity Statement of Cash Flows Note Disclosure Generally Accepted Accounting Principles (GAAP) The Building Blocks of Accounting

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Organizations Involved in Standard Setting: Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) International Accounting Standards Board (IASB) The Building Blocks of Accounting http://www.fasb.org/ http://www.sec.gov/ http://www.iasb.org/

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Cost Principle (Historical) dictates that companies record assets at their cost. Issues: Reported at cost when purchased and also over the time the asset is held. Cost easily verified, whereas market value is often subjective. Fair value information may be more useful. The Building Blocks of Accounting

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Monetary Unit Assumption include in the accounting records only transaction data that can be expressed in terms of money. Economic Entity Assumption requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. Proprietorship. Partnership. Corporation. AssumptionsAssumptions Forms of Business Ownership

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ProprietorshipPartnership Corporation Owned by two or more persons. Often retail and service-type businesses Generally unlimited personal liability Partnership agreement Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability Forms of Business Ownership Generally owned by one person. Often small service-type businesses Owner receives any profits, suffers any losses, and is personally liable for all debts.

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A business organized as a separate legal entity under state law having ownership divided into shares of stock is a a.proprietorship. b.partnership. c.corporation. d.sole proprietorship. Forms of Business Ownership Review Question

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AssetsAssetsLiabilitiesLiabilities Owners Equity =+ Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation

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Asset

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Asset - New Computer New computer worth $1700.00

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Asset - Cash in Bank Checking account balance $525.00

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Asset - Business Car Business car worth $20,000.00

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Asset - Building Building you purchased for $250,000.00

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Asset - Office Supplies Office supplies purchased for $75.00

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Asset Accounts Receivable I will receive the money later When a person owes YOU money, this is also an asset. The asset is called Accounts Receivable.

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Asset Prepaid Insurance Ive paid my 6 month insurance premium When you pay insurance premiums covering your property, this is also an asset. Making payments in advance is called a prepaid asset.

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Definition of an An asset is anything of value that is owned An asset may be something which is paid for in advance, like prepaid insurance or prepaid rent. Money you will receive later Accounts Receivable

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Check and Review Which account is NOT an asset. 1. Desk 2. Prepaid insurance 3. Money you owe another person 4. Money that another person owes you

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Prepaid Insurance Try again Remember, prepaid insurance is an asset because it has value.

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Desk a desk is an asset because it has value.

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Money you owe to another person Great job! Money $ you owe another person would not be of value to you because you will eventually have to pay the person off. Money you owe is a LIABILITY

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Liability I will pay you later A liability is when you owe to another person or business money.

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Liability 1.A liability is when you owe to another person or business money. 2.Liabilities typically include the word payable in the description.

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Examples of Liability Accounts Accounts Payable Notes Payable Income Tax Payable Social Security Tax Payable

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Check and Review So whats the key word for a liability? PayableReceivable

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Lets think Receivable means that you will receive money at a later date.

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Check and Review - Asset Select the asset below Money I owe to a business Money that someone owes to me

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Review Accounts Payable Remember, if you owe another person money its not really a good thing. When you owe to another person, you have a Liability.

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Which asset would require you to borrow more money from the bank?

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Larger asset/larger debt Great job, Since the building is a larger asset which costs more than a car, you would incur a higher debt.

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Smaller asset/smaller debt Try Again, Since the car probably costs less than the building, you would not need to borrow as much money from the bank.

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AssetsAssetsLiabilitiesLiabilities Owners Equity = + The Basic Accounting Equation Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc. AssetsAssets

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AssetsAssetsLiabilitiesLiabilities Owners Equity = + The Basic Accounting Equation Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc. LiabilitiesLiabilities

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AssetsAssetsLiabilitiesLiabilities Owners Equity = + The Basic Accounting Equation Ownership claim on total assets. Referred to as residual equity. Capital, Drawings, etc. (Proprietorship or Partnership). Owners Equity

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Owners Equity Revenues result from business activities entered into for the purpose of earning income. Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent. Illustration 1-6

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Owners Equity Expenses are the cost of assets consumed or services used in the process of earning revenue. Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc. Illustration 1-6

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Using The Basic Accounting Equation Transactions are a businesss 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.

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Q1-15: Q1-15: Are the following events recorded in the accounting records? Event Supplies are purchased on account. Criterion Is the financial position (assets, liabilities, or owners equity) of the company changed? An employee is hired. Owner withdraws cash for personal use. Record/ Dont Record Transactions (Question?)

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Discussion Question Q1-18: In February 2010, Ahmed invested an additional $10,000 in his business, ABC, which is organized as a proprietorship. ABCs accountant, recorded this receipt as an increase in cash and revenues. Is this treatment appropriate? Why or why not? See notes page for discussion TransactionsTransactions

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Transaction (1). Investment By Owner. Transaction (1). Investment By Owner. Ray Neal decides to open a computer programming service which he names ABS. On September 1, 2010, he invests $15,000 cash in the ABS. The effect of this transaction on the basic equation is: Transactions Analysis

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Transaction (2). Purchase of Equipment for Cash. ABS purchases computer equipment for $7,000 cash. Transactions Analysis

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Transaction (3). Purchase of Supplies on Credit. Transaction (3). Purchase of Supplies on Credit. ABS purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months.

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Transactions Analysis Transaction (4). Services Provided for Cash. Transaction (4). Services Provided for Cash. ABS receives $1,200 cash from customers for programming services it has provided.

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Transactions Analysis Transaction (5). Purchase of Advertising on Credit. Transaction (5). Purchase of Advertising on Credit. ABS receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.

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Transactions Analysis Transaction (6). Services Provided for Cash and Credit. Transaction (6). Services Provided for Cash and Credit. ABS provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.

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Transactions Analysis Transaction (7). Payment of Expenses. Transaction (7). Payment of Expenses. ABS pays the following Expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.

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Transactions Analysis Transaction (8). Payment of Accounts Payable. Transaction (8). Payment of Accounts Payable. ABS pays its $250 Daily News bill in cash.

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Transactions Analysis Transaction (9). Receipt of Cash on Account. Transaction (9). Receipt of Cash on Account. ABS receives $600 in cash from customers who had been billed for services [in Transaction (6)].

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Transactions Analysis Transaction (10). Withdrawal of Cash by Owner. Transaction (10). Withdrawal of Cash by Owner. Ray Neal withdraws $1,300 in cash from the business for his personal use.

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Transactions Analysis Summary of Transactions Illustration 1-8 Tabular summary of Softbyte transactions

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Very thanks 51