Intermediate Accounting I

Intermediate Accounting I Chapter 2 Part I Baruch College Instructor: Ethan Kinory Ethan@Acc3000.com Fall 2007

Assets and Liabilities • Assets are economic resources. They provide future economic benefits. • Liabilities are claims on those resources by everyone except from the owners • The claims to economic resources by owners are known as equity.

Accounting Equation • Assets = Liabilities + Owner’s Equity • The economic resources must equal the claims on those resources.

Assets Cash Notes Receivable Accounts Receivable Supplies Prepaid Assets (rent, insurance, etc) Land Building Equipment Other Liabilities Accounts Payable Notes Payable Unearned Fees Taxes Payable Wages Payable Mortgage Payable Other Assets and LiabilitiesCommon Examples

Owner’s Equity (“O.E.”) • What do the owners own? Equity. • Equity = What’s left. • O.E. = Assets - Liabilities

Owner’s Equity (“O.E.”) • Assets = Liabilities + Owner’s Equity Assets claimed or “owned” by anyone not considered to be an owner! Assets claimed or “owned” by the owners

Owner’s Equity • Increase: Contribute cash (ie. Paid in Capital); Revenue • Decrease: Withdraw cash (ie. Dividends); Expenses

Statement of Owner’s Equity • Shows the change in owner’s capital

Revenue and Expenses • Revenue increases owner’s equity • Expenses decrease owner’s equity Revenue - Expenses --------------- = Net Income

Revenue Recognition • Revenue is recognized when it is earned. This occurs when services are performed or when title passes to the buyer and collectibility is reasonably assured. • Cash need not be collected for revenue or expenses to be recognized (accrual principle).

(1) Fatima Dogsitting-Case Investment by Owner • Fatima incorporated her own dogsitting business on January 14th, 2006 called Fatima Dogsitting. She contributed $100,000 to a new bank account to get started. She received 100 shares stock. • Assets = Liability + Owner Equity

(2) Fatima Dogsitting-CasePurchase of Land (Property) • Fatima Dogsitting Inc. buys a small vacant plot of land to allow the dogs to run freely. Fatima pays $40,000 cash. • Assets = Liability + Owner Equity

(3) Fatima Dogsitting - CasePurchase Equipment for Cash • Fatima Dogsitting Inc. buys computer equipment from Staples for $2,500 cash. This equipment will provide future economic benefits to Fatima Dogsitting. • Assets = Liability + Owner Equity

(4) Fatima Dogsitting - CasePurchase Equipment for Cash • Fatima Dogsitting Inc. buys computer equipment from Staples for $2,500 cash. This equipment will provide future economic benefits to Fatima Dogsitting. • Assets = Liability + Owner Equity

(5) Fatima Dogsitting - Case Purchase- Accounts Payable • Fatima Dogsitting Inc. purchases supplies on credit from Staples. The supplies cost $2,000 and will provide future economic benefits to Fatima Dogsitting. • Assets = Liability + Owner Equity

Fatima Dogsitting - CasePurchase Supplies w/Credit • Staples mails Fatima Dogsitting Inc. the bill for $2,000 for the supplies purchased. Fatima Dogsitting Inc. receives the bill in the mail the same day. • Assets = Liability + Owner Equity

(6) Fatima Dogsitting - Case Payment of Accounts Payable • Fatima Dogsitting Inc. writes a check to pay the bill received from Staples for $1,500. This is a partial payment. • Assets = Liability + Owner Equity

(7) Fatima Dogsitting - Case Revenue Accounts Receivable • Fatima Inc. finds it’s first customer. She walks dogs for an aristocrat on Park Avenue. The aristocrat pays weekly. At the end of the week Fatima Inc. sends a bill for $12,000 to the customer and awaits payment. • Assets = Liability + Owner Equity

(8) Fatima Dogsitting - CaseCollect Account Receivable • The aristocrat pays Fatima Dogsitting Inc. the $12,000 owed. • Assets = Liability + Owner Equity

