Download Equity $10000 Land $84000 Notes Payable $10000

Lesson 1
2
• There are generally three types of
businesses:
– Manufacturing Businesses
– Merchandising Businesses
• Wholesale
• Retail
– Service Businesses
• Some services involve products
– E.g., restaurants
– CD calls them combination businesses
3
• We will focus on corporations
– 20% of US businesses
• There are other entities (Business forms)
– Different financial statements
– Examples:
• Sole proprietorships
– 70% of US businesses
• Partnerships
– 10% of US businesses
• Other entities as well
4
• With Partnerships & Sole Proprietorships
– Owner(s) treated as doing business
• Business debts are debts of the owners
– Unlimited Liability
• Corporations
– Legal entities separate from their owners.
• Business debts are corporation's debts
– not the owner's debts.
• Shareholders have limited liability
• Limited Liability
– shareholders can only lose their investment – nothing
more
5
• How will corporation be financed?
– Funds from You
– Funds from Third Parties
• Debt vs. Equity
– Debt - Advantages
» Owner keeps control of corporation
– Debt – Disadvantages
» Owner has to repay
» Owner has to pay interest
6
– Equity – Advantages
• Owner doesn’t have to pay interest
– Dividends do not have to be paid
• Owner doesn’t have to repay
– Equity – Disadvantages
• Owner dilutes control over corporation
7
• Once the business is created, the owner
receives:
– Operating profits / losses
– Capital gains / losses when business sold
8
• Accounting
– information system
• provides reports to stakeholders
• Information on economic activities and
condition of a business
9
• A lot of people interested in how business is doing.
– Business Stakeholder
• person or entity that has an interest in the economic performance of
the business
• Stakeholders include
–
–
–
–
–
–
owners,
managers,
employees,
customers,
creditors, and
various government agencies
• All stakeholders use accounting data
10
Stakeholder
A. Owner
Interested In
Sales
Profit
Cash
B. Investors/
Profit
Stockholders
Dividends
C. Bankers
Debts
Reason
Is advertising effective?
Can I take home more money
each week?
Can I afford to buy more
equipment?
Is my investment making
money?
What dividends are being
paid?
Can this business repay a
loan?
11
Stakeholder
Interested In
D. IRS
Profit
E. Managers
Expenses
Sales
F. Employees
Profit
Reason
What taxes does this
business owe?
Am I keeping expenses
within my budget?
Will I be eligible for a bonus
this year?
Can my company afford
raises?
Is my job secure?
12
Stakeholder
G. Customers
Interested In
Amount
spent on
warranty
Reason
How dependable is this
product?
Is the company going to
be in business in the
future?
H. Competitors
•
Amount
spent on
ads
How do I compare to my
competitor?
Competitors get valuable information from financial statements
•
So, companies disclose as little detail as possible
13
• Accountants have to act ethically.
– Not just a case of morals.
– Ethical violation can also lead to civil or
criminal liability for the violation
• Civil
– Malpractice
– Lose license
• Criminal – Go to Jail
14
• Profession of accounting is varied.
– Private accounting
• Accountants work for their clients
– e.g., Controllers
– Public accounting
• Accountants - independent of clients
– e.g., CPAs
15
• Financial accounting - preparation of
general purpose financial statements
– primarily for outsiders
• investors,
• government regulators, and
• creditors
– Done by internal accountants
• then certified by the public accountants
16
• Managerial or management accounting
– preparation of internal reports
• for the management of the company
• Tax accounting
– Preparation of tax returns
• Either private or public accountants
17
• Financial statements prepared using
GAAP
– Generally Accepted Accounting Principles
(GAAP)
– Set of rules that all accountants follow
• in preparing financial statements
18
• Didn’t always have GAAP.
• Basic rules developed during
Renaissance
• Up to 1933 - free to use whatever rules
you want
19
• With the 1929 crash, federal
government passed:
– The Securities Act of 1933 and
– The Securities Exchange Act of 1934
• Most publicly traded corporations now
must follow rules set by Securities
Exchange Commission (SEC)
– In preparing financial statements
20
• SEC allows accounting profession to
establish GAAP
– Now set by FASB
• Financial Accounting Standards Board (FASB)
• There were prior organizations
– If the SEC isn't happy with GAAP, then
• Can require different rules with governmental
filings and reports to shareholders
21
• GAAP reflects concepts/assumptions
used in preparing financial statements.
