ddt - chapter 1

7/30/2019 DDT - Chapter 1

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LECTURE 1

INTRODUCTION TO DOUBLE ENTRY


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Explain what is accounting about Briefly describe the history of accounting

Explain the relationship between bookeepingand accounting

List the users of accounting information Present and explain the accounting equation Explain the terms asset,liability and equity Describe how accounting transactions affect

the items in the accounting equation


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Luca Pacioli, who in 1494 first described thesystem of double-entry bookkeeping .

Pacioli who was the first to describe the systemof debits and credits injournals and ledgers that

is still the basis of today's accounting systems.
http://www.investopedia.com/terms/d/debit.asphttp://www.investopedia.com/terms/c/credit.asphttp://www.investopedia.com/terms/j/journal.asphttp://www.investopedia.com/terms/g/generalledger.asphttp://www.investopedia.com/terms/g/generalledger.asphttp://www.investopedia.com/terms/j/journal.asphttp://www.investopedia.com/terms/c/credit.asphttp://www.investopedia.com/terms/d/debit.asp


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Accounting - a process of identifying, recording,summarizing, and reporting economicinformation to decision makers in the form of

financial statements Financial accounting - focuses on the specific

needs of decision makers external to theorganization, such as stockholders, suppliers,banks, and government agencies


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The art of recording business transactions inbooks in a regular and systematic manner.


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The accounting system is a series of stepsperformed to analyze, record, quantify,accumulate, summarize, classify, report, andinterpret economic events and their effects onan organization and to prepare the financialstatements.


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Internal users

External users

Ethics in financial

reporting

Forms of Business

Organization

Users and Uses of

Financial

Information

Business ActivitiesCommunicating

with Users

Sole

proprietorship

Partnership

Corporation

Financing

Investing

Operating

Income statement

Retained earnings

statement

Balance sheet

Statement of cash

flows

Interrelationshipsof statements

Other elements of

an annual report

Introduction to Financial Statements


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PartnershipBusiness organization owned by

two or more people. Each partneris personally liable for all debts of

the business.

Corporation

A separate entity from both a legal

and accounting perspective.Owners of corporations

(stockholders) are not personallyresponsible for debts of the

corporation.

SoleProprietorship

Business organization owned by oneperson. The owner is personally liable

for all debts of the business.

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Management

Human

ResourcesTaxing

Authorities

Labor Unions

Regulatory

Agencies

Marketing

Finance

Investors

Creditors

Customers

Internal

Users

External

Users

Who Uses Accounting Data

Users and Uses of Financial Information


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All businesses are involved in three types of activity

financing,

investing,

and operating.

The accounting information system keeps track of the

results of each of these business activities.


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Two primary sources of outside funds are:

1. Borrowing money

Amounts owed are called liabilities.

Party to whom amounts are owed are creditors.

Notes payable and bonds payable are different type

of liabilities.

2. Issuing shares of stock for cash.

Payments to stockholders are called dividends.

Financing Activities


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Investing Activities

Purchase of resources a company needs to

operate.

Computers, delivery trucks, furniture, buildings, etc.

Resources owned by a business are called assets.


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Operating Activities

Once a business has the assets it needs, it

can begin its operations.

Revenues - Amounts earned from the sale of products

(sales revenue, service revenue, and interest revenue).

Inventory - Goods available for sale to customers.

Accounts receivable - Right to receive money from acustomer,in the future, as the result of a sale.


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Operating Activities

Expenses - cost of assets consumed or services used.

(cost of goods sold, selling, marketing, administrative,

interest, and income taxes expense).

Liabilities arising from expenses include accounts

payable, interest payable, wages payable, sales taxes

payable, and income taxes payable.

Net income when revenues exceed expenses.

Net loss when expenses exceed revenues.


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IncomeStatement

Statement of

RetainedEarnings

Balance

Sheet

Statement of

Cash Flows

Financial statements

are typically preparedin this order.

