Accounting 215 Week 1
Accounting 215 Week 1 ACCTG 215
Popular in Introduction to Accounting and Financial Reporting
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This 7 page Class Notes was uploaded by Anastasia Fischer on Saturday January 9, 2016. The Class Notes belongs to ACCTG 215 at University of Washington taught by Peter Demerjian in Summer 2015. Since its upload, it has received 19 views. For similar materials see Introduction to Accounting and Financial Reporting in Accounting at University of Washington.
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Date Created: 01/09/16
Chapter 1: Example: Running a business (Afternoon Newspaper): You run an afternoon paper route, 72 Newspapers $1.85/week -Customer $1.25/week - Me $0.60/ week -Profit An income statement summarizes inflows and outflows of economic resources received and sacrificed. Income statement week 1 Cash Revenue: 133.20 Cash Cost: 90.00 Weekly Profit: 43.20 Week 2 you only collect money from 60 of your customers. Cash Revenue: 111.00 Cash Cost: 90.00 Excess Cash: 21.00 Profit: 43.20 It is important to note that your profit remains the same because you preformed the service for all 72 customers, except you only collected from 60. Week 3, all 72 + collecting from the 12 you missed last week Cash Revenue: 155.40 Cash Cost: 90.00 Excess Cash: 65.40 Profit: 43.20 The accrual accounting concept: Transactions are recorded in the financial statements when they happen This means cash does not need to change hands The objective is to capture the economic substances of the business's activities. Balance Sheet Income statement provides a summary of the economic activity of a business over some period of time We may also want to know the financial position of the business at a specific point in time The balance sheet provides this information o What the business owns o What the business owes Payable: What we still need to pay the distributor Receivable: Expected to receive but is not yet cash Week 2: Week 1: Newspaper 90.00 Newspaper 90.00 Payable 90.00 Payable 90.00 After collection of cash After collection of cash Cash 111.00 Cash 133.20 Receivable 22.20 Payable 90.00 . Payable 90.00 . Profit 43.20 Profit 43.20 After payment to the distributor After payment to the distributor Cash 43.20 . Cash 21.00 Profit 43.20 Receivable 22.20 . Profit 43.20 Summary: Income statement reports the activities of the firm for a period The balance sheet captures what the firm owns and owes at a specific point in time When profit is reported on the Income statement, we call it "net income" When profit is reported on the balance sheet we call it "retained earnings" o The account will build up over time, capturing the net income over multiple periods Chapter 2 Business Forms: Sole Proprietorship o Only ONE owner o All your wealth is wrapped up in business Partnership o Multiple owners of business o Spreads the risk Corporation o Private Stock can't be sold/bought o Publically Traded Stock can be sold/bought Limited Liability: If things go south Creditors can only come after business assets Accounting Standards: GAAP: Generally Accepted Accounting Principals -- Accounting rules that publically traded stock must report FASB: Federal Accounting Standards Board -- Charged with creating the Accounting Standards SEC: Security Exchange Commission -- After stock market crash, it was created to keep dirty Accountants in line -- Pursue civil litigation against firms that have broke rules -- Requires GAAP and you must submit files to prove so IFRS: International analogue to US GAAP -- US is one of last to use own standards. Most countries use FIRS (India/China don’t use it either Financial Statements: 1. Balance sheet a. A "snapshot" of what the firm owns and owes at a given point in time 2 Income Statement a. A report of the economic performance of the firm over a time period 2 The Statement of Changes in Shareholders' equity a. A report of transactions with owners over a time period 2 The Statement of Cash Flows a. A report of sources and uses of cash over a time period Recording Transactions: 1. Determine the effect on the accounting equation a. A = L + E 2 Determine whether to debit or credit affected accounts 3 Record transactions in the journal 4 Post transactions to the ledger 5 Prepare a trial balance The Accounting Equation Assets = Liabilities + Shareholders' Equity Assets --> Resources Liabilities + Shareholders' Equity --> Claims against resources Each Transaction will have a dual effect hence… DOUBLE-ENTRY ACCOUNTING To effectively analyze a transaction, you need three pieces of information o What accounts are affected o The direction of the effect o The amount Debit/Credit In making sure the accounting equation balances, we analyze transactions" 1 What accounts are affected 2 The direction of the effect 3 The amount Debits and credits provide a short-hand for recording transactions The Accounting Equation Assets = Liabilities + Equity Left-hand Right hand side side Debit Credit For assets acounts: Debits increase, credits decrease So if you "debit" cash, it means cash increases and if you "credit" cash, it means cash decreases For liabilty and equity accounts: debits decrease, credits increase So when you borrow money, you will "credit" a payable and when you repay it will "debit " The same account Assets = Liability & Equity Credits Credits (increase) (increase) Credits Debits (decrease) (decrease) If you analyzed the transactions properly and correcly, debited and credited accounts, the debits and credits must EQUAL EXAMPLE: Phinneywood Bicycles The scout locations and identify a storefront they can rent They plan to open business on Oct 1 Their business will consist of o Selling Bicycles o Selling gear o Servicing bicycles The following transactions take place in September o In setting up a business (before operations) what are some o possible assets for PhinneyWood Bicycles? Some Liabilities? Estimated start-up costs are $50,000 o $30,000 for bicycles o $5,000 in parts o $10,000 for fixtures and other equipment o $5,000 in gear What also want some cash available on hand It is agreed that each partner (Kim, Kelley, and Francis) will contribute $20,000 1 On September 1, Kim and Kelley each contribute $20,000 to form the business Cash Assets 40,00 (+) 0 Contributed Equity 40,00 Capital (+) 0 Assets (+) = Equity (+) However, Francis des not have the money to buy in his share It is decided that he will work as an employee of Kim and Kelley Still need $20,000 1 Kim and Kelley's Uncle Robert agrees to lend them $20,000 to help start the business Cash Assets (+) 20,00 0 Loan Liabilities 20,00 Payable (+) 0 Assets (+) = Liabilities (+) 1 Using Cash, they Purchase $5,000 worth of gear for resale in the shop Inventory: Assets 5,00 gear (+) 0 Cash Assets (-) 5,00 0 Assets (+), Assets (-) =0 1 They purchase $35,000 in bicycles and parts directly from KHS Inventory: Assets 30,00 Bikes (+) 0 Inventory: Assets 5,000 Parts (+) Cash Assets (-) 35,00 0 Assets (+30,000) + Assets (+5,000), Assets (-35,000) =0 1 They spent 10,000 getting the storefront ready; this includes fictures and siplays, and equipment for the repair shop Property Assets 10,00 Improvements (+) 0 Cash Assets (-) 10,00 0
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