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Basic Accounting Richard Mross (208) 939-4717 revised 02/19/2008

Basic Accounting Richard Mross (208) 939-4717 revised 02/19/2008. Traditional Accounting System. Business Transactions. Accounting System. Documents. Accounting System. Business Transactions Sales Purchase/Expense Change in Value Guesses Other Events. Documents Income Statement

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Basic Accounting Richard Mross (208) 939-4717 revised 02/19/2008

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  1. Basic AccountingRichard Mross(208) 939-4717revised 02/19/2008

  2. Traditional Accounting System Business Transactions Accounting System Documents

  3. Accounting System Business Transactions Sales Purchase/Expense Change in Value Guesses Other Events Documents Income Statement Balance Sheet List Reports Transaction Reports Budgets Projections Invoices Checks Accounting System Lists Transactions Actions

  4. Primary Accounting ReportsThe information results of an accounting system Balance Sheet – What you have and owe Assets – Liabilities = Equity and Liabilities + Equity = Assets Income Statement – How much you make Sales - Expenses = Income

  5. Reports Income Statement Balance Sheet

  6. Balance Sheet Asset Liability Equity

  7. Income Statement Revenue Expense Profit

  8. Account The basic unit of accounting an Account or General Ledger Account. It is a unit of information that represents business records. There are five types of accounts: Asset Liability Equity Revenue Expense A business can have anywhere from a dozen to several thousand accounts, with each one being one of the five types.

  9. Accounting Accounting is the process of recording business activities that make changes to accounts. These include: • Sales of products • Revenue from services earned • Buying products and/or services • Incurring other expenses • Depreciation of fixed assets • Closing books for the year When any of these and other business activities are recorded, accounts change in value. The unit of measure is currency, in most cases, the dollar.

  10. Double Entry Accounting For any business transaction that happens, two or more accounts are affected. There is a give and take of equal dollar amounts. This is called Double Entry Accounting. There are two types of actions done to accounts to bring the values up or down. The actions are called Debit and Credit. Whether an account grows or shrinks when it is debited or credited depends on the account. A debit to an asset account makes it bigger but a debit to a liability account makes it smaller. The opposite applies when crediting. Crediting an asset makes it smaller and crediting a liability makes it bigger. A debit to a revenue account makes it smaller and debit to an expense makes it bigger. A credit to a revenue account makes it bigger and credit to expense makes it smaller. For equity, it gets bigger when it is credited and smaller when it is debited. A record entry that has debits and credits is called a Journal Entry.

  11. Debits and Credits To make an account go up (get bigger) Balance Sheet Income Statement Debit Credit Revenue Asset Liability Credit Expense Debit Equity Profit

  12. Debits and Credits To make an account go down (get smaller) Balance Sheet Income Statement Credit Debit Revenue Asset Liability Debit Expense Credit Equity Profit

  13. Bob’s Hotdog Stand To explain accounting and how business transactions impact financial statements, we will trace through the business transactions of a simple hot dog stand. For simplicity, we will not include all the different taxes and interest associated with business for the first sets of transactions.

  14. Bobs Hotdog Stand (B.H.S.) Asset Cash on hand Cash in bank Accounts Receivable Inventory Hot Dog Stand Accumulated Depreciation* Liability Accounts Payable Notes Payable Revenue Sales Expense Cost of Good Sold Electricity Depreciation Expense Equity Bobs Equity Profit/Loss No account here *Contra-Asset

  15. Chart of Accounts (General Ledger) Balance Sheet Accounts Asset Liability Equity Revenue Expense • 1000 Cash on hand • 1020 Cash in bank • 1100 Accounts Receivable • 1200 Inventory • 1400 Hot Dog Stand • Accumulated Depreciation* • 2000 Accounts Payable • 2400 Notes Payable • 3000 Bobs Equity • 4000 Sales • 5000 Cost of Good Sold • 6200 Electricity • 6500 Depreciation Expense Income Statement Accounts *Contra-Asset

