Accounting 1 MGT 130 Lecture 02 Overview of

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Accounting 1 MGT 130 Lecture 02

Accounting 1 MGT 130 Lecture 02

 • Overview of Lecture 01 • Lecture 02

• Overview of Lecture 01 • Lecture 02

 • Lecture 02 • Business Organizations – Proprietorships, – partnerships – corporations. •

• Lecture 02 • Business Organizations – Proprietorships, – partnerships – corporations. • Business Types – Manufacturing – Merchandizing – Services business.

Business Strategies • Business strategy • Low-cost strategy • Differential strategy

Business Strategies • Business strategy • Low-cost strategy • Differential strategy

Business Stakeholders Internal: Owners, managers, employees STAKEHOLDERS External: Customers, creditors, government

Business Stakeholders Internal: Owners, managers, employees STAKEHOLDERS External: Customers, creditors, government

The Process of Providing Information 1. Identify stake-holders. 2. Assess stakeholders’ informational needs 3.

The Process of Providing Information 1. Identify stake-holders. 2. Assess stakeholders’ informational needs 3. Design the accounting information system to meet stakeholders’ needs 4. Record economic data about business activities and events 5. Prepare accounting reports for stakeholders

 • Purpose of Information • The Purpose of Accounting • Accounting System •

• Purpose of Information • The Purpose of Accounting • Accounting System • Accounting

Accounting System Financial Accounting § § Balance Sheet Income Statement Cash Flow Statement of

Accounting System Financial Accounting § § Balance Sheet Income Statement Cash Flow Statement of Changes in Owner’s Equity Managerial Accounting Cost Accounting

Distinction Between Financial Accounting and Managerial Accounting • • Users of information Regulations Source

Distinction Between Financial Accounting and Managerial Accounting • • Users of information Regulations Source of Data Nature of Reports and Procedures

GAAP • Business entity concept • Cost concept • Objectivity concept • Unit-of-measure concept

GAAP • Business entity concept • Cost concept • Objectivity concept • Unit-of-measure concept

Accounting Equation • Techniques of calculating – Assets, – Liabilities and – Owner’s equity

Accounting Equation • Techniques of calculating – Assets, – Liabilities and – Owner’s equity • Transactions in Accounting Equation

The Accounting Equation Business Transactions 1. Javid Iqbal deposits Rs. 25, 000 in a

The Accounting Equation Business Transactions 1. Javid Iqbal deposits Rs. 25, 000 in a bank account in the name of Opportunities Inc. 2. Opportunities Inc. exchanged Rs. 20, 000 for land. 3. During the month, Opportunities Inc. purchased supplies for Rs. 1, 350 and agreed to pay the supplier in the near future (on account). 4. Opportunities Inc. provided services to customers, earning fees of Rs. 7, 500 and received the amount in cash. 5. Opportunities Inc. paid the following expenses: wages, Rs. 2, 125; rent, 800; utilities, Rs. 450; and misc, Rs. 275. 6. Opportunities paid Rs. 950 to creditors during the month. 7. At the end of the month, the cost of supplies on hand is Rs. 550, so Rs. 800 of supplies were used. 8. At the end of the month, Javid withdrew Rs. 2, 000 in cash from the business for personal use.

The Accounting Equation Business Transactions

The Accounting Equation Business Transactions

Opportunities Income Statement For the Month Ended November 30, 2010 Fees earned Rs. 7500

Opportunities Income Statement For the Month Ended November 30, 2010 Fees earned Rs. 7500 Operating expenses: Wages expense Rent expense Supplies expense Utilities expense Miscellaneous expense Total operating expenses Net income Rs. 2125 800 450 To the statement of owner’s equity 275 4450 Rs. 3050

Opportunities Inc. Statement of Owner’s Equity For the Month Ended November 30, 2010 Javid

