Basic Concepts 1. Money Money Measur Measureme ements nts 2. Entit tity 3. Goin Going g Con Conce cerrn 4. Cost 5. Dual Dual Aspe Aspect ct 6. Accou Accounti nting ng Perio erio !. Cons Conser er"a "ati tion on #. $eali eali%a %ati tion on &. Matc Matc'i 'ing ng 1(.Consistency Consistency 11.Materiality Materiality
)'e Money Measurement Measurement Concept A *usiness o+ns, Ca Cas'
-3((((
/ $a+ Material
6((( l*s
/ )ruc0s / Builing space ))A )) A
6 units 5(((( s. t
)'e Money Measurement Measurement Concept A *usiness o+ns, Ca Cas'
-3((((
/ $a+ Material
6((( l*s
/ )ruc0s / Builing space ))A )) A C Ca as' / $a+ Material
6 units 5(((( s. t -3(((( 6((( l*s
-3(((( -&(((
6 units
-15((((
5(((( s. t
-4((((((
/ )ruc0s / Builing space ))A )) A
-41#&(((
)'e Entity Concept Entity is any organi%ation or acti"ity or +'ic' accounting reports are prepare. E7ample 1, A *usiness o+ner ta0es -1(( rom t'e cas' register, t'e person is negligi*l negligi*le e •• )'e e8ect to t'e Due to entity concept t'e accounting recors s'o+ t'at t'e *usiness 'as less cas'
)'e Entity Concept E7ample 2, $etail store, • 9n la+ an unincorporate *usiness 'as no istinction *et+een t'e resources o t'e store :*usiness; an
t'e o+ner • 9n accounting resources are istinct an separate rom t'e *usiness an t'at o t'e o+ner
)'e Entity Concept <or a corporation t'e istinction is oten uite easily mae. A corporation is a legal entity separate rom t'e persons +'o o+n it an t'e accounts o many corporations correspon e7actly to t'e scope o t'e legal entity.
)'e Going Concern Concern Concept Concept Accounting assumes t'at an entity is a going concern t'at it +ill continue to operate oruture an ine=nitely longis perio in t'e unless t'ere goo e"ience to t'e contrary. 9t is assume t'at t'eto resources currently a"aila*le t'e entity +ill *e use in its uture operations.
)'e Going Concern Concern Concept Concept 9t pro"ies a more realistic "alue o *usiness assets. 9t allo+s =7e assets to *e +ritten o8 proportionally proportio nally o"er t'eir useul lie.
)'e Going Concern Concern Concept Concept E7ample, At any gi"en moment a >eans manuacturer 'as >eans in "arious stages o t'e prouction process. 9 t'e *usiness +ere liuiate toay t'ese partially complete >eans +oul 'a"e little i any "alue. Accounting assumes t'at t'e manuacturing process +ill *e carrie t'roug' to completion an t'ereor t'ereore e t'at t'e amount or +'ic' t'e partially complete >eans coul *e sol i t'e company +ere liuiate toay is irrele"ant. irrele"ant.
)'e Cost Concept An asset is orinarily entere initially in t'e accounting recors at t'e price pai to acuire it at its cost. 9n t'e case o nonmonetary nonmonetary assets t'e cost concept e7tens to t'eir accounting su*seuent to acuisition@ cost continues to *e t'e *asis or all su*seuent accounting or t'e asset
)'e Cost Concept 'ile in monetary assets t'ey are accounte or at t'eir air "alue su*seuent to acuisition. <air "alue iis s t'e amount at +'ic' an asset coul *e e7 e7c'ange c'ange in a current transaction *et+een +illing parties ot'er t'an in a orce or liuiation sale. Goo+ill represents t'e "alue o t'e name reputation clientele etc o t'e purc'ase company.
E7amples ?onmonetary asset, -25(((( cost o a lan +ill *e recore as -25(((( as its 'istorical cost e"en i ater 2 years you can sell it at a "alue o -2!5(((. Monetary Asset, ou ou 'a"e an in"estment in" estment o 1((((( s'ares o t'e common stoc0. )o etermine t'e air "alue you nee to +ait or E to close an reer to t'e stoc0 price reporting ser"ices.
)'e DualAspect DualAspect Concept )erms, )erms, Asset economic resources o an entity Equities claims o "arious parties against t'ese assets Liabilities claims o creitors Owner’s equity claims o t'e o+ner on t'e *usiness Transaction e"ents t'at a8ect t'e num*ers in an entitys accounting recors
)'e DualAspect DualAspect Concept <unamental accounting euation, Assets F Euities Assets F ia*ilities / +ners Euity E"ery transaction 'as a ual impact on t'e accounting recors. Accounting systems are set up so as to recor *ot' o t'ese aspects o a transaction.
