ac113 seminar unit 3 – chapter 2. chapter 2: basic accounting concepts objectives 1. describe the...
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AC113 Seminar
Unit 3 – Chapter 2
Chapter 2: Basic Accounting Concepts
• Objectives• 1. Describe the basic elements of a financial accounting
system.• 2. Analyze, record, and summarize transactions for a
corporation’s first period of operations. • 3. Prepare financial statements for a corporation’s first
period of operations.• 4. Analyze, record, and summarize transactions for a
corporation’s second period of operations.• 5. Prepare financial statements for a corporation’s second
period of operations.
Types of classifications of accounts:
• A=Assets• L=Liabilities• I=Income (revenue)• C=Capital (Stockholder’s Equity)• E=Expense
A=Debit• L=Credit• I=Credit• C=Credit• E=Debit
Accounting Transactions
• A transaction is an economic event that under generally accepted accounting principles (GAAP) affects an element of the financial statements and must be recorded.
• Can you think of an example of an accounting transaction?
Financial Statement Framework
• Look at Exhibit 1 on page 47 of your book.
• Assets = Liabilities + Stockholders’ Equity
• Notice that Stockholders’ Equity has two components: capital stock and retained earnings.
• On the income statement, we take revenues and subtract expenses which gives us net income. Net income becomes a component of retained earnings.
Recording Transactions
• When analyzing a• transaction, think about how the
transaction impacts the accounting equation:
• Assets = Liabilities + Stockholders’ Equity
• The equation must always remain in balance.
Terminology Reminder
• Assets: resources owned by a business.
• What are some examples of assets?
Exercise 2-10, page 67-68
• For this exercise, we will be reviewing some transactions for Juniper Delivery Service. The requirements ask us to indicate the effect of the transaction on the accounting equation. We will also take it one step further by analyzing how the transaction impacts our financial statement framework.
Exercise 2-10, page 67-68, #1
• 1. Received cash from issuance of capital stock, $50,000
• What impact would this transaction have on our accounting equation?
E2-10, Transaction 1
• 1. Received cash from issuance of capital stock, $50,000
• Answer: Increase in an asset, increase in stockholders’ equity
Assets = Liabilities + Stockholders' EquityCash Capital Stock
50,000 50,000
E2-10, Transaction 2
• 2. Received cash for providing delivery services, $18,000.
• How would this transaction impact our accounting equation?
E2-10, Transaction 2
• Answer: Increase our assets and increase our stockholders’ equity
= Liabilities +
CashCapital
StockRetained Earnings
18,000 18,000
Stockholders' EquityAssets
E2-10, Transaction 3
• 3. Paid advertising expense, $1,000.
• What impact does this have on our accounting equation?
***Hint: Anytime you see that we “paid” something, that tells you that cash went out the door meaning that the cash account would decrease.
E2-10, Transaction 3
• Answer: Decrease assets, decrease stockholders’ equity
= Liabilities +
CashCapital
StockRetained Earnings
-1,000 -1,000
Stockholders' EquityAssets
E2-10, Transaction 4
• 4. Billed customers for delivery services, $35,000.
• How does this transaction impact our accounting equation?
***Hint: If we “billed” the customer, then we have not received the cash yet. Instead, we have “accounts receivable” for those customers.
E2-10, Transaction 4
• Answer: Increase our assets and increase our stockholders’ equity
= Liabilities +
CashAccounts
ReceivableCapital
StockRetained Earnings
35,000 35,000
Stockholders' EquityAssets
E2-10, Transaction 5
• 5. Purchased supplies for cash, $2,100.
• What is the impact of this transaction?
E2-10, Transaction 5
• Answer: Increase in one asset, decrease in another asset (meaning total assets would be unchanged)
= Liabilities +
Cash SuppliesCapital
StockRetained Earnings
-2,100 2,100
Stockholders' EquityAssets
E2-10, Transaction 6
• 6. Paid creditors, $2,000.
• What is the impact of this transaction?
***Hint: Creditors are people or companies that we owe money. By paying a creditor, we would be decreasing the amount that we owe.
E2-10, Transaction 6
• Answer: Decrease assets, decrease liabilities
= Liabilities +
CashAccounts Payable
Capital Stock
Retained Earnings
-2,000 -2,000
Stockholders' EquityAssets
E2-10, Transaction 7
• Paid rent for May, $2,000.
• What impact does this have on our accounting equation?
E2-10, Transaction 7
• Answer: Decrease assets, decrease stockholders’ equity
= Liabilities +
CashAccounts Payable
Capital Stock
Retained Earnings
-2,000 -2,000
Stockholders' EquityAssets
E2-10, Transaction 8
• 8. Received cash from customers on account, $16,700.
• How does this transaction impact our accounting equation?
