ACNT1303lecture_notes.pdf

16 Pages
114 Views
Unlock Document

Department
Accounting
Course
ACCT 201
Professor
Gordon Whitman
Semester
Winter

Description
INTRODUCTION TO ACCOUNTING I ACNT 1303 Lecture Notes GENERAL INFORMATION FOR COMPLETING THE CLASS The following is a summary of the twelve chapters that you will be completing this semester. Be sure that you are taking the time to read and STUDY each chapter. It is important to go through each of the examples in the book and to complete the Review Quizzes. Spending time reading and understanding before you start the homework assignment will help you to complete in the exercises and case problems with more understanding. Please ask questions of your instructor to clarify questions that you may have on any assignment or concept. Be sure to check and correct your answers in the notebooks in the classroom/lab before turning in your assignments. The Study Partner CD that came with your text has many study helps for you. There is a Summary section that will show you the important concepts in the chapter. There are Flash Cards and Key Terms to help with terminology. The Matching section will also reinforce the concepts of the chapter. If you choose to take a Quiz, be sure to take the Practice Quiz only. Chapter 1 The Nature of Accounting Accounting is the process of recording, summarizing, analyzing, and interpreting financial (money-related) activities to permit individuals and organizations to make informed judgments and decisions. By law all businesses must keep accounting records. Decisions are based on accounting information for profit and non-profit companies alike. There are different forms of business organizations: o Business—the organization’s objective is to earn a profit o Sole Proprietorship—a business owned by one person o Partnership—co-owned by two or more persons o Corporation—owned by investors called stockholders (The business—not the owners—are responsible for the company’s obligations.) o Limited liability company (LLC)—combines features of a corporation and a proprietorship There are different types of business organizations:  Service business—doctors, lawyers, barber shop, etc.  Merchandising business—purchases goods for resale  Manufacturing business—produces a product to sell THE ELEMENTS OF ACCOUNTING ASSETS Assets are items with money value that are owned by a business. Some examples are: cash, accounts receivable (selling goods or services on credit), equipment (office, store, delivery, etc.), and supplies (office, store, delivery, etc.). LIABILITIES Liabilities are debts owed by the business. Paying cash is often not possible or convenient, so businesses purchase goods and services on credit. The name of the account used is Accounts Payable. Another type of liability is Notes Payable. This is a formal written promise to pay a specific amount of money at a definite future date. OWNER’S EQUITY The difference between Assets and Liabilities is Owner’s Equity. The can also be called capital, proprietorship, or net worth. THE ACCOUNTING EQUATION (Study the examples in the book, p. 18) Assets = Liabilities + Owner’s Equity This equation must always balance! BUSINESS TRANSACTIONS AND THE ACCOUNTING EQUATION A transaction is any activity that changes the value of a firm’s assets, liabilities, or owner’s equity. Introduction to Accounting I Lecture Notes Page 1 of 16 Each transaction has a dual effect on the basic accounting elements. A transaction may affect more than two accounts in a transaction. This is called a combined entry. Withdrawal (Drawing) is the removal of business assets for personal use by the owner. This transaction decreases the asset taken and the value of the business. Each transaction increases or decreases (or both) the basic elements in the accounting equation. The effect of recording a business transaction must always leave the two sides of the accounting equation in balance. To understand how a transaction affects the accounting equation, go through each of the examples in the textbook. Be sure to pay attention to the “Key Points” and “Cautions” that are given. FINANCIAL STATEMENTS Summaries of financial activities are called financial statements which are prepared on a regular basis at the end of an accounting period. The accounting period typically is one year; however, it can be any length of time for which records are maintained. Usually the minimum is one month and the maximum length of time is one year for financial statements. There are several financial statements. You are going to prepare the Income Statement, Statement of Owner’s Equity, and Balance Sheet. These must be completed in that order. Notice the page in your book that shows the three statements and how the information goes from one source to another. It is very important to always check your numbers since an incorrect number will affect more than one statement. Income Statement. This is a summary of a business’s revenue and expenses for a specific period of time. It ONLY shows revenue and expenses. Net Income is realized when revenue exceeds expenses. Net loss is realized when expenses exceed revenue. Statement of Owner’s Equity. This is a summary of the changes that have occurred in the owner’s equity during a specific period of time. This statement will show either an increase or decrease in the capital account. Balance Sheet. This statement is a listing of the firm’s assets, liabilities, and owner’s equity at a specific point in time. Total Assets must equal the addition of Liabilities and Owner’s Equity. NOTE: Be sure that you are looking carefully at the examples given in the book