E7ample uppose you start a *usiness an your =rst act is to open a *an0 account in +'ic' you eposite -4(((( rom your o+n money. )'e ual aspect o t'is transaction transac tion is t'at t'e *usiness no+ 'as an asset cas' o -4(((( an you t'e o+ner 'as a claim also o -4(((( against t'is asset. Assets :cas'; -4(((( F Euities :o+ners; -4((((
As its ne7t transaction t'e *usiness *orro+e -15((( rom a *an0 t'e *usiness accounting recor recors s +oul c'ange in t+o +ays, Cas' )otal ) otal assets
-55(((
+e to *an0
-15(((
-55(((
+ners euity )otal euities
4(((( -55(((
)'e Balance 'eet Balance s'eet a =nancial position o an accounting entity as o a speci=e moment in time. 9ts more ormal name is a statement o =nancial position. )'e *alance s'eet is snaps'ot o an instant in time it is a status report rat'er t'an a o+ report.
)'e Balance 'eet
)'e Balance 'eet De=nition o )erms 1. Assets Assets economic economic resou resourrces t'at t'at are are controlle *y an an cost :or air "alue; at entity t'e time o+'ose acuisition coul *e o*>ecti"ely measure. Cas' an ot'er assets t'at are e7pecte to *e reali%e in cas' or consume uring t'e normal operating cycle o t'e entity or +it'in one year are calle current assets
Mar0eta*le securitiesin"estments • Mar0eta*le t'at are *ot' reaily mar0eta*le an e7pecte to *e con"erte into cas' +it'in a year. E7. Ban0ers acceptance treasury *ills
Balance 'eet • Accounts recei"a*le amounts o+e to t'e entity *y its customers. Amounts o+e to t'e entity *y parties ot'er t'an customers +oul appear uner t'e 'eaing notes recei"a*le or ot'er recei"a*les. • 9n"entories aggregate o items t'at are
eit'er 'elinor in t'eoorinary course *usiness t'esale process prouction or o suc' sale or soon to *e consume in t'e prouction o goos t'at +ill *e a"aila*le or sale.
Balance 'eet • Prepai Prepai e7penses represent certain assets usually o an intangi*le nature +'ose useulness +ill e7pire in t'e near uture. E7ample is an insurance policy • Property Plant an Euipment consists o assets t'at are tangi*le an relati"ely longli"e. )'ey are calle =7e assets.
Balance 'eet • 9n"estments securities o one company o+ne *y anot'er eit'er in orer to control t'e ot'er company or in anticipation anticipati on o earning a longterm l ongterm return return rom t'e in"estment. 9n"estments are noncurrent noncurr ent assets ass ets • 9ntangi*le assets inclue goo+ill patents copyrig'ts ranc'ises an similar "alua*le *ut nonp'ysical t'ings controlle
*y t'e *usiness.
Balance 'eet 2. ia*ilities o*ligations to transer asstes or pro"ie ser"ices to outsie parties arising rom e"ents t'at 'a"e alreay 'appene. ia*ilities t'at are e7pecte to *e satis=e or e7tingui e7tinguis'e s'e uring t'e normal operating cycle or +it'in one year are calle current lia*ilities.
Balance 'eet • Accounts paya*le claims o suppliers arising rom t'eir urnis'ing goos or ser"ices t'e entity oruc' +'ic'suppliers t'ey 'a"e notto yet *een pai. are oten calle "enors. Amounts o+e to =nancial institutions are calle notes or s'ortterm loans. • ) )a7 a7es es paya*le amount t'at t'e entity o+es go"ernment agencies or ta7es.
*een pai *y t'e entity. • Deerre :unearne; re"enues represent repr esent t'e lia*ility t'at arises *ecause t'e entity 'as recei"e a"ance payment or a ser"ice it 'as agree to rener in t'e uture.
