c hapter 2 basics of financial accounting accounting and finance for entrepreneurs ebd-301 dr. david...

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CHAPTER 2Basics of Financial Accounting

Accounting and Finance for Entrepreneurs

EBD-301

Dr. David P Echevarria


Financial Accounting

• The systematic recording of transactions that affect the financial aspects of the business– Using account balances to prepare

financial statements• Income Statement (Profit & Loss)• Balance Sheet

– The Fundamental Relationship Assets = Liabilities + Owner’s Equity + Revenues -

Expenses




• Two Observations– Profits (Losses) = Revenues – Expenses• Profits increase the cash account• Losses decrease the cash account

– Reinvested Profits increase the owner’s equity account (Retained Earnings)• Owners reinvest a portion of their profits to

grow the business.• Losses will be charged against the equity

account.




• Double-Entry Accounting always requires– A Debit entryand– A Credit entry– S Debits = S Credits [S = sum or total]

• Result: Books are self-balancing

– Assets ~ carry debit balances– Liabilities and Equity ~ carry credit balances– Expenses ~ carry debit balances– Revenues ~ carry credit balances



T-Account Model

• Every transaction will result in at least one debit entry and one credit entry– Example #1: Cash Sale• Debit the Cash account• Credit the Revenue account

– Example #2: Pay a Bill• Debit an Expense account• Credit Cash account



T-Account Model

• Assets: Cash, Receivables, Inventory• Liabilities: Payables, Loans• Owner’s Equity: Capital, Retained

Earnings• Revenues: may distinguish between

cash and credit sales• Expenses: all deductible business

expenses

= + + -+ - - + - + - + + -

Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

ASSETS LIABILITIES OWNERS EQUITY REVENUES EXPENSES



T-Accounts

= + + -+ - - + - + - + + -

Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

+ - - + - + - + + -Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

+ - - + - + + -Debit Credit Debit Credit Debit Credit Debit Credit

+ - - + - + + -Debit Credit Debit Credit Debit Credit Debit Credit

+ - + -Debit Credit Debit Credit

+ - + -Debit Credit Debit Credit

RETAINED EARNINGS

EQUIPMENT LEASE

ACCOUNTS PAYABLE

Leasehold Improve

LOANS

ASSETS LIABILITIES OWNERS EQUITY REVENUES

T-ACCOUNT RELATIONSHIPS

EQUIPMENT

UTILITIES

ADVERTISING

PREPAID EXPENSE

INVENTORIES

SALES REVENUESOWNERS CAPITAL

OWNERS DRAW

WAGES

RENT

SUPPLIES

CASH

ACCTS RECEIVABLE

LEASE LIABILITY

EXPENSES



ZipPrint Company

• Record an investment by the owner of $50,000 in initial capital– Debit Cash (deposit in bank account)– Credit Owner’s Capital (acknowledge

investment)

+ - - +50,000 50,000Debit Credit Debit Credit

CASH OWNERS CAPITAL



ZipPrint Company

• Received a $25,000 loan from the SBA and deposited the check.– Debit Cash– Credit Loan [payable]– Total Debits = $75,000, Total Credits = $75,000


+ - - + - +50,000 25,000 50,00025,000 Debit CreditDebit Credit Debit Credit

CASH OWNERS CAPITALLOANS


ZipPrint Company

• Sign Lease and pay first and last months rent: $1,650 per month times 2 = $3,300– Debit Rent Expense– Credit Cash


+ - - + - + + -50,000 50,00025,000

3,300Debit Credit Debit Credit Debit Credit Debit Credit

+ - - + - + + -25,000 3,300

Debit Credit Debit Credit Debit Credit Debit Credit

CASH ACCOUNTS PAYABLE OWNERS CAPITAL WAGES

ACCTS RECEIVABLE LOANS OWNERS DRAW RENT


ZipPrint Company

• Acquire Laser Printers (industrial type that can print double sided and collate output)–Will purchase a small Mono Printer ($8,000)–Will Lease a Color Printer ($22,000): creates a

