finl acctg info process
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1
Chapter 2
The Financial Accounting Information Process
27 June 2013
2
1. Explain the use of the accounting equation and its components
2. Analyze the effect of business transaction to the accounting equation
3. Know the nature of accounts
4. Describe the most commonly encountered account names, both standard and hospitality account titles
5. Explain the nature and purpose of a chart of accounts
Learning ObjectivesLearning Objectives
After studying this chapter, you should
be able to:
After studying this chapter, you should
be able to:
3
Learning ObjectivesLearning Objectives
6. Identify the basic steps in the accounting process.
7. Apply double-entry accounting system8. Demonstrate journalization and posting
processes9. Balance off the accounts and prepare a trial
balance
4
Definition of TermsDefinition of Terms
Business Transactions are events which involve the exchange of values between two or more parties Economic events that occur in the business,
causing at least two changes in accounts Always expressed in terms of money Analyzed from the various business documents or
business papers External transactions – economic events entered into
between the business and outside enterprise or party Internal transactions – economic events that occur
entirely within the enterprise
5
Definition of TermsDefinition of Terms
Assets - A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.
Liabilities - A company's legal debts or obligations that arise during the course of business operations.
Owner’s equities - The capital employed in a company, computed by deducting the book value of the liabilities from the book value of the assets.
Assets = Liabilities + Owner’s Equity
The resources owned by a
business
The resources owned by a
business
Accounting EquationAccounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the creditors, which
represent debts of the business
The rights of the creditors, which
represent debts of the business
Accounting EquationAccounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the owners
The rights of the owners
Accounting EquationAccounting Equation
What is a business transaction?
A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.
On November 1, 2012, Chris
Clark begins a business that will
be known as NetSolutions.
a. Chris Clark deposits P25,000 in a bank account in the name of NetSolutions.
a. Chris Clark deposits P25,000 in a bank account in the name of NetSolutions.
Chris Clark, Capital25,000 Investment
by Chris Clark
Cash25,000 a.
Assets Owner’s Equity=
=
b. NetSolutions exchanged P20,000 for land.b. NetSolutions exchanged P20,000 for land.
Chris Clark, Capital25,000
Cash + Land 25,000 Bal.
Assets Owner’s Equity=
=b. –20,000 +20,000Bal. 5,000 20,000 25,000
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
c. During the month, NetSolutions purchased supplies for P1,350 and agreed to pay the supplier in the near future (on account).
c. During the month, NetSolutions purchased supplies for P1,350 and agreed to pay the supplier in the near future (on account).
Owner’s Liabilities + Equity=
Bal. 5,000 20,000 25,000c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
=
d. NetSolutions provided services to customers, earning fees of P7,500 and received the amount in cash.
d. NetSolutions provided services to customers, earning fees of P7,500 and received the amount in cash.
Bal. 12,500 1,350 20,000 1,350 32,500d. + 7,500 + 7,500
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets Owner’s Liabilities + Equity
Bal. 5,000 1,350 20,000 1,350 25,000Fees earned
=
=
e. – 3,650 –2,125– 800– 450
– 275
Wages
Rent
Util.
Misc.
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
e. NetSolutions paid the following expenses: wages, P2,125; rent, P800; utilities, P450; and miscellaneous, P275.
e. NetSolutions paid the following expenses: wages, P2,125; rent, P800; utilities, P450; and miscellaneous, P275.
Owner’s Liabilities + Equity=
Bal. 12,500 1,350 20,000 1,350 32,500
=
Bal. 8,850 1,350 20,000 1,35028,850
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
f. NetSolutions paid P950 to creditors during the month.
f. NetSolutions paid P950 to creditors during the month.
Owner’s Liabilities + Equity=
Bal. 8,850 1,350 20,000 1,350 28,850f. – 950 – 950
=
Bal. 7,900 1,350 20,000 400 28,850
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
g. At the end of the month, the cost of supplies on hand is P550, so P800 of supplies were used.
g. At the end of the month, the cost of supplies on hand is P550, so P800 of supplies were used.
Owner’s Liabilities + Equity=
Bal. 7,900 1,350 20,000 400 28,850g. – 800 – 800
=
Bal. 7,900 550 20,000 400 28,050
Supplies expense
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
h. At the end of the month, Chris withdrew P2,000 in cash from the business for personal use.
h. At the end of the month, Chris withdrew P2,000 in cash from the business for personal use.
Owner’s Liabilities + Equity
Bal. 7,900 550 20,000 400 28,050h. –2,000 –2,000Bal. 5,900 550 20,000 400 26,050
With-drawal
=
=
Owner’s withdrawals
Expenses
Decreased by
Owner’s Equity
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Increased by
Owner’s investments
Revenues
Net income
Standard Account TitlesStandard Account Titles
Cash: Coins, bills, and near cash items either in the possession of the business or entrusted to the banks for safekeeping and are available for use. Cash account increases with receipts of cash and decreases with payments. Be warned that while cash is an asset, it becomes a liability when over issued with checks, in the case of cash in bank account. Petty cash, demand deposits, time deposits, personal checks, traveller’s check are likewise included in the Cash account. Debit or ATM card transactions are also part of Cash transactions since this results in instant reduction of the cardholder’s cash balance in favour of the business.
Standard Account TitlesStandard Account Titles
Marketable Securities: Otherwise known as Money Market Placements, these are short-term investments for temporary idle cash. They can be easily converted back to cash when the need for it arises. Notes Receivable: Collectible from customers/ clients/ guests due to merchandise and/or services sold/rendered but not yet paid in cash. This collectible is supported by a written promise or note to pay a definite sum of money at a later date. The written promise or promissory note is issued by the customers/ clients/guests (maker) in favour of the seller (payee).
