Basic Accounting Concepts

Week 1
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 1

Role of Accountants

Financial accounting Management accounting

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The Need for Accounting

Managers, investors, and other internal groups want the answers to two important questions: How well did the organization perform?

Where does the organization stand?

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The Need for Accounting

Accountants answer these questions with 3 major financial statements: Income statement Statement of cash flows
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Balance sheet

The Need for Accounting

A transaction is any event that affects the financial position of an organization and requires recording.

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Balance Sheet
The balance sheet (also called statement of financial position) = snapshot of the financial status of an organization at a point in time.

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The Balance Sheet

Assets

Liabilities

Equity

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Balance Sheet
Assets are economic resources that are expected to benefit future activities of the organization. Liabilities are the entitys economic obligations to nonowners. Owners equity is the excess of the assets over the liabilities.
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Balance Sheet
The owners equity of a corporation is called shareholders equity. Shareholders equity

Paid-in capital

Retained earnings
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Retained Earnings
Retained earnings is a result of profitable operations, it is not a pot of cash awaiting distribution to shareholders.

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Dividends
Dividends are distributions of assets to shareholders that reduce retained earnings. Cash dividends are distributions of cash rather than some other asset. The distribution is made possible by profitable operations.
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Revenues and Expenses

Revenues are increases in ownership claims arising from the delivery of goods or services. Expenses are decreases in ownership claims arising from delivering goods or services or using up assets.

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Relationship Between Balance Sheet and Income Statement

The income statement measures the performance of an organization by matching its accomplishments (revenue from customers, which is usually called sales) and its efforts (cost of goods sold and other expenses.)

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Relationship Between Balance Sheet and Income Statement

Balance sheet 31 Dec 2006 Balance sheet 31 Dec 2007 Balance sheet 31 Dec 2008 Balance sheet 31 Dec 2009

Income statement 2007

Income statement 2008

Income statement 2009

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ABC Ltd
Income Statement for the Year Ended 31 Dec 2009 Sales Cost of goods sold Gross profit Operating expenses: Rent Wages Net income {A} $85,000 70,000 $15,000

$1,000 6,600

7,600 $ 7,400
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ABC Ltd
Balance Sheet as at 31 Dec 2009 Assets Cash Accounts receivable Inventory Prepaid rent Total assets {B} $ 60,000 102,000 20,000 1,000 $183,000

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ABC Ltd
Balance Sheet as at 31 Dec 2009 Liabilities and Shareholders Equity Liabilities Accounts payable Accrued wages payable Unearned sales revenue Shareholders equity Paid-in capital Retained income {C} Total equities {B} $ 71,000 600 3,000

$ 74,600

$100,000 8,400

108,400 $183,000
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ABC Ltd
Statement of Retained Earnings for the Year Ended 31 Dec 2009 Retained earnings, 1 Jan 2008 Add: Net income for the year {A} Total Deduct: Dividends Retained earnings, 31 Dec 2009 {C} $19,000 7,400 26,400 18,000 $ 8,400

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