– Relevance
• Information is relevant if it will influence
investment decisions
– Reliability (Credible)
• Information should be materially accurate
22
– Comparability
• Information is presented so decision makers
can recognize similarities, differences, and
trends over different time periods or between
different companies.
– Follow same general rules
– Consistency
• accounting procedure, once adopted, should
continue to be used.
– Rules for changing accounting rules to follow.
23
– Business Entity Concept (Separate Entity
Concept)
• Each business accounted for as an individual
organization.
– Even though you are a sole proprietorship
» (Not a separate legal entity),
» Financial statements only cover the business
operations.
» Do not include your personal assets and income.
24
– Cost Concept
• Most transactions recorded at historical cost.
• building recorded using purchase price, not
FMV
– Objectivity Concept
• Accounting reports should be based upon
objective evidence.
– Conservatism
• Accountants should value items
conservatively.
25
– Unit of Measure Concept
• Financial statements prepared using domestic
currency of corporation
– Continuity Assumption (Going Concern
Assumption)
• Assume company will not be going out of
business.
• Example
– Inventory valued at price paid
» Not liquidation value
26
• CD says Three General Purpose
Financial Statements:
– Balance Sheet
– Income Statement
– Statement of Cash Flows
• There is a fourth Corporate Statement
– Statement of Retained Earnings
27
• Balance Sheet
– prepared as of a given date
– usually the end of reporting period.
• Corporations can use calendar year or fiscal
year
– Fiscal year is 12-month period other than a calendar
year
– reports the financial position of the
company as of a given date.
28
• Balance Sheet reports:
– Assets,
– Liabilities, and
– Net worth of the company.
• Balance Sheet usually uses original
cost
– Not FMV
– Doesn’t show current value of the
company.
29
• Income Statement
– reports results of company’s operations
for the reporting period.
– Dated "For [Period] Ended [Date].“
• Example - "For the Year Ended December 31,
1998."
30
• The Income Statement reports:
– revenues,
– expenses and
– net income
• This information given for the period in
question
31
• Equity section of a corporate balance sheet
– Divided into two parts.
• Paid In Capital
– Also called “Contributed Capital”
– Shows equity contributed by shareholders
• Retained Earnings
– Shows earnings that corporation earns and keeps
» Not paid as dividends
• Statement of Retained Earnings
– explains how Retained Earnings changed from
last year to this year.
32
Statement of Retained Earnings
For the Year Ended __________________
Beginning Balance of Retained
Earnings
XXXXX
Plus Net Income for the Year
XXXXX
Less Dividends for the Year
(XXXXX)
Ending Balance of Retained
Earnings
XXXXX
33
• Accrual Method
– Used by most publicly traded
corporations.
– Revenue - when you earn it
• Not when you receive it
– Expenses when you owe them
• Not when you pay them
• Accountants prefer accrual method
– Match revenues with expenses that
generated them.
34
• Cash method
– Revenue - reported when received
– Expenses - reported when paid
• Accounts don’t like Cash method
– Companies can manipulate their income.
35
• Statement of Cash Flows
– Introduced around 1986
– Reports cash inflows and outflows
• From operations
– what it does for a living,
• From investing
– purchases and sales of equipment, real estate and
other assets
• From financing
– stock and debt transactions
• Statement of Cash Flows explains how
cash changed during the year.
36
Statement of Cash Flows
For the Year Ended _____________
Cash Flows From Operations (Details given line by
line like an Income Statement):
Cash Flows From Investing (Details given line by
line like an Income Statement):
Cash Flows From Financing (Details given line by
line like an Income Statement):
Cash Flows For the Year:
Plus Balance of Cash at Beginning of Year:
Balance of Cash at End of Year
XXXXX
XXXXX
(XXXXX)
XXXXX
XXXXX
XXXXX
37
• Notes to the Financial Statements
– At end of financial statements
– Notes convey great deal of important
information on:
• What accounting rules were followed.
