Hft 2401
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HFT 2401. Chapter 1 Introduction to Accounting. Accounting A Means to an End. Provides answers to questions How much cash do we have What was our payroll cost When did we buy a piece of equipment & at what cost What is our food cost What is our revenue What are our expenses

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HFT 2401

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HFT 2401

Chapter 1

Introduction to Accounting


AccountingA Means to an End

  • Provides answers to questions

  • How much cash do we have

  • What was our payroll cost

  • When did we buy a piece of equipment & at what cost

  • What is our food cost

  • What is our revenue

  • What are our expenses

  • What did we keep (net income)


American Accounting Association defines accounting as “The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of that information”


The Accounting Process

  • 1) Observe events in order to identify the events that are of a financial nature – monetary terms

  • 2) Requires the recording, classifying, and summarizing these events.

  • 3) Produces various financial statements for internal & external users.

  • 4) Communication


Bookkeeping vs. Accounting

  • Bookkeeping – records & classifies transactions

  • Accounting – summarizes and interprets


Branches of Accounting

  • Financial Accounting – Revenues, expenses, assets & liabilities

  • Cost Accounting – Record, classify, allocate & report current & prospective costs. Used mainly in manufacturing

  • Managerial Accounting – Analyzes & provides information to management to enhance controls


Branches of Accounting

  • Tax Accounting – Prepare & file tax returns

  • Auditing – Reviews and evaluates documents, records and control systems

  • Accounting Systems – Information systems


Organizations that Influence Accounting

  • AICPA

  • FASB

  • SEC

  • IRS

  • HFTP


Forms of Business Organizations

  • Sole Proprietorship

  • Partnerships

  • Limited Partnerships

  • Limited Liability Companies (LLC)

  • Corporations


Sole Proprietorship

  • Easiest to organize / dissolve

  • Legally not a separate business – liability issues

  • It is separate for accounting purposes, however

  • Owner not paid a salary or wage - withdrawals


Partnerships

  • Two or more people joined together in a non-corporate manner for conducting business. Can use a written or oral agreement


Advantages

Greater financial strength

Does not pay taxes

Shares liability

Greater management strength

Disadvantages

Partners are taxed on profits regardless of cash distribution

Limits decision making process

Unlimited legal liability

Partnerships


Limited Partnerships

  • Offers liability protection to limited partners

    • General Partner(s) – responsible for debts of the partnership

    • Limited Partner(s) – may not actively participate in the day to day operations of the business

    • Agreement must be written

    • Limited partners liability is limited to the amount of their investment


Corporations

  • A legal entity created by a state or other political authority

  • Characteristics

    • An exclusive name

    • Continued existence independent of stockholders

    • Paid in capital represented by shares of stock

    • Overall control vested in its directors


Advantages

Shareholders liability limited to amount of investment

Owners are taxed on distributed profits (dividends)

Employee equity participation (ESOP)

Lower tax rates

Corporation continues on in perpetuity

Disadvantages

Double taxation

Ownership control

Corporations


S-Corp

Eliminates double taxation

Limited to 75 shareholders

Only one class of stock

Shareholders pay taxes

Limited Liability Company (LLC)

May have unlimited number of owners

May have a single owner

Not restricted to one class of stock

Other Forms Of Business Organization


Principles of Accounting

  • Cost

  • Business Entity

  • Continuity of the Business Unit

  • Unit of Measurement

  • Objective Evidence

  • Full Disclosure

  • Consistency

  • Matching

  • Conservatism

  • Materiality


States that when a transaction is recorded, the transaction price (cost) establishes the accounting value.

Cost Principle


Statements are based on the concept that each business maintains its own accounts, & that these accounts are separate from other interests of the owners.

Business Entity


The assumption that the business will continue indefinitely

Continuity of the Business Unit


Unit of Measurement

  • All transactions are expressed in monetary terms


Accounting records are based on objective evidence ( invoices, checks, cash register receipts)

Objective Evidence


Financial statements must provide all information pertinent to interpretation of the financial statements.

Full Disclosure


The same accounting method from time period to time period.

Consistency


Match revenues with expensesCash versus accrual.

Matching


Recognize expenses as soon as possible, but delay recognition of revenues until they are sure.Also, Value Inventory, Investments, PPE at the lower of Original Cost or Current Market Value.

Conservatism


Events or information must be accounted for if they make a difference to the readers of the financial statements.

Materiality


Overview of Financial Statements

  • Balance Sheet

  • Income Statement

  • Statement of Cash Flows


Fundamentals of Accounting

  • Balance Sheet

    Assets (Things Owned)

    = Liabilities ( Obligations )

    + Equity ( Residual Claims on Assets )


Fundamentals of Accounting

  • Income Statement

    Revenues

    - Expenses

    = Net Income (Loss)

    Temporary Accounts are Netted and Closed to Equity (retained earnings)


Fundamental Equation

  • Assets = Liabilities + Owners Equity

  • Assets = Liabilities

    + Permanent OE

    + Temporary OE

  • Assets = Liabilities

    + Permanent OE

    + Revenue

    - Expenses


Cash vs Accrual

  • Cash Basis Accounting

    • Recognize revenue or expense when cash received or disbursed

  • Accrual Basis Accounting

    • Recognize revenue when earned

    • Recognize expense when incurred


Assets

  • Resources owned by a business

    • Common characteristic – the capacity to provide future benefit or service

    • Use for the purpose production, consumption and exchange of goods or services

    • Future economic benefits results in cash inflows


Liabilities

  • Claims against assets

    • Creditors

    • Existing debts and obligations

      • Accounts payable

      • Notes payable

      • Wages payable

      • Sales, Real Estate and Income Taxes payable


Equity

  • Claims of the owners on the assets

    • Corporations

      • Paid in capital

      • Retained earnings

      • Revenues

      • Expenses

      • Dividends

        • Revenues > Expenses = Net Income

        • Revenues < Expenses = (Net Loss)


Transactions

  • Transactions defined: economic events of the enterprise recorded

  • Each transaction may be internal or external

  • Each transaction must identify the specific items affected and the net change on each item

  • Each transaction has a dual effect on the accounting equation

  • The two sides of the accounting equation must always equal


Effects of Transactions on the Accounting Equation

  • Increase in an asset

    • Decrease in another asset

    • Increase in a liability

    • Increase in owners equity

  • Increase in a liability

    • Increase in an asset

    • Decrease in another liability

    • Decrease in owners equity

  • Increase in owners equity

    • Increase in an asset

    • Decrease in liability


Homework Assignment

  • Problem 1

  • Problem 4

  • Problem 5

  • Problem 9

  • Problem 12


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