Chapter01-The-Accounting--Equation-and-Doubl.ppt

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Business Transactions,Suppose that Mr Li initially invests 1 000 000 yuan of his own in Guangli Services by depositing the money in the name of the business.,To start the operation of house-moving service,Guangli Services buys a house which costs 360 000 yuan.,Recording Business Transactions,Recording Business Transactions,Guangli Services buys three trucks which costs 240 000 yuan from an auto dealer.The business pays the auto dealer 200 000 yuan in cash.The balance of 40 000 yuan will be paid 90 days later.,This is a liability called,Accounts Payable,.,Recording Business Transactions,Recording Business Transactions,Guangli Services buys house-moving equipment in cash from Haima Equipment Company,9 000 yuan.,Recording Business Transactions,Recording Business Transactions,Guangli Services pays 3 600 yuan for a one-year insurance policy on the trucks and equipment.We record it as an asset with an account name,Prepaid Insurance,.,Recording Business Transactions,Recording Revenues and Expenses,Soon after the opening of the business,Guangli Services renders house-moving services for its customers,resulting in the first inflow of revenue.,Revenues,are the amounts of assets that a business earns as a result of selling goods or rendering services.They may be in the form of cash or credit-card receipts or,receivables,.,As a result of receiving a cash revenue of 2000 yuan,the accounting equation is changed as follows:,Recording Revenues and Expenses,After a weeks operation,the trucks run out of gasoline.Guangli Services pays the gas station 200 yuan for the gasoline filled.This is the first expense of the business.,Expenses,are the amounts of assets that a business uses up in the process of generating revenues.,Recording Revenues and Expenses,Double-entry Bookkeeping,Double-entry bookkeeping is an accounting system by which each business transaction is recorded in at least two accounts and the accounting equation is kept in balance.,It also helps us to check whether we have made any arithmetic mistakes in recording business transactions,The T Account Form,The columnar form takes space,so the,T account form,is used.,Placement of T accounts,Assets=Liabilities+Owners Equity+Revenue-Expenses,Recording Transactions in the T Account Form,Now lets see how Guangli Services records its transactions in the T account form.(pp.20-21),Rules for Debit and Credit,The amount recorded on the debit side of one account(or accounts)always equals the amount recorded on the credit side of another account(or accounts).,The Trial Balance,A,trial balance,is a list of all the account balances at a given point of time.The balances of the accounts are recorded in a trial balance in the following order:Assets,Liabilities,Owners Equity,Revenue,and Expenses.,Guangli Services Trial BalanceJanuary 31,200,Chapter 2,Accounting Cycle(I)Journalizing,Posting and Preparing Trial Balance,Accounting Cycle,Accounting cycle,:,a sequence of accounting procedures which are repeated continuously during each,accounting period.,An accounting period/fiscal period:,any span of time covering a complete accounting cycle.,An accounting year/fiscal year:,an accounting period composed of twelve consecutive months.,Accounting Cycle,journalize business,transactions,post journal entries,to ledger accounts,prepare a,trial balance,complete a,work sheet,prepare,financial statements,journalize and post,the adjusting entries,journalize and post,the closing entries,prepare a,post-closing,trial balance,The General Journal,A,journal,:,a book in which all business transactions are initially recorded.,The process of recording business transactions in the journal is called,journalizing,.,The simplest form of journal is called a,general journal,.,DATE,DESCRIPTION,POST,REF.,DEBIT,CREDIT,GENERAL JOURNAL,PAGE,The General Journal,The General Ledger,General ledger,:,a book containing all the,ledger accounts,of a business.,DATE,ITEM,POST REF.,DEBIT,CREDIT,BALANCE,DEBIT,CREDIT,GENERAL LEDGER,ACCOUNT ACCOUNT NO.,The Chart of Accounts,Chart of accounts,:,the official list of all the accounts and their account numbers.,e.g.,Guangli Services,Chart of Accounts,Assets(100-199)Owners Equity(300-399),111Cash 311Li,Capital,112Accounts Receivable 312Li,Drawing,113Prepaid Insurance,121Trucks Revenue(400-499),123Equipment 411Income from Services,125House,Expenses(500-599),Liabilities(200-299)511Gas Expense,211Accounts Payable 512Utilities Expense,513 Wages Expense,Posting to the General Ledger,Posting:,The process of transferring the journal entries from the journal to ledger accounts.,Generally,we follow four steps:,Enter the date of transaction;,Enter the amount of transaction and the new balance of the account;,Insert the page number of the journal in the Posting Reference column of the ledger account(cross-reference);,Insert the ledger account number in the Posting Reference column of the journal.,GENERAL JOURNAL,PAGE,DATE,DESCRIPTION,POST,REF.,DEBIT,CREDIT,200,Jan.,1,Cash,111,1000,0,0,0,00,Li,Capital,1000,0,0,0,00,Original investment by Mr.Li in Guangli Services.,GENERAL LEDGER,ACCOUNT Cash ACCOUNT NO.111,DATE,ITEM,POST REF.,DEBIT,CREDIT,BALANCE,DEBIT,CREDIT,200Jan.,1,1,1000,0,0,0,00,1000,0,0,0,00,1,e.g.,After all the transactions posted from the journal,we can form,a completer ledger,.