when completing your assignments. You must write legibly and use a ruler to draw the lines. Notice that there are double rules to show that items have balanced. Be sure to read and study the Summary and Terms and Concepts Review at the end of each chapter. Using the CD Study Partner will also be helpful in studying this chapter. Chapter 2 Recording Business Transactions NOTE: It is important that you read the chapter and work through the problems and examples as given in the text. Reading, doing, and checking your answers will help you to understand. Read each transaction given and see which accounts are affected. There will always be at least two. I am going to summarize the chapter, but you need to spend quality time going through the exercises in order to apply the information to your assignment homework. ACCOUNT. An account is an individual record or form to record and summarize information for each asset, liability, or owner’s equity transaction. Each account will have a title and number. Debit means left side. Credit means right side. A “T” ACCOUNT is so named because it looks like a capital T. Use this form of an account to help you determine whether the amount is placed on the left (debit) or right (credit) side of the account. It is important that you think of debits and credits as only meaning left and right! Double-entry accounting means that there will be at least two (2) accounts affected by each transaction. Debits and Credits can either be increases or decreases depending on the type of account. Introduction to Accounting I Lecture Notes Page 2 of 16 DEBITS MUST ALWAYS EQUAL CREDITS! Look at the example on page 42 to help you understand the Temporary Owner’s Equity accounts. All transactions that affect owner’s equity could be recorded in one account, but it would be hard to determine profit and loss and would not be very practical. By putting expenses and drawing in separate, temporary debit accounts and revenue and owner investments in separate, temporary credit accounts, it is easier to make decisions. These decisions can be easily obtained from these temporary accounts. At the end of the accounting period these temporary accounts are “closed” into the capital account. They are only temporary—used during the current accounting period. Each new accounting period would have these accounts starting with a zero balance. Increases in Owner’s Equity are investments and revenue. Decreases in Owner’s Equity are withdrawals and expenses. Rules for Owner’s Equity Accounts. See page 60 and following based on the relationship to Owner’s equity. Drawing. This account increases on the Debit side (decreases capital). Usually an asset is removed—cash, supplies, equipment, etc. Expenses. These accounts decrease owner’s equity on the Debit side. Expenses are a debt and decrease capital. TRIAL BALANCE This statement is a listing on a certain date that shows all accounts and their balances. This usually occurs at the end of the month, but it could be any time. This is not a formal financial statement. See the sample on page 68. Because it is not a formal statement, no dollar signs are needed. * Even though the debits and credits equal, there could still be errors. Check carefully to see that you have used the correct amounts. For each account you must find a balance. This is called Footing. For each account, add the debits together, and then add the credits. Subtract the two amounts and list the difference on the same line and side as the balance. Use a pencil (pencil footings). Be sure to look carefully at the examples in your book. The Normal Balance of Accounts An account normally has more increases than decreases, so usually the balance is on the normal balance side of the account. ASSET = DEBIT LIABILITY = CREDIT OWNER’S EQUITY = CREDIT Drawing – Debit Expenses – Debit Revenue – Credit Chapter 3 Starting the Accounting Cycle for a Service Business NOTE: Be sure to read the chapter carefully and work through the exercises and examples given in the textbook. Study the examples to show the order of recording your transactions. This needs to become a habit so that parts of the entries are not left out. The date of the transaction will be needed on the first line. The very first entry on a page to an account will show the year, month, and day. Remember to show indenting of the credit account name when recording in the Journal on the line below the debit entry. You should also write a very short, but descriptive explanation of the transaction on the third line of the transaction in the General Journal. Be aware, too, of the column that you are entering the amount—either left or right. Do not show dollar signs in the Journal. Skip a line between each entry. Notice that you are not completing all exercises and case problems. Be sure to follow your assignment sheet. Be sure that you are reading the entire exercise or case problem. Some of the directions are at the end! THE ACCOUNTING CYCLE 1. Analyze transactions from source documents 2. Record transactions in a journal 3. Post from the journal to the ledger 4. Prepare a trial balance of the ledger ANALYZE Decide debits and credits and in which accounts they will be entered RECORD in journal (diary of information of day-to-day transactions) Double entry—in chronological order by date Book of original entry—(first formally recorded place) Introduction to Accounting I Lecture Notes Page 3 of 16 SEE PAGE 91 1. Journal pages numbered 2. Date 3. Account Title 4. Posting reference column 5. Debit and Credit columns JOURNALIZING is the recording of transactions in a journal SEE PAGE 91 for format  Debits are