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The accounting profession has developed acommon set of standards and procedures

known as Generally Accepted AccountingPrinciples (GAAP). These principles serve as ageneral guide to the accounting practitionerin accumulating and reporting the financialinformation of a business enterprise.


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Assets = Liabilities + Owners Equity


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Resources controlled by thecompany that have measurable

value and are expected to

provide future benefits to the

company.

Cash

Supplies Furniture

Equipment

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Amounts owed by thebusiness to creditors.

NotesPayable

AccountsPayable

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Owners claim to the

business resources.

Stock Certificate

ContributedCapital

RetainedEarnings

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On December 31, the ChristopherCorporation's assets were $150,000 and itsliabilities were $80,000. Determine the dollar

amount of the Christopher Corporation'sDecember 31, stockholders' equity.


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Assets = Liabilities + Stockholders' Equity

$150,000 = $80,000 + stockholders' equity

Stockholders' equity = $70,000


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Revenues

Sales of goods or services

to customers. They are

measured at the

amount the business

charges the customer.

Expenses

The costs of business

necessary to earn

revenues, including

wages to employees,

advertising, insurance,and utilities.

Revenues Expenses = Net Income

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Distributions of a companysearnings to its stockholders

as a return on their

investment.

Dividends are not an expense.1-2


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Revenues

Pizza Revenue 11,000$

Total Revenue 11,000

ExpensesSupplies Expense 4,000

Wages Expense 2,000

Rent Expense 1,500

Utilities Expense 600

Insurance Expense 300Advertising Expense 100

Income Tax Expense 500

Total Expenses 9,000

Net Income 2,000$

For the Month Ended September 30, 2010Income Statement

PIZZA AROMA, INC.

Reports theamount ofrevenues

lessexpenses for

a period of

time.

The unit ofmeasure

assumptionstates that

results ofbusinessactivities

should be

reported in anappropriate

monetary unit.

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Retained Earnings, Sept. 1, 2010 -$

Add: Net Income 2,000

Subtract: Dividends (1,000)

Retained Earnings, Sept. 30, 2010 1,000$

For the Month Ended September 30, 2010

PIZZA AROMA, INC.Statement of Retained Earnings

Reports the way that net income and the

distribution of dividends affected the financialposition of the company during the period.

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Reports at a point in time:

1. What a business owns(assets).

2. What it owes to creditors

(liabilities).

3. What is left over for theowners of the companys

stock (stockholders

equity).

Assets

Cash 14,000$

Accounts Receivable 1,000

Supplies 3,000

Equipment 40,000

Total Assets 58,000$

Liabilities

Accounts Payable 7,000$

Notes Payable 20,000

Total Liabilities 27,000

Stockholders' Equity

Contributed Capital 30,000

Retained Earnings 1,000Total Stockholders' Equity 31,000

Total Liabilities and Stockholders' Equity 58,000$

PIZZA AROMA, INC.

Balance Sheet

At September 30, 2010

BASIC ACCOUNTING EQUATION

Assets = Liabilities + Stockholders Equity

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Cash Flows from Operating Activities

Cash collected from customers 10,000$

Cash paid to suppliers and employees (5,000)

Cash Provided by Operating Activities 5,000Cash Flows from Investing Activities

Cash paid to buy equipment (40,000)

Cash Used in Investing Activities (40,000)

Cash Flows from Financing Activities

Capital contributed by stockholders 30,000

Cash dividends paid to stockholders (1,000)

Cash borrowed from the bank 20,000

Cash Provided by Financing Activities 49,000

Change in Cash 14,000

Beginning Cash Balance, Sept. 1, 2010 -

Ending Cash Balance, Sept. 30, 2010 14,000$

PIZZA AROMA, INC.Statement of Cash Flows


Summarizes howa businesss

operating,

investing, and

financingactivities caused

its cash balance

to change over a

particular periodof time.

1-2


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Notes help financial statement users

understand how the amounts werederived and what other information mayaffect their decisions.

