Mod2-Accounting and Financial Statements

Module 2
Accounting and Financial Statements
Objectives
Discuss goals and uses of accounting in a business.

Describe forms of business organizations.
Identify the users of accounting information
Discuss how technology is changing accounting.
Identify and explain the content and reporting aims of financial statements.
Identify, explain, and apply accounting principles.
Explain and interpret the accounting equation.
Illustrate how business transactions affect the accounting equation.
Prepare financial statements from business transactions.
Run an SAP demonstration.
Practice viewing financial statements in SAP.
SAP 2007 / SAP University Alliances
Introductory Accounting
What is Accounting?
Accounting is an
information system that:
identifies
measures
records
communicates
relevant, reliable,
consistent and
comparable information
about an organizations
economic activities.
Forms of Organization
Sole Proprietorship
Partnership
Corporation
Sole Proprietorship
One owner
Separate entity for accounting purposes
Not a separate legal entity from the owner
Unlimited liability
Limited life
Owner taxed on profits
Partnership
Two or more owners

Not a separate legal entity from the owners
Unlimited liability
Limited life
Owners taxed on profits
Corporation
One or more owners

Separate legal entity from the owner(s)
Limited liability
Unlimited life
Corporation taxed on profits
Non-Business Organizations
Not-for-profit and government

organizations
No identifiable owner
Examples: schools, charities,
libraries, hospitals, police, shelters
Users of Accounting Information
Internal
Owners
Managers
External
Bankers and other creditors

Investors and potential investors
Unions
External auditors
Tax Agencies
Accounting and Technology
Impact of technology on accounting:

Instant access to information
Decreased cost, effort, and time
Computer skills essential
Increased job opportunities
Communicating Through Financial

Statements
Accounting provides useful information that helps
users make decisions.
This information is often provided in the form of
financial statements.
The major statements are the:
Income statement
Statement of owners equity
Balance sheet
Statement of cash flows
Income Statement
The income statement reports:

Revenues of the organization
Expenses (costs incurred in earning the
revenues)
Net income or loss
The income statement covers a

period of time.
Income Statement
Inflows of assets
in exchange for
products and
services
provided to
customers.
S ervice Corporation
Income S tatement
For Month Ended January 31, 2005
Revenues:
Consulting revenue
Rental revenue
Total revenues
Operating Expenses:
Rent expense
$ 1,200
S alaries expense
900
Total operating expenses
Net income
$ 4,700
300
$ 5,000
2,100
$ 2,900
Income Statement
Income S tatement
Costs incurred
or the using
up of assets
from generating
revenue
Revenues:
Consulting revenue
Rental revenue
Total revenues
Operating Expenses:
Rent expense
$ 1,200
S alaries expense
900
Net income
$ 4,700
300
$ 5,000
2,100
$ 2,900
Income Statement
Income S tatement
Total revenues
less
total expenses
results in
Net Income
or Net Loss
Revenues:
Consulting revenue
Rental revenue
Total revenues
Operating Expenses:
Rent expense
$ 1,200
S alaries expense
900
Net income
$ 4,700
300
$ 5,000
2,100
$ 2,900
Statement of Owners Equity
Reports on changes in equity over a period

of time.
Equity is affected by:
Owner investments and withdrawals
Net income or net losses
Linked to the income statement


Service Company
Statement of Owner's Equity
Covers a
period
of time.
From the
Income
statement.
Service, capital, January 1

Add:
Investment by owner
Net income
Total
Less: Withdrawal by owner
$
$9,500
2,900
12,400
$12,400
1,200
$11,200
Balance Sheet
The balance sheet reports the:

Assets
Liabilities
Owners equity
of an organization at a point in time.

Linked to the Statement of Owners Equity.
Balance Sheet
Properties or
economic
resources
owned by a
business
Service Company
Balance Sheet
January 31, 2005
Assets
Cash
$ 7,100
Supplies
4,100
Equipment
7,050
Total assets $ 18,250

Liabilities
Accounts payable $ 950
Notes payable
6,100
Total liabilities
$ 7,050
Owner's Equity
11,200
Service, capital
Total liabilities
and owner's
equity
$ 18,250
Balance Sheet
Debts or
Obligations
of the
business
Service Company
Balance Sheet
January 31, 2005
Assets
Cash
$ 7,100
Supplies
4,100
Equipment
7,050
Liabilities
Notes payable
6,100
Total liabilities
$ 7,050
Owner's Equity
Service, capital
11,200
Total liabilities
and owner's
equity
$ 18,250
Balance Sheet
Owners
claim on the
assets of a
business
From the
Statement
Of Owners
Equity
Service Company
Balance Sheet
January 31, 2005
Assets
Cash
$ 7,100
Supplies
4,100
Equipment
7,050
Liabilities
Notes payable
6,100
Total liabilities
$ 7,050
Owner's Equity
Service, capital
11,200
Total liabilities
and owner's
equity
$ 18,250
Cash Flow Statement
Reports the sources and uses of

cash for a period of time.
Organized by the companys major
activities:
Operating
Investing
Financing
Cash Flow Statement
Cash Flow Statement