Balance 'eet • Current Current portion o longterm e*t part o a longterm e*t t'at is ue
+it'in t'e ne7t 12 mont's. • t'er lia*ilities o*ligations t'at o not meet t'e criteria or *eing classi=e as current current lia*ilities. ometimes calle noncurr noncurrent ent lia*ilities or longterm e*t
Balance 'eet • +ners euity s'o+s t'e amount t'e o+ners 'a"e in"es in"este te in t'e entity entity.. 9n a corporation t'e o+ners'ip interest is e"ience *y s'ares o stoc0 an t'e o+ners euity section o t'e *alance s'eet is calle a s'are'olers euity or stoc0'olers euity. euity. 9t is also calle net assets *ecause t'e amount s'o+n or o+ners euity is eual to assets net o :minus; lia*ilities. )'e <AB e=nes it as t'e resiual interest interest in t'e assets o an entity
t'at remains ater eucting its lia*ilities.
Balance 'eet 2 Categories of shareholder’s equity: 1. Paiin capital or contri*ute capital
amount t'e o+ners 'a"e in"este irectly int 'e *usiness *y purc'asing s'ares o stoc0 as t'ese t'ese s'ares +ere issue *y t'e corporation. P aiin capital in most corporations is su*i"ie into capital stoc0 an aitional paiin capital.
Balance 'eet Garsen Corporation 'as outstaning 1 million s'ares o common stoc0 +it' a par "alue o -1 per s'are. 9n"estors actually pai intos'ares. t'e corporation -5 million or t'ese Paiin capital, comm co mmon on st stoc oc0 0a att par par -1( -1((( ((( ((( ((.( .(( ( a it itio iona nall pai paii in n capi capita tall -4( -4(( (((( ((((. (.(( (( totall paiin tota paiin capital capital -5((( -5(((((( (((.(( .((
Balance 'eet 2. $etaine Earnings i8erence *et+een t'e total earnings o t'e entity from its inception to date an t'e total amount o i"iens pai out to its s'are'olers oer its entire life! 9 t'e i8erence is negati"e t'e item is calle e=cit.
Balance 'eet "nincorporated #usinesses Di8erent terminology is use in t'e o+ners
section. • euity 9n a proprietors'ip a *usiness o+ne *y one person t'e o+ners euity is customarily s'o+n as a single num*er suc' as Hee Iones CapitalJ • 9n a partners'ip a *usiness o+ne >ointly *y se"eral persons t'ere is a capital account or eac' partner. partner.
Balance 'eet E7ample, Iane Da"is capital -!5432 ayne mit' capital -!5432 )otal ) otal partners capital - 15(#64
Balance 'eet A proprietors'ip or partners'ip *alance s'eet also may s'o+ a reconciliation reconciliation o t'e *eginning an ening *alance in eac' o+ners capital account.
Balance 'eet E7ample, ee Iones capital as o Ian 1 2((6 -1#(((( A, 2((6 earnings 45((( Deuct, 2((6 ra+ings :4((((; ee Iones capital as o Dec 31 2((6 -1#5(((
Balance 'eet )'e unamental accounting euation can *e e7pane into, Assets F ia*ilities / paiin capital / retaine earnings
Balance 'eet Current ratio t'e ratio o curr Current current ent assets to curr current ent lia*ilities. A curr current ent ratio o at least 2 to 1 is *elie"e to *e esira*le in a typical manuacturing company. Garsen company 'as current assets o -22651(!2 an current lia*ilities o -&11&(#&. )'e curr current ent ratio is 2.5 to 1 +'ic' is satisactory
Balance 'eet C'anges Alt'oug' in practice a *alance s'eet is prepare prepar e only at prescri*e inter"als in learning t'e accounting process it is useul to consier t'e c'anges one *y one.
