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Basics of Accounting (The Language of Finance) Devotional Introduction Video Discussion of Fundamentals Basic Accounting Problem Grade on Neatness – Bring Back Problem on Wednesday Note: Use a Pencil & Take Good Notes Business & Accounting

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Basics of accounting the language of finance l.jpg

Basics of Accounting (The Language of Finance)

Devotional

Introduction Video

Discussion of Fundamentals

Basic Accounting Problem

Grade on Neatness – Bring Back Problem on Wednesday

Note: Use a Pencil & Take Good Notes


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Business & Accounting

  • Accounting is the universal language of Business and Finance.

  • More CEO’s from fortune 500 companies have come up through the ranks of accounting than from any other area in business. Currently: 54%

  • Small businesses and usually fail because of poor accounting understanding.

  • Marriages usually fail because of poor financial management (80% of divorces are $$$$ related.)

  • If you want to get ahead in business & marriage determine that you are going to understand accounting basics.


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What do Accountants Account For?

  • Everything of value!


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Terms

  • Assets: Tangible and Non-tangible resources of a business that have future value. Usually sub-classified as follows:

    • Quick Assets (Liquid Assets)

      • Cash – Petty Cash – Receivables - Securities

    • Current Assets (Turn into cash/use annually)

      • All the above + Inventories, Supplies

    • Fixed Assets (Depreciated over several yrs.)

      • Buildings, Equipment, Natural Resources

    • Land (Fixed, but never depreciated)

    • Intangible Assets: Patents, Trademarks, Copyrights


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What are your Assets?

  • Bank Account & Money in your pocket

  • Car

  • Clothes

  • Books

  • Stocks/Bonds/CD’s

  • Prepaid rent

  • Computers & Electronic Equip.

  • Knowledge????

  • Abilities????


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Accounting Term: Liabilities

  • Other people’s claims against your assets!

    • What you owe!! Debts!

    • Classified as:

      • Current Liabilities (one year debt)

        • Credit Card Debt, Accounts Payable

      • Long Term Liabilities

        • Car, Mortgage, Note Payable

      • Unearned revenues

      • Bonds (usually super long term)


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What are your liabilities?

  • School Loan

  • Car Loan

  • Credit Card Balance

  • J.C. Penny Account

  • BYU-Idaho Amount Due


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Capital or Owners Equity

  • The portion of your assets that you can legally claim. (Net Assets) What you really own legally.

  • Assets – (minus) Liabilities = Owners Equity (or Capital)

  • Example (purchased a building for $500,000 with a 10% down payment ($50,000)

    • Cost of a building (sales price = Asset amount) $500,000

    • Less: What you still owe on the building (Liability) $450,000

    • Equals: Your equity in the building (Capital) or your net worth in the building. $50,000

  • Formula universally used in all financial and personal financial institutions:

    • Assets = Liability + Owners Equity (Balance Sheet Equation)

    • (Resources you have) =(What you owe on them) + (the principle you have paid on them.)


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Owners Equity Account Titles

  • Single Proprietorship:

    • Capital

  • Corporation:

    • Common Stock (what owners paid in)

    • Preferred Stock (what owners paid in)

    • Retained Earnings (profits that the business keeps in the business)


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What is your net worth???

  • What you have minus what you owe.

  • What format do we use in business and in personal finance to show our net worth?

    • A Balance Sheet Financial Statement

      • List of Assets (classified by type in accounts)

      • Compared or balanced with:

        • List of Liabilities and Owners Equity (classified by type and in accounts)

      • Text Book Example Page 660


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Example (Simplified)

  • John Doe’s Business or Personal Records Balance Sheet

    September 10, 2003

  • Assets:

    • Current:

      • Cash at Home $100

      • Cash Deposits in Bank 500

    • Fixed:

      • Wardrobe 2000

      • Equipment 1000

      • Car 5000

    • Total Assets: $8,600

  • Liabilities:

    • Current:

      • Credit Card Payable $500

    • Long Term:

      • Note Payable (on Car) $2000

    • Total Liabilities $2,500

  • Capital, John Doe: 6,100

  • Total Liabilities & Owners Equity: $8,600


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Other Terms

  • Temporary Accounts are used in addition to balance sheet accounts to record changes in owners equity each reporting period.

    • Expenses – Decrease in owners equity during the period by using up an asset or a portion of an asset. (or creating additional liabilities)

    • Revenue – Increase in owners equity during the period by performing a service or selling an asset.

