LECTURE 1 INTRODUCTION TO DOUBLE ENTRY

Explain what is accounting about Briefly describe the history of accounting Explain the relationship between bookeeping and 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

 Luca Pacioli, who in 1494 first described the

system of double-entry bookkeeping .

Pacioli who was the first to describe the system

of debits and credits in journals and ledgers that is still the basis of today's accounting systems.

Accounting - a process of identifying, recording, summarizing, and reporting economic information to decision makers in the form of financial statements

Financial accounting - focuses on the specific needs of decision makers external to the organization, such as stockholders, suppliers, banks, and government agencies

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

The accounting system is a series of steps performed to analyze, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their effects on an organization and to prepare the financial statements.

Introduction to Financial Statements

Forms of Business Organization

Users and Uses of Financial Information Internal users External users Ethics in financial reporting

Business Activities

Communicating with Users

Sole proprietorship Partnership Corporation

Financing Investing Operating

Income statement Retained earnings statement Balance sheet Statement of cash flows Interrelationships of statements Other elements of an annual report

Sole Proprietorship Partnership

Business organization owned by one person. The owner is personally liable for all debts of the business.

Business organization owned by two or more people. Each partner is personally liable for all debts of the business. A separate entity from both a legal and accounting perspective. Owners of corporations (stockholders) are not personally responsible for debts of the corporation.

Corporation

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Users and Uses of Financial Information

Who Uses Accounting Data
Internal Users External Users
Human Resources Taxing Authorities Labor Unions

Finance
Management Customers Creditors Marketing Regulatory Agencies

Investors

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.

Financing Activities 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.

Investing Activities
Purchase of resources a company needs operate.

to

Computers, delivery trucks, furniture, buildings, etc. Resources owned by a business are called assets.

Operating Activities
Once a business has the assets it needs, can begin its operations.

it

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 a customer,in the future, as the result of a sale.

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.

Income Statement Statement of Retained Earnings

Financial statements are typically prepared in this order.

Balance Sheet Statement of Cash Flows

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The accounting profession has developed a common set of standards and procedures known as Generally Accepted Accounting Principles (GAAP). These principles serve as a general guide to the accounting practitioner in accumulating and reporting the financial information of a business enterprise.

Assets = Liabilities + Owners Equity

Resources controlled by the company 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 the business to creditors.

Notes Payable

Accounts Payable

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Owners claim to the business resources.

Contributed Capital Stock Certificate

Retained Earnings

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On December 31, the Christopher Corporation's assets were $150,000 and its liabilities were $80,000. Determine the dollar amount of the Christopher Corporation's December 31, stockholders' equity.

Assets = Liabilities + Stockholders' Equity $150,000 = $80,000 + stockholders' equity Stockholders' equity = $70,000

Revenues Expenses = Net Income

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.

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Distributions of a companys earnings to its stockholders as a return on their investment.

Dividends are not an expense.

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PIZZA AROMA, INC. Income Statement For the Month Ended September 30, 2010 Revenues Pizza Revenue $ 11,000 Total Revenue 11,000 Expenses Supplies Expense Wages Expense Rent Expense Utilities Expense Insurance Expense Advertising Expense Income Tax Expense Total Expenses Net Income
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4,000 2,000 1,500 600 300 100 500 9,000 2,000

The unit of measure Reports the assumption amount of states that revenues results of less business expenses activitiesfor a should period of be reported in an time. appropriate monetary unit.

PIZZA AROMA, INC. Statement of Retained Earnings For the Month Ended September 30, 2010 Retained Earnings, Sept. 1, 2010 $ Add: Net Income 2,000 Subtract: Dividends (1,000) Retained Earnings, Sept. 30, 2010 $ 1,000

Reports the way that net income and the distribution of dividends affected the financial position 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).

PIZZA AROMA, INC. Balance Sheet At September 30, 2010 Assets Cash Accounts Receivable Supplies Equipment Total Assets Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity Contributed Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity $ 14,000 1,000 3,000 40,000 $ 58,000 $ 7,000 20,000 27,000

3. What is left over for the owners of the companys stock (stockholders equity).

30,000 1,000 31,000 $ 58,000

BASIC ACCOUNTING EQUATION Assets = Liabilities + Stockholders Equity

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PIZZA AROMA, INC. Statement of Cash Flows For the Month Ended September 30, 2010 Cash Flows from Operating Activities Cash collected from customers $ Cash paid to suppliers and employees Cash Provided by Operating Activities Cash Flows from Investing Activities Cash paid to buy equipment Cash Used in Investing Activities Cash Flows from Financing Activities Capital contributed by stockholders Cash dividends paid to stockholders Cash borrowed from the bank Cash Provided by Financing Activities Change in Cash Beginning Cash Balance, Sept. 1, 2010 Ending Cash Balance, Sept. 30, 2010 $

10,000 (5,000) 5,000 (40,000) (40,000) 30,000 (1,000) 20,000 49,000 14,000 14,000

Summarizes how a businesss operating, investing, and financing activities caused its cash balance to change over a particular period of time.

