ACCT 211 NOTESChapter 1Lesson 1: Introduction to Accounting● Accounting Equation○ Total assets = total liabilities + total shareholders’ equity○ GAAP - Generally Accepted Accounting Principle○ Assets■ Owned or controlled (GAAP*: “probable future benefit”)■ Ex. cash, inventory, equipment, accounts receivable○ Liabilities are owed (obligations/debt owed to creditors) (GAAP*:“probable future sacrifice of resources”)■ Note Payable (long-term liability)■ Accounts Payable■ “Buying products on account” or “on credit)○ Shareholders’ Equity (Net Assets) “residual” or leftover amount whenassets are used to pay o liabilities, claims of the owners■ Assets-liabilities = shareholders’ equity (or “Equity”)● Shareholders’ Equity (owner’s claim)○ Two Types:■ Contributed● Common stock (C/S)■ Earned (retained earnings)● (-Dividends + Revenue - Expenses)● Dividends○ Way of distributing earnings to shareholders■ Net income● Revenue - Expenses○ Contributed capital (CC) (common stock or C/S) + Earned capital(retained earnings or R/E) = total shareholders’ equity● Four Basic Financial Statements○ Income Statement■ Net income■ Revenue - expenses = net income (loss)● If revenues > expenses, Net Income● If revenues < expenses, Net Loss■ Why prepare income statements first?● Need net income/ loss because it is the link between theincome statement and the statement of shareholders’ equity○ Statement of Shareholders’ Equity■ CC ; R/E calculated with Net Income from Income Statement■ Contributed Capital (CC) (Common Stock) + Earned Capital(Retained Earnings) = Total Shareholders’ Equity (Equity)■ Beginning Contributed capital + New Common stock issued =Ending Contributed capital■ Beginning Retained Earnings (earned capital) + Net Income (+Revenue - Expenses) income statement - Dividends = EndingRetained Earnings■ Total shareholders’ equity is the link between the Statement ofShareholders’ Equity and the Balance Sheet○ Balance Sheet■ Assets = liabilities + equity calculated with CC; R/E fromstatement of shareholders’ equity and net income from incomestatement■ Recording ending balances of assets, liabilities, and equity■ Total equity comes from the Statement of Shareholders’ Equity■ Ex. “At December 31”○ Statement of Cash Flows■ Describes changes in cash and flow of cash during time period■ Inflow (+) and outflow (-) of cash■ Total cash from Operating Activities (Income Statement)+ total cash from Investing Activities (Balance Sheet: long-termassets)+ total cash from Financing Activities (Balance Sheet: long-termand liabilities and equity)= Net Change in cash + Beginning Cash= Ending Cash■ Operating Activities● Cash received from customers● Expenses■ Investing Activities● Buying and selling assets that are held for long-term use(more than one year)● Equipment, land■ Financing Activities● Long-term borrowing and repaying of cash from lendersand the cash investments from, and dividends to,stockholders, or loans○ Balance Sheet: “Point in time” prepared “AS OF…” or “AT” a particulardate, a “snapshot” in time○ Income Statement, Statement of Shareholders’ Equity, and Statement ofCash Flows: “period of time” “FOR THE PERIOD ENDING”■ For month, for year● The Accounting Cycle1. Analyze transactions and create journal entries2. Post journal entries to ledger accounts (T-account)3. Balance ledger accounts and transfer balances to unadjusted trial balance4. Determine required adjustments and create adjusting journal entries5. Post adjusting journal entries to ledger accounts in #2 above (creatingnew ledger accounts as needed)6. Rebalance ledger accounts and transfer balances to adjusted trial balance7. Create financial statements from adjusted trial balance8. Create closing journal entries9. Post closing journal entries to ledger accounts in #5 above10. Rebalance ledger accounts and transfer balances to post-closing trialbalance● Transaction Analysis○ Transaction 1: Investment by Owner■ Assets and equity are impacted● Cash in assets increases● Common stock in equity increases○ Transaction 2: Purchase Supplies for Cash■ Assets is impacted● Cash decreases● Supplies increases○ Transaction 3: Purchase Equipment for Cash■ Assets is impacted● Cash decreases● Equipment increases○ Transaction 4: Purchase Supplies on Credit■ Assets and liabilities are impacted● Supplies in assets increases● Accounts payable in liabilities increases○ Transaction 5: Provide Services for Cash■ Assets and equity are impacted● Cash in assets increases● Revenues in equity increases (consulting revenue)○ Transactions 6 and 7: Payment of Expenses in Cash■ Assets and equity are impacted● Cash in assets decreases● Expenses in equity○ Transaction 8: Provide Services and Facilities for Credit■ Assets and equity are impacted● Accounts receivable in assets increases○ Accounts receivable instead of cash because thepayment has not been received yet● Revenues in equity increases (consulting revenue (services)and rental revenue (facilities))○ Transaction 9: Receipt of Cash from Accounts Receivable■ Assets is impacted● Cash increases● Accounts receivable decreases○ Transaction 10: Payment of Accounts Payable■ Assets and liabilities are impacted● Cash in assets decreases● Accounts payable in liabilities decreases○ Transaction 11: Payment of Cash Dividend■ Assets and equity are impacted● Cash in assets decreases● Dividends in equity decreasesLesson 2: Language of Business● Double-Entry Accounting: Debits and Credits○ Each party in a business transaction will receive somethingand give something in return○ T-account is a visual depiction of a particular account○ Debit■ Enter on left side○ Credit■ Enter on right side○ Types of Accounts■ Cash■ A/R■ Inventory■ A/P■ Common Stock■ R/E■ Sales Revenue■ Expense○ Total $ Debits = Total $ Credits● Debit and Credit○ Assets = liabilities + shareholders’ equity○ Left side (debit)■ Assets○ Right side (credit)■ Liabilities + shareholders’ equity○ The balance in the accounts on the left side (ASSETS) of theequation (assets) will increase with debits and decrease withcredits○ The balance in the accounts on the right side of the equation(LIABILITIES and SHAREHOLDERS’ EQUITY) will increase