ALWAYS written before credits  NO dollar signs  MUST INDENT credits to differentiate from debits  Must enter either zeroes (00) or a dash in the cents column A COMPOUND ENTRY – 3 or more accounts are affected by the transaction (be sure to line up correctly) Date/Title/Explanation Skip a line between entries Debits MUST equal Credits ADVANTAGES OF USING A JOURNAL  Provides a chronological record of transactions  A place is provided for an explanation  Lessens the chance of error—debits and credits are recorded together  Easier to locate errors POST FROM THE JOURNAL TO THE LEDGER with care  Must transfer to individual accounts to be able to summarize activity and obtain balance  Can post at the end of the day, week, month, or whenever CHART OF ACCOUNTS – directory (The order for the names is taken from the financial statements—Balance Sheet, then the Income Statement.) ASSETS, LIABILITIES, OWNER’S EQUITY, REVENUE, EXPENSES The number identifies the account and its location in the ledger. 4-column account form or balance form of account DEBIT/CREDIT/DEBIT BALANCE/CREDIT BALANCE Advantages on Page 99 POSTING – PAGE 99 DATE 1. RECORD DATE OF JOURNAL ENTRY 2. RECORD AMOUNT 3. RECORD CODE (GJ1) FOR GENERAL JOURNAL AND PAGE NO. 4. POST ACCOUNT NUMBER BACK IN JOURNAL 5. CALCULATE NEW BALANCE Record the same way for all account transactions Ledger is a history of transactions summarized in the accounts. LOCATING AND CORRECTING ERRORS – page 104  add twice going in different directions  find difference in debits and credits—divide by 9/ divide by 2/ double the amount Chapter 4 The Accounting Cycle Continued Work Sheet, Financial Statements, and Adjusting Entries NOTE: Remember that these notes are just a summary of the chapter. Take time to read the chapter and work through the exercises and quizzes. For this assignment, it might be helpful to use scotch tape to put together the two sheets for the worksheet carefully aligning the rows. Be sure to finish each set of columns completely before going on the next. Introduction to Accounting I Lecture Notes Page 4 of 16 STEPS IN THE ACCOUNTING CYCLE: 1. Determine the adjustments needed 2. Prepare a worksheet 3. Prepare financial statements 4. Journalize and post adjusting entries ADJUSTING ENTRIES Adjustments are a planned part of the accounting cycle. These entries at the end of an accounting period bring up to date the balance of accounts that are out of date. These transactions are also referred to as internal transactions, since they are not used outside of the business. For some accounts like office supplies, it would be impractical to make entries on a daily or frequent basis. An entry is made at the end of the accounting period to show usage. Changes in accounts happen because of passage of time, use of items, etc. Adjustments are internal, never involve cash. Adjusting entries affect both the balance sheet and the income statement. EXAMPLES: OFFICE SUPPLIES USED: Take the original balance; take an inventory to find out what is on hand; subtract to find the balance on hand. The adjusting entry transaction: DEBIT Office Supplies Expense CREDIT Office Supplies When this transaction is posted, you will have the current amount of office supplies showing in the asset account, and the correct amount of expense for the supplies used during the past year. INSURANCE EXPIRED: Insurance is paid in advance and debited to an asset account named Prepaid Insurance. When Prepaid Insurance has expired, it then becomes an expense. To figure the adjusting entry, calculate the monthly premium and multiply as needed for the months used. The adjusting entry transaction: DEBIT Insurance Expense CREDIT Prepaid Insurance UNPAID SALARIES: This adjusting entry must be made if the end of the pay period and the end of the accounting period are not exactly the same. Calculate the amount of pay for one day and multiply by the number of days needing to be paid. The adjusting entry transaction: DEBIT Salaries Expense CREDIT Salaries Payable Some other accounts that could need to be adjusted are: utilities and taxes. DEPRECIATION This is a term used to describe the expense that results from the loss of usefulness of an asset due to age, wear and tear, and obsolescence. This adjustment spreads the cost of an asset over its useful life. Calculate the yearly amount, then the monthly. Depreciation is ALWAYS recorded by debiting an expense account named Depreciation Expense and crediting an account called a “Contra Account” (means opposite or offsetting). The balance of this contra-asset account is a credit—the opposite of an asset account. The amount is not shown as a credit to the asset account, but in a separate contra-asset account. There will be an individual account for each of the items that are being depreciated. Some examples would be: office equipment, store equipment, automobile, delivery truck, etc. Land is never depreciated since it is considered permanent and is assumed to last forever. Depreciation only refers to the allocation of an asset’s cost over its estimated useful life. There are several ways to determine depreciation, but this class will only use one—the Straight-Line Method. To determine the depreciation in the straight-line method, take the cost of the asset, less the trade-in value, and divide by the estimated years of usefulness. The “book value” is the difference between an asset’s cost and accumulated depreciation. MATCHING PRINCIPLE This principle requires that revenue and expenses be recorded in the accounting period in which they occur. For a net income figure to be accurate, it should be a result of subtracting