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Transcript
Welcome Back Atef Abuelaish 1 Welcome Back Time for Any Question Atef Abuelaish 2 Atef Abuelaish 3 CHAPTER # 02 REVIEW Atef Abuelaish 4 Chapter 02 Analyzing Business Transactions Atef Abuelaish 5 Analyzing Business Transactions Section 1: Property and Financial Interest Section Objectives 2-1. Record in equation form the financial effects of a business transaction. 2-2. Define, identify, and understand the relationship between asset, liability, and owner’s equity accounts. Atef Abuelaish 6 Steps to analyze the effect of a business transaction 1. Describe the financial event. Identify the property. Identify who owns the property. Determine the amount of increase or decrease. 2. Make sure the equation is in balance. Property (asset) = Financial Interest (creditors and owners) Atef Abuelaish 7 Define, identify, and understand the relationship between asset, liability, and owner’s equity accounts Assets, Liabilities, and Owner’s Equity QUESTION: What are assets? ANSWER: Assets are property owned by a business. Atef Abuelaish 8 Liabilities and Equity QUESTION: What are liabilities? ANSWER: Liabilities are debts or obligations of a business QUESTION: What is owner’s equity? ANSWER: Owner’s equity is the term used by sole proprietorships. It is the financial interest of an owner of a business. It is also called proprietorship or net worth. Atef Abuelaish 9 The Balance Sheet QUESTION: What is a Balance Sheet? ANSWER: A balance sheet is a formal report of the financial position of a business on a certain date. It reports the assets, liabilities, and owner’s equity of the business Atef Abuelaish 10 The Balance Sheet Assets – the amount and types of property owned by the business Liabilities – the amount owed to the creditors Equity – the owner’s interest Atef Abuelaish 11 Property Assets Liabilities + Owner’s Equity Financial Interest Property equals Financial Interest Atef Abuelaish 12 Analyzing Business Transactions Section 2: The Accounting Equation and Financial Statements Section Objectives 2-3 Analyze the effects of business transactions on a firm’s assets, liabilities, and owner’s equity and record these effects in accounting equation form. 2-4 Prepare an income statement. 2-5 Prepare a statement of owner’s equity and a Atef Abuelaish balance sheet. 13 The Fundamental Accounting Equation QUESTION: What is the fundamental accounting equation? ANSWER: The fundamental accounting equation is the relationship between assets and liabilities plus owner’s equity. Atef Abuelaish 14 The Fundamental Accounting Equation In accounting terms the firm’s assets must equal the total of its liabilities and owner’s equity. This equality can be expressed in equation form as: Assets = Liabilities + Owner’s Equity The entire accounting process of analyzing, recording and reporting business transactions is based on the fundamental accounting equation. If any two parts of the equation are known, the third part can be determined. Atef Abuelaish 15 Revenues QUESTION: What is revenue? ANSWER: A revenue is an inflow of money or other assets that results from the sales of goods or services or from the use of money or property. It is also called income. Atef Abuelaish 16 Expenses QUESTION: What is an expense? ANSWER: An expense is an outflow of cash, use of other assets, or incurring of a liability. Atef Abuelaish 17 Prepare an Income Statement QUESTION: What is an income statement? ANSWER: An income statement is a formal report of business operations covering a specific period of time. It is also called a profit and loss statement or a statement of income and expenses. Atef Abuelaish 18 The income statement has a three-line heading The third line shows that the report covers operations over a period of time Wells’ Consulting Services Income Statement Month Ended December 31, 2016 Revenue Fees Income Expenses Salaries Expense Utilities Expense Total Expenses Net Income Atef Abuelaish $47,000.00 $8,000.00 650.00 8,650.00 $ 38,350.00 19 The income statement reports revenue Wells’ Consulting Services Income Statement Month Ended December 31, 2016 Revenue Fees Income Expenses Salaries Expense Utilities Expense Total Expenses Net Income Atef Abuelaish $47,000.00 8,000.00 650.00 8,650.00 $ 38,350.00 20 The income statement also reports expenses Wells’ Consulting Services Income Statement Month Ended December 31, 2016 Revenue Fees Income Expenses Salaries Expense Utilities Expense Total Expenses Net Income Atef Abuelaish $47,000.00 8,000.00 650.00 8,650.00 $ 38,350.00 21 The result is net income or net loss for the period Wells’ Consulting Services