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Basic Accounting Concepts: The Balance Sheet

Basic Accounting Concepts: The Balance Sheet. 2. Part One: Financial Accounting. The McGraw-Hill Companies, Inc., 1999. Basic Concepts. Slide 2-1. Accounting period Conservatism Realization Matching Consistency Materiality. Money measurement Entity Going concern Cost

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Basic Accounting Concepts: The Balance Sheet

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  1. Basic Accounting Concepts: The Balance Sheet 2 Part One: Financial Accounting • The McGraw-Hill Companies, Inc., 1999

  2. Basic Concepts Slide 2-1 • Accounting period • Conservatism • Realization • Matching • Consistency • Materiality • Money measurement • Entity • Going concern • Cost • Dual aspect

  3. The Entity Concept Slide 2-2 • Owner The owner of a clothing store removes $100 from the store’s cash register for personal use. Should the store’s accounting records show that the owner took this cash?

  4. The Entity Concept Slide 2-3 Yes, because of the entity concept. This concept requires that the accounting records of the clothing store show that the business has less cash than it had previously.

  5. The Going -Concern Concept Slide 2-4 A thriving blue jeans manufacturing firm has jeans in various stages of production. If the firm had to cease operations and liquidate today, the jeans would have little, if any, value. If today is the last day of the accounting period, should the jeans be shown at liquidation value?

  6. The Going -Concern Concept Slide 2-5 Because of the going-concern concept, the firm would not value the jeans at what they are currently worth--the liquidation value.

  7. The Cost Concept--Nonmonetary Assets Slide 2-6 Land purchased last year for $250,000 has a current market value of $270,000. What amount should be shown in the accounting records to reflect ownership of this land?

  8. The Cost Concept--Nonmonetary Assets Slide 2-7 The land should be shown at the original purchase price of $250,000 because of the cost concept.

  9. The Cost Concept--Monetary Assets Slide 2-8 A company invested surplus cash in 100,000 shares of the common stock of General Electric. The cost of per share was $60; therefore, the firm spent $6,000,000. By the end of the fiscal period, the stock had a fair market value of $65 per share. What amount should be shown on the balance sheet?

  10. The Cost Concept--Monetary Assets Slide 2-9 The fair value of the stocks is $6,500,000. This is the amount that should be shown for this monetary asset.

  11. = + $40,000 The Dual-Aspect Concept Slide 2-10 Assets = Equities Assets = Liabilities + Owners’ equity + $40,000 Ms. Jones opens a bank account for the business by depositing $40,000.

  12. The Dual-Aspect Concept Slide 2-11 Assets = Liabilities + Owners’ equity + $40,000 = $40,000 + 15,000 + 15,000 The business borrows $15,000 from the bank.

  13. The Dual-Aspect Concept Slide 2-12 Assets = Liabilities + Owners’ equity + $40,000 = $40,000 + 15,000 + 15,000 $55,000 $15,000 $40,000 Assets = Equities

  14. The Balance Sheet--The Heading Slide 2-13 GARSDEN CORPORATION Balance Sheet As of December 31, 1998 • Name of entity • Name of statement • Moment of time

  15. The Balance Sheet--Assets Slide 2-14 Current assets: Cash $ 3,448,891 Marketable securities 246,221 Accounts receivable 5,954,588 Inventories 12,623,412 Prepaid expenses 377,960 Total current assets $22,651,072 Property, plant, and equipment: Land 642,367 Building and equipment, at cost 26,303,481 Less: accumulated depreciation 13,534,069 12,769,412 Other assets: Investments 110,000 Intangible assets 63,214 173,214 Total assets $36,236,065

  16. The Balance Sheet--Liabilities and Shareholders’ Equity Slide 2-15 Current liabilities: Accounts payable $ 6,301,442 Taxes payable 1,672,000 Accrued expenses 640,407 Deferred revenues 205,240 Current portion of long-term debt 300,000 Total current liabilities $ 9,119,089 Long-term debt 3,000,000 Total liabilities 12,119,089 Shareholders’ equity: Paid-in capital 5,000,000 Retained earnings 19,116,976 Total shareholders’ equity 24,116,976 Total liabilities and shareholders’ equity $36,236,065

  17. Account Categories--Current Assets Slide 2-16 • Cash Funds that are readily available for distribution • Marketable securities Investments that are both readily marketable and expected to be converted into cash within one year • Accounts receivable Amounts owed to the entity by its customers

  18. Account Categories--Current Assets Slide 2-17 • Inventories Aggregate of items either held for sale in the ordinary course of the business, in process of production for such sale, or soon to be consumed in production • Prepaid expenses Assets, usually of an intangible nature, whose usefulness will expire in the near future

  19. Account Categories--Current Liabilities Slide 2-18 • Accounts payable Claims of suppliers arising from their furnishing goods or services to the entity for which they have not been paid • Taxes payable Amount the entity owes governmental agencies

  20. Account Categories--Current Liabilities Slide 2-19 • Accrued expenses Amounts earned by outside parties but have not been paid by the entity • Deferred revenues Liabilities that arise because the entity receives advanced payments for services the entity has agreed to render in the future • Current portion of long-term debt

  21. Music Mart Slide 2-20 On January 1, John Smith starts an incorporated CD and tape store called Music Mart, Inc. He deposits $25,000 of his own funds in a bank account that he opened in the name of the entity. In return, he takes $25,000 of stock certificates.

  22. Music Mart Slide 2-21 On January 1, John Smith starts an incorporated CD and tape store called Music Mart, Inc. He deposits $25,000 of his own funds in a bank account that he opened in the name of the entity. In return, he takes $25,000 of stock certificates. MUSIC MART Balance Sheet As of January 1 Assets Liabilities and Owners’ Equity Cash $25,000 Paid-in capital $25,000

  23. Music Mart Slide 2-22 On January 2, Music Mart borrows $12,500 from a bank; the loan is evidence by a legal document called a note. MUSIC MART Balance Sheet As of January 1 Assets Liabilities and Owners’ Equity Cash $25,000 Paid-in capital $25,000

  24. Music Mart Slide 2-23 On January 2, Music Mart borrows $12,500 from a bank; the loan is evidence by a legal document called a note. MUSIC MART Balance Sheet As of January 1 Assets Liabilities and Owners’ Equity Cash $37,500 Notes payable $12,500 Paid-in capital 25,000 Total $37,500 Total $37,500

  25. Music Mart Slide 2-24 On January 3, the business buys inventory in the amount of $5,000, paying cash. MUSIC MART Balance Sheet As of January 1 Assets Liabilities and Owners’ Equity Cash $32,500 Notes payable $12,500 Inventory 5,000 Paid-in capital 25,000 Total $37,500 Total $37,500

  26. Music Mart Slide 2-25 On January 4, the business sells merchandise that cost $500 for $750. Cash was received. MUSIC MART Balance Sheet As of January 1 Assets Liabilities and Owners’ Equity Cash $33,250 Notes payable $12,500 Inventory 4,500 Paid-in capital 25,000 Retained earnings 250 Total $37,750 Total $37,750

  27. Chapter 2 TheEnd

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