• Additional details about figures appearing in
statements.
• Additional information not appearing in
statements
– E.g., lines of credit, bank covenants & contingent
liabilities
38
• Financial statements accompanied by
letter from the CPAs preparing the
statements.
– Describes how the audit was conducted,
– States CPA's opinion on whether financial
reports were prepared in accordance with
GAAP
39
• BALANCE SHEET
– Imagine that you want to report your
wealth (net worth).
• Maybe you want to borrow money
• Creditor wants to know you can pay loan back
loan.
– If you own a house you bought for
$250,000.
• You could report that
– You have this house, and
– You have net worth of $250,000.
40
• Owning the house does not mean that
you are worth $250,000.
– If you borrowed the $250,000 purchase
price from your parents.
• You are not worth $250,000.
– You have an asset worth $250,000 and
– You have a liability for $250,000.
– You have zero net worth.
41
• What if you have no assets or liabilities.
– You have a zero net worth.
• But, you have a credit card & get a cash
advance of $10,000.
– Are you richer than before cash advance?
• You have $10,000 in cash
• You have a $10,000 debt
• You still have a zero net worth.
42
• In order to give full disclosure - report
your
– Assets,
– Liabilities and
– Net Worth
• Equity
43
• Balance Sheet provide this disclosure
– Gives information regarding a firm's assets,
liabilities and equity.
• Firm's assets are paid for with either
– Liabilities or
– Equity.
• Because of this relationship:
– Firm's assets = Firm’s liabilities + Firm’s equity.
– This relationship is called “Balance Sheet
Equation”
44
The Balance Sheet Equation is reflected in the
Balance Sheet:
Balance Sheet
Assets
Liabilities
Owner's Equity
Balance Sheets different formats
Left-Right
Top-Bottom
45
• Accounts
– Each asset, liability and equity item is represented
by an account
– Flexibility in the names given to accounts.
– Each account has two sides
• just like the Balance Sheet
• Left-hand side is the debit side
• Right-hand side is the credit side
– Example – firm has one asset account for Cash
46
• Example – firm has one asset account for
Cash
Cash
Debits
Credits
• Debits and credits are netted to give the
balance in the account.
• Accounts are kept in the General Ledger of
Accounts
47
• Balance Sheet
– Summarizes the assets, liabilities and equity
accounts
• If account is on the left-hand side of the
Balance Sheet
– Asset
– Account will normally (not always) have debit
balance.
• If an account is on the right-hand side of the
Balance Sheet
– Liabilities and equity
– Account will normally have credit balance.
48
• When account has debit balance
– E.g., asset
– Increase - debit it some more
• Add to the debit balance.
– Decrease - credit it
• Adding to the opposite side
• Two sides netted
• Thereby decreasing that balance.
Cash
1000
100
1100
49
• When account has a credit balance
– E.g., a liability or equity account
– Increase - credit it some more
– Decrease - debit it
Accounts Payable
1000
100
1100
50
• Order of accounts on Balance Sheet
follows convention.
– Assets listed by how soon they will be
converted into cash.
• Current Assets listed first
– Cash is the first line
– Assets that will be used, consumed or collected
within one year or business cycle, whichever is
longer
• Non-current Assets listed second
– Used, consumed or collected after one year or
business cycle
51
– Liabilities listed by how soon they will be
paid.
• Current Liabilities listed first
– Will be paid within one year or business cycle
• Non-current Liabilities listed second
– Will be paid after one year or business cycle
– Equity accounts are listed by their priority
of payment upon liquidation.
– Business cycle
• Time it takes to start and complete a
business transaction
52
• Business transactions are recorded in
accounts.
• Changes to accounts summarized in
the General Journal.
– General Journal notes
• which accounts are credited and
• which accounts are debited. These General
Journal entries take the following form:
53
• General Journal entries take the
following form:
D. Name of the Account Debited
Cr. Name of the Account Credited
$ XXX
$XXX
54
• ILLUSTRATIONS
55
• Our firm is a corporation.