(An example can be seen on p35-38.),A trial balance,(referred to Chapter 1)can be prepared to help you prove the equality of total debit amounts and total credit amounts.,Posting to the General Ledger,Guangli Services,Trial Balance,January 31,200,DEBIT,CREDIT,Cash,444 450,Accounts Receivable,1 300,Prepaid Insurance,3 600,Trucks,240 000,Equipment,9 000,House,360 000,Accounts Payable,40 000,Li,Capital,1 000 000,Li,Drawing,500,Income from Services,28 300,Gas Expense,200,Utilities Expense,250,Wages Expense,9 000,1 068 300,1 068 300,e.g.,Chapter 03,Accounting Cycle(II):Adjustments,Work Sheet and Financial Statements,The Work Sheet,Work sheet,:,a chart that provides necessary data for recording adjusting entries and for preparing such financial statements as the income statement and the balance sheet.,Guangli Services,Work Sheet,For month ended January 31,200,Trial Balance,Adjustments,Adjusted Trial Balance,Income Statement,Balance Sheet,Account Name,Debit,Credit,Debit,Credit,Debit,Credit,Debit,Credit,Debit,Credit,The Work Sheet,e.g.,The title,Work Sheet,The period of time covered,The name of the business,Placement of Accounts in the Work Sheet,First,enter the balances of,the ledger accounts,in the first two columns of the work sheet.The,updated ledger account,balances are entered in the,Adjusted Trial,Balance,columns.,Second,The,revenue and expense,accounts are placed in the Income Statement columns.,Third,The Balance Sheet columns will include,Assets,Liabilities,and Owners Equity,.(Drawing in the Debit side),Placement of Accounts in the Work Sheet,Trial Balance,Adjustments,Adjusted Trial Balance,Income Statement,Balance Sheet,Account Classification,Debit,Credit,Debit,Credit,Debit,Credit,Debit,Credit,Debit,Credit,Assets,Liabilities,Capital,Drawing,Revenue,Expenses,The AdjustmentsAdjustments:,internal transactions,that bring the ledger accounts up to date at the end of an accounting period.Only a few accounts require adjusting.,Take Guangli Services as an example(only four accounts need adjusting:Prepaid Insurance,Trucks,Equipment,and House).,Adjustment for Prepaid Insurance,Guangli Services has paid 3 600 yuan in advance for a one-year insurance policy on the trucks and equipment.Now,one month,has passed,the premium for January has now expired,which amounts to 300 yuan(3 600 yuan divided by 12 months).,T accounts of the adjustments:,Adjustments for Depreciation of Trucks,Suppose Guangli Services believes that the trucks will have a useful life of ten years,with an,estimated salvage value,of 30 000 yuan at the end of the tenth year and the cost of the trucks 240 000 yuan.So the depreciation for one month is:,Adjustments for Depreciation of Trucks,In the work sheet,Guangli Services records the depreciation of 1 750 yuan as a debit to Depreciation Expense:Trucks and a credit to Accumulated Depreciation:Trucks,Accumulated Depreciation,:the total depreciation of the asset since it was originally purchased.,T accounts for adjusting the depreciation of Trucks:,Adjustments for Depreciation of Equipment,and House,Equipment and House are with the same method of computing depreciation as the Trucks.,T accounts for adjusting the depreciation of Equipment:,T accounts for adjusting the depreciation of House:,Completing the Work Sheet,Trial Balance,Adjustments,Adjusted Trial Balance,Income Statement,Balance Sheet,An example can be seen in p49-50.,Preparing Financial Statements,Three major financial statements:,Income statement,Balance sheet,Statement of cash flows,The Income statement,An income statement shows the,revenue,expenses,and the difference between them,that is,net income or net loss,.It is also called a,profit and loss statement,.,The Income statement,Guangli Services,Income Statement,For month ended January 31,200,Revenue:,Income from Services,28 300,Expenses:,Gas Expense,200,Utilities Expense,250,Wages Expense,9 000,Insurance Expense,300,Depreciation Expense:Trucks,1 750,Depreciation Expense:Equipment,150,Depreciation Expense:House,1 