(9) Fatima Dogsitting - CaseExpense & Account Payable • Fatima Dogsitting Inc. receives a utility bill from Con Edison for $1,000. • Assets = Liability + Owner Equity

(10) Fatima Dogsitting- CasePayment of Accounts Payable • Fatima Dogsitting Inc. pays the Con Edison bill for $1,000. • Assets = Liabilities + Owner Equity

(11) Fatima Dogsitting - CaseCapital Withdrawal • Fatima celebrates her success! A dividend is paid to Fatima for $1,000. • Assets = Liabilities + Owner Equity

Fatima Dogsitting Summary

Financial Statement Balance Sheet Describes a company’s financial position at a point in time (assets, liabilities and equity).

Balance Sheet

Financial Statements Income Statement Describes a company’s revenue and expenses with the resulting NET INCOME over a period of time

Income Statement

Financial Statement Statement of Owner’s (Shareholder’s) Equity Explains changes in equity from net income and from the owners’ investments and withdrawals over a period of time. Equity = Capital Additions + Net Income -Capital W/D

Statement of Owner’s Equity

Financial Statements Statement of Cash Flows Identifies cash inflows and cash outflows over a period of time. Identifies the causes for changes in cash balances.

Financial Statements Statement of Cash Flows (cont’d) Operating Activities - Short term activities Investing Activities - Buying and selling of assets that are held for long term use (land, equipment etc.) Financing Activities - Long term borrowing and repayment of cash from lenders and owners.

Statement of Cash Flows

Chart of Accounts • A chart of account enables classification • Each account is assigned a number, name and description. Distinct numeric ranges are assigned for assets, liabilities, equity, revenue and expenses accounts. • Accounts can be added as necessary. Different companies use different accounts depending on their business.

Chart of Accounts Assets Liabilities Equity

Common Accounts Assets Cash Includes cash, coins, checks, money orders, petty cash and bank account balances, money market funds, etc.

Common Accounts Assets Accounts Receivable Represents oral or implied promises of payment or IOU’s from customers. Usually arises from sale of merchandise on credit.

Common Accounts Assets Notes Receivable A written promise of another entity to pay a definite sum of money on a specified future date to the holder of the note.

Common Accounts Assets Prepaid Expenses Assets that represent prepayment of future expenses. When the expenses are incurred, the amounts in the prepaid account are transferred to an expense account. (rent, insurance etc.)

Common Accounts Assets Supplies Supplies are assets until they are used up. They are expensed as they are used. The balance, or unused supplies, remains as an asset.

Common Accounts Assets Equipment Computers, copiers, telephone systems, etc. Equipment is depreciated. This means that it is expensed gradually based on predetermined rates.

Common Accounts Assets Buildings Stores, offices, warehouses, factories, etc. Building are depreciated. Land - NEVER depreciated since it is not depleted and is never obsolete.

Common Accounts Liabilities Accounts Payable Oral or implied promises to pay later. Arises from credit purchases usually of merchandise. The opposite of an Account Receivable.

Common Accounts Liabilities Notes Payable A written promise to pay another entity a definite sum of money on a specified future date.

Common Accounts Liabilities Unearned Revenue The prepayment by customers for services that have not yet been provided (opposite of prepaid assets).

Common Accounts Liabilities Accrued Liabilities Amounts owed that are not yet paid. Includes amounts that are not considered accounts payable because they did not arise from customer /merchandise transactions.

Common Accounts Equity Accounts 1) Owner’s Capital (contributions) 2) Owner’s Withdrawals - NOT expenses 3) Revenue 4) Expenses

Double Entry System • Every financial transaction has an effect on two accounts, or two effects on the same account. Accountants believe in the double entry system!

Double Entry System • We write a journal entry (“J.E.”) to summarize each financial transaction. All the journal entries are maintained in a General Journal. Journal entries contain a lot of information: Date # Account Dr. Cr. 9/12/06 112 Supplies XX 101 Cash XX -To record payment of supplies for cash

Intermediate Accounting I