• Equity in the corporation represented
by capital stock.
• There are different types of stock.
– Common Stock
• Residual Owners of Corporations
• Get what’s left when creditors are paid
56
• When corporation sells stock – it
increases its equity.
– Cash (or other property) is given to the
corporation
• assets (e.g., cash) have increased
– Cash did not come from debt.
• Equity is thereby increased.
– The equity account here is Common Stock.
57
• $100,000 of common stock is sold.
– Two things happen with each transaction.
– Here:
• Cash went up, and
• Equity went up.
Cash
Balance Sheet
UP Common Stock
$100,000
UP
$100,000
58
• Cash
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Cash? (Debit or Credit)
• Common Stock.
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Common Stock? (Debit or
Credit)
59
• Cash
–
–
–
–
Is an asset
Assets are on left side of Balance Sheet
Left Side means left (debit) balance
To increase a debit balance account – DEBIT IT
• Common Stock
–
–
–
–
Is an equity account
Equity is on the right side of Balance Sheet
Right Side means right (credit) balance
To increase a credit balance account – CREDIT IT
60
D. Cash
$100,000
Cr. Common Stock
Cash
$100,000
$100,000
Common Stock
$100,000
61
Balance Sheet
Assets
Cash
Liabilities
$100,000
Equity
Common Stock
$100,000
$100,000
$100,000
62
• Purchase of Equipment for $5,000 cash
– Two things happen with each transaction.
– Here:
• Equipment went up, and
• Cash went down.
Cash
Equipment
Balance Sheet
Down
$5,000
Up
$5,000
63
• Equipment
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Equipment? (Debit or Credit)
• Cash
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you decrease Cash? (Debit or Credit)
64
• Equipment
–
–
–
–
Is an asset
Assets are on left side of Balance Sheet
Left Side means left (debit) balance
To increase a debit balance account – DEBIT IT
• Cash
–
–
–
–
Is an asset
Assets are on the left side of Balance Sheet
Left Side means left (debit) balance
To decrease a debit balance account – CREDIT IT
65
D. Equipment
$5,000
Cr. Cash
Equipment
$5,000
$5,000
Cash
$100,000
$5,000
66
Balance Sheet
Assets
Cash
Equipment
Liabilities
$95,000
$5,000 Equity
Common Stock
$100,000
$100,000
$100,000
67
• Purchase of Equipment in exchange for a
promissory note for $10,000
– Two things happen with each transaction.
– Here:
• Equipment went up, and
• Notes Payable went up.
Equipment
Balance Sheet
Up Notes Payable
$10,000
UP
$10,000
68
• Equipment
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Equipment? (Debit or Credit)
• Notes Payable
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Notes Payable? (Debit or
Credit)
69
• Equipment
–
–
–
–
Is an asset
Assets are on left side of Balance Sheet
Left Side means left (debit) balance
To increase a debit balance account – DEBIT IT
• Notes Payable
–
–
–
–
Is a liability
Liabilities are on the right side of Balance Sheet
Right Side means right (credit) balance
To increase a debit balance account – CREDIT IT
70
D. Equipment
Cr. Notes Payable
Equipment
$5,000
$10,000
$10,000
$10,000
Notes Payable
$10,000
71
Balance Sheet
Assets
Cash
Equipment
Liabilities
$95,000 Notes Payable
$10,000
$15,000 Equity
Common Stock
$110,000
$100,000
$110,000
72
• Purchase of Supplies for $10,000 on credit (no
formal promissory note is given)
– Two things happen with each transaction.
– Here:
• Supplies went up, and
• Accounts Payable went up.
Supplies
Balance Sheet
Up Accounts Payable
$10,000
UP
$10,000
73
• Supplies
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Supplies? (Debit or Credit)
• Accounts Payable
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Accounts Payable? (Debit or
Credit)
74
• Supplies
–
–
–
–
Is an asset
Assets are on left side of Balance Sheet
Left Side means left (debit) balance
To increase a debit balance account – DEBIT IT
• Accounts Payable
–
–
–
–
Is a liability
Liabilities are on the right side of Balance Sheet
Right Side means right (credit) balance
To increase a crebit balance account – CREDIT IT
75
D. Supplies
Cr. Accounts Payable
Supplies
$10,000
$10,000
$10,000
Accounts Payable
$10,000
76
Balance Sheet
Assets
Liabilities
Cash
$95,000 Accounts Payable
Supplies
Equipment
$10,000 Notes Payable
$15,000 Equity
Common Stock
$120,000
$10,000
$10,000
$100,000
$120,000
77
• Purchase of Land and Building for $100,000.