Income Statement Month Ended December 31, 2016 Revenue Fees Income Expenses Salaries Expense Utilities Expense Total Expenses Net Income Atef Abuelaish $47,000.00 8,000.00 650.00 8,650.00 $ 38,350.00 22 Prepare a Statement of Owner’s Equity and Balance Sheet A Statement of Owner’s Equity Wells’ Consulting Services Statement of Owner’s Equity Month Ended December 31, 2016 Carolyn Wells, Capital, December 1, 2016 Net Income for December $38,350.00 Less Withdrawals for December 5,000.00 Increase in Capital Carolyn Wells, Capital, December 31, 2016 $100,000.00 33,350.00 $133,350.00 37 Atef Abuelaish 23 The Balance Sheet Wells’ Consulting Services Balance Sheet December 31, 2016 Assets Cash Accounts Receivable Supplies Prepaid Rent Equipment Total Assets Liabilities 111,350.00 5,000.00 1,500.00 8,000.00 11,000.00 136,850.00 Accounts Payable Owner’s Equity Carolyn Wells, Capital Total Liabilities and Owner’s Equity 3,500.00 133,350.00 136, 850.00 A single line shows that the amounts above it are being added or subtracted. A double line indicates final amounts for the column or section of a report. Atef Abuelaish 24 The Importance of Financial Statements • Business managers and owners use the balance sheet and the income statement to control current operations and plan for the future. Creditors, prospective investors, governmental agencies, and others are interested in the profits of the business and in the asset and equity structure. Atef Abuelaish 25 Financial statements are prepared in a specific order: 1st Income Statement 2nd Statement of Owner’s equity 3rd Balance Sheet Atef Abuelaish 26 Chapter 03 Analyzing Business Transactions Using T Accounts Atef Abuelaish 27 Analyzing Business Transactions Using T Accounts Section 1: Transactions That Affect Assets, Liabilities, and Owner’s Equity Section Objectives 3-1 Set up T accounts for assets, liabilities, and owner’s equity. 3-2 Analyze business transactions and enter them in the accounts. 3-3 Determine the balance of an account. Atef Abuelaish 28 The Accounting Equation ASSETS The property a business owns = LIABILITIES The debts of the business + OWNER’S EQUITY The owner’s financial interest in the business Atef Abuelaish 29 Classification of Accounts Asset Accounts Asset accounts show the property a business owns. Liability Accounts Liability accounts show the debts of the business. Owner’s Equity Accounts Owner’s equity accounts show the owner’s financial interest in the business. Atef Abuelaish 30 Set up T accounts for assets, liabilities and owner’s equity T Accounts = ASSETS + LIABILITIES OWNER’S EQUITY - - Record Increases Record Decreases Record Decreases Record Increases Record Decreases Record Increases LEFT SIDE RIGHT SIDE LEFT SIDE RIGHT SIDE LEFT SIDE RIGHT SIDE Atef Abuelaish + + - + 31 Analyze business transactions and enter them in the accounts Effects of Business Transactions Steps to analyze the effects of the business transactions: 1. Analyze the financial event. Identify the accounts affected. Classify the accounts affected. Determine the amount of increase or decrease for each account. 2. Apply the left-side-right side rules for each account affected. 3. Make the entry in T-account form. Atef Abuelaish 32 Initial Investment Carolyn Wells withdrew $100,000 from personal savings and deposited it in the new business checking account for Wells’ Consulting Services. LEFT Increases to asset accounts are recorded on the left side of the T account. RIGHT Increases to owner’s equity accounts are recorded on the right side of the T account. Cash (a) 100,000 Atef Abuelaish Carolyn Wells, Capital (a) 100,000 33 Business Transaction Wells’ Consulting Services issued a $5,000 check to purchase a computer and other equipment. Analysis: (b) The asset account, Equipment, is increased by $5,000. (b) The asset account, Cash, is decreased by $5,000. Equipment (b) 5,000 Atef Abuelaish Cash (b) 5,000 34 Purchase of Equipment on Account The firm bought office equipment for $6,000 on account from Office Plus. Analysis: (c) The asset account, Equipment, is increased by $6,000. (c) The liability account, Accounts Payable, is increased by $6,000. Equipment (c) 6,000 Atef Abuelaish Accounts Payable (c) 6,000 35 Purchase of Supplies for Cash Wells’ Consulting Services issued a check for $1,500 to Office Delux Inc. to purchase office supplies. Analysis: (d) The asset account, Supplies, is increased by $1,500. (d) The asset account, Cash, is decreased by $1,500. Supplies (d) 1,500 Atef Abuelaish Cash (d) 1,500 36 Payment of a Liability Wells’ Consulting Services issued a check in the amount of $2,500 to Office Plus. Analysis: (e) The asset account, Cash, is decreased by $2,500. (e) The liability account, Accounts Payable, is decreased by $2,500. Accounts Payable (e) 2,500 Atef Abuelaish Cash (e) 2,500 37 Prepayment of Rent Wells’ Consulting Services issued a check for $8,000 to pay rent for the months of December and January. Analysis: (f) The asset account, Prepaid Rent, is increased by $8,000. (f) The asset account, Cash, is decreased by $8,000. Prepaid Rent (f) 8,000 Atef Abuelaish Cash (f) 8,000 38 Determine the balance of an account An account balance is the difference between the amounts recorded on the two sides of an account. A footing is a small pencil figure written at the base of an amount column showing the sum of the entries in the column. Atef Abuelaish 39 Recording Account Balances IF THEN the total on the right side is larger than the total on the left side, the balance is recorded on the right side. the total on the left side is larger, the balance is recorded on the left side. an account shows only one amount, that amount is the balance. an account contains entries on only one side, the total of those entries is the account balance. Atef Abuelaish 40 Computing the Account Balance Cash (a) 100,000 Bal. 83,000 (b) (d) (e) (f) 5,000 1,500 2,500 8,000 ----------17,000 Footing (100,000 – 17,000) Atef Abuelaish 41 Summary of Account Balances ASSETS Cash = LIABILITIES Accounts Payable + OWNER’S EQUITY Carolyn Wells, Capital (a) 100,000 (b) 5,000 (d) 1,500 (e) 2,500 (f) 8,000 Bal. 83,000 17,000 ( e) 2,500 (c) 6,000 (b) Account balances for Carter Consulting Bal. 3,500 Services 100,000 Supplies SUMMARY OF ACCOUNT BALANCES (d) 1,500 ASSETS Prepaid Rent (f) 8,000 = LIABILITIES + OWNER’S EQUITY 83,000 1,500 8,000 11,000 3,500 100,000 Equipment 103,500 = 3,500 + 100,000 (b) 5,000 (c) 6,000 Bal. 11,000 Atef Abuelaish 42 Analyzing Business Transactions Using T Accounts Section 2: Transactions That Affect Revenue, Expenses, and Withdrawals Section Objectives 3-4 Set up T accounts for revenue and expenses. 3-5 Prepare a trial balance from T accounts. 3-6 Prepare an income statement, a statement of owner’s equity, and a balance sheet. 3-7 Develop a chart of accounts. Atef Abuelaish 43 T-Account for Revenue Owner’s Equity Decrease Increase Side Side _ + Revenue Decrease Increase Side Side _ + Revenues increase owner’s equity. Increases in owner’s equity appear on the right side of the T account. Therefore, increases in revenue appear on the right side of revenue T accounts. Atef Abuelaish 44 Revenue Decrease Increase Side Side _ + The right side of the revenue account shows increases and the left side shows decreases. Decreases in revenue accounts are rare but might occur because of corrections or transfers. Atef Abuelaish 45 Set up T accounts for revenues and expenses Recording Revenue from Services Sold for Cash Cash Fees Income (g) 36,000 Bal. 83,000 (g) 36,000 $36,000 is entered on the left (increase) side of the asset account Cash. Atef Abuelaish $36,000 is entered on the right side of the Fees Income account. 46 Recording Revenue from Services Sold on Credit In December, Wells’ Consulting Services earned $11,000 from various charge account clients. Analysis: (h) The asset account, Accounts Receivable, is increased by $11,000. (h) The revenue account, Fees Income, is increased by $11,000. Accounts Receivable (h) 11,000 Atef Abuelaish Fees Income (h) 11,000 47 Receipt of Payments on Account Charge account clients paid $6,000, reducing the amount owed to Wells’ Consulting Services. Analysis: (i) The asset account, Cash, is increased by $6,000. (i) The asset account, Accounts Receivable, is decreased by $6,000. Cash (i) 6,000 Atef Abuelaish Accounts Receivable (i) 6,000 48 Expenses Owner’s Equity Decrease Side Increase Side _ + Expense Revenue Increase Side Decrease Side Decrease Side Increase Side + _ _ + Expenses decrease owner’s equity. Decreases in owner’s equity appear on the left side of the T accounts. Atef Abuelaish 49 Payment of Salaries In December, Wells’ Consulting Services paid $8,000 in salaries. Analysis: (j) The asset account, Cash, is decreased by $8,000. (j) The expense account, Salaries Expense, is increased by $8,000. Salaries Expense (j) 8,000 Atef Abuelaish Cash (j) 8,000 50 Payment of Utilities Wells’ Consulting Services issued a check for $650 to pay the utilities bill. Analysis: (k) The asset account, Cash, is decreased by $650. (k) The expense account, Utilities Expense, is increased by $650. Utilities Expense (k)650 Atef Abuelaish Cash (k) 650 51 Owner’s Withdrawals Owner’s Equity Decrease Increase Side Side _ + Expense Revenue Increase Decrease Decrease Increase Side Side Side