Balance 'eet C'anges riiginal r inal Capi Capittal Con Contri*u ri*uti tion on Ian Ian. 1 Io'n Io'n mit mit' st start arts an an incorporate CD an tape store calle Music Mart 9nc. Ke oes t'is *y epositing -25((( o 'is o+n uns in a *an0 account t'at 'e 'as opene in t'e name o t'e *usiness entity an ta0ing -25((( o stoc0 certi=cates in return. Ke is t'e sole o+ner o t'e corporation. )'e *alance s'eet o Music Mart 9nc. +ill *e, Music Mart Balance 'eet As o Ianuary 1 Assets Ass ets ia*ilit ia*ilities ies an +ners +ners Euity
Cas' -25(((
Paiin capital
-25(((
Balance 'eet C'anges Ban0 Ba n0 oa oan n Ia Ian n 2 Mu Musi sic cM Mar artt * *or orrro+ o+s s-12 125 5(( (( r rom om a * *an an0@ 0@ t'e loan is e"ience *y a legal ocument calle a note. )'is transaction increases t'e asset cas' an t'e *usiness incurs a lia*ility to t'e *an0 calle notes paya*le. )'e *alance s'eet +ill *e, Music Mart Balance s'eet As o Ian 2 Cas' )otal ) otal
Balance 'eet C'anges Pur urc' c'as ase e o M Mer erc' c'an ani ise se Ia Ian n 3 )' )'e e *u *usi sine ness ss * *uy uys s in in"e "ent ntor ory y :merc'anise it intens to sell; in t'e amount o -5((( paying cas'. )'is transacton ecreases cas' an increass anot'er asset in"entory in"entory.. )'e *alance s'eet +ill *e, Music Mart Balance s'eet As o Ian 3 Assets ia*ilities an +ners Euity Cas' -325(( ?otes paya*le -125(( 9n"entory 5((( Paiin capital 25 ((( )otal ) otal -3!5(( )otal -3!5((
Balance 'eet C'anges ale al et'at o o Merc Me rc'a 'ani nise se )'e Ian Ian 4 <oro -! -!5( 5( cas' ca s' t'e st stor ore sel sells lsecrease me merc rc'an 'ani ise se costs -5((. e8ect t'is transaction iseto in"entory *y -5(( increase cas' *y -!5( an increase o+ners euity *y t'e i8erence -25(. )'e -25( is t'e pro=t on t'is sale. )o ) o istinguis' it rom t'e paiin capital portion o t'e o+ners euity it is recore as retaine earnings. )'e *alance s'eet is, . Music Mart Balance s'eet As o Ian 4 Assets ia*ilities ia*ilities an an +ners +ners Euity Euity Cas' -3325( ?otes paya*le -125(( 9n"e 9n "ent ntor ory y 45( 45(( ( Pai aiin in ca capi pita tall 25 25 ((( ((( $etaine earnings 25( )otal ) otal
-3!!5(
)otal
-3!!5(
Case 21, Maynar Company :A;
Diane Maynar mae t'e ollo+ing reuest o a rien, $y boo%%eeper has quit& and ' need to see the balance sheets of my company! (e has left behind a boo% with the numbers already entered in it! )ould you be willing to prepare balance forabout me* Also& any comments you caresheets to ma%e the numbers would be would appreciated! The cash account is healthy healthy&& which is a good sign& and he has told me that the net income in +une was ,-.&/01!
Case 21, Maynar Company :A; )'e *oo0 containe a etaile et aile recor recor o transactions an rom it t'e rien +as a*le to copy *alances t'een o *eginning o o8 t'et'e mont' an atatt'e t'e mont' as s'o+n in E7'i*it 1. Diane Maynar o+ne all t'e stoc0 o Maynar Company. At t'e en o Iune. Diane Maynar pai 'ersel an -11!(( i"ien an use t'e money to repay 'er loan rom t'e company
E7'i*it 1, Maynar Accounts payable Accounts receivable Accrue !a"es payable Accuulate epreciation on builin" Accuulate epreciation on e%uipent
Ju ne 1 $ 8,517.00 $ 21,798.00 $ 1,97#.00 $ 156,000.00 $ 5,30#.00
Nuestions, 1. Prepare *alance s'eets as o Iune 1 an as o Iune 3( in proper proper ormat. 2. Ma0e comments a*out 'o+ t'e =nancial conition as o t'e en o Iune compare +it' t'at at t'e *eginning o Iune. 3. 'y o retaine earnings not increase *y t'e amount o Iune net income 4. As o Iune 3( o you eel t'at Maynar Company is +ort' t'e amount in 'are'olers
Euity -61&446 E7plain.
As o Iune 1,
Di8erence )otal ) otal asset F -4335( 3(,
As o Iune
As o Iune 1,
Di8erence )otal ) otal lia*ilities 3(, F -35415
As o Iune
As o Iune 1,
Di8erence o+ners euities 3(, F -!&35
As o Iune
3. 'y o retaine earnings not increase incr ease *y t'e amount o Iune net income ?et income or Iune F -1&635 $etaine ea earning rning Iune 3( F -22&446 $etaine ea earning rning Iune 1 F -221511 Di"ien F -11!(( $etaine ea earning rning Iune 3( F $etaine earning Iune 1 / ?et income Di"ien F 221!11 / 1&635 11!(( F 22&446
4. As o Iune 3( o you eel t'at Maynar Company is +ort' t'e amount in 'are'olers Euity -61&446 E7plain ?et income or Iune F -1&635 Assume it is t'e net mont'ly income t'en IanIun Ian Iun net income F -11!#1( Companys +ort' F 61&446 / 11!#1( - !3!256