Basic Accounting Concepts, Techniques and Conventions

8/3/2019 Basic Accounting Concepts, Techniques and Conventions

1/17

2005 Prentice Hall Business Publishing,2005 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting13/e,13/e, Horngren/Sundem/StrattonHorngren/Sundem/Stratton 15 -15 - 11

Basic Accounting:Basic Accounting:

Concepts, Techniques,Concepts, Techniques,

and Conventionsand Conventions


2/17

2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 2

The Need for AccountingThe Need for Accounting

Managers, investors, and other internal groupsManagers, investors, and other internal groupswant the answers to two important questions:want the answers to two important questions:

How well didHow well didthe organizationthe organization

perform?perform? Where doesWhere doesthe organizationthe organization

stand?stand?


3/17



Accountants answer these questionsAccountants answer these questionswith three major financial statements:with three major financial statements:

IncomeIncomestatementstatement

BalanceBalancesheetsheet

Statement ofStatement of

cash flowscash flows


4/17



AA transactiontransaction is any event that affects theis any event that affects the

financial position of an organizationfinancial position of an organization

and requires recording.and requires recording.


5/17


Balance SheetBalance Sheet

TheThe balance sheetbalance sheet(also called(also called statement ofstatement offinancial positionfinancial position ororstatement of financialstatement of financial

conditioncondition) is a snapshot of the financial) is a snapshot of the financialstatus of an organization at a point in time.status of an organization at a point in time.


6/17



AssetsAssets are economic resources thatare economic resources that

are expected to benefit futureare expected to benefit futureactivities of the organization.activities of the organization.

LiabilitiesLiabilities are the entitys economicare the entitys economic

obligations to nonowners.obligations to nonowners.

Owners equityOwners equityis the excessis the excessof the assets over the liabilities.of the assets over the liabilities.


7/172005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 7


Shareholders equityShareholders equity

Paid-inPaid-incapitalcapital

RetainedRetainedearningsearnings

The owners equity of a corporationThe owners equity of a corporationis calledis called shareshareholders equityholders equity..



King Hardware TransactionsKing Hardware Transactions

Initial investment by owners: $100,000 cashInitial investment by owners: $100,000 cash

Acquisition of inventory: $75,000 cashAcquisition of inventory: $75,000 cash

Acquisition of inventory onAcquisition of inventory on

open account: $35,000open account: $35,000

Merchandise costing $100,000 wasMerchandise costing $100,000 was

sold on open account for $120,000.sold on open account for $120,000.




1)1) CashCash +100,000+100,000 +100,000+100,000

2)2) CashCash 75,000 75,000InventoryInventory + 75,000+ 75,000

3)3) InventoryInventory + 35,000+ 35,000 + 35,000+ 35,0004a)4a) ReceivableReceivable +120,000+120,000 +120,000+120,0004b)4b) CostCost 100,000100,000 100,000100,000

SubtotalSubtotal +155,000+155,000 + 35,000+ 35,000 +120,000+120,000

AssetsAssets == LiabilitiesLiabilities ++StockholdersStockholders

equityequity




Cash collections of accounts receivable: $15,000Cash collections of accounts receivable: $15,000

Cash payments of accounts payable: $20,000Cash payments of accounts payable: $20,000

On March 1, paid $3,000 cash for store rent forOn March 1, paid $3,000 cash for store rent for

March, April, and May. Rent is $1,000 per month.March, April, and May. Rent is $1,000 per month.




5)5) CashCash + 15,000+ 15,000ReceivableReceivable 15,000 15,000

6)6) CashCash 20,000 20,000 20,000 20,0007)7) CashCash 3,000 3,000

7a)7a) PrepaidPrepaid + 3,000+ 3,000

7b)7b) ExpenseExpense 1,000 1,000 1,000 1,000TotalTotal 21,000 21,000 20,000 20,000 1,000 1,000

Totals (1-4)Totals (1-4) +155,000+155,000 + 35,000+ 35,000 +120,000+120,000

AssetsAssets == LiabilitiesLiabilities ++StockholdersStockholders

equityequity

134,000134,000 134,000134,000


12/17


Revenues and ExpensesRevenues and Expenses

Revenues are increases in ownershipRevenues are increases in ownership

claims arising from the deliveryclaims arising from the delivery

of goods or services.of goods or services.

Expenses are decreases in ownershipExpenses are decreases in ownership

claims arising from delivering goodsclaims arising from delivering goodsor services or using up assets.or services or using up assets.


13/17


Relationship Between BalanceRelationship Between Balance

Sheet and Income StatementSheet and Income Statement

The income statement measures theThe income statement measures the

performance of an organization byperformance of an organization bymatching its accomplishmentsmatching its accomplishments

(revenue from customers, which is(revenue from customers, which is

usually calledusually called

salessales

) and its efforts) and its efforts

((cost of goods soldcost of goods soldand other expenses.)and other expenses.)


14/17


Relationship Between BalanceRelationship Between Balance

Sheet and Income StatementSheet and Income Statement


Feb. 28Feb. 2820xx20xx


March 31March 3120xx20xx


April 30April 3020xx20xx


May 31May 3120xx20xx

IncomeIncome

statementstatement

for Marchfor March

IncomeIncome

statementstatement

for Aprilfor AprilTimeTime TimeTime

IncomeIncome

statementstatement

for Mayfor May

Income statement for quarter ended May 31, 20xxIncome statement for quarter ended May 31, 20xx


15/17


The Analytical Power of theThe Analytical Power of the

Balance Sheet EquationBalance Sheet Equation

The balance sheet equation can highlight the linkThe balance sheet equation can highlight the linkbetween the income statement and balance sheet.between the income statement and balance sheet.

Assets (A) = Liabilities (L) + Stockholders equity (SE)Assets (A) = Liabilities (L) + Stockholders equity (SE)

A = L + Paid-in capital + Retained incomeA = L + Paid-in capital + Retained income

A = L + Paid-in capital + Revenue ExpensesA = L + Paid-in capital + Revenue Expenses


16/17


Accrual Basis and Cash BasisAccrual Basis and Cash Basis

TheThe accrualaccrualbasisbasisof accountingof accountingrecognizes revenues and expensesrecognizes revenues and expenses

when they occur regardless of whenwhen they occur regardless of whencash is received or disbursed.cash is received or disbursed.

TheThe cash basiscash basisof accounting recognizesof accounting recognizesrevenue and expense when cash isrevenue and expense when cash isreceived and disbursed.received and disbursed.


17/17


Accrual Basis and Cash BasisAccrual Basis and Cash Basis

The major deficiency of the cash basisThe major deficiency of the cash basis

of accounting is that it is incomplete.of accounting is that it is incomplete.

It fails to match efforts and accomplishmentsIt fails to match efforts and accomplishments

in a manner that properly measures economicin a manner that properly measures economicperformance and financial position.performance and financial position.

Documents

Basic Accounting Concepts, Techniques and Conventions