Side + _ _ + Owner Drawing Increase Decrease Side Side + _ Drawing decreases owner’s equity. Decreases in owner’s equity appear on the left side of the T accounts. Atef Abuelaish 52 The Owner Withdraws Funds Carolyn Wells wrote a check to withdraw $5,000 cash for personal use. Analysis: (l) The asset account, Cash, is decreased by $5,000. (l) The owner’s equity account, Carolyn Wells, Drawing, is increased by $5,000. Carolyn Wells, Drawing (l) 5,000 Atef Abuelaish Cash (l) 5,000 53 The Rules of Debit and Credit • A debit is an entry on the left side of an account. • A credit is an entry on the right side of an account. • A double-entry system is an accounting system that involves recording the effects of each transaction as debits and credits in separate accounts. • Every transaction in a Double entry accounting system has at least one debit and one credit. •The total of the debits and credits recorded in the separate accounts must be EQUAL. Atef Abuelaish 54 Any Account Left Side Right Side Accountants refer to the left side of an account as the debit side instead of saying the left side. The right side of the account is called the credit side. Atef Abuelaish 55 Rules for Debits and Credits Atef Abuelaish 56 Prepare a trial balance from T accounts 1. Use the proper heading to include who, what, and when information. 2. List the accounts in chart of account order or in the same order as they appear in the financial statement. 3. Enter the ending balance of each account in the appropriate Debit or Credit column. 4. Total the Debit column. 5. Total the Credit column. 6. Compare the column totals. They should be equal. Atef Abuelaish 57 The Trial Balance Atef Abuelaish 58 Errors Some common errors in a trial balance are: Adding trial balance columns incorrectly Recording only half a transaction – for example, recording a debit but not recording a credit, or vice versa Recording both halves of a transaction as debits or credits rather than recording one debit and one credit Recording the incorrect amount for a transaction Recording a debit for one amount and a credit for a different amount Mathematical errors in calculating account balances Forgetting to carry over an account balance to the Trial Balance Atef Abuelaish 59 Prepare an income statement, a statement of owner’s equity, and a balance sheet After the trial balance is prepared, the financial statements are prepared. Net income from the income statement is used on the statement of owner’s equity. The ending balance of the Carolyn Wells, Capital account, computed on the statement of owner’s equity, is used on the balance sheet. Atef Abuelaish 60 Wells’ CONSULTING SERVICES Income Statement Month Ended December 31, 2016 Revenue Fees Income Expenses Salaries Expense Utilities Expense Total Expenses Net Income 47,000.00 8,000.00 650.00 8,650.00 38,350.00 Wells’ CONSULTING SERVICES Statement Of Owner’s Equity Month Ended December 31, 2016 Carolyn Wells, Capital, Dec. 1, 2016 100,000.00 Net Income for December 38,350.00 Less Withdrawals for December 5,000.00 Increase in Capital 33,350.00 Carolyn Wells, Capital, Dec. 31, 2016 133,350.00 ASSETS Cash Accounts Receivable Supplies Prepaid Rent Equipment Total Assets Atef Abuelaish Wells’ CONSULTING SERVICES Balance Sheet December 31, 2016 LIABILITIES 111,350.00 Accounts Payable 5,000.00 1,500.00 8,000.00 OWNER’S EQUITY 11,000.00 Carolyn Wells, Capital 136,850.00 Total Liabilities and Owner’s Equity 3,500.00 133,350.00 136,850.00 61 Develop a chart of accounts Each account has a number and a name. The Balance Sheet accounts are listed first, followed by the Statement of Owner’s Equity accounts, ending with the income statement accounts. The account number is assigned based on the type of account. Each account should have a number assigned to its title (name) Balance Sheet accounts are listed before income statement accounts. Atef Abuelaish 62 Atef Abuelaish 63 Permanent and Temporary Accounts A permanent account is an account that is kept open from one accounting period to the next. A temporary account is an account whose balance is transferred to another account at the end of an accounting period. A temporary account is “zeroed out” at the end of the accounting period. Atef Abuelaish 64 Homework assignment Using Connect – 5 Questions for 50 Points for Chapter 03. Log in Connect web site and do “Connect Orientation” for 10 Points Quiz # 01 is due at home; today till 09/13 at 11:59 PM. Prepare chapter 4 “The Ledger.” General Journal and General Happiness is having all homework up to date Atef Abuelaish 65 Thank you and See You Next Week at the Same Time, Take Care Atef Abuelaish 66