Opportunities Inc. Statement of Owner’s Equity For the Month Ended November 30, 2010 Javid Iqbal, capital, November 1, 2010 Investment on November 1 Net income for November Rs. 25 000 3 050 Rs. 28 050 2 000 Less withdrawals Increase in owner’s equity To 30, the balance Javid Iqbal, capital, November 2010 sheet 26 050 Rs. 26 050

The Accounting Equation Business Transactions

The Accounting Equation Business Transactions

Opportunities Inc. Statement of Owner’s Equity For the Month Ended November 30, 2010 Javid

Opportunities Inc. Statement of Owner’s Equity For the Month Ended November 30, 2010 Javid Iqbal, capital, November 1, 2010 Investment on November 1 From the income Net income for November statement Less withdrawals Increase in owner’s equity Javid Iqbal, capital, November 30, 2010 Rs. 25 000 3 050 Rs. 28 050 2 000 26 050 Rs. 26 050

Opportunities Income Statement For the Month Ended November 30, 2010 Fees earned Rs. 7500

Opportunities Income Statement For the Month Ended November 30, 2010 Fees earned Rs. 7500 Operating expenses: Wages expense Rent expense Supplies expense Utilities expense Miscellaneous expense Total operating expenses Net income Rs. 2125 800 450 To the statement of owner’s equity 275 4450 Rs. 3050

Opportunities Inc. Statement of Owner’s Equity For the Month Ended November 30, 2010 Javid

Opportunities Inc. Statement of Owner’s Equity For the Month Ended November 30, 2010 Javid Iqbal, capital, November 1, 2010 Investment on November 1 From the income Net income for November statement Rs. 25 000 3 050 Rs. 28 050 2 000 Less withdrawals Increase in owner’s equity To 30, the balance Javid Iqbal, capital, November 2010 sheet 26 050 Rs. 26 050

Opportunities Inc. Balance Sheet November 30, 2010 Assets Cash Supplies Land Total assets Liabilities

Opportunities Inc. Balance Sheet November 30, 2010 Assets Cash Supplies Land Total assets Liabilities Rs, 5 900 Accounts Payable 550 Owner’s Equity 20 000 Javid Iqbal, cap. Total liabilities and Rs. 26 450 owner’s equity This balance sheet presented using the account form Rs. 400 26 050 Rs. 26 450

When the balance sheet displays the liabilities and owner’s equity below the assets, the

When the balance sheet displays the liabilities and owner’s equity below the assets, the report form is being used.

Statement of Cash Flows from Operating Activities—This section reports a summary of cash receipts

Statement of Cash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations. Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets. Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.

Opportunities Inc. Statement of Cash Flows For the Month Ended November 30, 2010 Cash

Opportunities Inc. Statement of Cash Flows For the Month Ended November 30, 2010 Cash flows from operating activities: Cash received from customers Rs. 7 500 Deduct cash payments for expenses and payments to creditors 4 600 Net cash flow from operating activities Cash flows from investing activities: Cash payment for acquisition of land Cash flows from financing activities: Cash received as owner’s investment Rs. 25000 Deduct cash withdrawal by owner 2000 Net cash flow from financing activities Net cash flow and Nov. 30, on 2005 bal. sheet Should match Cash thecash balance 2 900 (20 000 ) 23 000 Rs. 5 900

Opportunities Inc. Balance Sheet November 30, 2010 Assets match Cash Liabilities Rs, 5 900

Opportunities Inc. Balance Sheet November 30, 2010 Assets match Cash Liabilities Rs, 5 900 Accounts Payable Supplies Land 550 Owner’s Equity 20 000 Javid Iqbal, cap. Total liabilities and Rs. 26 450 owner’s equity Total assets This balance sheet presented using the account form Rs. 400 26 050 Rs. 26 450

Tools for Financial Analysis and Interpretation The ratio of liabilities to owner’s equity allows

Tools for Financial Analysis and Interpretation The ratio of liabilities to owner’s equity allows owners like Javid Iqbal to analyze the firm’s ability to withstand poor business conditions. Total Liabilities Ratio of liabilities = to owner’s equity Total owner’s equity (or total stockholders’ equity)

Tools for Financial Analysis and Interpretation Ratio of Rs. 400 liabilities to = Rs.

Tools for Financial Analysis and Interpretation Ratio of Rs. 400 liabilities to = Rs. 26, 050 owner’s equity Ratio of liabilities to = 0. 015 / 15% owner’s equity

Over View of the Lecture Collective Transactions of Accounting equations Treatment of these transactions

Over View of the Lecture Collective Transactions of Accounting equations Treatment of these transactions Income Statement of Owner’s Equity Balance Sheet Statement of Cash Flows

Each financial statement item, called an account, is included in the ledger.

Each financial statement item, called an account, is included in the ledger.

A group of accounts for a business entity is called a ledger.

A group of accounts for a business entity is called a ledger.

A list of the accounts in a ledger is called a chart of accounts.

A list of the accounts in a ledger is called a chart of accounts.

Major Account Classifications Assets are resources owned by the business. Cash Supplies Building Accounts

Major Account Classifications Assets are resources owned by the business. Cash Supplies Building Accounts receivable Liabilities are debts owed to outsiders (creditors). Accounts payable Notes payable Wages payable

Major Account Classifications Liabilities are often identified on sheet by are titlesdebts that Assets

Major Account Classifications Liabilities are often identified on sheet by are titlesdebts that Assets are the balance Liabilities include payable. resources owned by the business. Cash Supplies Building Accounts receivable owed to outsiders (creditors). Accounts payable Notes payable Wages payable

Major Account Classifications Owner’s equity is the owner’s right to the assets of the

Major Account Classifications Owner’s equity is the owner’s right to the assets of the business. Javid Iqbal, Capital Javid Iqbal, Drawing Expenses are the Revenues are using up of assets increases in owner’s equity as or consuming of services to a result of selling generate revenue. services or products. Fees Earned Fares Earned Commission Revenue Rent Expense Salary Expense Utilities Expense

To assist you in learning, an account can be drawn to resemble the letter

To assist you in learning, an account can be drawn to resemble the letter T.

The T-Account Cash The T-account has a title.

The T-Account Cash The T-account has a title.

The T-Account Cash Left side debit The left side of the account is the

The T-Account Cash Left side debit The left side of the account is the debit side.

The T-Account Cash Left side debit Right side credit The right side of the

The T-Account Cash Left side debit Right side credit The right side of the account is the credit side.

The T-Account Cash 3, 750 4, 300 2, 900 Typical entries 850 1, 400

The T-Account Cash 3, 750 4, 300 2, 900 Typical entries 850 1, 400 700 2, 900

Balancing a T-Account

Balancing a T-Account

First, total the debit side. Cash 3, 750 4, 300 2, 900 10, 950

First, total the debit side. Cash 3, 750 4, 300 2, 900 10, 950 850 1, 400 700 2, 900

Cash 3, 750 4, 300 2, 900 10, 950 850 1, 400 Next, total

Cash 3, 750 4, 300 2, 900 10, 950 850 1, 400 Next, total the 700 credit side. 2, 900 5, 850

Subtract total Cash credits from total debits to obtain the 3, 750 850 account

Subtract total Cash credits from total debits to obtain the 3, 750 850 account balance. 5, 100 4, 300 2, 900 10, 950 1, 400 700 2, 900 5, 850

Transactions and Balance Sheet Accounts

Transactions and Balance Sheet Accounts

Rules of Debit / Credit Balance Sheet Accounts Debits Asset accounts………. Increase (+) Liability

Rules of Debit / Credit Balance Sheet Accounts Debits Asset accounts………. Increase (+) Liability accounts…… Decrease (-) Owner’s equity accounts…. Decrease (-) Credits Decrease (-) Increase (+) (capital) Increase (+)

Chapter 01 Lecture 02 The End

Chapter 01 Lecture 02 The End