Standard Account TitlesStandard Account Titles
Accounts Receivable: Collectible from customers/ clients/ guests due to merchandise and/or services sold/rendered but not yet paid for in cash. Office Supplies on Hand (Office Supplies Unused): Coupon Bond, carbon paper, ledgers, worksheets, ballpens, erasers, envelopes, journals, fasteners, stationeries, and many others used in the office.
Store Supplies on Hand (Store Supplies Unused): Plastic bags, tapes, stapler, fillers, adding machine tapes, string, and many others used in the store
Standard Account TitlesStandard Account Titles
Prepaid Expenses:Prepaid Rent: Rent payment for the use of office, store and/or factory space made in advance covering a specified period of time Prepaid Insurance: Insurance premiums paid in advance covering a specified period of time. Prepaid Advertising: Payments made in advance in the promotion of the business merchandise/goods and/or services such as publication in the newspapers, announcements, etc.
Standard Account TitlesStandard Account Titles
Investments: Bonds or stocks issued by other businesses where the intention of the management is regular income therefrom or to hold a controlling interest. However, while land is classified under Property and Equipment account, when it is held for future expansion, then it is classified as Investment account. Land: The very land or ground where the building is situated.
Standard Account TitlesStandard Account TitlesBuilding: The cost of building for use by the business., Physically, the land and the building constructed thereon are inseparable. Furniture and Fixture: Cost of office/store chairs, tables, shelves, cabinets, lighting, air-conditions, etc. Office Equipment: Cost of computers, calculators, typewriters, fax machines, etc for use in the office. Store Equipment: Cost of weighing scale, calculators, adding machine, etc, used in the store. Delivery Truck: Cost of truck used in delivery of goods/services from one place to another.
Standard Account TitlesStandard Account Titles
Accounts Payable: Obligations or debts owed by the business to other parties for services or merchandise acquired on account and are not supported by promissory notes. On account means “on credit.” Notes Payable: Obligations or debts owed to other parties for services received or merchandise acquired on account and are supported by promissory notes issued in favour of the creditor/seller.
Standard Account TitlesStandard Account TitlesBank Payable/Loan Payable: Obligations or debts owed to bank (s) for money borrowed and for use by the business. Utilities Payable: Obligations or debts owed to utility companies for the use of electricity, water, and telephone facilities. Interest Payable: Amount due to banks or financing institutions for the use of money. Taxes and Licenses Payable: Estimated taxes, licenses and other fees due to the government.
Standard Account TitlesStandard Account TitlesSSS and Medicare Payable: Amount withheld from the salaries and wages of employees and workers and the employer’s contribution due and payable to the Social Security System. Salaries and Wages Payable: Amounts due as compensation for the services rendered by employees and workers.
Accrued Expenses Payable: Expenses incurred but not payable until after the balance sheet date like salaries and wages, interest, rent, taxes, utilities, vacation pay and many others.
Standard Account TitlesStandard Account TitlesMortgage Payable: Obligations and debts owed to financial institutions and are collateraled by some permanent assets of the business, like land. Bonds Payable: Obligations and debts owed to third parties for the funds used to finance long-term projects of the business. They are also amounts due to bond holders. Unearned Subscription Income: Subscription income already received but not yet earned because the corresponding services are not yet rendered.
Standard Account TitlesStandard Account TitlesProfessional Fees: Income derived in the practice of profession for the professional services rendered, whether received in cash or not. Fare Income: Income derived from transportation services provided to others, whether received in cash or not. Rent Income: Income derived by lessors engaged in business of renting apartment, building, condominium, market stalls, automobile, machines, etc., whether received in cash or not.
Standard Account TitlesStandard Account TitlesLegal Fees: Income derived in the exercise of a law profession. Interest Income: Income derived from lending money to others, whether received in cash or not. Commission Income: Income derived by insurance businesses, real estate brokers, etc. whether received in cash or not.
Standard Account TitlesStandard Account TitlesSalaries and Wages Expense: Amount incurred/paid for the services rendered by employees and workers in the business. Advertising Expense: Payments made in the promotion of the business merchandise/goods and/or services such as publications in the newspaper, announcements through radios and televisions, billboards, etc. Office Supplies Expense (Office Supplies Used): Office-related materials used by the business such as coupon bonds, carbon paper, worksheets, ledgers, ballpens, erasers, envelopes, stationeries, etc.
Standard Account TitlesStandard Account TitlesStore Supplies Expense (Store Supplies Used): Store-related materials used by the business such as plastic bags, tapes, stapler fillers, etc. Rent Expense: Amount incurred/paid for the use of space for the office, store and/or factory area. Transportation Expense: Amount incurred/paid as transportation allowance of executives or staff entitled to it.
Standard Account TitlesStandard Account TitlesDepreciation Expense: Cost allocation of certain permanent assets owned by the business such as building, furniture and fixture, equipment, machineries, etc. over the life of the business or the asset, whichever is shorter. It is noteworthy that of the permanent assets, land is not subject to depreciation. Insurance Expense: Expired insurance or insurance, the period covered of which has already lapsed. Utilities Expense: Amount of incurred/paid for the use of the light, water and telephone for the business.
Standard Account TitlesStandard Account TitlesTaxes and Licenses Expense: Taxes, licenses, and other government fees paid or incurred.
Interest Expense: The cost of money borrowed by the business.
SSS and Medicare Contribution Expense: The employer’s share in the payment of SSS and medicare for the welfare of its employees and workers. Incidentally, this counterpart share of the employer as payment to the SSS is mandated by law.
Miscellaneous Expense: Expenses incurred/paid by the business for which separate account is not advisable as they are immaterial, uncommon and infrequent. Examples may include cost of cleaning materials
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