  16. Trial Balance • 1000 Cash on hand 0.00 • 1020 Cash in bank 0.00 • 1100 Accounts Receivable 0.00 • 1200 Inventory 0.00 • 1400 Hot Dog Stand 0.00 • 1410 Accumulated Depreciation* 0.00 • 2000 Accounts Payable 0.00 • 2400 Notes Payable 0.00 • 3000 Bobs Equity 0.00 • 4000 Sales 0.00 • 5000 Cost of Good Sold 0.00 • 6200 Electricity 0.00 • Depreciation Expense 0.00 • Total 0.00 *Contra-Asset

  17. On December 1, Bob takes $10,000 out of his personal checking account and puts it into a newly created a business checking account, B.H.S. Company. What General Ledger accounts are affected and how? General Journal Date Event Account Debit Credit

  18. Date Event Account Debit Credit 12/01 Cash in bank 10,000 12/01 Bobs Equity 10,000 BHS Company Trial Balance 1000 Cash on hand 0 1020 Cash in bank 10,000 1100 Accounts Receivable 0 1200 Inventory 0 1400 Hot Dog Stand 0 1410 Accumulated Depreciation* 0 2000 Accounts Payable 0 2400 Notes Payable 0 3000 Bobs Equity 10,000 4000 Sales 0 5000 Cost of Good Sold 0 6200 Electricity 0 6500 Depreciation Expense 0

  19. Bobs Hotdog Stand (B.H.S.)December 1 Asset 10,000 Liability 0 Revenue 0 Expense 0 Equity 10,000 Profit/Loss 0 *Contra-Asset

  20. On December 2, Bob is busy. He wrote a check for a hotdog stand for $6,000. He buys 100 hot dogs for $1 each on credit. He also withdrew $200 cash from bank. General Journal Date Event Account Debit Credit

  21. General Journal Date Event Account Debit Credit 12/02 Wrote check for hot dog stand 1400 6000 12/02 1020 6000 12/02 Bought 100 hot dogs on credit 1200 100 12/02 2000 100 12/02 Withdrew $200 cash from bank 1000 200 12/02 1020 200 T Account Credit Debit 1000 - Cash On Hand 1400 – Hot Dog Stand 1020 - Cash In Bank 2000 – Accounts Payable 10,000 3000 – BHS Equity 1200 - Inventory 10,000

  22. 1000 - Cash On Hand 1400 – Hot Dog Stand 200 6000 1020 - Cash In Bank 2000 – Accounts Payable 10,000 6000 100 200 3,800 3000 – BHS Equity 1200 - Inventory 10,000 100

  23. BHS Trial Balance, December 2 • 1000 Cash on hand 200 • 1020 Cash in bank 3,800 • 1100 Accounts Receivable 0 • 1200 Inventory 100 • 1400 Hot Dog Stand 6,000 • 1410 Accumulated Depreciation 0 • 2000 Accounts Payable (100) • 2400 Notes Payable 0 • 3000 Bobs Equity (10,000) • 4000 Sales 0 • 5000 Cost of Good Sold 0 • 6200 Electricity 0 • Depreciation Expense 0 • Total 0

  24. Bobs Hotdog Stand (B.H.S.)December 2 Asset Cash on Hand 200 Cash in Bank 3,800 Inventory 100 Hot Dog Stand 6,000 Liability Acct Payable 100 Revenue 0 Expense 0 Equity 10,000 Profit/Loss 0 *Contra-Asset

  25. On December 3, Bob gets busy. He sells 50 of them for $2 each. Bob pays the hot dog vendor for the inventory with a check. General Journal Date Event Account Debit Credit

  26. General Journal Date Event Account Debit Credit 12/03 Sold 50 hotdogs for cash 1000 100 12/03 4000 100 12/03 Cost of hot dog inventory in the sales 5000 50 12/03 1200 50 12/03 He pays vendor for hot dogs with check 2000 100 12/03 1020 100 1000 - Cash On Hand 2000 – Accounts Payable 200 100 1020 - Cash In Bank 4000 – Sales 10,000 6000 200 5000 – Cost of Goods sold 3,800 1200 – Inventory 100

  27. 2000 – Accounts Payable 1000 - Cash On Hand 200 100 100 100 300 0 1020 - Cash In Bank 10,000 6000 200 100 4000 – Sales 100 3,700 1200 – Inventory 5000 – Cost of Goods sold 100 50 50 50

