Week 1 - Introduction and Balance Sheet PDF

Definition of Accounting
Accounting is a system for recording information about business transactions to provide summary statements of a company's financial position and performance to users who require such information. Three sets of books
Financial accounting
Standardized reports for external stakeholders
Tax accounting
IRS rules for computing taxes payable
Managerial accounting
Custom reports for internal decision making
KNOWLEDGE FOR ACTION
What are the financial reporting requirements?

The Securities and Exchange Commission (SEC) requires periodic financial statement filings:
10 K: Annual report 10 Q: Quarterly report 8 K: Current report (material events) Must be prepared in accordance with Generally Accepted Accounting Principles (GAAP)
Periodic filing requirements create much of the tension in financial accounting

Ship goods to a customer in one quarter, collect cash in the next
When did the sale occur?
Buy equipment in one quarter, use it for the next 23 quarters

When does the expense occur?
Who makes the rules?

Generally Accepted Accounting Principles (GAAP) established by:
U.S. Congress, but they delegate to: The SEC, but they delegate to: Financial Accounting Standards Board (FASB)
Emerging Issues Task Force (EITF) American Institute of CPAs (AICPA)
International Financial Reporting Standards (IFRS) are established by the IASB and are required in over 70 countries, including the EU
US GAAP is still required for US firms For intro accounting topics, there is a high degree of overlap in the two standards
Standard setting is a political process
Who is responsible for financial reporting?

Management is responsible for preparing financial statements
The Audit Committee of the Board of Directors provides oversight of managements process Auditors are hired by the Board to express an opinion about whether the statements are prepared in conformity with GAAP
The SEC and other regulators take action against the firm if any violations of GAAP or other rules are found Information intermediaries (stock analysts, institutional investors, the media) may expose or flee firms with questionable accounting
What are the required financial statements?

Balance Sheet
Financial position (listing of resources and obligations) on a specific date
Income Statement
Results of operations over a period of time using accrual accounting (i.e., recognition tied to business activities)
Statement of Cash Flows

Sources and uses of cash over a period of time
Statement of Stockholders Equity

Changes in stockholders equity over a period of time
Example: Daves Car Transport Service

Dave starts a business to transport expensive cars On December 1, 2012
Receives $50,000 cash from issuing common stock Borrows $80,000 from bank and buys $100,000 truck
Will be used for 48 mos., with a $4,000 salvage value
Pays $12,000 cash upfront to rent office space for 1 year
During December
Moves two cars, will get paid $40,000 within 30 days Pays employees $10,000 of wages
December 31: Bank wants to see financial statements
Did the company make money during December?

Cash Flows Stock Bank Truck Rent Wages Cash 50,000 80,000 (100,000) (12,000) (10,000) 0 8,000
On December 1, 2012 Receives $50,000 cash from issuing common stock Borrows $80,000 from bank and buys $100,000 truck Will be used for 48 mos., with a $4,000 salvage value Pays $12,000 cash upfront to rent office space for 1 year During December Moves two cars, will get paid $40,000 within 30 days Pays employees $10,000 of wages
Customers

Cash Flows Operating Rent Wages CFO Investing Truck CFI Stock Bank CFF Cash (100,000) (100,000) 50,000 80,000 130,000 8,000
(12,000) (10,000) 0 (22,000)
Customers
Financing

Dec 2012 Cash Flows Operating Rent Wages CFO Investing Truck CFI Stock Bank CFF Cash (100,000) (100,000) 50,000 80,000 130,000 8,000
Reports cash transactions over a period of time Operating Activities

Transactions related to the provision of goods or services and other normal business activities
(12,000) (10,000) 0 (22,000)
Customers
Investing Activities
Transactions related to the acquisition or disposal of long-lived productive assets
Financing
Financing Activities
Transactions related to owners or creditors

