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What is Accounting? Accounting is a process by which financial activities
are organized, recorded, analyzed and transformed into information in a consistent manner.
Financial activities (Transactions)
Accounting Processes,Internal Controls & Procedures
Financial Reports
Uses & Purpose of Accounting
Uses at Home Review accuracy of bank
statements Verify your credit card bills Make household expenses, pay
bills
Uses at Work Track hours worked Order supplies Pay items ordered Take student payments
It is used by everyone at home and at work
The purpose of Accounting is to provide information to help you analyze the financial situation of the company or household
Accounting Equation
Assets = Liabilities + Fund Balance (General Ledger)
(Revenue – Expenses) (Operating Ledger)
Double-Entry System
Assets = Liabilities + Fund Balance(Revenues – Expenses)
Received Food Services Revenue for $100.00
+ 100.00(Cash)
+ 100.00(Food Service Revenue)
Received Cash for Student Tuition for $500
+ 500.00(Cash)
-500.00(Accts Receivable)
Paid for expenses owed to vendors
-300.00(Cash)
-300.00(Accts Payable)
Every transaction must be two sided to keep the accounting equation in balance
Assets, Liabilities & Fund Balance
Assets – anything that is owned by the company and has money value
Liabilities – everything the company owes to others
Fund Balance (Equity) – represents how much really belongs to the company and is not owed to someone else.
LedgersAssets = Liabilities + Fund Balance (General Ledger)
(Revenue – Expenses) (Operating Ledger)
General Ledger keeps track of all the company’s assets, liabilities and fund balance accounts.
Operating Ledger keeps track of the company’s revenue and expense accounts.- At STC, most department organizations reflect expense accounts. Revenues are recorded in separate organizations.
Debits & Credits System Used to keep the accounting equation in
balance; every transaction has an equal debit and credit entry.
A debit and a credit act as an addition or subtraction depending on the type of account.
Debits – used to increase the value of an assets, to increase an expense, to reduce revenue or a liability account
Credits – used to increase a liability or revenue, to decrease an expense and an asset account
Debits & Credits RulesAssets Liabilities & Fund Balance
Debits Credits Debits Credits
Increases(+)
Decreases(-)
Decreases(-)
Increases(+)
Expenses Revenues
Debits Credits Debits Credits
Increases(+)
Decreases(-)
Decreases(-)
Increases(+)
Increases = normal balance of account group
T-Accounts
Used in traditional manual accounting to analyze the two sided (debit & credit) posting of transactions
Account
Debit Credit
Normal Balance – Activity # 1Account Asset Liability Expense Revenue
Cash
Tuition Revenue
Food Service Revenue
Accounts Payable
Fees Revenue
Loans Receivable
Salaries Paid
Food Purchases
Accounts Receivable
Supplies Expense
Normal Balance – Activity # 1Account Asset Liability Expense Revenue
Cash D
Tuition Revenue C
Food Service Revenue C
Accounts Payable C
Fees Revenue C
Loans Receivable D
Salaries Paid D
Food Purchases D
Accounts Receivable D
Supplies Expense D
Cash vs. Accrual Basis Accounting
Cash Accounting – transactions are recorded only when cash is involved. Example: a purchase is recorded when the items are paid.
Supplies Expense Cash
xxx xxx
Accrual Accounting – transactions are recorded as they happen, even if no cash is involved. Example: a purchase is recorded when the items are
ordered.When Order When Paid
Supplies Expense Accounts Payable Accounts Payable Cash
xxx xxx xxx xxx
Financial Statements Financial Statements are the main result of
Accounting. The most common statements include:Balance Sheet – reports ending balance of
assets, liabilities and fund balance accounts at a point of time (example: as of 8/31/07).
Income Statement – reports cumulative revenue and expense transactions for a period of time (example: Sept – Aug)
Cash Flow – reports uses and sources of cash
Calendar vs. Fiscal YearCalendar Year runs: Fiscal Year runs:
January 1st – December 31st September 1st – August 31st
Calendar Year Calendar Month Fiscal Year Fiscal Period
2005 09 2006 01
2005 10 2006 02
2005 11 2006 03
2005 12 2006 04
2006 01 2006 05
2006 02 2006 06
2006 03 2006 07
2006 04 2006 08
2006 05 2006 09
2006 06 2006 10
2006 07 2006 11
2006 08 2006 12
2006 09 2007 01
2006 10 2007 02
2006 11 2007 03
2006 12 2007 04
Posting Transactions ActivityStudent Receivable Tuition & Fee Rev
$600 $600
In-State Travel Exp Accounts Payable
$300 $300
Student Receivable Cash
$35 $35
Subscription Exp Accounts Payable
$100 $100
Accounts Payable Cash
$100 $100
Cash Subscription Exp
$15 $15
1) Student Registers for classes ($600)
2) Student pays registration fee ($35)
3) Order magazine subscription ($100)
4) Pay invoice for magazine subscription ($100)
5) Received refund for magazine subscription ($15)
6) Book in state travel ($300)
Posting to Account GroupsAssets = Liabilities + Fund Bal Revenues - Expenses
1) 600 600
2) (35)
35
3) 100 100
4) (100) (100)
5) 15 (15)
6) 300 300
515515 300300 215215 600600 385385
Closing the Periods When periods are closed, the net of revenues
and expenditures is added (or decreased) to the fund balance account.
Revenue – Expenses Income Statement $600 - $385 = $215
Fund BalanceBeginning Balance as of 9/1/06 $ 0Increase (Decrease) to Fund Balance $ 215Ending Balance as of 8/31/07 $ 215
Assets = Liabilities + Fund Balance Balance Sheet$ 515 = $300 + $215
Balance SheetASSETS
Cash (50)
Student Receivable 565
TOTAL ASSETS $515
LIABILITIES
Accounts Payable 300
TOTAL LIABILITIES $300
FUND BALANCE $215
Income StatementREVENUES
Tuition and fees 600
TOTAL REVENUES $600
EXPENSES
Subscription expense 85
In-state travel 300
TOTAL EXPENSES $385
Increase (Decrease) to Fund Balance 215
Fund Balance, Beginning of Year 0
Fund Balance, End of Year $215
Activity # 3Assets = Liabilities + Fund Bal Revenues - Expenses
1) 2,000 2,000
2) 1,800
(1,800)
3)
4)
5)
6)
Activity # 3Assets = Liabilities + Fund Bal Revenues - Expenses
1) 2,000 2,000
2) 1,800
(1,800)
3) 800 800
4)
5)
6)
Activity # 3Assets = Liabilities + Fund Bal Revenues - Expenses
1) 2,000 2,000
2) 1,800
(1,800)
3) 800 800
4) (600) (600)
5)
6)
Activity # 3Assets = Liabilities + Fund Bal Revenues - Expenses
1) 2,000 2,000
2) 1,800
(1,800)
3) 800 800
4) (600) (600)
5) 400 400
6)
Activity # 3Assets = Liabilities + Fund Bal Revenues - Expenses
1) 2,000 2,000
2) 1,800
(1,800)
3) 800 800
4) (600) (600)
5) 400 400
6) 150 (150)
Activity # 3Assets = Liabilities + Fund Bal Revenues - Expenses
1) 2,000 2,000
2) 1,800
(1,800)
3) 800 800
4) (600) (600)
5) 400 400
6) 150 (150)
1,5501,550 200200 1,3501,350 2,4002,400 1,0501,050