    • Drawing or Dividends – Decrease in owners equity due to personal withdrawals by the owner(s).


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Income Statement Report

  • Used to determine the net income or net loss of an individual or business for a defined period of time.

    • Used for marking progress by comparing months and years

    • Used by financial institutions for determining the progress and status of a company or individuals financial health.

    • Used by the IRS for determining taxes


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Income Statement – What does it contain?

  • Matches Expenses with Revenues for a specific period of time. (Only the temporary type of accounts are on the income statement.) No Assets/Liabilities

  • Income Statement accounts are closed out at the end of the reporting period and started over again the next period….so comparisons can be made.

  • Personal Income Statement sometimes called a Cash Flow Statement example on page 661


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Income Statement – Example

Name of Individual or business

Income Statement

For period of time (Month of Sept. 2003)

Revenue:

Income from Job $500

Income from Pell Grant 2000

Total Revenue: $2500

Expenses:

Clothes Expense $300

Rent Expense 200

Food Expense 50

Tuition Expense 1200

Misc. Expense 250

Total Expenses: $2000

Net Income for September: $ 500


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Pop Quiz – Use a Pencil Today

  • 1. Which financial report is a “snapshot” of the of the financial status of a business or a family…..and is given a specific date?

  • 2. Which financial report is a “moving picture” of the business/enterprise for a period of time?

  • 3. What does a balance sheet balance?

  • 4. What are the two kinds of accounts found on an Income Statement?

  • 5. On what financial report(s) is the “cash” account found?

  • 6. What are the three subtitles of a income statement. (name them in the order they are given on the report)

  • 7. If the bank wanted to know your “Net Worth” what report would they ask for?

  • 8. Capital in a corporation is entitled ?

  • 9. Two ways to increase the capital account are?

  • 10. Two ways to decrease the capital account are?


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How do individuals or businesses keep track for all their assets, liabilities, capital, expenses, revenues. Etc.?

  • The “Accounting Process” or otherwise known as the Accounting Cycle. (also called the “Audit Trail” of business.

  • Based on universally accepted accounting principles. (Generally accepted accounting principles)

  • Double Entry Bookkeeping

  • Accrual Accounting vs. Cash Accounting

  • Bookkeeping part of accounting.


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Accounting Cycle – Start with financial transactions (you will need to know these steps!)

  • Verbs & Nouns for each step

  • #1 AnalyzeSource Documents

    • Check, receipts, invoices, deposit slips, etc.

    • Decide what accounts they represent

  • #2 Enter (journalize) data in the journal.

    • Chronological record of transactions

    • Book of original entry – checks and balances

    • Two or more accounts entered at cost

  • Make a Journal – Required


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Accounting Cycle will need to know these steps!)

  • #3 Post from the journal to the individual ledger accounts. (to keep a running balance of each account)

    • Ledger divided up into these different accounts:

      • Assets (100 accounts)

      • Liabilities (200 accounts)

      • Capital/Owners Equity (300 accounts)

      • Revenues (400 accounts)

      • Cost of Goods Sold (Expense) – (500 accounts)

      • General Expenses (600 accounts)

  • Make some ledger accounts - required


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Accounting Cycle #4 will need to know these steps!)

  • Adjust the necessary accounts to bring them up to date.

    • Requires internal transactions

    • Requires journal entries & posting as well

    • Example: Maybe some of your Supplies valued at $500 when you bought them have been used…you need to bring their value up to date and expense what has been used.

    • Example: Depreciation of Equipment


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Accounting Cycle #5 will need to know these steps!)

  • #5 At the end of the period or at any time (with computers) balance all of the accounts in a trial balance. (Checks and balance step to see if all of your journal entries and posting was correct.)

    • The trail balance is a list of all of your accounts with balances.

    • The total of the debit balances must equal the total of the credit balances.

  • Make a Trial Balance - Required


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Accounting Cycle #6 & 7 & 8 will need to know these steps!)

  • #6 Prepare the Financial Statements

    • Income Statement

    • Statement of Changes in Owners Equity

    • Balance Sheet

  • Make Financial Statements - Required

  • #7 Close out all the temporary accounts to zero, so that you can start a new period/cycle.

    • Requires journal entries and postin gs

  • #8. Analyze your financial findings.