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Notes help financial statement users understand how the amounts were derived and what other information may affect their decisions.

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PIZZA AROMA, INC. Income Statement For the Month Ended September 30, 2010 Revenues Pizza Revenue $ 11,000 Total Revenue 11,000 Expenses Supplies Expense Wages Expense Rent Expense Utilities Expense Insurance Expense Advertising Expense Income Tax Expense Total Expenses Net Income 4,000 2,000 1,500 600 300 100 500 9,000 2,000

PIZZA AROMA, INC. Statement of Retained Earnings For the Month Ended September 30, 2010 Retained Earnings, Sept. 1, 2010 $ Add: Net Income 2,000 Subtract: Dividends (1,000) Retained Earnings, Sept. 30, 2010 $ 1,000

Net income flows from the Income Statement to the Statement of Retained Earnings.
1

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PIZZA AROMA, INC. Balance Sheet At September 30, 2010

Ending Retained Earnings flows from the Statement of Retained Earnings to the Balance Sheet.
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PIZZA AROMA, INC. Statement of Retained Earnings For the Month Ended September 30, 2010 Retained Earnings, Sept. 1, 2010 $ Add: Net Income 2,000 Subtract: Dividends (1,000) Retained Earnings, Sept. 30, 2010 $ 1,000

Assets Cash Accounts Receivable Supplies Equipment Total Assets Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity Contributed Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity

$ 14,000 1,000 3,000 40,000 $ 58,000 $ 7,000 20,000 27,000

30,000 1,000 31,000 $ 58,000

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PIZZA AROMA, INC. Statement of Cash Flows For the Month Ended September 30, 2010 Cash Flows from Operating Activities Cash collected from customers $ Cash paid to suppliers and employees Cash Provided by Operating Activities Cash Flows from Investing Activities Cash paid to buy equipment Cash Used in Investing Activities Cash Flows from Financing Activities Capital contributed by stockholders Cash dividends paid to stockholders Cash borrowed from the bank Cash Provided by Financing Activities Change in Cash Beginning Cash Balance, Sept. 1, 2010 Ending Cash Balance, Sept. 30, 2010 $

PIZZA AROMA, INC. Balance Sheet At September 30, 2010

10,000 (5,000) 5,000 (40,000) (40,000) 30,000 (1,000) 20,000 49,000 14,000 14,000

Assets Cash Accounts Receivable Supplies Equipment Total Assets Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity Contributed Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity

$ 14,000 1,000 3,000 40,000 $ 58,000 $ 7,000 20,000 27,000

30,000 1,000 31,000 $ 58,000

Cash on the Balance Sheet and Cash at End of Year on the Statement of Cash Flows agree.

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Main Goal: Provide useful financial information to external users for decision making.

Useful Faithful Faithful Representation Representation

Relevant 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

2. On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable.

1. +10,000 2. +5,000 +5,000

+10,000

3. On October 2, Sierra purchased equipment by paying $5,000 cash to Superior Equipment Sales Co.

1. +10,000 2. +5,000 3. -5,000 +5,000 +5,000

+10,000

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

1. +10,000 2. +5,000 3. -5,000 4. +1,200 +5,000 +5,000 +1,200

+10,000

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

1. +10,000 2. +5,000 3. -5,000 4. +1,200 5. +10,000 +5,000 +5,000 +1,200

+10,000

+10,000

6. On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900.

1. +10,000 2. +5,000 3. -5,000 4. +1,200 5. +10,000 6. -900 +5,000 +5,000 +1,200

+10,000

+10,000 -900

7. On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30.

1. +10,000 2. +5,000 3. -5,000 4. +1,200 5. +10,000 6. 7. -900 -600 +600 +5,000 +5,000 +1,200

+10,000

+10,000 -900

8. On October 5, Sierra purchased supplies on account from Aero Supply for $2,500.

1. +10,000 2. +5,000 3. -5,000 4. +1,200 5. +10,000 6. 7. 8. -900 -600 +2,500 +600 +2,500 +5,000 +5,000 +1,200

+10,000

+10,000 -900

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

1. +10,000 2. +5,000 3. -5,000 4. +1,200 5. +10,000 6. 7. 8. 10. -500 -900 -600 +2,500 +600 +2,500 +5,000 +5,000 +1,200

+10,000

+10,000 -900

-500

11. Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26.

1. +10,000 2. +5,000 3. -5,000 4. +1,200 5. +10,000 6. 7. 8. 10. -500 11. -4,000 -900 -600 +2,500 +600 +2,500 +5,000 +5,000 +1,200

+10,000

+10,000 -900

-500 -4,000

Estimated warranty liability Temporary investments

Office supplies

Rent payable Merchandise inventory

Patents Goodwill

Salaries payable Long term liabilities Cash Dividends Buildings Dividends payable Common Shares Retained earnings

Accounts payable

Discount on bonds payable

Property&equipment Preferred shares

Owners withdrawal

Accounts receivable Owners equity