– When you pay one price for a bundle of assets
• Allocate the purchase price according to FMV.
– Assume:
• Land is worth $10,000
• Building is worth $90,000
• Price $100,000 is paid:
– Cash ($20,000) and
– Promissory note ($80,000).
78
• Purchase of Land and Buildings for $100,000
– Two things happen with each transaction.
– Here:
• Land & Buildings went up, and
• Cash went down & Notes Payable went up.
Cash
Balance Sheet
Down Notes Payable
$20,000
Land
Buildings
Up
$10,000
Up
$90,000
UP
$80,000
79
• Cash
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you decrease Cash? (Debit or Credit)
• Land
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Land? (Debit or Credit)
80
• Buildings
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Buildings? (Debit or Credit)
• Notes Payable
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Notes Payable? (Debit or
Credit)
81
• Cash
–
–
–
–
Is an asset
Assets are on left side of Balance Sheet
Left Side means left (debit) balance
To decrease a debit balance account – CREDIT IT
• Land
–
–
–
–
Is an asset
Assets are on left side of Balance Sheet
Left Side means left (debit) balance
To increase a debit balance account – DEBIT IT
82
• Buildings
–
–
–
–
Is an asset
Assets are on left side of Balance Sheet
Left Side means left (debit) balance
To increase a debit balance account – DEBIT IT
• Notes Payable
–
–
–
–
Is a liability
Liabilities are on the right side of Balance Sheet
Right Side means right (credit) balance
To increase a debit balance account – CREDIT IT
83
D. Land
Buildings
$10,000
$90,000
Cr. Cash
Notes Payable
Land
$10,000
$20,000
$80,000
Buildings
$90,000
84
D. Land
Buildings
$10,000
$90,000
Cr. Cash
Notes Payable
$20,000
$80,000
Cash
$100,000
Notes Payable
$5,000
$10,000
$20,000
$80,000
85
Balance Sheet
Assets
Liabilities
Cash
$75,000 Accounts Payable
Supplies
Equipment
Land
Buildings
$10,000 Notes Payable
$15,000
$10,000 Equity
$90,000 Common Stock
$200,000
$10,000
$90,000
$100,000
$200,000
86
• Pay the principal of $6,000 on a promissory note
– Two things happen with each transaction.
– Here:
• Cash went down, and
• Notes Payable went down.
Cash
Balance Sheet
Down Notes Payable
Down
$6,000
$6,000
87
• Cash
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you decrease Cash? (Debit or Credit)
• Notes Payable
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you decrease Notes Payable? (Debit or
Credit)
88
• Cash
–
–
–
–
Is an asset
Assets are on left side of Balance Sheet
Left Side means left (debit) balance
To decrease a debit balance account – CREDIT IT
• Notes Payable
–
–
–
–
Is a liability
Liabilities are on the right side of Balance Sheet
Right Side means right (credit) balance
To decrease a credit balance account – DEBIT IT
89
D. Notes Payable
Cr. Cash
$6,000
$6,000
Cash
$100,000
Notes Payable
$5,000
$20,000
$6,000
$6,000
$10,000
$80,000
90
Balance Sheet
Assets
Liabilities
Cash
$69,000 Accounts Payable
Supplies
Equipment
Land
Buildings
$10,000 Notes Payable
$15,000
$10,000 Equity
$90,000 Common Stock
$194,000
$10,000
$84,000
$100,000
$194,000
91
• Income Statement
– Equity increased by:
• Contributions from its owners (e.g., the sale of
stock)
– Contributed Capital.
• Firm generating profits from its operations
– If the firm distributes those profits to stockholders –
dividends
– If firm keeps profits - Retained Earnings.