  28. BHS Trial Balance - December 3 • 1000 Cash on hand 300 • 1020 Cash in bank 3,700 • 1100 Accounts Receivable 0 • 1200 Inventory 50 • 1400 Hot Dog Stand 6,000 • 1410 Accumulated Depreciation 0 • 2000 Accounts Payable 0 • 2400 Notes Payable 0 • 3000 Bobs Equity (10,000) • 4000 Sales (100) • 5000 Cost of Good Sold 50 • 6100 Office Supplies Expense 0 • 6200 Electricity 0 • 6300 Insurance Expense 0 • Depreciation Expense 0 • Total 0

  29. Bobs Hotdog Stand (B.H.S.)December 3 Asset Cash on Hand 300 Cash in Bank 3,700 Inventory 50 Hot Dog Stand 6,000 Liability Acct Payable 0 Revenue 100 Expense 50 Equity 10,000 Profit/Loss 50 *Contra-Asset

  30. On Dec. 4, Bob was scheduled to work at a wedding. The wedding host told Bob not to charge customers but to bill him. That day, Bob sold 40 hot dogs and sent the bill to the host. General Journal Date Event Account Debit Credit

  31. General Journal Date Event Account Debit Credit 12/04 Sold 40 hotdogs on account 1000 80 12/04 4000 80 12/04 Cost of hot dog inventory in the sales 5000 40 12/04 1200 40 1100 – Accounts Receivable 4000 – Sales 100 1200 – Inventory 100 50 5000 – Cost of Goods sold 50 50

  32. 4000 – Sales 1100 – Accounts Receivable 100 80 80 180 5000 – Cost of Goods sold 1200 – Inventory 50 100 50 40 40 10 90

  33. Bob did not work any more for the whole month of December. He recognizes depreciation for the stand. The stand has a book life of 5 years and Bob uses straight line depreciation. General Journal Date Event Account Debit Credit 12/31

  34. General Journal Date Event Account Debit Credit 12/31 Bob recognized depreciation on stand 6500 100 12/31 1410 100 6500 – Depreciation Expense 1410 – Accumulated Depreciation

  35. 6500 – Depreciation Expense 1410 – Accumulated Depreciation 100 100 BHS Trial Balance December 31 • 1000 Cash on hand 300 • 1100 Accounts Receivable 80 • 1200 Inventory 10 • 1400 Hot Dog Stand 6,000 • 1410 Accumulated Depreciation (100) • 2000 Accounts Payable 0 • 2400 Notes Payable 0 • 3000 Bobs Equity (10,000) • 4000 Sales (180) • 5000 Cost of Good Sold 90 • 6200 Electricity 0 • Depreciation Expense 100 • Total 0

  36. On January 2 of the next year, Bob gets his electric bill for December for $20. What accounts are affected? General Journal Date Event Account Debit Credit 01/02

  37. Date Event Account Debit Credit 01/02 Bob gets $20 electric bill for December 6200 20 01/02 2000 20 2000 – Accounts Payable 6200 – Electricity 100 100 0

  38. BHS Trial Balance January 2 before year end close 1000 Cash on hand 300 1020 Cash in bank 3,700 1100 Accounts Receivable 80 1200 Inventory 10 1400 Hot Dog Stand 6,000 1410 Accumulated Depreciation (100) 2000 Accounts Payable (20) 2400 Notes Payable 0 3000 Bobs Equity (10,000) 4000 Sales (180) 5000 Cost of Good Sold 90 6200 Electricity 20 6500 Depreciation Expense 100

  39. B.H.S. 12/31/2007 Income Statement Balance Sheet Asset Cash on hand 300 Accounts Receivable 80 Cash in bank 3700 Inventory 10 Hot Dog Stand 6000 Accumulated Depreciation* (100) Total 9,990 Liability Accounts Payable 20 Notes Payable 0 Total 20 Revenue Sales 180 Expense Cost of Good Sold 90 Electricity 20 Depreciation Expense 100 Equity Bobs Equity 10,000 Total 10,020 Profit/Loss Profit/Loss (30) *Contra-Asset

  40. On January 3 , Bob closes his books for the previous year. Enter the journal entries to close all of the revenue and expense accounts into equity for the year of 2008. General Journal Date Event Account Debit Credit 01/03