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The Balance Sheet and Debits and Credits will need to know these steps!)

  • Balance Sheet Equation

    • A = L + OE

  • Use of another checks & balance method

    • Debits and Credits are terms used to increase or decrease various accounts and show balances.

    • All Accounts have either a debit or credit balance.

    • Assets/Expenses/Withdrawals have debit balances

      • Increased by debiting and decreased by crediting

    • Liabilities, Capital, and Revenues have credit balances.

      • Increased by crediting, and decreased by debiting


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  • Assets = Liabilities + O.E. will need to know these steps!)

  • Cash A/P Capital

  • Debit Credit Debit Credit Debit Credit

  • + - - + + -

  • 100 50 100

  • 75

  • -Drawing -Expense +Revenue

    • Dr Cr Dr Cr Dr Cr

    • + - + - - +

    • 50 75

  • Each Transaction in finance has a debit and a credit. The debit amount must always equal the credit amount. (Checks & Balances)

  • Example: Invested 100 Cash in my business.

  • Example: Paid $50 for Advertising Expense.

  • Example: Earned $75 for performing services

  • At the end of the day: (Assets = 125) = (Liabilities = 0) + (OE = 125) and debits = 225 and credits = 225 (Double balance, double witness)


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Quiz Preview – Review with Partner will need to know these steps!)

  • 1-2. Give the accounting equation and define each element in the equation.

  • _____________________________ = _________________________ + ______________________

  • Define:_________________________ _______________________ ______________________

  • 3. Accounting is called the _____________________________________ of business.

  • 4-7. Name these two statements (The Trial Balance is not a Statement) used in accounting which are used by managers to make financial decisions (the ones completed in your accounting project) What type of accounts are on each statement?

  • First Statement Prepared_____________________________________________________________

  • Types of accounts found on this statement._______________________________________________

  • Last Statement Prepared___________________________________________________________

  • Two accounts found on this statement?__________________________________________________

  • 8-12. Give the verbs and nouns of the Six first steps in the accounting cycle: (fill in the blanks)

  • VerbNoun

  • 1.) _________________________________ _________________________________

  • 2.) _________________________________ _________________________________

  • 3.) _________________________________ _________________________________

  • 4.) ____Adjust _______________________ ____Internal Accounts_______________

  • 5.) _________________________________ _________________________________

  • 6.) _________________________________ _________________________________


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Accounting Quiz - Continued will need to know these steps!)

  • 13. If the accountant wanted to know the balance of cash currently owned by the business he would go to the:

  • ______________________________________________________

  • 14. If the accountant wanted to know what type of transaction happened on a specific day he would go to the:

  • ______________________________________________________

  • 15. The report that determines the net profit or loss of a business for a specific period of time is called the:

  • ______________________________________________________

  • Credit Debit Matching

  • 16. ______Increase to Assets when recorded in the journal are: A. Debit(s)

  • 17._______Increase to Liabilities when recorded in the journal are: B. Credit(s)

  • 18. _______Increase to Expenses when recorded in the journal are: C. Can be either Dr or Cr.

  • 19._______Asset accounts carry what kind of balances: D. Always both Dr & Cr

  • 20._______Revenue accounts carry what kind of balance:


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Quiz – Last Page will need to know these steps!)

  • 21. What does ROI stand for in finance/accounting? _____________ __________ ______________________

  • 22. What is the “Separate Entity Principle”_______________________________________________________

  • 23. Net Income is added to what account in the “Statement of Owners Equity”__________________________

  • 24. In what two ways can you decrease the Capital Account? _________________ _____________________

  • On the Back

  • 25-26. Draw/format the ledger account for cash (only) with a beginning balance of $2000 and post the following two transactions in the account that occurred today. (You do not need to make any journal entries.)

  • A. Received $5000 into the business from a personal investment from the owner of the business.

  • B. Paid out $1000 to employees in wages.

  • 27-30. Format the April Income Statement for “Ace” company that has these accounts: (You may not need to use all of the accounts): Cash: $100, A/P $50, Service Revenue: $500, Sales Revenue: $1000, Cost of Goods Sold Expense: $400, Advertising Expense: $100, Misc. Expense: $300, Wages Expense $200, A/R: $300.


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The best way to learn: will need to know these steps!)

  • Complete a simplified practice set that covers the entire accounting cycle.

  • Work in partnership with another student and the teacher. Use a pencil!