Lease Liability*


+ - + - - +8,000 30,000 22,000

Debit Credit Debit Credit Debit Credit

CASH EQUIPMENT LEASE LIABILITY


ZipPrint Company

* Contract details on the leased laser printerThe 5-year capital lease for the laser color

printer will be amortized monthly at the rate of $451.36. At the end of the 5th year, ZipPrint will own the color printer

The Lease Liability recorded in the books represents the present value of the 60 monthly payments capitalized at 8.5%.

This is a lease-to-own contract and is another way top finance asset acquisitions.



ZipPrint Company

• Leasehold Improvements– ZipPrint has leased new space which

must be finished to provide a proper store front, work and storage space, a toilet/washroom facility.

– The work will be contracted out and will cost $30,000 to paid in three installments


+ - + -10,000 10,000

Debit Credit Debit Credit

CASH Leasehold Improve


ZipPrint Company

• Purchase on umbrella insurance policy; fire, theft, liability– Annual premium = $2,000• Policy will be amortized (written off as

expense) at the rate of $500.00 per quarter


+ - + -2,000 2,000


CASH PREPAID EXPENSES


ZipPrint Company

• Insurance Policy requires that the business have a 24/7 monitored security system to qualify for a discount.– ADT System installed• Upfront cost of $800 (miscellaneous

expense)• Monthly fee of $49.00 (due the 1st of every

month)


+ - + -800 800


MISC EXPENSESCASH


ZipPrint Company

• Buying some signage– $2,000 to William’s Sign Company

(misc. exp.)


+ - + -2,000 2,000


CASH MISC EXPENSES


ZipPrint Company

• Buy a pallet of copier paper– $1,400 to local Staples


+ - + -1,400 1,400


CASH SUPPLIES


ZipPrint Company

• Acquire miscellaneous furnishings for cash: – countertops, desks, chairs and small

tables, filing cabinets, cash register and credit card reader, and a workstation PC.

–Will record as Other Assets


+ - + -3,400 3,400


CASH OTHER ASSETS


ZipPrint Company

• All of the previous transactions were recorded in the General Journal.– The G.J. is the book of original entry• Contains all the transactions in chronological

order

– The transactions will be then recorded in the appropriate [General] Ledger.

– The Ledgers are organized by numbered accounts.



ZipPrint CompanyChart of Accounts


Assets Acct# Liabilities Acct#Cash 110 Accounts Payable 210Receivables 120 Loans 220Inventory 130 Lease Liabilities 230Prepaid Expense 140Equipment 150 Owner's Equity Acct#Leasehold Imprv 160 Owner's Capital 310Other Assets 170 Owner's Draw 320

Retained Earnings 330

Revenues Acct# Expenses Acct#Sales 410 Wages 510

Rent 520Supplies 530Utilities 540Advertising 550Lease Obligations 560Misc Expenses 570

ZipPrint Chart of Accounts


ZipPrint CompanyGeneral Journal Entries for June,20xx



ZipPrint CompanyCash Account # 110: June, 20xx Entries


2014June 1 1 50 0 0 0 50 0 0 0June 3 1 25 0 0 0 75 0 0 0June 3 1 3 3 0 0 71 7 0 0June 4 1 8 0 0 0 63 7 0 0June 5 1 10 0 0 0 53 7 0 0June 7 1 2 0 0 0 51 7 0 0June 12 1 10 0 0 0 41 7 0 0June 23 1 10 0 0 0 31 7 0 0June 28 1 2 0 0 0 29 7 0 0June 29 1 1 4 0 0 28 3 0 0June 29 1 3 4 0 0 24 9 0 0

Account: CASH GENERAL LEDGER ACCOUNT NO. 110

DATE ITEMPOST-

REF DEBIT CREDITBALANCE

DEBIT CREDIT

Post-Ref” column refers to the page of the General Journal from which this entry was made. Note that they were all from page # 1


ZipPrint CompanyAccount Balances: Month ending June, 20xx

• Asset Accounts

• Liability Accounts

• Equity Accounts


Account Name No. Debit CreditInventory 130 1,400Prepaid Expense 140 2,000Equipment 150 30,000Leasehold Improve 160 30,000Other Assets 170 3,400

Account Name No. Debit CreditAccounts Payable 210 800Loans 220 25,000Lease Liabilities 230 22,000

Account Name No. DebitOwner's Equity 310 50,000Owner's Draw 320 0Retained Earnings 330 0


ZipPrint CompanyAccount Balances: Month ending June, 20xx

• Revenue and Expenses Accounts– During the month of June, ZipPrint had

no Revenues due to the time spent organizing the store and acquiring assets and miscellaneous items.


Account Name No. Debit CreditSales Revenues 410 0Rent Expense 520 3,300Miscellaneous Exp. 570 2,800


ZipPrint CompanyPreparing the Trial Balance


Debit Credit Debit Credit Debit Credit Debit Credit Debit CreditCash 24,900 24,900 24,900 A/R - - - Inventory 1,400 1,400 1,400 Prepaid Insurance 2,000 2,000 2,000 Equipment 30,000 30,000 30,000 Leasehold Imprv 30,000 30,000 30,000 Other Assets 3,400 3,400 3,400 Accounts Payable 800 800 800 Loans 25,000 25,000 25,000 Lease Liabilities 22,000 22,000 22,000 Owner's Equity 50,000 50,000 50,000 Owner's Draw 0 0 0Retained Earnings 0 0 0Revenues 0 0 0 0Rent Expenses 3,300 3,300 3,300 Misc Expense 2,800 2,800 2,800

97,800 97,800 97,800 97,800 6,100 0 91,700 97,800 Net Income (6,100) (6,100)

0 0 91,700 91,700

ZipPrint, LLC

For Month Ending June 30, 2014WORKSHEET

Income Statement Balance Sheet

ACCOUNT NAMETrial Balance Adjustments

Adjusted Trial Balance


ZipPrint Company

• The Trial Balance contained on the previous slide indicates that we have made the accounting entries correctly: the footings match – Debits ($97,800) = Credits ($97,800).

• Since there are no adjustments, the Adjusted Trial Balance is unchanged.

• The Income Statement is comprised of three entries: Zero revenues and $6,100 in expenses.

• Net Income is a negative $6,100. The Balance Sheet will reflect the $6,100 loss in the Retained Earnings account.



CHAPTER SUMMARY

• Keeping accurate records are a must for every business.

• Accurate records are a must when preparing tax returns

• Good accounting systems allow the owner manager to analyze business performance

• Double-entry accounting requires more effort but assists in keeping accurate records.



Homework

• The following transactions were incurred by Aloe Products, LLC. Use simple T-accounts to make the required entries: Debits = Credits1. Aloe purchase $3,000 of merchandise and paid cash.

2. Aloe purchased packaging equipment for $12,500 in cash.

3. Aloe paid a supplier $2,500 for merchandise bought on credit.

4. Aloe paid the telephone company $245.00 for last month’s service.

5. Aloe paid the rent on office and warehouse; $2,650.

6. Aloe sold $4,200 merchandise for cash (cost $2,800)

7. Aloe sold $2,000 of merchandise on credit (cost $1,300)

8. Aloe paid $7,400 in salaries and wages.

9. Aloe borrowed $10,000 from the bank (a 6-month note)

10. Aloes owners invested $20,000 to support additional product lines.


c hapter 2 basics of financial accounting accounting and finance for entrepreneurs ebd-301 dr. david...

Documents

cash account credit

account balances

cash account losses

owners equity account

debit entry

cash sale debit

debit rent expense credit

carry credit balances