000,Total Expenses,12 650,Net Income,15 650,The Statement of Owners Equity,The statement of owners equity,shows how and why the owners equity account of a business has changed over the accounting period.,Guangli Services,Statement of Owners Equity,For month ended January 31,200,Li,Capital,January 1,200,1 000 000,Add:Net Income for January,15 650,Subtotal,1 015 650,Less:Withdrawals,500,Li,Capital,January 31,200,1 015 150,e.g.,The Balance Sheet,A balance sheet is also called a,statement of financial position,because it shows the financial position of a business at a given point of time.,Assets=Liabilities+Owners equity,The Balance Sheet,e.g.,The relationship,Recording and Posting the Adjusting Entries,Journalize the adjusting entries in the general journal from the work sheet:,Adjusting Entries,Jan.,31,Insurance Expense,300,Prepaid Insurance,300,31,Depreciation Expense:Trucks,1 750,Accumulated Depreciation:Trucks,1 750,31,Depreciation Expense:Equipment,150,Accumulated Depreciation:Equipment,150,31,Depreciation Expense:House,1 000,Accumulated Depreciation:House,1 000,Recording and Posting the Adjusting Entries,Post the adjusting entries in the ledger accounts:,Recording and Posting the Adjusting Entries,Chapter 4,Accounting Cycle(III):Closing Entries and Post-closing Trial Balance,2 more“follow-up”steps,the closing procedure;,preparation of a post-closing trial balance.,In accounting practice,a business usually makes closing entries only at the end of its fiscal year.,Closing Entries,Reduce its balance to zero-,debiting the account by the same amount of its credit balance,or crediting the account by the same amount of its debit balance.,If Debit balance,How to close?,If Credit balance,Temporary-equity accounts VS permanent accounts,Temporary-equity accounts:,apply to only one fiscal period and which are closed at the end of that fiscal period.,Revenue,Expense,and Drawing accounts are all temporary-equity accounts,permanent accounts,:remain open all the time until the business is liquidated.,Assets=Liabilities+Capital +Revenue Expenses Drawing,Permanent accounts Temporary accounts,Open Closed,The practical purpose of closing entries is to update these temporary-equity accounts so that the owner of the business knows the“results”of the operations:,The Closing Procedurefour steps:close the revenue accounts into the Income Summary;close the expense accounts into the Income Summary;close the Income Summary account into the Capital account;close the Drawing account into the Capital account.,Income Summary involved in the first three steps,Income Summary,Expenses balRevenue Bal.,Net loss,Net income,(if R E),Step 1 Closing the Revenue Accounts,Income from Services,Income Summary,-,+,Closing 28 300,Balance,28 300,28 300,we have put the revenue balance into the right side of our“basket”,Step 2Closing the Expense Accounts,Since the expense accounts have debit balances,we close them into the Income Summary account by crediting them,.,Step 3,Closing the Income Summary Account,Income,Summary,Li,Capital,-,+,12 650 28 300 Balance 1 000 000,Closing 15 650 Balance 15 650 Net Income 15 650,Step 4Closing the Drawing Account,crediting the Drawing account and debiting the Capital account.,Summarize the procedure,Journalizing the Closing,Entries,closing entries have to be recorded in the general journal,.,When a journal entry involves two or more debits and/or two or more credits,we call it a,compound entry,.,Posting the Closing,Entries,the ledger,accounts,writing the word“Closing”in the Item column of the ledger,and extending a line through both the debit and credit balance columns,.,Preparing the Post-closing Trial,Balance,post-closing trial balance,lists only the accounts which appear on the balance sheet,namely,assets,liabilities,and owners equity,.,real accounts,or permanent,accounts,Example:The post-closing trial balance of Guangli Services,Cash,Accountings Receivable,Prepaid Insurance,Trucks,Summary,A,ll,the eight steps involved in the accounting,cycle,The accounting cycle,Key terms and exercises,Chapter 5,Sales and Sales Journal,Lead-in,Chapter One to Chapter,Four:,basic,accounting concepts and procedures of a service-type sole,proprietorship,Now,accounting practice of a,merchandising sole proprietorship,Example context,Mr Li decides to extend his business to the sale of merchandise and thus opens a store called Guangli Furniture Store,which sells furniture and fixtures.,Follow the process,The Accounting Equation of a Merchandising Business,Revenue from the sales of goods under the,Sales,account,Merchandise,:goods acquired by a merchandising business for resale,to its customers in the same physical condition.,Merchandise inventory,: