Week 1 and Week 2 notes
Week 1 and Week 2 notes ACCN 2010
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This 8 page Class Notes was uploaded by Sophie Levy on Sunday September 11, 2016. The Class Notes belongs to ACCN 2010 at Tulane University taught by Christine Smith in Fall 2016. Since its upload, it has received 12 views. For similar materials see Financial Accounting in Accounting at Tulane University.
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Date Created: 09/11/16
What is Accounting? • Special language used to communicate financial information about economic entities to interested parties • "language we use to tell the story" • Important because every user-‐group are all trying to make decisions; decision usefulness is th e overarching reason that we exist as storytellers! o Need to be able to compare stores (of company A to company B); need same criteria prepared by a set of standards/rulebook that everybody shares o GAP: set of standards • Need to make decisions because resour ces are scarce Interested Parties • Internal users: within the economic entity (firm); ex: CEOs, CPAs, shareholders, employees • External users: outside the economic entity; ex: competitors, creditors, potential investors 9/1/16 GAP • Every country used to have their own GAP; they had their differences, which created issues –so, globalization occurred and a GAP was created that was universally accepted • Convergence: creating one GAP for all countries o U.S. GAP is used by domestic corporations, and all other "Le vel 1" country economies use International Financial Reporting Standards (IFRS) o So we are down to two standards, but the U.S. feels so strongly about our own GAP so we don't want to let go; US believes that the result of U.S. GAP standards create a better outcome that correlate with reality Assumptions • As storytellers, we need to have a list of assumptions – in accounting, there are 4 1. Economic Entity Assumption: we, as storytellers, are going to identify, measure, record, and communicate all of the financial information about this economic entity as if that economic entity is separate and apart from its owners (whether or not, legally, that is the case) i. Entities form by attorneys, depending on how much liability you want to assume; ex: if you open up a business, you assume that you will only tell the story of the data which relates to the economic entity, separate from yourself (you won't report to your users that you own a house, afford vacations, etc.) 2. Monetary Unit Assumption : that we are going to capture and record these financial transactions in terms of some monetary unit aka dollars 3. Unnamed Assumption: that, in the for-‐profit world of storytelling, we assume that people go into business to make money and profit – not a bad assumption! Accounting Equation: Assets=Equities • Assets: future economic benefit; an unused cost; things you own, things that are owed to you o Ex: Accounts receivable o Property plant and equipment o Cash: the most liquid asset o Employees? Debatable, but they are not quantifiable– not considered a financial asset • Equities: claims to the assets; broken down into two categories to represent the source of the asset (who has a claim to the asset) o Liabilities: non-‐owners o Owner's equity/shareholders equity : owners; claims arise from either contributed capital or earned capital • Contributed capital: the owner putting assets directly into the business • Earned capital: make profit so assets increase! The owners have claim to these assets because they took the financial risk • If you subtracted liabilities from both sides of the equation, you would end up with Assets–Liabilities=Owners Equity o Owners claims against the Assets are nothing more than the residual interest of our future economic benefit over what our non -‐owners claims are o Aka if the business were to fail, everything would be liquidated and we would get a pile of cash. The owners have to satisfy the obligations of the non -‐owners (liabilities) first. • Net Assets=Assets–Liabilities • Net Assets=Owners Equity How do we know if a transaction has occurred? If it has an impact on the accounting equation! Each transaction involves an increase/decrease in one side and a balanced increase/decrease in the opposite side of the equation Ex: Beau's Bodacious Baseball Busines s (BBBB) Transactions • Goes into business on January 1st, 2016 • Sole-‐proprietorship: one owner who takes complete risks for the entity; legally, Beau and the business are ONE o Opposite view of Economic Entity Assumption 1. Day one: Beau opens up a checking account for BBBB with $1,000 personal funds o Has a transaction occurred? Yes o Beau's claims against the assets increased because it's contributed capital– nothing to do with owning the business Assets = Liabilities + Owner's Equity Cash: +1,000 Beau capital (equity): +1,000 2. BBBB purchases 1,000 baseballs from Spalding Sports at $10 each, for a total purchase of $10,000. Paid $600 cash as down payment and will pay balance of $9,400 in 60 days ( transaction on credit) Assets = Liabilities Owner's Equity Cash:1000–600 Accounts payable: +9,400 Beau capital: 1,000 Inventory: +10,000 3. BBBB sells 300 baseballs for $14 each, for a total sale of $4,200. Customers pay $200 cash as a down payment, with a balance of $4,000 due in 30 days (Breakdown into two transactions – 3A and 3B) Assets = Liabilities Owner's Equity Cash:400+200 Accounts payable: 9,400 Beau capital: 1,000 + 4,200 –3,000 Inventory: 10,000 –3,000 Accounts Receivable: +4,000 • Accounts Receivable: claim to cash against the customer because they purchased goods and haven't yet paid the company • Inventory loss in terms of cost of goods • Beau earned sales revenue and lost expenses as a cost of goods 4. Customer sends BBBB a check for $2,500 Assets = Liabilities Owner's Equity + Cash:600 +2,500 Accounts payable: 9,400 Beau capital: 2,200 Inventory: 7,000 Accounts Receivable: 4,000 –2,500 • Accounts Receivable decreases because we no longer have that claim to cash 5. BBBB writes a check to Spalding Sports for $2,700 Assets = Liabilities Owner's Equity Cash:3,100 –2,700 Accounts payable: 9,400 –2,700 Beau capital: 2,200 Inventory: 7,000 Accounts Receivable: 1,500 6. Beau's wife calls and says she needs $250. Beau looks in his wallet to find no money. Therefore, BBBB writes a check to Beau for $250. Assets = Liabilities Owner's Equity Cash: 400 –250 Accounts payable: 6,700 Beau capital: 2,200 –250 Inventory: 7,000 Accounts Receivable: 1,500 • Beau's decrease is caused by drawing/capital withdrawn (if this was a corporation, it would be dividends: a returning of the assets of the business to the owners) 7. When BBBB purchased the baseballs from Spalding Sports, they had to rent a storage space to store the inventory for $50/month. The baseballs were stored there for the entire month, however, the landlord had not yet been paid Assets = Liabilities Owner's Equity Cash:150 Accounts payable: 6,700 +50 Beau capital: 1,950 – Inventory: 7,000 50 Accounts Receivable: 1,500 • Beau's decrease is rent expense • This only affects right hand side until we pay the bill which will lead to a decrease of cash and accounts payable Under GAF, we tell stories under the Accrual Method of accounting, saying that we will record all of the changes, regardless of the movement of cash • Opposite is the Cash Basis of accounting, which only records accounting when there is a movement of cash; does not show the whole story BBBB Income Statement (Articulation period): For the Month Ended January 31st, 2016 REVENUES: Sales: $4,200 Expenses: (matching principle ) include all expenses used to generate revenue • COGS: $3,000 • Rent: $50 Net income: Sales-‐Expenses= $1,150 • Businesses cannot spend this; this money does not exist • They only have $150 cash • You can't spend earnings!! • "measurement of success" BBBB Statement of Owner's Equity (entire activity) For the Month Ended January 31st, 2016 Beau Parent Capital: $0 Contributed: $1,000 Net Income: $1,150 Capital Withdrawn: $250 Beau Parent Capital January 31st, 2016: $1,900 BBBB Balance Sheet January 31st, 2016 Assets Cash: $150 Liabilities Owner's Equity Accounts Payable: $6,750 Beau's capital: $1,900 Inventory: $7,000 Accounts Receivable: $1,500 Total Assets: $8,650 Total claims: $8,650 Week$2:$ch.$2$ Tuesday,*September* 6,*2016 11:52*AM 1492:*Italian*priest*documented*and*wrote*on*accounting;*documenting*the* double'entry' bookkeeping'system'of'accounting ! Phoenicians*wanted*to*keep*a*separate*piece*of*paper*for*every*single*item*that*they* wanted*to*keep*track*of* ! At*the*top*of*the*paper,*they*wrote*the*name*of*the*account ! They*tied*all*the*paper*into*a*book* ! Name*of*that*book=* General'ledger :*the*sum*of*all*of*the*individual*accounts*of*any* entity*that*we*are*keeping*score*of* ○ Any*business*has*had/does*have/will*have*only*one*general*ledger*in*the*life*of* the*business* ○ They*divided*the*paper*in*half*to*create*the*debit*(left*side)*andhe*dit'(right* side);*created*the*look*of*T'accounts Debit*vs*Credit ! Debit:*means*left;*if*we*debit*any*account,*we*are*affected*the*left*side* Debit*≠increase*or*decrease,*good*or*bad* ○ ! Credit:*means*right ! Decided*that*sum*of*our*debits*will*equal*the*sum*of*our*credits* ○ If*you*debit*one*account,*you*must*credit*the*same*amount*in*another*account* ! If*you*want*to*show*that*an*asset*has*increased,*you*will*debit*the*asset*account* ○ Aka*to*increase*an*asset*account,*you*will*always*debit*that*account* ******* ny*Asset Any*Liabilities Any*Owner's*Equity Left Right Left Right Left Right Debit Credit Debit Credit Debit Credit Increase decrease Increase decrease Increase decrease Divided*into*Revenue –Expenses Week$2:$BBBB$pt$2$ Thursday,)September) 8,)2016 11:43)AM ASSETS LIABILITIES OWNER'S)EQUITY Cash Inventory 1)1000 )))2)600 2)10,000))3b)3000 Accounts)Payable Beau's)Parent)Capital )))5)2700 3a))200 )))6)250) 5)2700 ))))2)9400 6)250))))1)1000 4)2500 ))))7)50 7)50 Accounts)Receivable 3a))4000)4)2500 EXPENSES REVENUES) COGS Sales)Revenue) 3b)3000 3a))4200 1. Day)one:)Beau)opens)up)a)checking)account)for)BBBB)with)$1,000)personal)funds) 2. BBBB)purchases)1,000)baseballs)from)Spalding)Sports)at)$10)each,)for)a)total) purchase)of)$10,000.)Paid)$600)cash)as)down)payment)and)will)pay)balance)of) $9,400)in)60)days)( transaction)on)cre)it 3. BBBB)sells)300)baseballs)for)$14)each,)for)a)total)sale)of)$4,200.)Customers)pay) $200)cash)as)a)down)payment,)with)a)balance)of)$4,000)due)in)30)days 4. Customer)sends)BBBB)a)check)for)$2,500) 5. BBBB)writes)a)check)to)Spalding)Sports)for)$2,700 6. Beau's)wife)calls)and)says)she)needs)$250.)Beau)looks)in)his)wallet)to)find)no) $200)cash)as)a)down)payment,)with)a)balance)of)$4,000)due)in)30)days 4. Customer)sends)BBBB)a)check)for)$2,500) 5. BBBB)writes)a)check)to)Spalding)Sports)for)$2,700 6. Beau's)wife)calls)and)says)she)needs)$250.)Beau)looks)in)his)wallet)to)find)no) money.)Therefore,)BBBB)writes)a)check)to)Beau)for)$250.) 7. When)BBBB)purchased)the)baseballs)from)Spalding)Sports,)they)had)to)rent)a) storage)space)to)store)the)inventory)for)$50/month.)The)baseballs)were)stored) there)for)the)entire)month,)however,)the)landlord)had)not)yet)been)paid) Journalisation:)first)step;)we)go)to)the)General)Journa l:)record,)every)day,)in) chronological)order,)the)economic)events)of)the)business) General)Journal: Transaction)# Accounts Debit Credit 1 Cash $1000 [ Beau's)capital [ $1000 2 Cash [ $600 Inventory $10,000 [ Accounts)Payable [ $9400 3a Cash $200 [ Accounts)Receivable $4000 [ Sales)Revenue [ $4200 3b Inventory [ $3000 COGS $3000 [ 4 Cash $2500 [ Accounts)Receivable [ $2500 5 Cash [ $2700 Accounts)Payable $2700 [ 6 Cash [ $250 Beau)Capital $250 [ 7 Account's)Payable [ $50 Beau)Capital) $50 [