Accounting Income Revenue 40,000 Truck Expense Rent Expense Net Income (2,000) (1,000) 27,000
Wages Expense (10,000)
Notes: Truck expense (depreciation) = (100,000-4,000)/48 Rent expense is one month at $1000/mo.
Income Statement
Dec 2012 Accounting Income Reports results of operations over a period of time using accrual accounting Revenue 40,000 Recognition tied to business activities Truck Expense (2,000) Rent Expense Net Income (1,000) 27,000
Revenues
Increases in owners equity from providing goods or services
Expenses
Notes: Truck expense (depreciation) = (100,000-4,000)/48 Rent expense is one month at $1000/mo. Decreases in owners equity incurred in the process of generating revenues
Net Income (or Earnings or Net Profit)
= Revenues Expenses
=> DOES NOT EQUAL CHANGE IN CASH!!!

Dec 2012 Cash Flows Operating Rent Wages CFO Investing Truck CFI Stock Bank CFF Cash (100,000) (100,000) 50,000 80,000 130,000 8,000
Dec 2012 Accounting Income Revenue 40,000 Truck Expense Rent Expense Net Income (2,000) (1,000) 27,000
(12,000) (10,000) 0 (22,000)
Customers
Notes: Truck expense (depreciation) = (100,000-4,000)/48 Rent expense is one month at $1000/mo.
Financing
What is financial position at end of the month?

Balance Sheet Assets Cash Accounts Receivable Prepaid Rent Truck Total 8,000 40,000 11,000 98,000 157,000 (Cash in the bank on 12/31/2012) (Cash owed by customers on 12/31/2012) (Prepaid for 11 months of future space on 12/31/2012) (100,000 original cost 2,000 depreciation)
Liabilities & Stockholders Equity Bank Debt 80,000 (Cash owed to the bank on 12/31/2012) Common Stock Retained Earnings Total 50,000 27,000 157,000 (Stockholder investment as of 12/31/2012) (Accounting Net income Dividends as of 12/31/2012)
Balance Sheet
Dec 12, 2012 Balance Sheet Assets Cash Accounts Receivable Prepaid Rent Truck Total 8,000 40,000 11,000 98,000 157,000
Reports financial position (resources and obligations) on a specific date Assets

Resources owned by a business that are expected to provide future economic benefits
Liabilities
Claims on assets by creditors (non-owners) that represent an obligation to make future payment of cash, goods, or services
Liabilities & Stockholders Equity Bank Debt 80,000 Common Stock Retained Earnings Total 50,000 27,000 157,000
Stockholders Equity (Owners Equity)

Claims on assets by owners of business
Contributed Capital (arises from sale of shares) Retained Earnings (arises from operations)

Well get to this later
Review: Required financial statements

Balance Sheet
Financial position (listing of resources and obligations) on a specific date
Income Statement
Results of operations over a period of time using accrual accounting (i.e., recognition tied to business activities)

Sources and uses of cash over a period of time

Changes in stockholders equity over a period of time
Balance Sheet Equation (The Accounting Identity)

Assets = Liabilities + Stockholders equity Claims on Resources by Outsiders + Owners
Resources = Key features
Equates resources and claims on resources at a point in time on the Balance Sheet Must always balance! (Double-entry bookkeeping) Changes over a period between two Balance Sheets are summarized in the Income Statement, Statement of Stockholders Equity and Statement of Cash Flows
Financial Statements
Balance Sheet at 12/31/11 Assets = Liabilities + Stockholders equity
Cash + Noncash assets = Liabilities + Contributed Capital + Retained Earnings
Statement of Cash Flows for year ended 12/31/12
Income Statement for year ended 12/31/12 Statement of SE for year ended 12/31/12
Cash + Noncash assets = Liabilities + Contributed Capital + Retained Earnings
Assets
= Liabilities + Stockholders equity
Balance Sheet at 12/31/12
Complete Balance Sheet Equation

Assets = Liabilities + Stockholders equity
Stockholders Equity = Contributed Capital + Retained Earnings Retained Earnings = Prior Retained Earnings + Net Income Dividends Net Income = Revenues Expenses
Assets =
Liabilities + Contributed Capital + Prior Retained Earnings + Revenues Expenses Dividends
Using the Balance Sheet equation

