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Basic Accounting Concepts

Basic Accounting Concepts. Chapter 2. Learning Objectives. After studying this chapter, you should be able to: Describe the basic elements of a financial accounting system. Analyze, record, and summarize transactions for a corporation’s first period of operations.

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Basic Accounting Concepts

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  1. Basic AccountingConcepts Chapter 2

  2. Learning Objectives After studying this chapter, you should be able to: • Describe the basic elements of a financial accounting system. • Analyze, record, and summarize transactions for a corporation’s first period of operations. • Prepare financial statements for a corporation’s first period of operations. • Analyze, record, and summarize transactions for a corporation’s second period of operations. • Prepare financial statements for a corporation’s second period of operations.

  3. Learning Objective 1 Describe the basic elements of a financial accounting system

  4. Basic Rules of an Accounting System Rules determine: • A transaction is an economic event that can affect one, two or more items in the financial statements. WHAT transactions are to be recorded WHEN transactions are to be recorded HOW transactions are to be recorded AMOUNT of the transaction to be recorded

  5. Framework of an Accounting System The Accounting Equation Assets = Liabilities + Stockholders’ Equity

  6. Integrated Financial Statement Framework: Template • By expanding the accounting equation, transactions can be analyzed, summarized, and recorded within the integrated financial statement framework. Exhibit 1: Integrated Financial Statement Framework Impact of transaction on Income Statement Impact of transaction on cash

  7. Controls of an Accounting System Ending Cash on Balance Sheet = Ending Cash on Statement of Cash Flows THE ACCOUNTING EQUATION MUST BALANCE Net Income on Income Statement = Net Effects of Revenues/Expenses on Retained Earnings

  8. Learning Objective 2 Analyze, record, and summarize transactions for a corporation’s first period of operations

  9. Integrated Financial Statement Framework: Starting Family Health Care, P.C. • Dr. Landry invests $6,000 to start a practice

  10. Integrated Financial Statement Framework: Borrowing Money • Family Health Care, P.C. borrows $10,000 from First National Bank

  11. Integrated Financial Statement Framework: Buying Land • Family Health Care buys land for $12,000 cash

  12. Integrated Financial Statement Framework: Earning of Fees • Family Health Care, P.C. earns fees of $5,500 and receives those fees in cash.

  13. Integrated Financial Statement Framework: Paying of Expenses • Family Health Care, P.C. pays $2,900 in cash for various expenses of doing business.

  14. Integrated Financial Statement Framework: Paying of Dividends • Family Health Care, P.C. pays dividends of $1,500 to their only stockholder, Dr. Lee Landry.

  15. Integrated Financial Statements: Family Health Care, P.C. Exhibit 2: Family Health Care Summary of Transactions for September

  16. Observations from Family Health that apply to all companies Exhibit 3: Effects of Transactions on Stockholders’ Equity

  17. Learning Objective 3 Prepare financial statements for a corporation’s first period of operations

  18. Preparation of Financial Statements • This exhibit lists Family Health’s transactions in the order they occurred; it does not group and summarize the transactions in a meaningful manner. Exhibit 2: Family Health Care Summary of Transactions for September Balance Sheet components Income Statement components Statement of Cash Flow components

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