Professional Documents
Culture Documents
Importance of Accounting
Importance of Accounting
is a
Accounting
system that
Identifies
Records
information
Relevant
that is
Communicates
Reliable
Comparable
McGraw-Hill/Irw1in
Reliable Information
Is trusted by
users.
Comparable
Information
Is helpful in contrasting
organizations.
McGraw-Hill/Irw2in
Objectivity Principle
Accounting information is supported by independent,
unbiased evidence. It is intended to make financial
statements useful by ensuring they report reliable and
verifible information.
Source documents.
McGraw-Hill/Irw3in
Principles of Accounting
Assets
Owner
Capital
McGraw-Hill/Irw5in
Liabilities
Owner
Withdrawals
+
Revenues
Equity
Expenses
Double-Entry Accounting
Assets
ASSETS
Debit
Normal
Balance
McGraw-Hill/Irw6in
Credit
Liabilities
LIABILITIES
Debit
Credit
Normal
Balance
Equity
EQUITIES
Debit
Credit
Nomal
Balance
Exh.
3.8
Double-Entry Accounting
Equity
Owners
Capital
Owners
Withdrawals
Revenues
Expenses
Capital
Withdrawals
Revenues
Expenses
Debit Credit
Debit Credit
Debit Credit
Debit Credit
Normal
Balance
McGraw-Hill/Irw7in
Normal
Balance
Normal
Balance
Normal
Balance
Double-Entry Accounting
When there is a debited account, there must
be a credited account.
The total amount debited must be equal to the
total amount credited for each transaction.
The left side is the normal balance side for
assets, and the right side is the normal
balance side for liabilities and equity.
McGraw-Hill/Irw8in
Liabilities
Equity
T- Account
(Left side)
(Right side)
Debit
Credit
Step 1: Analyze
transactions and source
documents.
ACCOUNT NAME:
Date
GENERAL JOURNAL
ACCOUNT No.
Description
PR
Debit
Credit
Balance
Date
Description
Page
Post.
Ref.
Debit
123
Credit
Cash
Accounts receivable
Supplies
Prepaid Insurance
Equipment
Accounts payable
Unearned consulting revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Salaries expense
Rent expense
Utilities expense
Total
McGraw-Hill/Irw10in
Debits
$ 4,400
9,270
Credits
2,400
26,000
$
6,200
3,000
30,000
600
5,800
300
1,400
1,000
230
$ 45,300 $ 45,300
The McGraw-Hill Companies, Inc., 2006
McGraw-Hill/Irw11in
Adjusting Accounts
An adjusting entry is recorded to bring an asset or
liability account balance to its proper amount.
Prepaid
(Deferred)
expenses*
McGraw-Hill/Irw12in
Unearned
(Deferred)
revenues
*including depreciation
Accrued
expense
Accrued
revenues
Prepare
adjusted trial
balance.
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
McGraw-Hill/Irw13in
FastForward
Work Sheet
For Month Ended December 31, 2004
Unadjusted
Trial Balance
Dr.
Cr.
3,950
9,720
2,400
26,000
Adjustments
Dr.
f
6,200
3,000 d
30,000
Cr.
1,800
b
a
1,050
100
375
210
Adjusted
Trial Balance
Dr.
Cr.
3,950
1,800
8,670
2,300
26,000
250
600
600
5,800
d
f
250
1,800
7,850
300
1,400
1,000
230
45,300
45,300
375
6,200
210
2,750
30,000
300
c
e
a
375
210
100
1,050
3,785
3,785
375
1,610
100
1,000
1,050
230
47,685
47,685
FastForward
Sort adjusted
trial balance
Work Sheet
amounts
to Ended
financial
statements.
For Month
December
31, 2004
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
McGraw-Hill/Irw14in
Adjusted
Trial Balance
Dr.
Cr.
3,950
1,800
8,670
2,300
26,000
Income
Statement
Dr.
Cr.
375
6,200
210
2,750
30,000
375
6,200
210
2,750
30,000
600
600
7,850
300
7,850
300
375
1,610
100
1,000
1,050
230
47,685
47,685
375
1,610
100
1,000
1,050
230
4,365
8,150
43,320
39,535
Financial Statements
Income Statement: revenues and expenses
together with the how much profit the firm makes.
Statement of Owners Equity: reports information
how equity changes over the reporting period.
Balance Sheet: a companys financial position at
a point of time.
Statement of cash flows: cash receipts and cash
payments over a period of time.
McGraw-Hill/Irw15in
Income
Summary
McGraw-Hill/Irw16in
Liabilities
Permanent
Accounts
Owners
Capital
Temporary
Accounts
Assets
Withdrawals
Expenses
Revenues
Accounting cycle
1. Analyze transactions
9. Prepare Post-closing
Trial balance
2. Journalize
8. Close
3. Post
7. Prepare statements
4. Prepare unadjusted
Trial balance
McGraw-Hill/Irw17in
5. Adjust
6. Prepare adjusted
Trial balance
Inventory Systems
Beginning
inventory
Net cost of
purchases
+
= Merchandise
Ending Inventory
McGraw-Hill/Irw18in
Cost of Goods
Sold
The McGraw-Hill Companies, Inc., 2006
McGraw-Hill/Irw19in
$ 2,451,000
$ 29,412
18,500
47,912
$ 2,403,088
(1,928,600)
$ 474,488
Sales discounts and returns and allowances are Contra Revenue accounts.