Assets = 100, Liabilities = 50. What is Stockholders Equity? Liabilities increase by 100 and Stockholders Equity is unchanged. What is the change in Assets? All noncash assets = 70, Total Liabilities = 60, Total Stockholders Equity = 30. What is Cash? Cash decreases by 10 and noncash Assets increase by 15. What is the change in Liabilities?
Using the Balance Sheet equation

Retained Earnings increase by 100, Dividends = 50. What is Net Income?
Revenue increases by 100 and all other categories are unchanged, except Assets. What is the change in Assets?
Expenses increase by 60 and all other categories are unchanged, except Cash. What is the change in Cash?
Assets
An asset is a resource that is expected to provide future economic benefits (i.e. generate future cash inflows or reduce future cash outflows) An asset is recognized when:
It is acquired in a past transaction or exchange The value of its future benefits can be measured with a reasonable degree of precision
Which of the Following are Assets?

BOC sells $100,000 of merchandise to a customer that promises to pay cash within 60 days BOC signs a contract to deliver $100,000 of natural gas to DEF each month for the next year BOC buys $100,000 of chemicals to be used as raw materials, with payment made in time to secure a 2% discount on the purchase price. BOC pays $12 million for the annual rent on its office building. It has already occupied it for one month. BOC buys a piece of land for $100,000. Its broker says this was a steal because the land is probably worth $150,000. BOC is advised by a marketing firm that its brand name is worth $63 million
Liabilities
A liability is a claim on assets by creditors (non-owners) that represents an obligation to make future payment of cash, goods, or services A liability is recognized when:
The obligation is based on benefits or services received currently or in the past The amount and timing of payment is reasonably certain
Which of the Following are Liabilities?

BOC receives $300,000 of raw materials from its supplier and promises to pay within 60 days Based on this quarters operations, BOC estimates that it owes the IRS $3 million in taxes BOC signs a three-year, $120 million contract to hire Al Dokes as its new CEO, starting next month BOC has not yet paid employees who earned salaries of $1,000,000 during the most recent pay period BOC borrows $500,000 from a bank on a one-year note with a 10% interest rate BOC is sued by a group of customers who claim their products were defective. The suit claims damages of $6 million.
Stockholders Equity
Stockholders equity is the residual claim on assets after settling claims of creditors (= assets liabilities)
Also called net worth, net assets, net book value
Sources of Stockholders equity:

Contributed capital (arises from sale of shares)
Common stock (par value) Addl paid-in-capital (excess over par value) Treasury Stock (stock repurchased by company)
Retained earnings (arises from operations)

Accumulation of net income (revenues minus expenses), less dividends, since start of business Retained EarningsEND = Retained EarningsBEG + Net Income Dividends
Stockholders Equity Issues

Dividends
Distributions of retained earnings to shareholders
Not an expense Recorded as a reduction of retained earnings on the declaration date (creates a liability until payment date)

Required financial statement Reports changes in stockholders equity over a period of time
Three Fundamental Bookkeeping Equations

Assets = Liabilities + Stockholders Equity Sum of Debits = Sum of Credits Beginning account balance + Increases - Decreases = Ending account balance These equations must be in balance at all times! The balance sheet equation can be preserved through the use of debits and credits Definitions of Debit and Credit:
Debit (Dr.) = Left-side Entry Credit (Cr.) = Right-side Entry
Debit/Credit Bookkeeping
Assets = Liabilities + Shareholders Equity
Assets = Liabilities + Contrib. Capital + Retained Earnings + Revenues Expenses Assets + Expenses = Liabilities + Contrib. Capital + Retained Earnings + Revenues
Debits
Credits
Rules of Debits and Credits:

Every transaction must have at least one debit and at least one credit Debits must equal credits for all transactions No negative numbers are allowed
Accounts and Account Balances

Normal Balance
The type of balance (debit or credit) the account carries under normal circumstances
T Account
A record of all changes in an accounting quantity Debits are listed on the left side of the T Credits are listed on the right side of the T
Account Balance
Difference between sum of debits and sum of credits for the account
Change in Account Balance Equation:

Beginning Balance + Increases - Decreases = Ending Balance
Normal Balances and T-accounts

Assets, Expenses
Normal Balance is Debit (Left side of T) Increases through Debits (Left entries) Decreases through Credits (Right entries) Beginning (Debit) Balance + Debits - Credits = Ending (Debit) Balance Accounts Receivable (A) Beg. Balance New Sales (Increase) End. Balance 1,000 100 1,020 80 Cash Collections (Decrease)
Normal Balances and T-accounts

Liabilities, Stockholders' Equity, Revenues
Normal Balance is Credit (Right side of T) Decreases through Debits (Left entries) Increases through Credits (Right entries) Beginning (Credit) Balance + Credits - Debits = Ending (Credit) Balance
Accounts Payable (L) 1,000 Cash Payments (Decrease) Beg. Balance
80 100 New Purchases (Increase) 1,020 End. Balance
Super T-account Assets

Assets Dr. + Cr. -
Liabilities & Stockholders Equity

Liabilities Dr. Cr. + Contributed Capital Dr. Cr. +
Retained Earnings Dr. Expenses
Cr. +
Revenues
Dr. +
Cr. -
Dr. -
Cr. +
Analyzing Transactions & Journal Entries

Three questions in analyzing transactions
Which specific asset, liability, stockholders' equity, revenue or expense accounts does the transaction affect? Does the transaction increase or decrease the affected accounts? Should the accounts be debited or credited?
Journal entry format

Dr. <Name of Account Debited> $XXX Cr. <Name of Account Credited> $XXX
Always list Debits first and always indent Credits
Bookkeeping Examples - I
Increase an asset and increase a liability or equity
Receive $100 cash from a bank loan Assets 100 = = 100 100 Liabilities 100 + + Equity 0
Balance Sheet Equation
Journal Entry
Dr. Cash (+A) Cr. Notes Payable (+L)
T - accounts
Cash (A) 100 Bal. 100 Notes Payable (L) 100 100 Bal.
Bookkeeping Examples - II
Decrease an asset and decrease a liability or equity
Repay $20 of a bank loan Assets (20) = = Liabilities (20) + + Equity 0
Journal Entry
Dr. Notes Payable (-L) 20 Cr. Cash (-A) 20
T - accounts
Cash (A) 100 Bal. 80 20 Notes Payable (L) 20 100 80 Bal.
Bookkeeping Examples - III

Increase an asset and decrease an asset
Pay $10 in cash for inventory Assets = 10, (10) = Liabilities 0 10 10 + + Equity 0
Journal Entry
Dr. Inventory (+A) Cr. Cash (-A)
T - accounts
Cash (A) 100 20 10 Bal. 70 Inventory (A) 10 Bal. 10 Notes Payable (L) 20 100 80 Bal.
Bookkeeping Examples - IV
Increase a liability or equity and decrease another liability or equity
Issue $80 in Common Stock to pay off the bank loan

Assets 0 = = Liabilities (80) 80 80 + + Equity 80
Journal Entry
Dr. Notes Payable (-L) Cr. Common Stock (+SE)
T - accounts
Cash (A) 100 20 10 Bal. 70 Inventory (A) 10 Bal. 10 Notes Payable (L) Common Stock (SE) 20 100 80 80 80 Bal. 0 Bal.
What is the Journal Entry?

1. BOC issues 10,000 shares of $5 par value stock for $15 cash per share
2. BOC acquires a building costing $500,000. It pays $80,000 cash and assumes a long-term mortgage for the balance of the purchase price
3. BOC obtains a 3-year fire insurance policy and pays the $3,000 premium in advance

4. BOC acquires on account office supplies costing $20,000 and merchandise inventory costing $35,000
5. BOC pays $22,000 to the suppliers above
6. BOC exchanges a building valued on the books at $200,000 for a piece of undeveloped land

7. BOC retires $1,000,000 of debt by issuing 100,000 shares of $5 par value stock
8. BOC receives an order for $6,000 of merchandise to be shipped next month. The customer pays $600 at the time of placing the order.
9. BOC declares and pays $8,000 of cash dividends
Quick Review
Journal entries and T-accounts are used to track the effects of transactions
Sum of Debits = Sum of Credits => Assets = Liabilities + Stockholders Equity
Debit = left-side entry; Credit = right-side entry

Assets and Expenses have Debit balances
Debits increase assets and expenses Credits decrease these accounts
Liabilities, Shareholders Equity and Revenues have Credit balances

Credits increase liabilities, shareholders equity, and revenues Debits decrease these accounts
Quick Review: Super T-account Assets

Assets Dr. Cr. + -
Liabilities & Shareholders Equity

Liabilities Dr. Cr. + Contributed Capital Dr. Cr. +
Retained Earnings Dr. Expenses
Cr. +
Revenues
Dr. +
Cr. -
Dr. -
Cr. +
The Accounting Cycle

Analyze Start new period Transactions During Period Closing Entries Journalize and Post End of Period Unadjusted Trial Balance Financial Statements Adjusting Entries
Adjusted Trial Balance
The Accounting Cycle

Analyze Transactions During Period Journalize and Post
1.
Journalize: recording each transaction as a journal entry in the general journal Post: journal entries are transferred to the T-accounts or general ledger.
2.
Relic Spotter Inc. Case

In March 2012, Rebecca Park identified an excellent business opportunity while she was a first-year MBA student at Wharton. She read a story about an MBA student who tripped while jogging in Fairmount Park and found an ancient gold coin in the underbrush. It was an old Viking coin that was appraised at $77,500. She realized that she could set up a profitable business that rented out portable Metal Detectors to people that wanted to search Fairmount Park for more Viking relics. Also, Park had the idea of stocking her store with sundries, such as water bottles and energy bars, that she could sell at a huge mark-up to renters before their expedition into the park.
Relic Spotter Inc. Case

Park prepared a business plan and approached a fellow student, Jay Girard, who had a sizable trust fund and who she believed would invest in this new venture. Due to his myriad of other investments, and his heavy course load, Girard agreed to invest as a silent partner and allow Park to run the business, which she named Relic Spotter Inc. We will now record journal entries and post to t-accounts for all of the transactions of this start-up company. After each transaction is read, you should pause the video and try to do the journal entry. Think about (1) what accounts are involved? (2) did they increase or decrease? (3) do we debit or credit? Then, resume the video to see the answer and the explanation.
Relic Spotter Inc. Case: Transaction 1

(1) On April 1, 2012, Girard decided to invest $200,000 and Park put up $50,000 to purchase a total of 25,000 shares in the new company. The par value of the shares was $1.00. Journal Entry

(2) Lacking the funds for her initial investment, Park borrowed the $50,000 from the Imperial Bank of Philadelphia on April 1, using her parents house as collateral. Journal Entry

(3) On April 2, Park hired a lawyer to have the business incorporated. Because this was a fairly simple organization, the legal fees were only $5,100. Journal Entry

(4) To house the business, Park bought an abandoned pizza parlor near Fairmount Park for $155,000 on April 7. The building was old and needed renovation work. The purchase documents allocated $103,000 to the land and $52,000 to the building. Park paid for the building with $31,000 cash and a $124,000 mortgage from the Imperial Bank. Journal Entry

(5) Park felt that some renovation work would extend the life of the building to 25 years (with an expected salvage value of $10,000). She ordered the renovation work, costing $33,000, to begin immediately. The work was completed on May 25, at which time she paid in cash the amount owed for the renovations. Journal Entry

(6) Park phoned a number of Metal Detector vendors until she found one that was willing to give her a volume discount. On June 2, Park purchased 240 Metal Detectors at an average cost of $500 per unit ($120,000 total). The innovation in the industry is so rapid that Park felt the units would only last for two years, at which time they would have no remaining value. Journal Entry

(7) On June 15, Park ordered $2,000 of sundries inventory (e.g., water bottles, energy bars, etc.) to be delivered on June 30. Park was able to purchase the inventory on account, which meant she had up to 30 days after delivery to pay the supplier. Journal Entry

(8) On June 30, Park paid $700 for a site license to use geo-contour mapping software in the Metal Detectors. The license was good for three-years with $700 due to be paid annually (i.e., the total cost over three-years will be $2,100). Journal Entry

(9) On June 30, Park signed a contract with a local advertising agency to provide various forms of advertising for a period of one year. She paid $8,000 upfront for advertising through June 30, 2013. Journal Entry

(10) On June 30, Park needed cash to make a payment on the Imperial Bank loan that funded her purchase of Relic Spotter stock. She borrowed $5,000 from Relic Spotter at 10% interest, with the principal and interest due in a lump sum on June 30, 2013. Journal Entry

(11) On June 30, Park also hired two employees, Linda Carlyle and Charlotte Cafferly, to run the shop. They signed employment contracts promising each salaries of $32,000 per year. Journal Entry

(12) On June 30, Girard called from St. Tropez to check in on the business. Upon hearing that Relic Spotter only had $47,200 of cash left in the bank, Girard became concerned about his investment. Thinking fast, Park stated that she was so confident of Relic Spotters prospects that she was declaring a $0.10 per share dividend, to be paid on August 31 ($2,500). This dividend seemed to reassure Girard. Journal Entry

(13) Relic Spotter opened for business on July 1, 2012, just in time for the big Independence Day weekend. On July 31, Park paid the supplier the $2,000 it was owed. Journal Entry

(14) On August 31, Park paid the $2,500 dividend that had been declared in June. Journal Entry
An Introduction to Financial Accounting

Summary of Common Transactions and Accounts
Examples of Common Transactions

The following slides review the most commonly-used accounts and shows the transactions that generally affect these accounts Note that you will learn additional transactions for many of these accounts later onthese are just the basic transactions Also, there are additional accounts that we will learn later onthis is the basic set to get you started.
Typical Current Assets

Cash Marketable Securities (short-term, liquid investments) Accounts Receivable (amounts owed by customers on sales) Notes Receivable (amounts owed by noncustomers on loans) Interest Receivable (accrued revenue not yet received in cash) Inventory (costs of goods available for sale) Prepaid Expenses (rent, insurance, etc.deferred expenses)
Accounts Receivable
Sell products to customers Dr. Accounts Receivable (+A) 100 Cr. Sales (+R, +SE) Collect cash from customers Dr. Cash (+A) 80 Cr. Accounts Receivable (-A)
Accounts Receivable Beg. Balance Sales (Revenue) End. Balance 1,000 100 1,020 80 Collections (Cash)
100
80
Notes Receivable
Lend money Dr. Notes Receivable (+A) 100 Cr. Cash (-A) Collect cash principal on loan Dr. Cash (+A) 100 Cr. Notes Receivable (-A)
Notes Receivable Beg. Balance Cash payment End. Balance 1,000 100 1,000 100 Collect Cash Principal
100
100
Interest Receivable (Accrued Revenue)

Recognize accrued interest receivable on a loan Dr. Interest Receivable (+A) 100 Cr. Interest Revenue (+R , +SE) 100 Collect cash for interest Dr. Cash (+A) 80 Cr. Interest Receivable (-A) 80
Interest Receivable Beg. Balance Accrued Revenue End. Balance 1,000 100 1,020 80 Collection in Cash
Inventory
Purchase inventory Dr. Inventory (+A) 100 Cr. Accounts Payable (+L) or Cash (-A) 100 Sell inventory Dr. Cost of Goods Sold (+E , -SE) 80 Cr. Inventory (-A) 80
Inventory Beg. Balance 1,000 80 Sales (COGS Expense)
Purchases (Cash or AP) 100 End. Balance 1,020
Prepaid Expenses
Pay for rent (or other expense) in advance of use Dr. Prepaid Rent (+A) 100 Cr. Cash (-A) 100 Occupy space and recognize expense Dr. Rent Expense (+E , -SE) 80 Cr. Prepaid Rent (-A) 80
Prepaid Rent Beg. Balance Prepayment (Cash) End. Balance 1,000 100 1,020 80 Recognize Expense
Typical Long-Term Assets

