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Basic Accounting

Copyright © 2004 by Gaylen BunkerAll right reserved

This material may not be used or reproducedwithout permission of Gaylen Bunker

BusinessAllstars.comPresents

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Assets are resources owned by the business and used or consumed to

produce revenue.

Claims show who has provided funds to buy assets. Claims are obligations

that must be paid in the future.

Accounting systems are designed with checks and balances. The Assets must equal the Claims. This is the

single most important control feature in the system.

When you actually play the game you will sometimes be asked to click “NEXT” to continue to the next screen. As you post entries, if you click on the wrong account,

an error will be recorded.

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Accumulated Depreciation shows how much of the building and equipment have been used up due to wear and tear. As equipment gets older it loses value.

Retained Earnings show the results of operating activity (Revenue minus

Expenses) that belongs to the Equity Investors.

Cash is money on hand or in the bank.

Accounts Receivable are IOUs from customers for sales made but not yet collected.

Inventory are the products we will sell.

Fixed Assets are the buildings and equipment to store and move the inventory.

Payables are bills (to be paid) for the purchase of products to be sold or for taxes

(to be paid) to the government.

Long-term Debts are like a 30-year mortgage on a building that will be paid over a long period of time. For large corporations these may be called bonds.

Common Stock shows how much money investors (owners) have put

into the business.

The beginning balances are the results of prior periods activity. They are called balances because they are totals.

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3000 3000

During the game, the Help button can be clicked to show the way the accounting equation is affected. It shows that this is an “Asset Source” where an asset

and a claim are increased by the same amount.

“Equity” represents the owner’s claim on the assets of the company. When people invest in a company, they may be issued common stock for the amount of their investment. If no common stock is issued, a capital account is created

that shows how much they invested.

The first event is a transaction where the owners of the company invest an additional $3,000.

It must be determined which of the accounts will be affected

and will $3,000 be added to or subtracted from accounts.

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4000 4000

When we acquire products to be sold it is called inventory. Sometimes instead of paying cash

immediately, the vendors, who sold us the products, extend credit to us. These obligations on our books

are called Accounts Payable and will be paid within a short period of time.

The next entry is a transaction where the company purchased $4,000 of products that is to be sold. Will the Inventory account be

increased “+” or decreased “-” ?

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6000 6000 Revenue

Revenue is recorded when it is earned which is when delivery has occurred or services have been rendered. We can extend credit to our customers

and show their commitments on our books as Accounts Receivable that they will pay shortly.

The Income Statement summarizes changes to the Retained Earnings account.

‘On account’ means that we did not received cash, but instead a promise. from the buyer. to pay later.

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-3000 -3000 C.O.G.S.

When inventory leaves the company, assets are reduced and claims must be reduced. The owner’s claim on assets is reduced through an

entry to Retained Earnings that is called Cost of Goods Sold. As a result of this, and the previous entry for revenue, the owners are better off by

the difference of Revenue less Cost of Goods Sold or $3,000.

This is an “Asset Use” where an asset and a claim are reduced by the same amount.

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-2000 2000

An expenditure is set up as a “Fixed Asset” when the company acquires tangible property that will be

consumed (used up) over several years. Fixed Assets can be buildings, equipment, machines, vehicles,

remodeling, etc.

This is an “Asset Exchange” where we give up one asset (cash) for another (equipment) and the Accounting

Equation remains in balance.

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5500 -5500

Remember those promises to pay from our customers. Well, they finally paid us.

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-2000 -2000 Oper Exp

Expenditures for resources that are immediately consumed are an Expense and a reduction of owner’s

equity (Retained Earnings).

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-500 -500 Depr Exp

As equipment is used and wears out, we reduce the value of the

asset and reduce owner’s equity calling it depreciation expense.

The amount of Fixed Assets less the Accumulated Depreciation is

equal to a Net Fixed Asset amount. This is called an accrual entry because no cash changed hands to initiate the entry, but

was based on an estimate.

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-3600 -3600

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200 -200 Inc Taxes

We set up a payable for the amount of income taxes that would be required on

the income earned as shown on our Income Statement.

This is a “Claims Exchange” where we trade one claim (earnings belonging to the owners) for another (taxes payable).

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-150 -150

The IRS/state has special rules that change some expenses and result in the company paying taxes that are

different than what our Income Statement shows. This doesn’t

eliminate the taxes we expected to pay, but shifts them to the future.

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-100 -100 Dividends

The distribution of cash or other assets to the owners is called a dividend. Notice that it is not an expense and is not part of the

Income Statement, but still reduces the Retained Earnings.

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The Ending Balance is the result of adding or subtracting all

transactions from the beginning balance. We do this for each

account.

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Proceed to the next program for

Financial Statements

based on the

Accounting information just developed.