Chapter 2 PowerPoint slides (PDF file)

ACC 111
CHAPTER TWO
ANALYZING
TRANSACTIONS: THE
ACCOUNTING EQUATION
Material Copyright-Protected: Janice
Stoudemire and Barbara Wagers
Chapter 2
Analyzing Transactions: The Accounting
Equation
Learning Objectives
1.
2.
3.
4.
5.
6.
Accounting elements
Accounting equation
Business transactions
Effects of transactions on accounting
equation
Income statement, Statement of
Owner’s Equity, Balance Sheet
Phases of Accounting Process
MEET YOUR GUIDES!
SEINFELD TRIVIA:
Who are Jerry‟s three best
friends and co-stars in
Seinfeld?
Elaine,
George,
and Kramer
INTRODUCING …
WHO IS SHE?
THIS IS???
AND THIS IS?
SEINFELD QUOTE:
According to most studies, people‟s
number one fear is public speaking.
Number two is death.
Death is number two.
Does that sound right?
This means to the average person,
if you go to a funeral, you‟re better
off in the casket than doing the
eulogy.
BASIC CONCEPTS
Separate Entity Concept
Cost Concept
Objectivity Concept
Unit of Measure Concept
Accounting Period Concept
OBJECTIVE 1: DEFINE THE ACCOUNTING
ELEMENTS
OBJECTIVE 2: CONSTRUCT THE
ACCOUNTING EQUATION
OBJECTIVE 5: PREPARE AND DESCRIBE
THE PURPOSES OF A SIMPLE INCOME
STATEMENT, STATEMENT OF OWNER‟S
EQUITY, AND BALANCE SHEET
FINANCIAL
STATEMENTS

Primary means of
communicating
accounting
information to users
TYPES OF FINANCIAL
STATEMENTS




Income Statement
Statement of Owner's
Equity
Balance Sheet
Statement of Cash Flows
HEADING FOR ALL
FINANCIAL STATEMENTS
First Line:
Name of Company
Second Line:
Name of Statement
Third Line:
Date Line (two possibilities)
INCOME STATEMENT



Shows how profitable the
business was
Heading
Summarizes revenues
earned and expenses
incurred over a period of
time
INCOME STATEMENT
Revenues
-Expenses
=Net Income or (Loss)
Revenues > expenses? Income
Expenses > revenues? (Loss)
George‟s Rental Agency
Income Statement
For the Year ended December 31, 2013
REVENUES:
Rental Fees
$650
Delivery Fees
50
Total Revenues
$700
EXPENSES:
Wage Expense
$150
Tax Expense
50
Supply Expense
200
Total Expenses
400
NET INCOME
$300
Why two columns for numbers? Try this one!
George‟s Rental Agency
Income Statement
For the Year ended December 31, 2013
REVENUES:
Rental Fees
$650
Delivery Fees
50
Total Revenues
$700
EXPENSES:
Wage Expense
$150
Tax Expense
50
Supply Expense
200
Total Expenses
400
NET INCOME
$300
Harder to figure out!
SILLY TIP
Intelligent Students
Read Every Night!
Income Statement:
Revenues
– Expenses
= Net Income (or Loss)
REVENUES
• What we earn by performing a
service or selling a product
• When we perform the service,
we earn revenue (regardless of
when we are paid in cash)
• Makes us worth more
• Revenue = income = earned = FEES
• Do not include investment by
owner or borrowing by business
EXPENSES
• The costs of doing business
• Sometimes we pay in cash, other
times we promise to pay
• When we “use up” goods or
services, we incur the expense
(regardless of when we pay it in
cash)
• Makes us worth less
• Do not include withdrawals by owner
SEINFELD TRIVIA:
What is
Jerry‟s job
in the
television
series?
Comedian
SEINFELD TRIVIA:
Who is this and
what is his
famous line?
Soup Nazi
“no soup for
you”
SEINFELD QUOTE:
Men don‟t care what‟s on
TV.
They only care what else is
on TV.
EXAMPLE

Prepare an Income Statement for
Kramer's Custom Car Rentals for
the month of April 2013, using the
following data:
–Car Rental Fees
1,700
–Salary Expense
800
–Security Expense
250
–Truck Rental Fees
300
–Utilities Expense
100
Kramer's Custom Car Rentals
Income Statement
For the Month ended April 30, 2013
REVENUES:
Car Rental Fees
$1,700
Truck Rental Fees
300
Total Revenues
$2,000
EXPENSES:
Salary Expense
$800
Security Expense
250
Utilities Expense
100
Total Expenses
1,150
NET INCOME
$850
IN-CLASS
PROBLEM 3-10A
Income Statement
(hint: just use from Delivery
Fees on down the list –
ignore other items for now)
Answers
BALANCE SHEET
o
o
o
Shows company‟s
financial position at
particular point in time
o Heading
Often called Statement
of Financial Position
Represents the
“Accounting Equation”
BALANCE SHEET
ASSETS = LIABILITIES + OWNER‟S
EQUITY
Top & bottom OR
Left & right
SILLY TIP
Boy Scouts Are Learning Opera!
Balance Sheet:
Assets = Liabilities + Owners
Equity
ASSETS
Resources we own that we expect
to benefit us in the future
\6
4
EXAMPLES OF ASSETS
o
Cash
o
Accounts Receivable
o
Notes Receivable
PROMISSORY NOTE
$1,000.00
Amount
Principal
Interest period
starts
May 20, 20x1
Date
For value received, I promise to pay to the order of
Cook County Bank & Trust Company
Chicago, Illinois
One Thousand and no/100---- Dollars
on August 18, 20x1
plus interest at the annual rate of 8 percent.
Payee
Interest period
ends on the
maturity date
Interest rate
Maker
EXAMPLES OF ASSETS
o
Inventory
o
Prepaid Expenses (including supplies)
o
Land, Building, Equipment, etc
EXAMPLES OF ASSETS
oListed in order they will be
converted to cash or used in
operations
oCRISP, then more permanent
items
LIABILITIES
Debts - amounts we owe
that (typically) we must
pay in the future
EXAMPLES OF
LIABILITIES
o
Accounts Payable
o
Notes Payable
o
Wages,Taxes,
Mortgage Payable
OWNER‟S EQUITY
o
Business‟ net worth; how
much of the business
the owner owns outright
o
How much owner would
get if we go out of
business (theoretically)
OWNER‟S EQUITY
IF
Assets = Liabilities + Owner‟s Equity
THEN
Assets – Liabilities = Owner‟s Equity
This is always true for
any transaction!
OWNER‟S EQUITY
There are only TWO types of
Owner's Equity accounts!
“Owner‟s name,CAPITAL”
“Owner‟s name, DRAWING”
OWNER‟S EQUITY
ASSETS = LIAB. + OWNER‟S EQUITY
LEFT side = resources of the business
(assets)
RIGHT side = who provided these
resources: creditors (liabilities) and
owners (capital)
IN-CLASS
EXERCISE 2-2A
Accounting Equation
Answers
SEINFELD TRIVIA:
Where did the
majority of the
Seinfeld series
take place?
Manhattan
SEINFELD QUOTE:
Why do people give each other
flowers?
To celebrate various important
occasions, they‟re killing living
creatures?
Why restrict it to plants?
“Sweetheart, let‟s make up. Have
this deceased squirrel.”
EXAMPLE – BALANCE SHEET
Prepare a Balance Sheet for Kramer's Custom Car
Rentals on April 30, using the following data:
• Accounts Payable
300
• Accounts Receivable
500
• Cash
1,600
• Kramer, Capital
3,000
• Land
1,900
• Notes Payable
1,700
• Prepaid Insurance
200
• Tools
800
Kramer's Custom Car Rentals
Balance Sheet
April 30, 2013
ASSETS
Cash
$1,600
Accounts Receivable
500
Prepaid Insurance
200
Land
1,900
Tools
800
Total Assets
$5,000
LIABILITIES AND OWNER‟S EQUITY
LIABILITIES
Accounts Payable
$300
Notes Payable
1,700
Total Liabilities
$2,000
OWNER‟S EQUITY
Kramer, Capital
3,000
Total Liab. and Owner‟s Equity
$5,000
ASSETS VS. EXPENSES
ASSETS:
o Items we have purchased
but not yet used up
EXPENSES:
o When we use up an
asset, it becomes
an expense to us
REVENUES VS. ASSETS
REVENUES:
o Represent the activity
o Intangible
ASSETS:
o Are tangible, real
o A by-product of earning
revenue
o Can get an asset
without earning revenue
EXPENSES VS. LIABILITIES
EXPENSES:
o Represent the cost of the
activity
o Intangible
LIABILITIES:
o
o
o
o
Are tangible, real
Incurred, not paid yet
A by-product of expenses
Can incur liability without
incurring expense
IN-CLASS
PROBLEM 3-12A Balance Sheet
(assume $15,400 capital; ignore
items you don‟t need)
STATEMENT OF
OWNER‟S EQUITY