Service Company
Cash Flow Statement
From
the
balance
sheet
Cash flows from operating activities:

Cash received from clients
Cash paid for supplies
Cash paid for rent
Cash paid to employee
Net cash used by operating acitivities
Cash flows from investing activities:
Cash flows from financing activities:
Investment by owner
Withdrawal by owner
Net cash provided by financing activities
Net increase in cash
Cash balance, January 1
Cash balance, January 31
$5,000
(4,100)
(1,200)
(900)
($1,200)
0
$9,500
(1,200)
8,300
$7,100
$7,100
Generally Accepted Accounting Principles (GAAP)
Rules that make up acceptable

accounting practices.
GAAP were developed to make
information in financial statements:
Relevant
Reliable
Consistent
Comparable
Business Entity Principle
Every business is to
be accounted for
separately from its
owner or owners.
Cost Principle
All transactions are recorded

based on the actual cash
amount received or paid.
In absence of cash, the cash
equivalent amount of the
exchange is recorded.
Objectivity Principle
Financial statement
information must be
supported by
independent, unbiased,
and verifiable evidence.
Going-Concern Principle
Financial statements
reflect the assumption that
the business will continue
operating instead of being
closed or sold.
Monetary Unit Principle
Transactions are expressed using

units of money as the common
denominator.
Adjustments are not made for
changes in exchange rates or
inflation.
Revenue Recognition
Principle
Revenue is recorded at
the time it is earned
regardless of whether
cash or another asset
has been exchanged.
The Accounting Equation

The accounting equation must remain in balance after each
transaction.
Assets
Liabilities
Equity
Transactions
For each transaction we need to

determine:
Which accounts are being affected.
If the accounts are increasing or decreasing as a
result of the transaction
Transaction 1
John Rich invests $9,500 cash in the business.
Cash increases by $9,500.
Owners capital increases by $9,500.
(1)
Bal
Owner's
Assets
=
Liabilities
+ Equity
Accounts Notes
Owner's
Cash
Supplies Furniture
Payable Payable
Capital
$9,500
$9,500
$9,500
$0
$9,500
$0
$0
=
$0
$9,500
$9,500
Transaction 2
Purchased supplies for $3,000 cash.
Supplies increase by $3,000.
Cash decreases by $3,000.
Assets
(2)
Bal
Cash
Supplies Furniture
$9,500
-$3,000
$3,000
$6,500
$3,000
$0
$9,500
Liabilities
Accounts Notes
Payable Payable
$0
=
Owner's
+ Equity
Owner's
Capital
$9,500
$0
$9,500
$9,500
Transaction 3
Purchased $7,050 of Furniture and $1,400 of supplies on
credit. (A/P for supplies and Notes Payable for the furniture.)
Supplies increase by $1,400.
Furniture increases by $7,050.
Accounts Payable increases by $1,400.
Notes payable increases by $7,050.
(3)
bal
Owner's
Assets
=
Liabilities
+ Equity
Accounts Notes
Owner's
Cash
Supplies Furniture
Payable Payable
Capital
$6,500
$3,000
$9,500
$1,400
$7,050
$1,400
$7,050
$6,500
$4,400
$7,050
$1,400
$7,050
$9,500
$17,950
$17,950
Transaction 4
Services rendered for $2,700 cash.
Cash increases $2,700.
Owners equity increases $2,700.
(4)
bal
Owner's
Assets
=
Liabilities
+ Equity
Accounts Notes
Owner's
Cash
Supplies Furniture
Payable Payable
Capital
$6,500
$4,400
$7,050
$1,400
$7,050
$9,500
$2,700
$2,700
$9,200
$4,400
$7,050
$1,400
$7,050
$12,200
$20,650
$20,650
Transaction 5
Payment of $1,200 rent expense in cash.
Cash decreases $1,200.
Owners equity decreases $1,200.
(5)
bal
Owner's
Assets
=
Liabilities
+ Equity
Accounts Notes
Owner's
Cash
Supplies Furniture
Payable Payable
Capital
$9,200
$4,400
$7,050
$1,400
$7,050
$12,200
-$1,200
-$1,200
$8,000
$4,400
$7,050
$1,400
$7,050
$11,000
$19,450
$19,450
Transaction 6
Payment of $900 salaries expense in cash.
Cash decreases $900.
Owners equity decreases $900.
(6)
bal
Owner's
Assets
=
Liabilities
+ Equity
Accounts Notes
Owner's
Cash
Supplies Furniture
Payable Payable
Capital
$8,000
$4,400
$7,050
$1,400
$7,050
$11,000
-$900
-$900
$7,100
$4,400
$7,050
$1,400
$7,050
$10,100
$18,550
$18,550
Transaction 7
Service contract signed for February and March.
No economic exchange has taken place.
All accounts remain unaffected.
Owner's
Assets
=
Liabilities
+ Equity
Accounts Notes
Owner's
Cash
Supplies Furniture
Payable Payable
Capital
$7,100
$4,400
$7,050
$1,400
$7,050
$10,100
(7)
bal
$7,100
$4,400
$18,550
$7,050
$1,400
=
$7,050
$10,100
$18,550
Transaction 8
Services revenue of $1,700 and rental revenues of $300 rendered for
credit.
Accounts receivable increases $2,000.
Owners capital increases $2,000.
Assets
Cash
$7,100
(8)
bal $7,100
Accounts
Receivable
$2,000
$2,000
$4,400
Liabilities
Accounts
Notes
Owner's
payable Payable capital
$1,400
$7,050 $10,100
$2,000
$1,400
$7,050 $12,100
Supplies Furniture
$4,400
$7,050
$ 20,550
Owner's
Equity
$7,050
=
$ 20,550
Transaction 9
Receipt of $2,000 cash on account.
Cash increases $2,000.
Accounts receivable decreases $2,000.
Assets
Accounts Notes Owner's

