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Week 1 and Week 2 notes

by: Sophie Levy

Week 1 and Week 2 notes ACCN 2010

Marketplace > Tulane University > Accounting > ACCN 2010 > Week 1 and Week 2 notes
Sophie Levy

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Financial Accounting
Christine Smith
Class Notes
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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 [


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