ACG2021 Intro to Financial Accounting Chapter 1 Introduction to Financial Statements Forms of Business Organization o Sole proprietorship owned by one person small business o Partnership owned by two or more persons o Corporation ownership in shares of stock Users Uses of Financial Info o Internal Users o External Users Business Activities o Financing o Investing o Operating Two Primary sources of outside funds 1 Borrowing Money liabilities o To whom the money is owed creditors o Notes payable accounts payable 2 Issuing shares of stock for cash o Payments to stockholders dividends NOT AN EXPENSE Purchase of resources a company needs to operate Computers delivery trucks furniture etc Resources own by a business Assets Once a business has the assests it needs it can begin its operations Revenues amounts earned from the sale of products sales revenue service revenuse interest revenue income statement Inventory goods available for sale to customers balance sheet Accounts receivable right to receice money from a customer in the future as the result of a sale or service balance sheet Expenses cost of assets consumed or services used Cost of goods sold selling marketing interest income tax exp Income statement Communicating with Users Liabilities arising from expenses incld Accounts payable interest payable wages payable etc Balance sheet Net Income revenues exceed expenses Net loss expenses exceed revenues o Revenues expenses Net Income Loss Income statement o Income Statement Revenues Expenses Net Income Loss o Retained Earnings Statement Beginning Retained Earning Add Net Income Less Dividends o Balance Sheet o Statement of Cash Flows Cash inflow cash outflow Net cash flow Used only when physical cash is exchanged Operating Activities cash from operations selling utilities etc Investing Activities equipment trucks etc Financing Activities stock loans etc Common Stock Retained Earnings Assets Liabilities Stockholder s Equity Ending Retained Earnings amount used in Balance Sheet Assets Liability Stockholder s Equity Common Stock equity contributed by owners Retained Earnings equity earned by operations 1 Revenue 2 Expense 3 Dividends Transactions economic events that require recording in the statements o Internal payroll etc o External selling a product service borrowing money etc o Transaction has dual effect on equation WAIT NOT all activities represent transactions Ex hiring employee meeting with a customer do not require transactions to be recorded even if money is mentioned Example JR Co is started when it receives 5 000 cash from investors in exchange for common stock Assets Liabilities Com Stk RE 5 000 Cash 5 000 Com Stk Dual Transactions Assets 5000 Cash Common Stock 5000 Com Stk Cash Flow 5000 FINANACIAL stock Examples of A L SE Assets Cash Accounts Receivable Supplies Prepaid Insurance Rent Equipment Inventory Liabilities Accounts Payable Unearned Service Revenue Notes Payable Stockholder s Equity Common Stock Retained Earnings o Balance Sheet Ending Retained Earnings Chapter 2 Further Look into Financial Statements Classified Balance Sheet groups similar assets liabilities together Liabilities Stockholder s Equity Assets Current Liabilities Current Assets Long tern Investments Long term Liabilities Property plant equipment Stockholder s Equity Intangible Assets Assets Current Assets Company expects to convert to cash or use within one year Cash investments receivables inventories prepaid expenses Long term Investments Stock investments real estate Property plant Equipment Land Equpiment Accumulated Depreciation equipment Intangible Assets Patents trademarks Liabilities Stockholder s Equity Current Liabilities pay within the next year or operating cycle whichever is longer Accounts payable salaries wages payable notes payable income taxes payable Long term Liabilities current liabilities with long term obligations Mortgage payable notes payable Stockholder s Equity Common stock retained earnings Example JR Co provides a service to a customer and charges 400 The customer says she ll return next month to pay Assets Liabilities Com Stk RE 400 Serv Rev 400 A R There is no revenue recognized next month Revenue is only recognized when service is preformed Dual Transactions Assets 400 A R Common Stock 400 Service Revenue Cash Flow 0 No cash was exchanged Next month when customer pays Cash with increase by the amount of the payment A R will decrease by the amount of the payment Current Ratio Current Assets Current Liabilities Chapter 3 The Accounting Information System Steps in the Recording Process The Journal where each transaction is recorded The Ledger each component of the transaction is posted to the ledger contains the entire group of accounts maintained by a company Debits Left Credits Right Double entry Accounting each transaction must affect two or more accounts to keep the accounting equation in balance The Account Posting Debit one account must credit another account Debits Credits Debit Balance balance with a debit with a credit Credit Balance balance with a credit with a debit Assets debits increase assets credits decrease assets o Assets expenses dividends Liabilities credits increase liabilities debits decrease liabilities Equity credit increase equity debit decrease equity o Liabilities equity revenues o Revenue Expense accounts are NOT equity accounts Revenue credits increase accounts debits decrease accounts Expense debits increase accounts credits decrease accounts Dividends debits increase account credits decrease account Example JR Co pays 1 500 in advance for three months of rent Journal Entry Prepaid Rent Cash Ledger Entry Prepaid Rent 1 500 Assets Liabilities Com Stk RE 1 500 Pre Rent 1 500 Cash debit account first credit account second Cash 1 500 Bal 8725 1 500 1 500 Account Title JR Co Trial Balance December 31 2015 Trial Balance total list of all accounts with final debit credit balances All amounts on the trial balances come from the accounts Cash Accounts Receivable Supplies Equipment Bank Loan Accounts Payable Common Stock Service Revenue Rent Expense Salaries Wages Expense Supplies Expense Utilities Expense 7 000 3 000 3 000 5 000 600 2 500 1 200 700 23 000 5 000 1 000 10 000 7 000 23 000 Credit Debit Total Chapter 4 Accrual Accounting Concepts Adjusting Closing Entries Adjusting Entries ensure that the correct amounts are on the balance sheets and the income statement o Two categories for adjusting entries Accrual 1 Accrued revenues revenues for
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