92
• Profits reflected in accounts
– Inflows reflected in revenue accounts
– Outflows reflected in expense accounts.
• Revenues less expenses give you the
firm's Net Income.
• Income Statement summarizes these
revenue & expense accounts
93
• Revenues
– CD defines as “the amount of inflowing assets
from the sale or providing of goods or
services to customers.
94
• Revenues
– Increase a firm's equity or net worth.
• Equity appears on the right-hand side of the Balance
Sheet
– It normally has a credit (right) balance
– Increased with a credit
– Decreased with a debit
• Because revenues increase equity
– Revenues will normally have a credit (right) balance.
• Because expenses decrease equity
– Expenses will normally have a debit (left) balance.
95
• Illustration Continued
96
• Our firm earns consulting commissions of $50,000.
The client has not yet paid these commissions
– Two things happen with each transaction.
– Here:
• Consulting Revenue went up (Retained Earnings Up), and
• Accounts Receivable went up.
Accounts
Receivable
Balance Sheet
Up Retained Earnings
$50,000
Up
$50,000
97
• Accounts Receivable
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Accounts Receivable?
(Debit or Credit)
• Consulting Revenue
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Consulting Revenue? (Debit
or Credit)
98
• Accounts Receivable
–
–
–
–
Is an asset
Assets are on left side of Balance Sheet
Left Side means left (debit) balance
To increase a debit balance account – DEBIT IT
• Consulting Revenue
– Is a Revenue Account
– Revenues increase Equity
– Equity accounts are on the right side of Balance
Sheet
– Right Side means right (credit) balance
– To increase a credit balance account – CREDIT IT
99
D. Accounts Receivable
Cr. Consulting Revenue
$50,000
Accounts Receivable
Consulting Revenue
$50,000
$50,000
$50,000
100
Balance Sheet
Assets
Liabilities
Cash
$69,000 Accounts Payable
Accounts Rec.
Supplies
Equipment
Land
Buildings
$50,000
$10,000
$15,000
$10,000
$90,000
$244,000
Notes Payable
Equity
Common Stock
$10,000
$84,000
$100,000
Retained Earnings $50,000
$244,000
101
• The firm pays salaries of $20,000
– Two things happen with each transaction.
– Here:
• Salary Expense went up (Retained Earnings Down), and
• Cash went down
Cash
Balance Sheet
Down Retained Earnings
$20,000
Down
$20,000
102
• Cash
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you decrease Cash? (Debit or Credit)
• Salary Expense
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Salary Expense? (Debit or
Credit)
103
• Cash
–
–
–
–
Is an asset
Assets are on left side of Balance Sheet
Left Side means left (debit) balance
To decrease a debit balance account – CREDIT IT
• Salary Expense
– Is an Expense
– Expenses decrease Equity
– Equity accounts are on the right side of Balance
Sheet
– Right Side means right (credit) balance
– To decrease a credit balance account – DEBIT IT
104
D. Salary Expense
Cr. Cash
$20,000
$20,000
Cash
$100,000
Salary Expense
$5,000
$20,000
$6,000
$20,000
$20,000
105
Balance Sheet
Assets
Liabilities
Cash
$49,000 Accounts Payable
Accounts Rec.
Supplies
Equipment
Land
Buildings
$50,000
$10,000
$15,000
$10,000
$90,000
$224,000
Notes Payable
Equity
Common Stock
$10,000
$84,000
$100,000
Retained Earnings $30,000
$224,000
106
• The firm uses $3,000 of its supplies
– Two things happen with each transaction.
– Here:
• Supplies Expense went up (Retained Earnings Down), and
• Supplies went down
Supplies
Balance Sheet
Down Retained Earnings
Down
$3,000
$3,000
107
• Supplies
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you decrease Supplies? (Debit or Credit)
• Supplies Expense
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Supplies Expense? (Debit or
Credit)
108
• Supplies
–
–
–
–
Is an asset
Assets are on left side of Balance Sheet
Left Side means left (debit) balance
To decrease a debit balance account – CREDIT IT
• Supplies Expense
– Is an Expense
– Expenses decrease Equity
– Equity accounts are on the right side of Balance
Sheet
– Right Side means right (credit) balance
– To decrease a credit balance account – DEBIT IT
109
D. Supplies Expense
Cr. Supplies
$3,000
$3,000
Supplies
$10,000
Salary Expense
$3,000
$3,000
110
Balance Sheet
Assets
Liabilities
Cash
$49,000 Accounts Payable
Accounts Rec.
Supplies
Equipment
Land
Buildings
$50,000
$7,000
$15,000
$10,000
$90,000
$221,000
Notes Payable
Equity
Common Stock
$10,000
$84,000
$100,000
Retained Earnings $27,000
$221,000
111
• The firm owes one month’s rent
– Two things happen with each transaction.
– Here:
• Rent Expense went up (Retained Earnings Down), and
• Rent Payable went up
Balance Sheet
Rent Payable
Up
$10,000
Retained Earnings
Down
$3,000
112
• Rent Payable
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Rent Payable? (Debit or
Credit)
• Rent Expense
– What kind of account is it?
– On what side of Balance Sheet is it located?
– What kind of balance does this account normally
have?
– How do you increase Rent Expense? (Debit or
Credit)
113
• Rent Payable
–
–
–
–
Is a liability
Liabilities are on right side of Balance Sheet
Right Side means right (credit) balance
To increase a credit balance account – CREDIT IT
• Rent Expense
– Is an Expense
– Expenses decrease Equity
– Equity accounts are on the right side of Balance
Sheet
– Right Side means right (credit) balance
– To decrease a credit balance account – DEBIT IT
114
D. Rent Expense
Cr. Rent Payable
$5,000
$5,000
Rent Payable
Rent Expense
$5,000
$5,000
115
Balance Sheet
Assets
Liabilities
Cash
$49,000 Accounts Payable
Accounts Rec.
Supplies
Equipment
Land
Buildings
$50,000
$7,000
$15,000
$10,000
$90,000
$221,000
$10,000
Rent Payable
$5,000
Notes Payable
$84,000
Equity
Common Stock
$100,000
Retained Earnings $22,000
$221,000
116
• Trial Balance
– At the end of the accounting period
– Done to help in locating errors
– Total all accounts with debit balances
– Total all accounts with credit balances
– The totals should equal
– A number of trial balances are conducted
during the accounting cycle.
117
Cash
Trial Balance
$49,000 Accounts Payable
Accounts Rec.
Supplies
Equipment
$50,000 Rent Payable
$7,000 Notes Payable
$15,000 Common Stock
$5,000
$84,000
$100,000
Land
Buildings
Salary Expense
Supplies Exp.
$10,000 Consulting Rev.
$90,000
$20,000
$3,000
$50,000
Rent Expense
$5,000
$249,000
$10,000
$249,000
118
• Closing Entries
– Have to reflect the revenues and expenses
in Retained Earnings
– Close revenue and expense accounts to
the Income Summary account.
– Then close Income Summary to Retained
Earnings
119
• Close Consulting Revenue to Income
Summary
D. Consulting Revenue
Cr. Income Summary
Consulting Revenue
$50,000
$50,000
$50,000
$5,000
Income Summary
$50,000
120
• Close Salary Expense to Income
Summary
D. Income Summary
Cr. Salary Expense
Salary Expense
$20,000
$20,000
$20,000
$20,000
Income Summary
$20,000
$50,000
121
• Close Supplies Expense to Income
Summary
D. Income Summary
Cr. Supplies Expense
Salary Expense
$3,000
$3,000
$3,000
Income Summary
$3,000
$20,000
$3,000
$50,000
122
• Close Rent Expense to Income
Summary
D. Income Summary
Cr. Rent Expense
$5,000
$5,000
Rent Expense
$5,000
Income Summary
$5,000
$20,000
$3,000
$5,000
$50,000
123
• Close Income Summary to Retained
Earnings
D. Income Summary
Cr. Retained Earnings
Retained Earnings
$22,000
$22,000
$22,000
Income Summary
$20,000
$50,000
$3,000
$5,000
$22,000
$22,000