1 © Copyrright Doug Hillman 1997 The System of Accounting

1© Copyrright Doug Hillman 1997

The System of Accounting


The Entity Concept

Any organizational unit


The Entity Concept

Any organizational unit for which we

want


The Entity Concept

Any organizational unit for which we

want financial information


Assets

Anything of value held by an organization

Assets have


Assets


Assets have

» Potential usefulness


Assets


Assets have


» Future usefulness


Assets


Assets have


» Future usefulness

» Economic Value


Equities

Claims against the total assets of an organization

Liabilities

» Claims of nonowners Owner's Equity

» Claims of owners


Revenues

Inflows of assets that result from performing services or selling goods

Revenues are realized when

» the service is performed or


Revenues

Inflows of assets that result from performing services or selling goods

Revenues are realized when

» the service is performed or

» the goods are delivered


Expenses

Outflows of assets or incurrence of liabilities while earning revenues

A business incurrs expenses to earn revenues


The Accounting Equation

Things of Value = Claims Assets = Equities Assets = Liabilities + Owner's Equity


The Account

Account Title


The Account

Left sideLeft side

Account Title


The Account

Left sideLeft side RightRight sideside

Account Title


The Account


the debit sidethe debit side

Account Title


The Account


the debit sidethe debit side the credit sidethe credit side

Account Title


Summary of the Debit/Credit Rules

Assets



Assets

» Appear on the left (debit) side of the equation



Assets

» Appear on the left (debit) side of the equation

» Therefore we:

–Increase them with debits

–Decrease them with credits


Summary of Debit/Credit Rules

Liabilities



Liabilities

» Appear on the right (credit) side of the equation



Liabilities


» Therefore we:

–Increase them with credits

–Decrease them with debits



Owners' Equity



Owners' Equity




Owners' Equity


» Therefore:

–Increase them with credits

–Decrease them with debits



Changes in owners' equity Issuances of common stock




» Causes increase in owners' equity




» Causes increase in owners' equity

» Recorded by regular owners' equity rules

–Increased with credits

–Decreased with debits



Changes in owners' equity Dividends




» Cause decreases in owners' equity





» Recorded opposite as regular owners' equity

–Increased with debits

–Decreased with credits



Changes in owners' equity Revenues




» Cause increases in owners' equity




» Cause increases in owners' equity

» Recorded by regular owners' equity rules

–Increased with credits

–Decreased with debits



Changes in owners' equity Expenses









» Recorded opposite as regular owners' equity

–Increase with debits

–Decreased with credits


Records in the Accounting System

Journal

» Book of original entry

» Chronological record of events Ledger

» Book of final entry

» Categorical record of events


Journal Entries

What information do we need to record?

» Date


Journal Entries


» Date

» Debit account


Journal Entries


» Date

» Debit account

» Debit amount


Journal Entries


» Date

» Debit account

» Debit amount

» Credit account


Journal Entries


» Date

» Debit account

» Debit amount

» Credit account

» Credit amount


Journal Entries


» Date

» Debit account

» Debit amount

» Credit account

» Credit amount

» Supplementary information


Journal Entry

Dec. 1


Journal Entry

Dec. 1 Cash


Journal Entry

Dec. 1 Cash 25,000


Journal Entry

Dec. 1 Cash 25,000

Common Stock


Journal Entry

Dec. 1 Cash 25,000

Common Stock 25,000


Journal Entry

Dec. 1 Cash 25,000

Common Stock 25,000

Issuance of

common stock


Posting

Process of transferring


Posting

Process of transferring the amounts in the journal


Posting

Process of transferring the amounts in the journal to the ledger


Posting Process

Locate the ledger account for the debit account

Enter the date, journal page number, and debit amount in the ledger

Enter the ledger account number in the journal entry


Posting Process

Locate the ledger account for the credit account

Enter the date, journal page number, and credit amount in the ledger

Enter the ledger account number in the journal


Trial Balance

A test of the accuracy of journalizing and posting process

Preparation


Trial Balance


Preparation

» List each ledger account and place the ending account balance in the proper column


Trial Balance


Preparation


» Total the debit and credit columns


Trial Balance


Preparation


» Total the debit and credit columns

» Compare the totals


Financial Statements

Prepared from the information contained in the trial balance

Four primary statements





» Income Statement





» Income Statement

» Statement of Owner's Equity





» Income Statement


» Balance Sheet





» Income Statement


» Balance Sheet

» Statement of Cash Flows



Title


Income statement

Title

» Company name


Income statement

Title

» Company name

» Statement name


Income statement

Title

» Company name

» Statement name

» For the period ending date or date


Income statement

Title - For the period ending date List revenues and subtotal List expenses and subtotal Subtract expenses from revenues


Statement of Owners' Equity

Title» For the period ending date

List the beginning balance in common stock

Add issuances of common stock Subtotal ending common stock


Statement of Owner's Equity

List beginning balance in retained earnings

Add net income Deduct dividends Subtotal ending retained earnings Total common stock and retained

earnings


Balance Sheet

Title

» Date Assets


Balance Sheet

Title

» Date Assets

» First list and subtotal current assets


Balance Sheet

Title

» Date Assets


» Then list and subtotal property, plant, and equipment


Balance Sheet

Title

» Date Assets


» Then list and subtotal property, plant, and equipment

» Determine total assets


Balance Sheet

Liabilities


Balance Sheet

Liabilities

» First list and subtotal current liabilities


Balance Sheet

Liabilities


» Then list and subtotal long-term liabilities


Balance Sheet

Liabilities


» Then list and subtotal long-term liabilities

Total all liabilities


Balance Sheet

Owners’ Equity


Balance Sheet

Owners’ Equity

» Enter ending common stock and retained earnings from Statement of Owners’ Equity


Balance Sheet

Owners’ Equity

» Enter ending common stock and retained earnings from Statement of Owners’ Equity

Total liabilities and owners' equity


Statement of Cash Flows

Title

» For the period ending Three sections



Title


» Cash Flows from Operating Activities



Title



» Cash Flows from Investing Activities



Title



» Cash Flows from Investing Activities

» Cash Flows from Financing Activities

Documents

1 © Copyrright Doug Hillman 1997 The System of Accounting