Shows the changes in a
business‟ net worth (i.e., it‟s
owner‟s equity) during a
period of time
Heading – for a period of
time
WHAT AFFECTS OWNER‟S
EQUITY?
“WIRE” can help you remember!
 Withdrawals
by Owner
 Investments by Owner
 Revenues
 Expenses
STATEMENT OF OWNER‟S
EQUITY
REMEMBER “BINWE”
Beginning Capital
+ Investments by Owner
+ Net Income (or – Net Loss)
- Withdrawals
= Ending Capital
Elaine‟s Elephant Ear Company
Statement of Owner‟s Equity
For the Year ended December 31, 2014
Elaine, Capital, Jan. 1,2014
$5,000
Investments during year
1,000
Total investment
$6,000
Net Income for year
$3,000
Less Withdrawals for year
600
Increase in capital
2,400
Elaine, Capital, Dec. 31,2014
$8,400
Note: revenues and expenses are not shown
individually, just difference between two!
Elaine‟s Elephant Ear Company
Statement of Owner‟s Equity
For the Year ended December 31, 2014
Elaine, Capital, Jan. 1,2014
$5,000
Investments during year
1,000
Total investment
$6,000
Net Income for year
$3,000
Less Withdrawals for year 6,600
Decrease in capital
(3,600)
Elaine, Capital, Dec. 31,2014
$2,400
SEINFELD TRIVIA:
What catchprase
used in the series
became a part of
everyday speech?
Yada Yada
SEINFELD QUOTE:
Somebody just gave me a
shower radio.
Thanks a lot.
Do you really want music in the
shower?
I guess there‟s no better place
to dance than a slick surface
next to a glass door.
SEINFELD QUOTE:
I was the best man at the
wedding.
If I‟m the best man, why is
she marrying him?
EXAMPLE – OWNERS EQUITY
Kramer‟s Beginning Capital $1,900
Withdrawals
350
850 ?
Net Income
Investments by Kramer
600
Kramer's Custom Car Rentals
Statement of Owner‟s Equity
For the Month Ended April 30, 2013
Kramer, Capital, April 1, 2013
$1,900
Investments during month
600
Total investment
$2,500
Net Income
$850
Less Withdrawals
350
Increase in capital
500
Kramer, Capital, April 30, 2013
$3,000
Goes to
Balance
Sheet
IN-CLASS
EXERCISES 2-6A, 2-7A
Statement of Owner‟s
Equity
Answers
SEINFELD QUOTE:
Now they show you how
detergents take out bloodstains,
a pretty violent image there. I
think if you‟ve got a T-shirt with
a bloodstain all over it, maybe
laundry isn‟t your biggest
problem. Maybe you should get
rid of the body before you do
the wash.
IN WHAT ORDER DO WE
PREPARE STATEMENTS?
o
o
o
Income Statement
first – why?
Statement of
Owner‟s Equity
second – why?
Balance Sheet last
TIPS ON PRESENTATION
 Adding
two numbers together?
 Subtracting one number from
another?
 Final total?
 Dollar signs?
 Only one of an item?
REAL-WORLD FINANCIAL
STATEMENTS
 Google
 McDonalds
 Krispy
Kreme
OBJECTIVE 3: ANALYZE
BUSINESS TRANSACTIONS
OBJECTIVE 4: SHOW THE
EFFECTS OF BUSINESS
TRANSACTIONS ON THE
ACCOUNT EQUATION
ANALYZING
TRANSACTIONS



What are transactions?
Ask: What do I have
MORE of? What do I
have LESS of?
Record in accounting
equation – it must stay
in balance!
POSSIBILITIES
 Sometimes
MORE of TWO
things
 Sometimes LESS of TWO things
 Sometimes MORE of one and
LESS of another
 As long as it BALANCES
ANALYZING
TRANSACTIONS