Land (tangible asset, not depreciated) Buildings, Equipment (tangible assets that are depreciated) Accumulated Depreciation (contra assetsum of past depreciation) Investments (long-term investments) Notes Receivable (could also be noncurrent) Intangible assets (patents, goodwill, etc.)
Land
Purchase Land Dr. Land (+A) 100 Cr. Cash (-A) or Notes payable (+L) 100 Sell Land (assumes no gain or loss on sale) Dr. Cash (+A) 100 Cr. Land (-A) 100 (note: no depreciation on Land)
Land Beg. Balance Purchase (Cash or NP) End. Balance 1,000 100 1,000 100 Cash Sales (Not Revenue!)
Buildings & Equipment

Purchase Buildings & Equipment Dr. Buildings & Equipment (+A) 100 Cr. Cash (-A) or Notes payable (+L) 100 Sell Bldgs & Equip (assumes no gain/loss on sale) Dr. Cash (+A) 20 Dr. Accumulated Depreciation (-XA, +A) 80 Cr. Buildings & Equipment (-A) 100
Buildings and Equipment Beg. Balance Purchase (Cash) End. Balance 1,000 100 1,000 100 Cash Sales (Not Revenue!)
Accumulated Depreciation (XA)

Recognize Depreciation Expense (period cost) Dr. Depreciation Expense (+E, -SE) 10 Cr. Accumulated Depreciation (+XA, -A) 10 Sell Buildings & Equipment (no gain/loss) Dr. Cash (+A) 20 Dr. Accumulated Depreciation (-XA, +A) 80 Cr. Buildings & Equipment (-A) 100
Accumulated Depreciation 1,000 Sales of Bld & Equip 80 10 930 Beg. Balance Depreciation Expense End. Balance
Intangible Assets
Purchase Patent Dr. Patent (+A) 100 Cr. Cash (-A) 100 Recognize Amortization Expense (period cost) Dr. Amortization Expense (+E, -SE) 10 Cr. Patent (-A) 10
Patents Beg. Balance Purchase (Cash) End. Balance 0 100 90 10 Amortization
Typical Liabilities
Accounts Payable (amounts owed to suppliers on purchases) Notes Payable (or mortgage payableamounts owed to creditors [banks] on loanscould be current or noncurrent) Accrued Payables (or Accrued Expenses) (wages, salaries, interest, dividends, taxes, warranties, etc.accrued expenses not yet paid in cash) Unearned Revenue (also advances from customers deferred revenues)
Accounts Payable
Purchase inventory (or another asset) on account Dr. Inventory (+A) 100 Cr. Accounts Payable (+L) 100 Pay cash to supplier Dr. Accounts Payable (-L) 80 Cr. Cash (-A) 80
Accounts Payable 1,000 Payments (Cash) 80 Beg. Balance
100 Purchases (Receive Asset) 1,020 End. Balance
Notes Payable
Borrow money on a loan from a bank/creditor Dr. Cash (+A) 100 Cr. Notes Payable (+L) 100 Pay cash principal to creditor Dr. Notes Payable (-L) 80 Cr. Cash (-A) 80
Notes Payable 1,000 Repayments (Cash) 80 100 1,020 Beg. Balance Receive Cash End. Balance
Accrued Payables Settled in Cash

Recognized expense for unpaid wages (or other Exp.) Dr. Wages Expense (+E, -SE) 100 Cr. Wages Payable (+L) 100 Pay cash to satisfy liability Dr. Wages Payable (-L) 80 Cr. Cash (-A) 80
Wages Payable 1,000 Payments (Cash) 80 100 1,020 Beg. Balance Recognize Expense End. Balance
Accrued Payables Settled with Goods

