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Basic 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
ã The r
 £also called   

 


 or   
 



) is a snapshot of the financial
status of an organization at a point in time.
 Balance Sheet

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

 are the claims against, or interests in,

the assets of the organization.
Business Transactions

A   
 is any event that affects the
financial position of an organization
and requires recording.
 ming Hardware Transactions
1 Initial investment by owners, ¼100,000
cash.
2 Acquisition of inventory for ¼75,000 cash.
3 Acquisition of inventory for ¼35,000 on
open account.
4 Merchandise costing ¼100,000 was sold on
open account for ¼120,000.
 ming 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
 ming 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.
 ming 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  .
Revenues must be 
.
 Expenses

Expenses are decreases in

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

-
 £or   or 
) 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 
) and its
efforts £





 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 + Re enue E penses

(

 





    





 

 

 


 

 Accrual Basis versus Cash Basis

The 
r  of accounting recognizes

revenues and expenses when they occur
instead of when cash is received or disbursed.

The  r  of accounting recognizes

revenue and expense when cash is
received and disbursed.
 Accrual Basis versus Cash Basis

The accrual basis is the principal conceptual

framework for relating accomplishments
£revenues) with efforts £expenses).

The cash basis fails to match expenses and

revenues in a manner that properly
measures financial position.
(

 



 
 

  





 Adjustments
ã Under the accrual basis of accounting,
  are used to record 

  
, in contrast to the 

  
 that trigger nearly all day-to-
day routine entries.
ã Adjustments are generally prepared by the
accountant at month or year end.
 Types of Adjustments

Expiration of unexpired costs

Recognition £earning) of unearned revenues

Accrual of unrecorded expenses

Accrual of unrecorded revenues

 ·epreciation

Accountants usually«

predict the residual value.

predict the length of the useful life.

allocate the cost to the years of its useful life.

(

 




 


 





 ·ividends

·ividends are distributions of assets to

stockholders that reduce retained income.
Cash dividends are distributions of assets
that liquidate a portion of the ownership claim.
The distribution is made possible by profitable
operations.
Retained Income

Retained income is a result of profitable

operations, it is not a pot of cash awaiting
distribution to stockholders.

The retained income is, in effect, invested

in the assets and liabilities of the entity.
(

 










  




 



 


 




 ming Hardware Company
Income Statement for the Month Ended April 30, 20x1

Sales ¼85,000
Cost of goods sold 70,000
Gross profit ¼15,000
Operating expenses:
Rent ¼1,000
Wages 6,600 7,600
Net income ¼ 7,400
 ming Hardware Company
Statement of Retained Income
for the Month Ended April 30, 20x1
Retained income, March 31, 20X1 ¼19,000
Add: Net income for April 7,400
Total 26,400
·educt: ·ividends 18,000
Retained income, April 30, 19X1 ¼ 8,400
ming Hardware Company
Balance Sheet as of April 30, 20x1

Assets
Cash ¼ 85,000
Accounts receivable 87,000
Inventory 20,000
Prepaid rent 1,000

Total assets ¼193,000

 ming Hardware Company
Balance Sheet as of April 30, 20x1
Liabilities and Stockholders¶ Equity
Liabilities
Accounts payable ¼ 81,000
Accrued wages payable 600
Unearned sales revenue 3,000 ¼ 84,600
Stockholders¶ equity
Paid-in capital ¼100,000
Retained income 8,400 108,400
Total equities ¼193,000
(

 





    


 
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 Sole Proprietorship/
Partnership

A sole 

 is a business entity with
a single owner.

A  is an organization that joins two

or more individuals together as co-owners.
 Comparison of
Owners¶ Equity Reporting
Owners¶ Equity for a Corporation

Stockholders¶ equity
Capital stock £paid-in capital) ¼100,000
Retained income 8,400
Total stockholders¶ equity ¼108,400
 Comparison of
Owners¶ Equity Reporting
Owner¶s Equity for a Sole Proprietorship

Alice Walsh, capital ¼108,400

 Comparison of
Owners¶ Equity Reporting
Owners¶ Equity for a Partnership

Susan Zingler, capital ¼ 54,200

John Martin, capital 54,200
Total partners¶ equity ¼108,400
 Generally Accepted
Accounting Principles £GAAP)
Årsregnskabslov £ÅL)
International Accounting
Standards Committee £IASC)

Accounting is based on a set of principles on which

there is general agreement, not on rules that can be
³proved.´
Audit

A V
 is a e a i ati r i -de t
i s ecti f fi a cial state e ts a d
c a ies¶ rec rds t at is ade i
acc rda ce it e erall acce ted
auditi sta dards.
(

 


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 Financial Statements
Managers and investors
can learn about the
financial position
and prospects of an
organization from its
financial statements.

Financial statements describe the financial results of an organi-

zation in a consistent way that allows comparison to historical
results of the organization and to the results of other organizations.
 Exercises
ã 16-A1
ã 16-A2
ã 16-B1
ã 16-B2
ã 16-B3
ã 16-22 to 16-25
ã 16-27 to 16-33
ã 16-35 to 16-36

Ë2002 Prentice Hall Business Publishing, K



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  Horngren/Sundem/Stratton 16 - 42