  41. Date Event Account Debit Credit 12/31 Closes books for the year 4000 180 12/02 5000 90 12/02 6200 20 12/02 6500 100 12/02 3000 30 3000 – BHS Equity 5000 – Cost of Goods Sold 10000 90 6200 – Electricity Expense 4000 – Sales 20 180 6500 – Depreciation Expense 100

  42. 3000 – BHS Equity 5000 – Cost of Goods Sold 30 10000 90 90 6200 – Electricity Expense 4000 – Sales 20 20 180 180 6500 – Depreciation Expense 100 100 Sales Revenue 180 Total Revenue 180 Cost of Goods Sold 90 Depreciation Expense 100 Electricity Expense 20 Total Expense 210 Total to go to equity (30)

  43. BHS Trial Balance 01/03/2008 (after year end close) • 1000 Start Cash on hand 300 • Cash in bank 3,700 • 1100 Accounts Receivable 80 • 1200 Inventory 10 • 1400 Hot Dog Stand 6,000 • 1410 Accumulated Depreciation 100 • 2000 Accounts Payable 20 • 2400 Notes Payable 0 • 3000 Bobs Equity 9,970 • 4000 Sales 00 • 5000 Cost of Good Sold 00 • 6200 Electricity 00 • Depreciation Expense 00 • Total 0

  44. B.H.S. 1/3/2008 BHS Balance Sheet for year end 2007 Income Statement for 2007 Asset Cash on hand 300 Cash in bank 3700 Inventory 10 Hot Dog Stand 6000 Accumulated Depreciation* (100) Total 9,990 Liability Accounts Payable 20 Notes Payable 0 Total 20 Revenue Sales 0 Expense Cost of Good Sold 00 Electricity 0 Depreciation Expense 000 Equity Bobs Equity 9,970 Profit/Loss Profit/Loss 00 *Contra-Asset

  45. National Bank of America - Bank Statement BHS Company Starting Balance: 12/01/2006 0.00 Deposits: deposit 12/01/2007 $10,000 Withdraws and Checks: Withdraw 12/01/2007 $200 Check #1 12/03/2007 $6,000 Bank charges: Bank Fee 12/31/2007 $10 New Balance: 12/31/2007 $3,790 On January 5, Bob gets his bank statement for December 2007. He needs to do a bank rec.

  46. Here is the reconciliation BHS Bank Reconciliation for 12/07 Book Balance (from account 1020 in general ledger) 12/31/2007 $3,700 Bank fee adjustment $10 Balance $3,690 Bank Statement Balance 12/31/2007 $3,790 Outstanding check (Check 2 to Hotdog world ) adjustment $100 Balance $3,690

  47. Based on the reconciliation, Bob needs to add another expense, bank fee, item to his chart of accounts and enter the bank fee expense into his books. Since the bank expense happened in December, Bob has to do a prior period adjustment. This means that after making bank expense journal entry, he needs to make a closing journal entry for last years books which will change his pre-closing reports General Journal Date Event Account Debit Credit 01/07 Bank Charge Expense 6100 10 Cash 1020 10 Close Books Bank Expense 1020 10 Close Books Equity 3000 10

  48. B.H.S. 12/31/2007Restated 01/08/2008 Income Statement Balance Sheet Asset Cash on hand 300 Accounts Receivable 80 Cash in bank 3690 Inventory 10 Hot Dog Stand 6000 Accumulated Depreciation* (100) Total 9,980 Liability Accounts Payable 20 Notes Payable 0 Total 20 Revenue Sales 180 Expense Cost of Good Sold 90 Electricity 20 Bank Charge 10 Depreciation Expense 100 Equity Bobs Equity 10,000 Total 10,020 Profit/Loss Profit/Loss (40) *Contra-Asset

  49. Restated 2008 Balance Sheet BHS Balance Sheet for year end 2007 Asset Cash on hand 300 Cash in bank 3690 Inventory 10 Hot Dog Stand 6000 Accumulated Depreciation* (100) Total 9,980 Liability Accounts Payable 20 Notes Payable 0 Total 20 Equity Bobs Equity 9,960

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