***Hint: The term, “customers on account,” refers to our accounts receivable. If we receive cash from our customers on account, this means that our customers are paying off the receivables.
E2-10, Transaction 8
• Answer: Increase in one asset, decrease in another asset (meaning total assets would be unchanged)
= Liabilities +
CashAccounts
ReceivableAccounts Payable
Capital Stock
Retained Earnings
16,700 -16,700
Stockholders' EquityAssets
E2-10, Transaction 9
• 9. Determined that the cost of supplies on hand was $1,200; therefore, $900 of supplies had been used during the month.
• What is the impact of this transaction?
***Hint: When we initially purchase supplies, we will record them as an asset. We will then move into the expense account as we use the supplies.
E2-10, Transaction 9
• Answer: Decrease assets, decrease stockholders’ equity
= Liabilities +
Cash SuppliesAccounts Payable
Capital Stock
Retained Earnings
-900 -900
Stockholders' EquityAssets
E2-10, Transaction 10
• 10. Paid dividends, $1,500.
• How does this transaction impact our accounting equation?
***Hint: Dividends represent a distribution of earnings, and therefore, they will decrease the retained earnings account.
E2-10, Transaction 10
• Answer: Decrease assets, decrease stockholders’ equity
= Liabilities +
CashAccounts Payable
Capital Stock
Retained Earnings
-1,500 -1,500
Stockholders' EquityAssets
Financial Statements, Problem 2-3
Since we have some extra time, let’s work through Problem 2-3 on page 72 of your textbook. We are told that
the following amounts were taken from the accounting records of Caravan Services, Inc. as of March 31, 2009. The company began operations on April 1, 2008. So, this is the end of their first year of operations.
We are then asked to prepare an 1) income statement, 2) retained earnings statement, 3) balance sheet, and 4) statement of cash flows.
Capital stock 10,500$ Cash 28,875$ Dividends 5,250$ Fees earned 240,975$ Interest Expense 1,260$ Land 78,750$ Miscellaneous expense 7,140$ Notes payable 15,750$ Rent expense 25,200$ Salaries expense 68,250$ Taxes expense 18,900$ Utilities expense 33,600$
Requirement 1, Income Statement
• Let’s begin with the income statement.
• What are some account balances that we will need to include on the income statement?
Income Statement
CARAVAN SERVICES, INC.
Income Statement For the Year Ending March 31, 2009
Revenues: Fees earned ................................................................ $240,975 Expenses: Salaries expense ........................................................ $68,250 Utilities expense ......................................................... 33,600 Rent expense .............................................................. 25,200 Taxes expense ........................................................... 18,900 Interest expense ......................................................... 1,260 Miscellaneous expense ............................................. 7,140 Total expenses ...................................................... 154,350 Net income $ 86,625
Requirement 2, Retained Earnings Statement
How should we prepare our Retained Earnings statement?
Retained Earnings Statement
***Note: If this were the second or third year of operations, then we would have to start with our beginning retained earnings. However, since this was our first year of operations, we do not have any beginning retained earnings.
CARAVAN SERVICES, INC. Retained Earnings Statement
For the Year Ending March 31, 2009
Net income ............................................................................................ $86,625 Less dividends ..................................................................................... 5,250 Retained earnings, March 31, 2009 ..................................................... $81,375
Balance Sheet
• Which accounts will we need to include on our balance sheet?
***Hint: Remember the accounting equation: Assets = Liabilities + Stockholders’ Equity
Balance Sheet
CARAVAN SERVICES, INC.
Balance Sheet March 31, 2009
Assets Cash ................................................................................. $ 28,875 Land .................................................................................. 78,750 Total assets...................................................................... $107,625
Liabilities Notes payable .................................................................. $ 15,750
Stockholders’ Equity Capital stock .................................................................... $10,500 Retained earnings ........................................................... 81,375 Total stockholders’ equity ......................................... 91,875
Total liabilities and stockholders’ equity ...................... $107,625
Statement of Cash Flows
CARAVAN SERVICES, INC. Statement of Cash Flows
For the Year Ending March 31, 2009
Cash flows from operating activities: Cash receipts from operating activities ................... $240,975 Cash payments for operating activities ................... 154,350 Net cash flows from operating activities ....................... $ 86,625
Cash flows from investing activities: Cash payments for land ............................................ (78,750)
Cash flows from financing activities: Cash receipts from issuing capital stock ................ $ 10,500 Cash receipts from notes payable ............................ 15,750 Cash payments for dividends ................................... (5,250) Net cash flows from financing activities ....................... 21,000 Net increase in cash during the year ............................. $ 28,875 Cash as of April 1, 2008 .................................................. 0 Cash as of March 31, 2009 .............................................. $ 28,875
Questions?
Questions??????