Owner investments and
earning revenues mean
Owner‟s Equity INCREASES
(show with plus sign)
Owner withdrawals and
incurring expenses mean
Owner‟s Equity DECREASES
(show with minus sign)
ANALYZING BUSINESS
TRANSACTIONS
SEINFELD TRIVIA:
How many seasons was
Seinfeld on the air?
9 (1989 – 1998)
SEINFELD QUOTE:
It‟s amazing that the
amount of news that
happens in the world every
day always just exactly fits
the newspaper.
ASSETS
Cash
Beginning
balance
Jerry
invests
$9000
Buy a
camera
for $2000
cash
Create
$600 ads
for Elaine
(cash)
Create
$1900
ads –
Kramer to
pay soon
Acc.
Receiv.
LIAB.
Equip
Acc.
Pay.
OWNER’S EQUITY
Jerry,
Capital
1,000
1,000
+9000
+9000
-2000
- Jerry,
Draw.
Prof.
Fees
+2000
+600
+600
+1900
+1900
- Utility - Salary
Exp.
Exp.
SEINFELD QUOTE:
You know you‟re getting old
when you get that one
candle on the cake. It‟s
like, “See if you can blow
this out.”
ASSETS
Cash
Pay $800
Salary to
George
Acc.
Receiv.
Equip
Acc.
Pay.
OWNER’S EQUITY
Jerry,
Capital
- Jerry,
Draw.
Prof.
Fees
- Utility - Salary
Exp.
-800
+3000
Pay $900
for
electricity
-900
Pay half
owed on
computer
-1500
+500
Exp.
-800
Buy
$3,000
computer
-pay later
Kramer
pays us
$500
LIAB.
+3000
-900
-1500
-500
SEINFELD QUOTE:
I once had a leather jacket that got
ruined in the rain.
Why does moisture ruin leather?
Aren‟t cows outside a lot of the time?
When it‟s raining, do cows go up to
the farmhouse, “Let us in! We‟re all
wearing leather! Open the door! We‟re
going to ruin the whole outfit here!”
ASSETS
Cash
Acc.
Receiv.
LIAB.
Equip
Acc.
Pay.
OWNER’S EQUITY
Jerry,
Capital
Jerry
takes out -200
$200
Prof.
Fees
+300
4700
- Utility - Salary
Exp.
Exp.
-200
Receive
$300
phone
bill- don’t
pay
Totals
- Jerry,
Draw.
1400
5000
1800
-300
10000
-1200
2500
-1200
-800
SEINFELD QUOTE:
Why do they call it a
“building”?
It looks like they‟re finished.
Why isn‟t it a “built”?
ASSETS
Cash
Acc.
Receiv.
LIAB.
Equip
Acc.
Pay.
OWNER’S EQUITY
Jerry,
Capital
Jerry
takes out -200
$200
Prof.
Fees
+300
5700
Utility
Exp.
Salary
Exp.
-200
Receive
$300
phone
bill- don’t
pay
Totals
Jerry,
Draw.
1400
12,100
5000
1800
-300
10000
-200
2500
12,100
-1200
-800
POSSIBILITIES
 Sometimes
MORE of TWO
things
 Sometimes LESS of TWO
things
 Sometimes MORE of one and
LESS of another
 As long as it BALANCES
IN-CLASS
PROBLEM 2-9A
Analyzing transactions
Use these columns:
 Assets: Cash; AR; Office
Supplies; Prepaid Insurance
 Liabilities: Accounts Payable
 Owner‟s Equity: Jay, Capital;
Jay, Drawing; Service Fees; Rent
Expense
HOMEWORK
PROBLEM 2-9B
Analyzing transactions
Answers
LET‟S PREPARE
FINANCIAL
STATEMENTS BASED ON
INFO ON PAGE 16
Seinfeld Advertising Company
Income Statement
For the Month Ended May 31, 2013
Revenues:
Professional Fees
Expenses:
Utilities Expense
Salary Expense
Total Expenses
Net Income
$2,500
$1,200
800
2,000
$ 500
Seinfeld Advertising Company
Statement of Owner‟s Equity
For the Month Ended May 31, 2013
Jerry, Capital, May 1, 2013
Investments during May
9,000
Total Investment
Net Income for May
Less Withdrawals for May
$1,000
$10,000
$500
200
Increase in capital
Jerry, Capital, May 31, 2013
300
$10,300
Seinfeld Advertising Company
Balance Sheet
May 31, 2013
ASSETS
Cash
$ 5,700
Accounts Receivable
1,400
Equipment
5,000
Total Assets
$12,100
LIABILITIES AND OWNER‟S EQUITY
LIABILITIES
Accounts Payable
$ 1,800
Total Liabilities
1,800
OWNER‟S EQUITY
Jerry, Capital
10,300
Total Liabilities and OE
$12,100
Must
come
from
Statement of
OE!!
OR THE LEFT-RIGHT
APPROACH!
IN-CLASS
PROBLEMS 2-10A, 2-11A,
2-12A
Financial Statements
Answers
HOMEWORK
EXERCISE 2-5A
Identify accounts
PROBLEMS 2-10B, 2-11B, 2-12B
Financial Statements
Answers
HOMEWORK
MASTERY PROBLEM
Answers
OBJECTIVE 6: DEFINE THE
THREE BASIC PHASES OF THE
ACCOUNTING PROCESS
PHASES
 Input
- transactions
 Processing – record the affect
of the transactions on the
assets, liabilities, capital,
drawing, revenue, and
expenses
 Output – financial statements
SEINFELD TRIVIA:
What superhero
is seen or
mentioned in
every Seinfeld
episode?
Superman
SEINFELD QUOTE:
The Swiss have an interesting army.
Five hundred years without a war. Pretty
impressive. Also pretty lucky for them.
Ever see that little Swiss Army knife
they have to fight with? Not much of a
weapon there.
Corkscrews, Bottle openers. „Come on,
buddy, let‟s go. You get past me, the guy
in back of me, he‟s got a spoon. Back
off. I‟ve got the toe clippers right here.
GOOD LUCK!
Chapter 2
Analyzing Transactions: The Accounting
Equation
Learning Objectives
1.
2.
3.
4.
5.
6.
Accounting elements
Accounting equation
Business transactions
Effects of transactions on accounting
equation
Income statement, Statement of
Owner’s Equity, Balance Sheet
Phases of Accounting Process