Recognized expense for warranties at time of sale Dr. Warranties Expense (+E, -SE) 100 Cr. Warranties Payable (+L) 100 Delivery new inventory to satisfy liability Dr. Warranties Payable (-L) 80 Cr. Inventory (-A) 80
Wages Payable 1,000 Deliver inventory 80 100 1,020 Beg. Balance Recognize Expense End. Balance
Unearned Revenues
Receive cash in advance of delivering goods/services Dr. Cash (+A) 100 Cr. Unearned Revenue (+L) 100 Recognized revenue upon delivery Dr. Unearned Revenue (-L) 80 Cr. Revenue (+R, +SE) 80
Unearned Revenue 1,000 Delivery (Revenue) 80 100 1,020 Beg. Balance Receive cash End. Balance
Typical Stockholders Equity

Common Stock (at Par) (Shares issued times par value) Additional Paid-in-Capital (Shares issued times [market price par value]) Retained Earnings (Equals prior retained earnings plus revenues minus expenses minus dividends)
Common Stock at Par

Issue 100 shares of $1 par value stock for $10/share Dr. Cash (+A) 1000 Cr. Common Stock (+SE) 100 Cr. Additional Paid-In-Capital (+SE) 900
Common Stock 1,000 100 1,100 Beg. Balance Receive Cash End. Balance
Additional Paid-in-Capital
Issue 100 shares of $1 par value stock for $10/share Dr. Cash (+A) 1000 Cr. Common Stock (+SE) 100 Cr. Additional Paid-In-Capital (+SE) 900
Additional Paid-in-Capital 1,000 900 1,900 Beg. Balance Receive Cash End. Balance
Retained Earnings
Declare dividends Dr. Retained Earnings (-SE) 10 Cr. Cash (-A) or Dividends Payable (+L) Close Revenue accounts Dr. Revenue Accounts (-R, -SE) 100 Cr. Retained Earnings (+SE) Close Expense accounts Dr. Retained Earnings (-SE) 80 Cr. Expense Accounts (-E, +SE) Retained Earnings Declare dividends Close Expenses 10 80 1,000 100 1,010 Beg. Balance Close Revenues End. Balance
10
100
80

Week 1 - Introduction and Balance Sheet PDF

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Definition of Accounting

KNOWLEDGE FOR ACTION

What are the financial reporting requirements?

Periodic filing requirements create much of the tension in financial accounting

Buy equipment in one quarter, use it for the next 23 quarters

KNOWLEDGE FOR ACTION

Who makes the rules?

Standard setting is a political process

KNOWLEDGE FOR ACTION

Who is responsible for financial reporting?

KNOWLEDGE FOR ACTION

What are the required financial statements?

Statement of Cash Flows

Statement of Stockholders Equity

KNOWLEDGE FOR ACTION

Example: Daves Car Transport Service

Pays $12,000 cash upfront to rent office space for 1 year

December 31: Bank wants to see financial statements

KNOWLEDGE FOR ACTION

Did the company make money during December?

KNOWLEDGE FOR ACTION

Did the company make money during December?

(12,000) (10,000) 0 (22,000)

Statement of Cash Flows

Reports cash transactions over a period of time Operating Activities

(12,000) (10,000) 0 (22,000)

Did the company make money during December?

Wages Expense (10,000)

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Wages Expense (10,000)

Net Income (or Earnings or Net Profit)

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Did the company make money during December?

(12,000) (10,000) 0 (22,000)

Wages Expense (10,000)

What is financial position at end of the month?

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Reports financial position (resources and obligations) on a specific date Assets

Stockholders Equity (Owners Equity)

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Statement of Stockholders Equity

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Review: Required financial statements

Statement of Cash Flows

Statement of Stockholders Equity

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Balance Sheet Equation (The Accounting Identity)

Resources = Key features

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Statement of Cash Flows for year ended 12/31/12

Cash + Noncash assets = Liabilities + Contributed Capital + Retained Earnings

= Liabilities + Stockholders equity

Balance Sheet at 12/31/12

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Complete Balance Sheet Equation

Liabilities + Contributed Capital + Prior Retained Earnings + Revenues Expenses Dividends

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Using the Balance Sheet equation

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Using the Balance Sheet equation

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Which of the Following are Assets?