McGraw-Hill/Irw20in
Last-In, First-Out
(LIFO)
Weighted
Average
McGraw-Hill/Irw21in
Sales of Merchandise
On March 18, Diamond Store sold $25,000 of
merchandise on account. The merchandise was
carried in inventory at a cost of $18,000.
Mar. 18 Accounts Receivable
Sales
25,000
25,000
18,000
McGraw-Hill/Irw22in
Two Methods
1.
2.
McGraw-Hill/Irw24in
$ 100,000
4.00%
= $
4,000
Allowance for
Doubtful Accounts
900
3,100
4,000
3,100
McGraw-Hill/Irw25in
Annual
interest
rate
9%
Time
expressed = Interest
in years
90/360
270
Cost.
Salvage Value.
Useful Life.
McGraw-Hill/Irw27in
Depreciation Methods
Straight-line
Units-of-production
Declining balance
McGraw-Hill/Irw28in
Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
The McGraw-Hill Companies, Inc., 2006
McGraw-Hill/Irw30in
Cost
Accumulated depreciation
$ 100,000
38,000
Book Value
Cash Received
Loss on disposal
62,000
60,000
$ (2,000)
The McGraw-Hill Companies, Inc., 2006
Estimated Liabilities
An estimated liability is a known
obligation of an uncertain amount, but
one that can be reasonably estimated.
Warranty: Sellers obligation to replace or correct a
product (or service) that fails to perform as
expected within a specified period. To conform with
the matching principle, the seller reports expected
warranty expense in the period when revenue from
the sale is reported.
McGraw-Hill/Irw32in
Corporation
McGraw-Hill/Irw33in
McGraw-Hill/Irw34in
Cash
Discount on bonds payable
Bonds payable
926,405
73,595
1,000,000
Contra-Liability
Account
McGraw-Hill/Irw35in
57,360
7,360
50,000
McGraw-Hill/Irw36in
Cash
1,081,145
Premium on bonds payable
Bonds payable
81,145
1,000,000
Adjunct-Liability
Account
McGraw-Hill/Irw37in
41,885
8,115
50,000
McGraw-Hill/Irw38in
Amortized
Cost
Trading
AvailableFor-Sale
Market Value
Method
Significant
Influence
Controlling
Influence
Equity
Method
Consolidate
Reporting
McGraw-Hill/Irw39in
McGraw-Hill/Irw40in
1, 2005
customers
sale of land
stock issuance
Cash
22,000 Payments for merchandise
466,000 Payments for wages
25,000 Payments for interest
35,000 Payments for taxes
Payments for equipment
Payments for bond retirement
Payments for dividends
63,000
150,000
145,000
10,000
20,000
70,000
50,000
40,000
Cash Flows
from Operating
Activities
Net
Income
+ Losses and
- Gains
+ Noncash
expenses such as
depreciation and
amortization.
Tools of Analysis
Horizontal Analysis
Comparing a companys financial condition
and performance across time
Time
McGraw-Hill/Irw43in
Tools of Analysis
Comparing a companys
financial condition and
performance to a base amount
V
e
r
t
i
c
a
l
A
n
a
l
y
s
i
s
McGraw-Hill/Irw44in
Tools of Analysis
Using key relations
among financial
statement items
McGraw-Hill/Irw45in
Ability to provide
financial rewards
sufficient to
attract and retain
financing
McGraw-Hill/Irw46in
Liquidity
and
Efficiency
Solvency
Market
Profitability
Prospects
Ability to
generate future
revenues and
meet long-term
obligations
Ability to
generate
positive
market
expectations
Total
$ 100,000
60,000
$ 40,000
30,000
$ 10,000
Unit
$ 50
30
$ 20
Exh.
22-14
Dollar sales =
McGraw-Hill/Irw48in
Computing Multiproduct
Break-Even Point
Exh.
22-19
Fixed costs
Contribution margin
per composite unit
Exh.
26-7
Present
Present
Annual Net Value of $1
Value of
Year
Cash Flows
Factor
Cash Flows
1
$
4,100
0.8929 $
3,661
2
4,100
0.7972
3,269
3
4,100
0.7118
2,918
4
4,100
0.6355
2,606
5
4,100
0.5674
2,326
6
4,100
0.5066
2,077
A positive
net present
indicates that
this
7
4,100 value
0.4523
1,854
project earns
more than
8
4,10012 percent
0.4039on the investment.
1,656
Total
$
32,800
$
20,367
Amount to be invested
(16,000)
Net present value of investment
$
4,367
McGraw-Hill/Irw50in
Present
value of
cash inflows
Present
value of
cash outflows
Relevant Costs
Costs that are applicable
to a particular decision.
Costs that should have a
bearing on which alternative
a manager selects.
Costs that are avoidable.
Future costs that differ
between alternatives.
McGraw-Hill/Irw52in