payable Payable capital
$1,400 $7,050 $12,100
Accounts
Cash Receivable Supplies Furniture
$7,100
$2,000 $4,400
$7,050
(9) $2,000
-$2,000
bal $9,100
$0 $4,400
$7,050
$ 20,550
Liabilities
Owner's
Equity
$1,400
=
$7,050 $12,100
$ 20,550
Transaction 10
Payment of $450 accounts payable.
Cash decreases $450.
Accounts payable decreases $450.
Assets
Accounts
$9,100
$0
$4,400
$7,050
(10) -$450
bal $8,650
$0
$4,400
$7,050
$ 20,100
Liabilities
Accounts Notes
payable Payable
$1,400
$7,050
-$450
$950
$7,050
=
$ 20,100
Owner's
+ Equity
Owner's
capital
$12,100
$12,100
Transaction 11
Withdrawal of $1,200 cash by owner.
Cash decreases $1,200.
Owners capital decreases $1,200.
Assets
Accoun
ts
Notes
payable Payable
$950
$7,050
Accounts
$8,650
$0
$4,400
$7,050
(11) -$1,200
bal
$7,450
$0
$4,400
$7,050
$ 18,900
Liabilities
$950
=
$7,050
$ 18,900
Owner's
+ Equity
Owner's
capital
$12,100
-$1,200
$10,900
Financial Statements
Financial statements
are now prepared to
reflect the
transactions we have
recorded.
Income Statement
Service Company
Income Statement
Revenues:
Consulting revenue
$
Rental revenue
Total revenues
$
Operating expenses:
Rent expense
$ 1,200
Salaries expense
900
$
Net income
$
4,400
300
4,700
2,100
2,600
Service Company
Statement of Owner's Equity
Plus: Investment by owner
Net income
Less: Withdrawal by owner
$
$ 9,500
2,600
12,100
$ 12,100
1,200
$ 10,900
Balance Sheet
Service Company
Balance Sheet
January 31, 2005
Assets
Cash
Supplies
Equipment
Total assets
$ 7,450
4,400
7,050
$ 18,900
Liabilities
Accounts payable
$
Notes payable
Total liabilities
$
Owner's equity
Service, capital
Total liabilities and
owner's equity
$
950
7,050
8,000
10,900
18,900

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Module 2

Accounting and Financial Statements

Discuss goals and uses of accounting in a business.

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

Two or more owners

One or more owners

Not-for-profit and government

Users of Accounting Information

Bankers and other creditors

SAP 2007 / SAP University Alliances

Accounting and Technology

Impact of technology on accounting:

SAP 2007 / SAP University Alliances

Communicating Through Financial

SAP 2007 / SAP University Alliances

The income statement reports:

The income statement covers a

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

Statement of Owners Equity

Reports on changes in equity over a period

Linked to the income statement

Statement of Owners Equity

Service, capital, January 1

SAP 2007 / SAP University Alliances

The balance sheet reports the:

of an organization at a point in time.

SAP 2007 / SAP University Alliances

Total assets $ 18,250

Total assets $ 18,250

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

Total assets $ 18,250

Cash Flow Statement

Reports the sources and uses of

Cash Flow Statement

Cash Flow Statement

Cash flows from operating activities:

SAP 2007 / SAP University Alliances

Generally Accepted Accounting Principles (GAAP)

Rules that make up acceptable

SAP 2007 / SAP University Alliances

Business Entity Principle

All transactions are recorded

Monetary Unit Principle

Transactions are expressed using

The Accounting Equation

SAP 2007 / SAP University Alliances

For each transaction we need to

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

SAP 2007 / SAP University Alliances

Accounts Notes Owner's

SAP 2007 / SAP University Alliances

Statement of Owners Equity