the expenses of a period from the revenue of the same period. PREPARE A WORKSHEET Look carefully at the worksheet in the text. Remember that this is an informal working paper used to prepare the financial statements. Place the transparencies over the blank worksheet and see the entries made. Be sure to complete the worksheet working left to right Introduction to Accounting I Lecture Notes Page 5 of 16 and balancing the first two columns before going to the next two columns. Remember that Accumulated Depreciation is a contra- asset account. Preparing a Worksheet List all needed accounts under “Account Title” even if they do not have a balance. Enter the ending balances in the Trial Balance columns. Make sure that these columns balance before going on. Record the adjustments. Make sure that these two columns balance before going on. Carry the amounts across to the “Adjusted Trial Balance” columns. If the amounts are both debits, add them and enter the amount in the debit column of the Adjusted Trial Balance. If the amounts are both credits, add them and enter the amount in the credit column of the Adjusted Trial Balance. If there is one amount that is a debit and one a credit, do the calculations and enter the amount in the appropriate column. Make sure that these columns balance before continuing. The Income Statement columns of the worksheet will contain the amounts from the Adjusted Trial Balance columns that are revenues and expenses. These columns will not balance. Place the difference in the appropriate column—debit if expenses are larger than revenue; credit if revenue is larger than expenses. The Balance Sheet columns of the worksheet will contain the amounts from the Adjusted Trial Balance columns that are assets, liabilities, capital, and drawing. These columns will not balance. Place the difference in the appropriate column—debit if liabilities and capital are larger than the assets; credit if assets are larger than capital and liabilities. (Be sure to look at sample in the book.) The difference between the amounts of the columns in the Income Statement and Balance Sheet must be the same amount. The words “Net Loss” or “Net Gain” will be entered in the left column showing the position of the company at the end of the accounting period. ADJUSTING ENTRIES IN THE GENERAL JOURNAL Be sure to write the words “Adjusting Entries” at the beginning of the journal after the last entry of the month. By placing these words at the beginning of these entries, it is not necessary to have an explanation at the end of each set of adjusting entry transactions. The entries should be listed with a date, debit, then credit. The credit should be indented in the journal. FINANCIAL STATEMENTS The financial statements are created from the worksheet. The Income Statement, the Statement of Owner’s Equity, and the Balance Sheet. Chapter 5 Completing the Accounting Cycle for a Service Business Closing Entries and the Post-Closing Trial Balance NOTE: Remember that these notes are just a summary of the chapter. Be sure to read the chapter and work through the sample exercises and quizzes. Remember that your Post-Closing Trial Balance should not have any accounts open except for assets, contra- assets, liabilities, and capital. This chapter shows you how to “close’ or “make zero” the temporary accounts. Revenue and expense accounts are temporary accounts used to show changes in owner’s equity during a single accounting period. The balances are summarized and transferred to the capital account. The account used to summarize the balances of the temporary accounts is called Income Summary. INCOME SUMMARY ACCOUNT This is a temporary account used to summarize the balances of the temporary revenue and expense accounts. This is also called a clearing account. There is no “normal” balance for this account. This account never appears on financial statements. CLOSING ENTRIES There is a certain order that must be used to close accounts: REID 1. The balance of the total Revenue to Income Summary 2. The balance of the total Expenses to Income Summary 3. The balance of the Income Summary account to the Capital account. This will be the Net Income or Net Loss amount. 4. The balance of the owner’s Drawing account is closed directly to the Capital account. This is not used in the determination of net loss or gain. You can check the accuracy of the closing entries by comparing the balance of the Owner’s Equity capital account, after posting, with the ending balance of capital as reported on the Statement of Owner’s Equity—amounts MUST be the same. Check the diagram on page 183 to see how closing entries are handled. POSTING CLOSING ENTRIES When the closing entries are entered in the General Journal, they should appear on the next line after the Adjusting Entries. The words “Closing Entries” should be at the beginning of these entries so that an explanation is not needed for each closing entry. After the entries have been posted, the permanent accounts will show the correct amount. The temporary accounts will have a zero balance. Introduction to Accounting I Lecture Notes Page 6 of 16 The word “closing” should be written on the item line of each ledger entry, like “adjusting” in Chapter 4. POST CLOSING TRIAL BALANCE This statement will only show permanent accounts with a balance; all temporary accounts should have a zero balance. Debits and Credits must balance. Fiscal Period is any period of time covering the complete accounting cycle. Twelve consecutive months is a fiscal year regardless of starting dates. Government is July 1 through June 30; Retail is September 1 through August 