Horngren’s Accounting Accounting Process Lecture 4
1 2 3 5 4 Account Groups Assets （A） an economic resource that are expected to benefit the business in the future.. Liabilities （L） the business owe debts to an individual or company. E.g. AP, loan, etc Owner ' s Equity （O/E） the owner’s claim to the business assets. E.g. Capital, withdraws, etc. Revenue （ R ） are increases in net assets resulting from operations over a period time. E.g. sales, r ent received, Expenses （ E ） Money spent or cost incurred in an organization, representing the cost of doing business. E.g. salaries, r ent expense, etc. Review: Five Elements of Accounts
Step 1: transactions occur and source documents. Liabilities Equity Assets = + Step 2: Apply double-entry accounting Step 4: Post entry to ledger Step 3: Record journal entry
It is a system of recording transactions that recognizes that there are two sides to every transaction. Accounting uses this double-entry system to record the dual effects of each transaction. A transaction would be incomplete if only one side were recorded. These “double” entries help keep the accounting equation in balance. Accounting 4
We can explain the balancing impact of transactions using T-accounts and debits and credits. In accounting equation, Total Debit balances on the left side = Total Credit balance on the right side
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Which of the following statements is correct? A. Accounts Payable is increased with a credit. B. Salary Expenses are decreased with a debit. C. Services Revenue is increased with a debit. D. Rent Expense is increased with a credit.
Chapter 2
Explain accounts as they relate to the accounting equation and describe common accounts Define debits, credits, and normal account balances using double-entry accounting and T-accounts Reporting Principle Record transactions in a journal and post journal entries to the ledger
1. Economic Entit y Assumption 2. Goning Concern Assumption 3. Monetary Unit assumptiom 4. The Cost principle 5. Profit Determination 6. The Accounting Equation 7. Double-entry bookkeeping 8. Matching principle 9. Reporting Principle Accounting 10
Collect source documents Parts of Accounting Process Record relevant transactions in a journal Post journal information to ledger accounts Prepare and analyze the trial balance Prepare Financial Statements Accounting 8 Identify transaction happened
Not all commerce events are transactions Think of a business transaction as a very special kind of historical event. It involves the exchange of economic resources. We must be able to measure the economic impact in monetary units. Accounting
Cheque or Check Bank Statements Purchase invoices Receipts 2. Source Documents Sale Invoices Employee Earnings Records Accounting 10
Accountant use source documents to provide the evidence and data for recording transactions. Based on these documents, the business can determine how to record this transaction. Auditors and controllers need to see the source documents to verify the transactions. Eg. Purchase invoices, bank check, bank deposit slip, receipts, etc. Accounting 20
Invoice company sell on credit (sales on account). when the entity (seller) provides goods or services, and make an invoice in triplicate. Original copy(sales invoice) is sent to the customers; duplicate copy is source document for journalizing; triplicate copy for future reference. Invoice provides detail of a credit sales ( including sale price, date). Customers will pay them within the credit period (10-90days). Accounting 16
Adjustment Note ( Credit Note ) Purchase return on credit A document, which customers may need reduction the original amount charging for goods supplies on credit. A credit note is prepared by entity, when the goods were originally supplied on credit. However, customers have not pay them yet. Accounting 17
Cheque butt (check) Cash payment Entity deposit money into bank, and the bank provides empty formal cheque book. The drawer of the cheque is the entity(buyer) which needs to pay the money. Two copies: cheque butt is retained by the drawer for later reference; and another copy gives to the creditor ( eg. supplier). 18
Receipts Cash sales The entity sold good or services by cash. sellers make receipts The entity (sellers) record Cash Receipts Journal (special journal) and keep one copy of receipt as business document, and give another copy to customers. Accounting 19
Invoices, adjustment notes, check butt and receipts must be kept as business documents Other business documents: bank deposit slip, Bank Statements, Employee Earnings Records, Purchase orders, sales orders are not accounting business documents (as future references ) In today’s highly computerized environment many source documents are stored digitally. Knowing how to access these digital source documents is an important part of accounting. Accounting 20
Dollar amount of debits and credits 3. General Journal e.g. Taylor invested $30,000 cash to start a consulting business on Dec. 1 st 2009. Transaction Date Transaction explanation Titles of Affected Accounts 33
Six special journals for a Merchandising or Manufacturing businesses (not including Service business). They are significant and frequent increase or decrease amounts. They includes: 1.Sales journal 2.Sales returns and allowance journal 3. Purchases journal 4.Purchases returns and allowance journal 5.Cash payments journal 6.Cash receipts journal General Journal: any transaction which cannot be recorded in any of the six special journals. Accounting 21
The ledger is a collection of all accounts in details for an information system. It includes increases and decreases in each account and its balance at a specific time. Accounting 12
The chart of accounts is a list of all accounts and includes an identifying number for each account. One account No. equals to one account name. account No. usually have three digits. Notice that all assets accounts begin with an account number of 1. Accounting 13
Debits Credits Cash 4,350 $ Accounts receivable - Supplies 9,720 Prepaid Insurance 2,400 Equipment 26,000 Accounts payable 6,200 $ Unearned consulting revenue 3,000 C. Taylor, Capital 30,000 Owner's Withdrawals 200 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total 45,300 $ 45,300 $ FastForward Trial Balance December 31, 2009 The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits. 5. Trial Balance 14
Statement of Financial Performance (Income Statement), Statement of Changing in Equity ( Statement of Owner’s Equity) Statement of Financial Position (Balance Sheet), Cash Flow Statement textbook pp42-46 Accounting 15
C. Taylor, Capital 12/1/09 - $ Net income for December 3,470 Plus: Investments by Owner 30,000 33,470 Less: Owner Withdrawals 200 . C. Taylor, Capital, 12/31/09 33,270 $ Statement of Owner's Equity For the Month Ended December 31, 2009 FASTFORWARD Connections
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 Annually 1 2 Monthly Quarterly Semiannually The Accounting Period Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Accounting 3
Assumes that a business’s activities can be sliced into small segments and that financial statements can be prepared for specific time periods, such as a month, quarter, or year. Any twelve month period is referred to as a fiscal year. p158 30 Financial Accounting
Accrual Basis Accounting Under the accrual basis accounting, revenues and expenses are recognized as follows: Revenue recognition conditions : Revenue is earned. Revenue is earned when products are delivered or services are provided. Revenue is realized or realizable. Realized means cash is received. Realizable means it is reasonable to expect that cash will be received in the future. Expense recognition : Expenses be recognized when incurred Expense is recognized in the period in which related revenue is recognized Accounting 35 Cash Basis Accounting Revenues and expenses are recognized as follows: Revenue recognition: Revenue is recognized when cash is received. Expense recognition: Expense is recognized when cash is paid.
On the cash basis the entire $2,400 would be recognized as insurance expense in 2009. No insurance expense from this policy would be recognized in 2010 or 2011, periods covered by the policy. Accounting 36
On the accrual basis $100 of insurance expense is recognized in 2009, $1,200 in 2010, and $1,100 in 2011. The expense is matched with the periods benefited by the insurance coverage. Accounting 37
Accounting Accrual Basis vs Cash Basis Accounting Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid. Not GAAP 34
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