  • Final product: Do your own set of personalized financial statements.

  • Problem due on Friday 1/16/04. Quiz over the accounting language and Accounting Cycle on Friday.


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Separate Entity Principle will need to know these steps!)(Keep your business records separate from you personal records)

  • Lets start a home cleaning business.

  • First Transaction on 1/1

    • Pull $1,000 savings out of your personal account and put it into your business account.

    • Assets = Liabilities + Owners Equity

      Cash = 0 Capital

      1,000 1,000


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Record in Daily Journal will need to know these steps!)

  • Date Entries PR DR CR Pg1

    • 1/1 Cash 101 $1000

    • Capital 301 $1000

    • Started business with personal investment.


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Posting to the Ledger Accounts: will need to know these steps!)

  • Post $1000 as a debit to the cash account

  • Post $1000 as a credit to the capital account

  • Cash 101

  • Date Explanation PR DR CR BAL

  • 1/1 J1 $1000 $1000

  • Capital 301

  • 1/1 J1 $1000 $1000


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2 will need to know these steps!)nd Transaction

  • Acquire a Loan of $5,000 to buy equipment and materials to start a cleaning business.

  • Assets = Liabilities + OE

  • Cash Loan Payable Capital

    $6,000 $5,000 $1,000

    ($1,000 + $5,000)

    $6000 = $6000


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Journal Entry will need to know these steps!)

  • Date Explanation PR DR CR

    • 1/2 Cash 101 $5000

    • Loan Payable 201 $5000

    • Received cash on credit.


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Posting will need to know these steps!)

  • Cash (101)

    • Date Explanation PR DR CR BAL

    • 1/1 J1 1000 1000

    • 1/2 J1 5000 6000

  • Loan Payable (201)

    • Date Explanation PR DR CR BAL

    • 1/2 J1 5000 5000


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3 will need to know these steps!)rd Transaction – Jan 3rd

  • Purchased Equipment (Vacuum, Carpet Cleaner, Floor Polisher etc.) Cost: $3,000

  • Assets = Liabilities + OE

  • Cash Loan Payable + Capital

  • Equipment

  • Accounting Equation Stays in Balance:

  • Cash = $3000 = $5000 + $1000

  • Equipment = $3000


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Journal Entry will need to know these steps!)

  • Date PR Dr Cr___

    • 1/3 Equipment 120 $3000

    • Cash 101 $3000

      • Used cash to purchase equipment


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Posting to the Ledger Accounts will need to know these steps!)

  • Cash 101

    • Date PR Dr Cr Bal___

    • 1/1 J1 1000 1000

    • 1/2 J1 5000 6000

    • 1/3 J1 3000 3000

  • Equipment 120

    • Date PR Dr Cr Bal__

    • 1/3 J1 3000 3000


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Pop Quiz – Are you ready? will need to know these steps!)

  • 1. Give the accounting equation and define each element.

  • 2. What is the separate-entity principle?

  • 3. Give the first three steps in the accounting cycle using verbs and nouns.

  • 4. When a family or a business does something to change their financial picture or position it is called what?

  • 5. What are the two financial statements discussed in class and what type of accounts are on each.

  • 6. When we increase an asset what do we say in terms of debits and credits? How about a liability?

  • 7. What are the temporary accounts used in financial management?

  • 8. What kind of a balance do the following accounts carry:?

    • Assets Expenses Revenues Liabilities Capital Drawing

  • 9. Format a balance sheet and income statement.

  • 10. What do the following terms mean? ROI, Liquidity, Profit, Goodwill


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4 will need to know these steps!)th Transaction – 1/4

  • Paid $200 for full page ad in the Newspaper.


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Journal Entry will need to know these steps!)

  • Date PR Dr Cr

    • 1/3 Advertising Expense 601 200

    • Cash 101 200

    • Purchased ad for business


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Postings will need to know these steps!)

  • Advertising Expense 601

    • Date PR Dr Cr Bal______

      1/4 J2 200 200

  • Cash 101

    • Date PR Dr Cr Bal___

    • 1/1 J1 1000 1000

    • 1/2 J1 5000 6000

    • 1/3 J1 3000 3000

    • 1/4 J2 200 2800


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5 will need to know these steps!)th Transaction 1/5

  • Had my first cleaning job for $400. Was paid $100 down with the rest due at the end of the month.


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Journal Entry will need to know these steps!)

Date PR Dr Cr

1/5 Cash 101 100

A/R 110 300

Revenue 401 400

Performed services and received

down payment. Bal due: 1/31


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Postings will need to know these steps!)

  • Cash 101

    • Date PR Dr Cr Bal___

    • 1/1 J1 1000 1000

    • 1/2 J1 5000 6000

    • 1/3 J1 3000 3000

    • 1/4 J2 200 2800

    • 1/5 J2 100 2900

  • Accounts Receivable 110

    • Date PR Dr Cr Bal___

    • 1/5 J2 300 300

  • Service Revenue 401

    • Date PR Dr Cr Bal___

    • 1/5 J2 400 400


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Transaction #6 #7#8#9&10 will need to know these steps!)

  • Hired my little brother to help me and paid him $100 in wages

  • Worked all day on second cleaning job and was paid $500

  • Had to spend $300 on cleaning supplies to be used during the next two months.

  • Took $200 out of my business to take my wife on a mini moon.

  • Allocated 50% use of my truck to my business. Book price of truck = $6000


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Journal Entries will need to know these steps!)

  • Date PR Debit Credit

  • 1/6 Wages Expense 620 100

  • Cash 101 100

  • 1/7 Cash 101 500

  • Service Revenue 401 500

  • 1/8 Cleaning Supplies 130 300

  • Cash 101 300

  • 1/9 Drawing 320 200

  • Cash 101 200

  • 1/10 Truck 150 3000

  • Capital 301 3000


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Postings will need to know these steps!)

  • Wages Expense 620

  • Date PR Dr Cr Bal

  • 1/6 J2 100 100

  • Cash 101

    • Date PR Dr Cr Bal___

    • 1/1 J1 1000 1000

    • 1/2 J1 5000 6000

    • 1/3 J1 3000 3000

    • 1/4 J2 200 2800

    • 1/5 J2 100 2900

    • 1/6 J2 100 2800

    • 1/7 J2 500 3300

    • 1/8 J2 300 3000

    • 1/9 J2 200 2800


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Posting Cont. will need to know these steps!)

  • Service Revenue 401

    • Date PR Dr Cr Bal___

    • 1/5 J2 400 400

    • 1/7 J2 500 900

  • Cleaning Supplies 130

    • Date PR Dr Cr Bal_____

    • 1/8 J2 300 300

  • Anderson, Drawing 320

    • Date PR Dr Cr Bal______

      1/9 J2 200 200


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Posting Cont. will need to know these steps!)

  • Truck 150

    • Date PR Dr Cr Bal_____

    • 1/10 J2 3000 3000

  • Capital 301

  • 1/1 J1 $1000 $1000

  • 1/10 J2 $3000 $4000


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Adjustments at the end of the month – Internal Transactions – Step #4 in the Accounting Cycle

  • Adjusted the cleaning supplies to show that 33% had been used up.

  • Adjusted the truck account to show that one month had been used up.

    • Truck was expected to last for two more years

    • $3000/24months = $125 use per month


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Journal Entries – Adjustments Transactions –

  • Date PR Dr Cr__

  • 1/31 Adjustments

  • Cleaning Supplies Expense 621 100

  • Cleaning Supplies 130 100

    • Inventory showed that only $200 in supplies remained

    • at the end of the month.

  • 1/31 Adjustment

  • Depreciation Expense/Trk 650 125

  • Truck (Accum Dpr.) 151 125


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Postings of Adjustment Entries Transactions –

  • Cleaning Supplies Expense 621

  • Date PR Dr Cr Bal

    • 1/31 Adjustment J2 100 100

  • Cleaning Supplies 130

    • Date PR Dr Cr Bal_____

    • 1/8 J2 300 300

    • 1/31 Adjustment J2 100 200

  • Depreciation Expense – Truck 650

  • Date PR Dr Cr Bal

    • 1/31 Adjustment J2 125 125

  • Truck 150

  • Date PR Dr Cr Bal_____

    • 1/10 J2 3000 3000

    • 1/31 Adjustment 125 2875


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Step # 5 – Trial Balance Transactions –

  • Account Debit Credit

    • Cash $2800

    • Accounts Receivable 300

    • Cleaning Supplies 200

    • Equipment 3000

    • Truck 2875

    • Loan Payable 5000

    • Anderson, Capital 4000

    • Anderson, Drawing 200

    • Service Revenue 900

    • Advertising Expense 200

    • Wages Expense 100

    • Cleaning Supplies Expense 100

    • Depreciation Expense/Truck 125

    • Total Balance $9,900 $9,900


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Step #6 – Prepare Financial Statements Transactions –

Anderson Cleaning Services

Income Statement

Month of January 2004

Revenue:

Service Revenue: $900

Expenses:

Advertising Expense: $200

Wages Expense: 100

Cleaning Supplies Expense: 100

Depreciation Expense: 125

Total Expenses: 525

Net Income (Loss) $375

Return on Cash Investment $375/1000 = 37.5%

Return on Total Investment $375/4000 = 9.4%

What is our Income Statement Missing???????


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Statement of Owners Equity Transactions –

Anderson’s Cleaning Business

Statement of Owners Equity

For May 2005

Beginning Capital 5/1/05: $1000

Add: New Investments (truck) 3000

Net Income (from Income Statement) 375

Less: Drawing (mini-moon) (200)

Net Loss na

Ending Capital 5/31/05: $4175


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Balance Sheet Transactions –

  • Anderson Cleaning

  • Balance Sheet

  • January 31, 2204

  • Assets:

    • Cash $2,800

    • Accounts Receivable 300

    • Cleaning Supplies 200

    • Equipment 3000

    • Truck 3000

    • Less Accum. Depr. 1252875

    • Total Assets: $9,175

      • ________

  • Liabilities

    • Loan Payable $5,000

  • Owner’s Equity

    • Anderson, Capital 4,175

  • Total Liabilities & O.E: $9,175

  • ______


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    Sample Quiz Questions Transactions –

    • Terms: Assets, Liabilities, Owners Equity, Capital, Debits, Credits, Accounting Equation, Ledger, Accounting Cycle, Posting, Financial Statements, ROI

    • Seven Steps in the Accounting Cycle? Verbs & Nouns???

    • Format an Income Statement/Balance Sheet? (Given the accounts)

    • Record and post and business transaction


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    8 Steps Reviewed Transactions –

    • VerbNoun

    • 1. Analyze Source Documents

    • 2. Enter (Journalize) Journal

    • 3. Post Ledger

    • 4. Adjust Internal Entries

    • 5. Balance Trial Balance

    • 6. Prepare Financial Statements

    • 7. Close Temporary Accounts

    • 8. Analyze Data


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    Debits & Credits Transactions –

    • Used for checks and balances in Acct.

    • Must always be equal

    • Every Transaction has equal debits/credits

    • Debits increase Assets/Expenses/Drawing

    • Credit increase Liabilities/Capital/Revenue

    • Debits decrease Liabilities/Cap/Rev

    • Credits decrease Assets/Exp/Drawing


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    Owners Equity Transactions –

    • Two ways to increase this account:

      • 1) New investments in the business

        • Cash Investments

        • Equipment Investments

      • 2) Revenues earned in the business

    • Two ways to decrease this account:

      • 1) Expenses (Using assets up to generate a profit or incurring new liabilities)

      • 2) Taking money out of the business for personal use.


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    Debits and Credits Transactions –

    • Terms used to increase or decrease an account and keep everything in balance.

    • Assets = Liabilities + O.E.

      Increases Increases Increases

      (Debits) (Credits) (Credits)

      Decreases Decreases Decreases

      (Credits) (Debits) (Debits)


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    Steps in the Accounting Cycle Transactions –

    • 1. Analyze the transaction source documents and decide what accounts are involved. What account needs to be increased and what account needs to be decreased…..what account(s) needs to be debited and what account(s) need to be credited.

    • Examples of Source Documents:

      • Deposit Slips, Invoices, Sales Slips, Contracts, memos, packing slips, electronic memos, etc.

    • Source documents are usually kept on file (three years) as backup for tax and company audits.


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    Step #2 - Enter source document data in a chronological journal. (Data Entry on the Computer)

    • The Journal is called the book of original entry, and is on the computer in most companies.

      • It gives the date of the transaction.

      • It gives a record of the accounts debited and credited in the transaction. (the accounts increased or decreased)

      • It gives the post reference number of the ledger accounts involved. (after the transaction has been posted to the ledger accounts)


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    Step #3 – Post (transfer) transaction data from the journal to the individual ledger accounts.

    • The “Ledger Accounts” are individual records of all the assets, liabilities, and owners equity accounts.