31. Read about the accrued, cash, and modified-cash basis of accounting at the end of the chapter. COMPREHENSIVE REVIEW I This assignment starts on page 213. You will be completing an entire month in the accounting cycle for Jim Arnold’s Photography Studio. Notice the account names listed in the Chart of Accounts. Follow the directions at the end of the assignment which starts on page 214. Complete each step completely before going on to the next step. On the cover sheet, I will give you answers to check your progress. You will not be able to check your answers for this assignment in the notebooks, but instructors will be available to help you complete your work. You may use the workbook pages or the Excel assignment sheets. In this assignment you will be journalizing transactions, journalizing adjusting and closing entries, posting those entries, creating the worksheet, and creating financial statements. This is a great review for your first exam. TEST 1 REVIEW - CH 1-5  Account normal balance, increases and decreases—debits or credits.  Trial Balance, Income Statement, Statement of Owner’s Equity, and Balance Sheet. Know what accounts go on each statement and where on the statement the amount is placed. (debit or credit column)  Journalizing daily entries, Adjusting Entries, and Closing Entries.  Terms as listed in the end of each chapter and on the CD.  Multiple Choice, fill in the blank, journalizing transactions – 100 points total. Sample quizzes on the CD are good reviews. Take your test in the classroom/lab when you have completed all the chapter work for Chapters 1-5, and the Comprehensive Review. (You may also take your test in the Testing Center, if you would like. You need to let your instructor know that you need the test placed in the Testing Center at least two (2) days before you intend to take the test. You MUST have your student ID. You may take your calculator and don’t take any books.) The Testing Center is located in J232 at the Spring Creek Campus. Be sure to check the hours. Chapter 6 Internal Control and Accounting for Cash NOTE: Remember that these notes are just a summary of the chapter. Be sure to read the chapter carefully and work through the sample exercises and quizzes. New legislation has been made called the Sarbanes-Oxley Act of 2002 (SOX).This only applies to public companies (or publicly held companies), which are companies that sell their stock to the public—usually through a broker. Cash refers to the amount of currency, coin, and checks made payable to the business, money orders, and amounts on deposit in banks and other financial institutions. These are all important to the business. Without adequate cash, a business cannot survive. Not only is cash needed to pay employees, creditors, expenses, and taxes, cash is also needed for the business to grow and expand. CONTROL OF CASH Internal control refers to methods and procedures a business uses to protect its assets. Read the information on pages 220 and 221. Checks are written for all transactions except for petty cash. There should only be a small amount of actual cash available—petty cash. Be sure to study the figures on p. 223 to further understand the controls. Petty Cash. This is a small amount of money kept in the office for making small expenditures. ($10, $25, $50, etc.) The business will determine how much cash needs to be on hand. o This needs to be secure and with only one person in charge. o Vouchers must be kept to show usage. Introduction to Accounting I Lecture Notes Page 7 of 16 o There needs to be supporting documentation (Auxiliary Record) to summarize and record the expenditures. Establishing the Petty Cash Fund. Petty Cash (asset) is debited and Cash is credited. Replenishing the Petty Cash Fund. Debit each expense account, supplies, or drawing as needed. Credit to Cash. Petty Cash is only debited when the fund is established or increased. THE CHANGE FUND. Business that have many cash transactions usually establish this fund, which is an amount of money that is placed in the cash register drawer and is used to make change for customers who pay in cash. Establishing the Change Fund. Change Fund (asset) is debited and Cash is credited. The only time this fund will be used is if the fund is established or increased, just like the Petty Cash fund. CASH SHORT AND OVER This account is used to record both a shortage and overage of cash in the cash drawer. When change is made during a business day, mistakes can be made and the sales will not equal the amount of cash in the drawer. This is determined by counting the drawer money, removing the change fund, and comparing the amount left with the total of the Sales. This account does not have a normal balance because it only summarizes the cash usage. At the end of the month, if the balance is a debit, it is considered an expense; if its balance is a credit, it is considered miscellaneous income. Cash Short and Over is closed to the Income Summary account at the end of the accounting period. Miscellaneous Income if overage; Miscellaneous Expense if shortage. BANK CHECKING ACCOUNTS Be sure to read about checking accounts, writing checks, and endorsements in the chapter. THE BANK STATEMENT The bank sends out bank statements each month. It is important that this statement and the checking account balance balances. There are certain items that the bank is not aware of: outstanding checks, deposits in transit, and others. The business may not be aware of some items from the bank: service charges, bank fees, bank coll
More Less

Related notes for ACCT 201

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit