BASIC ACCOUNTING

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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 16 - 1
BasicBASIC ACCOUNTING
Accounting:
Concepts, Techniques, Conventions.

Read and interpret the basic financial

statements.
 The Need for Accounting

Managers, investors, and other internal groups

want the answers to two important questions:

How well did the

organization perform?

Where does the

organization stand?
The Need for Accounting
Accountants answer these questions
with two major financial statements:

Income Statement

Balance Sheet
 Balance Sheet
 The balance sheet (also called statement of
financial position or statement of financial
condition) is a snapshot of the financial
status of an organization at a point in time.
 Balance Sheet

Assets = Equities
Assets are economic resources that are expected
to benefit future activities of the organization.

Equities are the claims against, or interests in,

the assets of the organization.
Business Transactions

A transaction is any event that affects the

financial position of an organization
and requires recording.
 King Hardware Transactions
1 Initial investment by owners, €100,000
cash.
2 Acquisition of inventory for €75,000 cash.
3 Acquisition of inventory for €35,000 on
open account.
4 Merchandise costing €100,000 was sold on
open account for €120,000.
 King Hardware Transactions
Value in the Borrowed Owners claim
company
Stockholders’
Assets = Liabilities + Equity
1) Cash + $100,000 + $100,000
2) Cash – 75,000
Inventory + 75,000
3) Inventory + 35,000 + 35,000
4) Receivable + 120,000 + 120,000
4b) Cost – 100,000 – 100,000
 King Hardware Transactions
5 Cash collections of accounts receivable,
$30,000.
6 Cash payments of accounts payable,
$10,000.
7 On March 1, paid $3,000 cash for rent for
March, April, and May. Rent is $1,000 per
month.
 King Hardware Transactions
Stockholders’
Assets = Liabilities + Equity
5) Cash + 30,000
Receivable – 30,000
6) Cash – 10,000 –10,000
7) Cash – 3,000
7a) Prepaid + 3,000
7b) Expense – 1,000 – 1,000
Totals $144,000 $25,000 $119,000
Revenues
Revenues are increases in ownership
claims arising from the delivery
of goods or services.

Revenues must be earned.

Revenues must be realized.

 Expenses

Expenses are decreases in

ownership claims arising
from delivering goods or
services or using up assets.
Profits

Profits (or earnings or income) are

the excess of revenues over expenses.
Income Statement

The income statement measures

the performance of an organization
by matching its accomplishments
(revenue from customers, which
is usually called sales) and its
efforts (cost of goods sold and
other expenses).
 Income Statement

Balance Sheet Balance Sheet Balance Sheet

February 28 March 31 April 30
202 202 202

Income Income
Statement Statement
Time for March for April Time
The Analytical Power of the
Balance Sheet Equation
The balance sheet equation
can highlight the link between
the income statement and balance sheet.

Assets (A) = Liabilities (L)

+ Stockholders’ equity (SE)
 The Analytical Power of the
Balance Sheet Equation

A = L + Paid-in capital + Retained income

A = L + Paid-in capital + Revenue – Expenses

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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 16 - 19