    • Each Ledger Account is updated daily and keeps a ongoing record of activity in the account and balance of the account.

    • All data that goes into the ledger accounts must first be put into the journal and then posted from the journal to the ledger account on the day the information is journalized.


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    Step #4 – Adjustments journal to the individual ledger accounts.

    • Adjustments are the internal transactions of a company that a good accountant will make to set in order each account. They must be journalized first and then posted to the ledger.

    • Adjustments are usually made at the end of an accounting period.

    • Examples: Depreciation, Use of pre-paid rent or insurance, interest earned or expensed, use of supplies and materials, unearned revenues earned during the period.


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    Step #5 – Trial Balance journal to the individual ledger accounts.

    • Before preparing your statements, make sure that all of your accounts have the correct balance.

    • List of all accounts with debit and credit balances……DEBITS MUST EQUAL CREDITS.

    • If not in balance you must go back in your audit trail and find your errors.


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    #6 Prepare your Financial Statement – Income Statement, Statement of OE, & Balance Sheet

    • This is the main product of the accounting system that outsiders/investors/creditors etc. will look at to see the financial health of your business.

    • These statements and how to read them and create profitability ratios from their numbers should become second nature to a business owner, or anyone interested in finance. This knowledge is essential.


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    #7 – Close all the temporary accounts and start over. Statement of OE, & Balance Sheet

    • Close the temporary accounts:

      • All Expense Accounts

      • All Revenue Accounts

      • All Drawing or Dividend accounts.

    • Transfer the net increases or decreases of these temporary accounts into the permanent owners equity account of capital or retained earnings.

    • This makes it possible for the company to start a new set of reports to compare with the old etc.


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    #8 Analyze Data Statement of OE, & Balance Sheet

    • A list of the accounts you start the new accounting period with.

    • A check to see if Debits = Credits with these continuing accounts.

    • If total DEBITS DO NOT EQUAL total CREDITS a mistake has been made and needs correction.


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    Final Quiz Statement of OE, & Balance Sheet

    • 1. Define:

      • Asset:

      • Liability:

      • Capital:

      • Expense:

      • Revenue:

    • 2. Write out the proper accounting equation: (formula)


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    Final Quiz: Statement of OE, & Balance Sheet

    • 3. What is the first accounting book called that is used to record transactions chronologically?

    • 4. For any and all transactions Debits must always equal _______________?

    • 5. If I wanted to know what balance I had in cash what record/book would I turn to?

    • 6. Cash carries what kind of a balance?


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    Quiz: Statement of OE, & Balance Sheet

    • 7. The use of a fixed asset over a period of time is called what?

    • 8. What is ROI and what two figures in accounting do you use to determine it?

    • 9. The accounting cycle is also known as the _______________ _____________?


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    Quiz – Last Question Statement of OE, & Balance Sheet

    • 10. Using the following accounts, format in titles only the Income Statement and the Balance Sheet. (List titles and total lines were appropriate.)

      • Cash,

      • Accounts Payable,

      • Accounts Receivable,

      • Equipment,

      • Advertising Expense,

      • Depreciation Expense,

      • Service Revenue,

      • Capital


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    Monday’s Assignment Statement of OE, & Balance Sheet

    • 1. Using the “Balance Sheet Format,” prepare your own personalized or family Balance Sheet Report listing at least seven accounts. (Make it neat (with heading) and type it up)

    • 2. Using the “income statement format,” complete a cash flow personalized income statement showing all the revenue (money) you received in January, and the expenses (money) you spent. The bottom line would be your net profit or net loss for January. Show at least seven items in this report. Examples of Revenue: (money from parents) (money from pell grant) (money from savings) (money earned from work) (money borrowed from roommates) (money received from loans) etc. Examples of expenses: (money paid for tuition) (money paid for books) (food) (entertainment) (utilities) (phone) etc.

    • Both Reports need to have headings and both need to be in the format for balance sheet and income statement that we have learned in class. Both Need to be typed.


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    Monday Statement of OE, & Balance Sheet

    • Turn in your neat & complete accounting problem with three statements.

    • Be prepared for a quiz on the basics of accounting.

      • Know the 8 steps of the accounting cycle.

      • Know the financial report formats for the income statement and balance sheet….and the format of a ledger account. Also debits & credits.

    • Turn in your personal balance sheets and income statements for January.


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