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Net incomeflows from the

IncomeStatement to

the Statementof Retained

Earnings.Retained Earnings, Sept. 1, 2010 -$






1

RevenuesPizza Revenue 11,000$

Total Revenue 11,000

Expenses

Supplies Expense 4,000

Wages Expense 2,000

Rent Expense 1,500

Utilities Expense 600Insurance Expense 300

Advertising Expense 100

Income Tax Expense 500

Total Expenses 9,000

Net Income 2,000$


Income Statement

PIZZA AROMA, INC.

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Retained Earnings, Sept. 1, 2010 -$






Ending RetainedEarnings flows from the

Statement of RetainedEarnings to the BalanceSheet.

Assets

Cash 14,000$


Supplies 3,000

Equipment 40,000


LiabilitiesAccounts Payable 7,000$





Retained Earnings 1,000

Total Stockholders' Equity 31,000


PIZZA AROMA, INC.

Balance Sheet


2

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Cash on the Balance Sheet and Cash at End of

Year on the Statement of Cash Flows agree.

Assets

Cash 14,000$


Supplies 3,000

Equipment 40,000


LiabilitiesAccounts Payable 7,000$





Retained Earnings 1,000

Total Stockholders' Equity 31,000


PIZZA AROMA, INC.

Balance Sheet


Cash Flows from Operating ActivitiesCash collected from customers 10,000$

Cash paid to suppliers and employees (5,000)

Cash Provided by Operating Activities 5,000

Cash Flows from Investing Activities

Cash paid to buy equipment (40,000)

Cash Used in Investing Activities (40,000)Cash Flows from Financing Activities

Capital contributed by stockholders 30,000

Cash dividends paid to stockholders (1,000)

Cash borrowed from the bank 20,000

Cash Provided by Financing Activities 49,000

Change in Cash 14,000

Beginning Cash Balance, Sept. 1, 2010 -

Ending Cash Balance, Sept. 30, 2010 14,000$

PIZZA AROMA, INC.

Statement of Cash Flows


3

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Main Goal: Provide usefulfinancial information to externalusers for decision making.

Relevant

Useful

Faithful

Representation

Faithful

Representation

Relevant

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Illustration: 1. On October 1, cash of $10,000 is invested in Sierra

Corporation by investors in exchange for $10,000 of common stock.

1. +10,000 +10,000


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2. On October 1, Sierra borrowed $5,000 from Castle Bank by signing

a 3-month, 12%, $5,000 note payable.

1. +10,000 +10,000

2. +5,000 +5,000


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3. On October 2, Sierra purchased equipment by paying $5,000 cash

to Superior Equipment Sales Co.

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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4. On October 2, Sierra received a $1,200 cash advance from R.

Knox, a client.

4. +1,200 +1,200

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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5. On October 3, Sierra received $10,000 in cash from Copa Company

for guide services performed.

4. +1,200 +1,200

5. +10,000 +10,000

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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6. On October 3, Sierra Corporation paid its office rent for the month

of October in cash, $900.

4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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7. On October 4, Sierra paid $600 for a one-year insurance policy that

will expire next year on September 30.

4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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8. On October 5, Sierra purchased supplies on account from Aero

Supply for $2,500.

4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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10. On October 20, Sierra paid a $500 dividend.

4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

10. -500 -500

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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11. Employees have worked two weeks, earning $4,000 in salaries,

which were paid on October 26.

4. +1,200 +1,200

5. +10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

10. -500 -500

11. -4,000 -4,000

3. -5,000 +5,000

1. +10,000 +10,000

2. +5,000 +5,000


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Cash

Temporary investments

Accounts receivable

Merchandise inventory

Office supplies

Buildings Common Shares

Property&equipment

Patents

Goodwill

Accounts payable

Rent payable

Salaries payable

Estimated warranty liability

Dividends payable

Long term liabilities

Discount on bonds payable

Owners equity

Owners withdrawal

Preferred shares

Retained earnings

Dividends


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ddt - chapter 1

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