Principles of Financial Accounting

1. Principles of Financial Accounting

2. The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information” (American Accounting Association) Definition of Accounting

3. Bookkeeping is only part of accounting – recording & classifying events Accounting includes summarizing & interpreting Bookkeeping & Accounting

4. Classifysimilartransactionsintouseful reports. • Summarize and communicate information to decision makers. Basic Functions of an Accounting System • Interpretandrecordbusinesstransactions.

5. Financial Accounting Cost Accounting Managerial Accounting Tax Accounting Auditing Accounting Systems Branches of Accounting

6. Sole Proprietorship Partnership Limited Liability Company (LLC) Corporation Forms of Business Organization

7. Principles of Identity Business Entity Going Concern Define the identity of an organization by setting it up as a unique entity that is separate from its owners as well as other entities, and that is presumed to operate indefinitely Generally Accepted Accounting Principles (GAAP)

8. Principles of Operation Unit of Measurement Objectivity Cost Generally Accepted Accounting Principles (GAAP) – continued • Consistency • Matching/Revenue Recognition Define how the accounting systems works, i.e. how financial events are measured, recorded and repeated

9. Principles of Reporting Conservatism Materiality Full Disclosure Decide how financial events are reported by defining the margin that can affect business decisions, and cautioning against understating or overstating figures Generally Accepted Accounting Principles (GAAP) – continued

10. Cash Basis Accounting Methods Recognizes Accounting transaction at point of cash inflow or outflow Accrual Basis Accounting Methods Recognizes all revenue earned and records all expenses incurred for the period Requires adjusting entries Accounting Methods

11. Three primary financial statements. Balance Sheet Income Statement Statement of Cash Flows We will use a corporation to describe these statements. Introduction to Financial Statements

12. Balance Sheet Outlines the fundamental accounting equation Reports assets, liabilities, and stockholder’s equity of a business enterprise at a specific date. Income Statement Also called Profit & Loss Statement Shows results of operation (revenues ad expenses resulting in net income or net loss) for a period Statement of Cash Flow Shows cash inflows and outflows for a period Financial Statements

13. Relationships Among Financial Statements Date at beginning of period Date at end of period Time Balance Sheet Balance Sheet Income Statement Statement of Cash Flows

14. Financial Statement Articulation

15. Balance Sheet Income Statement Statement of Cash Flows The Need for Adequate Disclosure Notes to the financial statements often provide facts necessary for the proper interpretation of the statements.

16. A Starting Point: Statement of Financial Position

17. Assets Assets are economic resources that are owned by the business and are expected to provide positive future cash flows.

18. Liabilities Liabilities are debts that represent negative future cash flows for the enterprise.

19. Owners’ Equity Owners’ equity represents the owners’ claims to the assets of the business.

20. The Accounting Equation Assets = Liabilities + Owners’ Equity $300,000 = $80,000 + $220,000

21. Rules of Debit & Credit

22. Invested $8,000 in his business in exchange for common stock. Purchased $500 of supplies for cash. Purchased $4,000 of equipment on account. Received $3,000 cash for consulting services. Paid salaries of $800 Paid the first month’s rent of $200. Paid $1,000 owned to a creditor. The corporation paid a dividend of $1,500 in cash to Sam Doty, the stockholder. Recording Business Transactions A. Review of Selected Transactions Mr. Sam Doty opened and incorporated a hospitality consulting firm during the month of September and provided you with the following data. Instructions: Prepare the tabular summary for the transactions above.

23. Recording Business Transactions(continued) Summary of Transactions Month of September 2008 Answer:

24. Recording Business Transactions(continued) Summary of Transactions Month of September 2008 Answer:

25. Recording Business Transactions(continued) B. Financial Statement Relationship to Transactions and Balances • Prepare the Income Statement and Retained Earnings Statement from the Stockholders’ Equity Column of the Summary of Transactions for the month of September. Stockholders’ Equity

26. Recording Business Transactions(continued) Answer:

27. Recording Business Transactions(continued) • Prepare the Balance Sheet from the Month-end Balances of the Summary of Transactions. Assets Liabilities Stockholders’ Equity = + Cash + Supplies + Equip. $7,000 + $500 + $4,000 Accounts Payable $3,000 Common Stock $8,000 R.E. $500 = + + = + +

28. Recording Business Transactions(continued) Answer:

29. Prepare the Statement of Cash Flows from the Cash Column of the Summary of Transactions for the month of September. Recording Business Transactions(continued)

30. Identify the various transactions indicated by the information provided: CASH ACCOUNTS RECEIVABLEincreased………………….. decreased_________________ RENT EXPENSE CASHincreased………………….. decreased_________________ SUPPLIES ACCOUNTS PAYABLEincreased………………….. increased_________________ EQUIPMENT CASHincreased………………….. decreased_________________ ACCOUNTS RECEIVABLE REVENUEincreased………………….. increased_________________ DIVIDENDS CASHincreased………………….. decreased_________________ Analyzing Transactions

31. Collection of an accounts receivable. Payment of the current month’s rent. Purchase of supplies on account. Purchase of equipment for cash. Rendering of services for a customer on account. The declaration of a cash dividend. Analyzing Transactions(continued) Answer: