3 rd session

Report
3rd session :
Balance Sheet
Recording the Effects of Transactions and Events
Goals of Today’s Class
1. Develop a better understanding of
Balance Sheet Concepts
2. Understand the Accounting Process and
Transactional Analysis
3. Understand Debits, Credits, and the use
of T-accounts
2
Exercise II – Fill in the Gaps
2009
Current Assets
Non-current Assets
Total Assets
Current Liabilities
Non-current Liabilities
m
l
Total L and E
2006
9,975
e
9,366
15,547
14,960
f
14,659 b 12,033
24,935
24,025
h
n
8,040
8,287
p
8,663
9,207
1,399
o
2007
9,988
25,535
Contributed Capital
Retained Earnings
2008
7,433
25,535
8,435
a
7,642
g
20,468
6,733
7,312
5,999
c
k
1,292
1,149
j
6,149
7,922
6,719
i
24,935
24,025
20,468
d
e. Current Assets – Current Liabilities = $1,724
j. Net loss = $656 and Dividends = $1,117
n. Current Assets – Current Liabilities = $1,948
o. Net income = $2,524 and Dividends = $1,240
1,017
3
How do we get the numbers in the
balance sheet?
1. Record financial effects of transactions in
accounts
2. Calculate the ending balance
3. Report the ending balance on the balance
sheet
• Note: Balance sheet accounts are cumulative
4
Accounting Process
• Transaction analysis
• Recording transactions
• Deriving account balances
• Prepare financial statements
5
Dual Effects of Transactions on the
Accounting Equation
Assets = Liabilities + Equity
Example #1: Receive $100 from bank loan
+ Increase Cash (an asset)
+ Increase Bank Loan (a liability)
Assets = Liabilities + Equity
100 = 100
+ 0
6
Dual Effects of Transactions on the
Accounting Equation
Assets = Liabilities + Equity
Example #2: Repay $20 of bank loan
+ Decrease Cash (an asset)
+ Decrease Bank Loan (a liability)
Assets = Liabilities + Equity
100 = 100
+ 0
(20) = (20)
+ 0
7
Dual Effects of Transactions on the
Accounting Equation
Assets = Liabilities + Equity
Example #3: Purchase $10 of inventory with cash
+ Decrease Cash (an asset)
+ Increase Inventory (an asset)
Assets = Liabilities + Equity
100 = 100
+ 0
(20) = (20)
+ 0
+10 - 10 = 0
+ 0
8
Dual Effects of Transactions on the
Accounting Equation
Assets = Liabilities + Equity
Example #4: Issue $50 of common stock to repay
portion of bank loan
+ Increase Common Stock (equity)
+ Decrase Bank Loan (a liability)
Assets = Liabilities + Equity
100 = 100
+ 0
(20) = (20)
+ 0
+10 - 10 = 0
+ 0
0
= (50)
+ 50
80 = 30 + 50
9
All transactions will fit into one or a
combination of two or more of the below
This change
will be accompanied by
This change
+A
+A
+A
-A
+L
+E
-L
-L
-L
-A
+L
+E
+E
+E
+E
+A
-L
-E
Or vice versa!
10
Transaction Analysis
Indicate the effects of the following transactions on the
balance sheet equation using this format:
Trans. # Assets = Liabilities + Equity
1. The firm issues 3,000 share of $10 par value common
stock at par for cash
Trans. 1 30,000 =
0 + 30,000
Subtotal 30,000 =
0 + 30,000
2. The firm purchases merchandise costing $18,900 on
account.
Trans. 2 18,900 = 18,900 + 0
Subtotal 48,900 = 18,900 + 30,000
11
Transaction Analysis
3. The firm acquires store equipment costing $12,700.
It issues a check for $2,000 with the balance payable
over 3 years under an installment contract.
Trans. 3 12,700
-2,000 = 10,700 + 0
Subtotal 59,600 = 29,600 + 30,000
4. The firm issues a check for $1,800 covering two
months’ rent in advance.
Trans. 4 1,800
-1,800 = 0 + 0
Subtotal 59,600 = 29,600 + 30,000
12
Transaction Analysis
5. Refer to transaction (3) above. The firm issues
common stock with a market value of $10,700 in full
settlement of the installment contract.
Trans. 5 0 = -10,700 + 10,700
Subtotal 59,600 = 18,900 + 40,700
6. The firm pays the merchandise supplier in
transaction (2) the amount due.
Trans. 6 -18,900 = -18,900 + 0
Total
40,700 =
0 + 40,700
13
Recording Transactions Using Ledger Accounts
• Maintaining accounts using balance sheet equation is inefficient,
especially as the number of accounts grow. Use Journal Entries and
ledger accounts instead.
• The increases and decreases in each asset, liability and equity item is
tracked through its “T-account”
Account Title
Left
Debit
(Dr.)
Right
Credit
(Cr.)
•
There can be no negative entries in T-Accounts
•
Note: Debit only means “left” and Credit only means “right”
•
One side of the T-account is used for increases and one for
decrease. There is a beginning balance and an ending
balance that appear on the financial statements (e.g.,
balance sheet).
14
T-Accounts
Credit = Right
Debit = Left
Assets
Dr.
Cr.
=
Liabilities
Dr.
BB
Incr.
EB
Cr.
+
Equity
Dr.
BB
Decr.
Decr.
Incr.
EB
Cr.
BB
Decr.
Incr.
EB
15
T-Accounts
• For Asset accounts:
debit = left = increase
credit = right = decrease
• For Liability and Equity accounts:
debit = left = decrease
credit = right = increase
16
T-Accounts
Handy Trick of the Day:
Whether debit (left) means increase or
decrease depends on what side of the Balance
Sheet equation the account sits.
Assets = Liabilities + Equity
That is,
Assets are on the left side of the equation, thus debit
(left) is an increase for assets [and credits are
therefore decreases].
Liabilities and Equity are on the right side of the
equation, thus credit (right) is an increase [and
debits are therefore decreases].
17
T- Accounts,
Dual Effects of Transactions,
and the Balance Sheet Equation
• In our prior examples we used the equation to make
sure that each transaction had two effects on the
balance sheet and thus the equation always held.
• Now that we have T-accounts, we can also make sure
that:
Debits = Credits
This will also ensure that the Balance Sheet equation
holds!
Let’s check this…
18
Debits = Credits
Assets = Liabilities + Equity
Recall the 4 possible combinations of the dual effects of
transactions:
1) Increase an asset and Increase a liability or equity
Debit
Credit
2) Decrease an asset and Decrease a liability or equity
Credit
Debit
3) Increase an asset and Decrease an asset
Debit
Credit
4) Increase a liab. or eq. and Decrease another liab or eq.
Credit
Debit
19
Debits and Credits
Retained Earnings
Liability or Owners’ Equity
Asset
(Debit)
+
Remember RE is an
Owners’ Equity Account
(Credit)
-
Memorize this for Assets
(Debit)
(Credit)
-
+
Flip it for Liabs + OE
Expenses/Losses
An increase in an Expense
is a decrease in Retained
Earnings. (We decrease
Owners’ Equity accounts
with a debit.)
(Debit)
+
Revenues/Gains
An increase in a
Revenue is an
increase in Retained
Earnings. (We
increase Owners’
Equity accounts with
a credit.)
(Credit)
+
20
Debits and Credits, Some Intuition
“Debit” card
Suppose I open a checking account with BOA with $1,000.
Assets
Cash
Bank of America
Liabilities
credit
debit
Accounts Payable (Chris)
$1,000
$1,000
$150
$850
$150
$850
I use my debit card to buy an iPod at Best Buy for $150.
Using a debit card reduces the bank’s liability to you.
The word “debit” in the term “debit card” is intuitive from the
bank’s point of view.
21
Debits and Credits, Some Intuition
“Credit” card
Suppose I sign up for a Visa credit card.
My Finances
debit
Assets
iPod
$150
Liabilities
Accounts Payable (Visa)
credit
$150
I use my credit card to buy an iPod at Best Buy for $150.
Using a credit card increases your liability to your credit card
company (i.e., Visa)
The word “credit” in the term “credit card” is intuitive from
your point of view.
22
Balance Sheet at the beginning of
2010
Injection Plastics Company
Balance Sheet
As of Dec. 31, 2010
Cash
$21,000 Accounts Payable
$15,000
Investments (short-term)
2,000 Accrued liabilities payable
2,000
Accounts receivable
3,000 Notes payable (short-term)
7,000
Inventory
Notes receivable (long-term)
24,000 Long-term notes payable
48,000
1,000
Equipment
48,000 Contributed capital
90,000
Factory building
90,000 Retained earnings
30,000
Intangibles
3,000
$192,000
$192,000
23
P2-3
Assets
Cash
$21,000
Liabilities
Intangible Assets
$3,000
Accounts Payable
Accrued Liabs. Payable
$15,000
Short Term Inv
$2,000
$2,000
Accts Receivable
$3,000
Short Term Note Pybl
$7,000
Inventory
$24,000
Long Term Note Pybl
$48,000
Long Term Note Recv
$1,000
Equity
Equipment
$48,000
Factory Bldg
$90,000
Contributed Capital
$90,000
Retained Earnings
$30,000
24
P2-3
a. Lent $7,000 to a supplier who signed a two-year note
Assets
Cash
$21,000
$7,000
Long-term note rec
$1,000
$7,000
Journal Entry
Long-term note receivable
Cash
7,000
7,000
25
P2-3
b. Purchased Equipment that cost $18,000. Paid $6,000 cash and signed a
one-year note for the balance.
Assets
Liabilities
Equipment
$48,000
$18,000
Cash
$21,000
Short Term Note Payable
$7,000
$7,000
$12,000
$6,000
Journal Entry
Equipment
18,000
Cash
6,000
Short-term Note Payable
12,000
26
P2-3
c. Issued an additional 2,000 shares of capital stock for $12,000 cash.
Assets
Equity
Cash
Contributed Capital
$21,000
$7,000
$12,000
$6,000
$90,000
$12,000
Journal Entry
Cash
12,000
Contributed Capital
12,000
27
P2-3
d. Borrowed $12,000 cash from a local bank, payable in three months.
Assets
Liabilities
Short-term note payable
Cash
$21,000
$7,000
$12,000
$6,000
$7,000
$12,000
$12,000
$12,000
Journal Entry
Cash
12,000
Short-term note payable
12,000
28
P2-3
e. Purchased short-term investments for $9,000 cash
Assets
Cash
$21,000
Short-term investments
$7,000
$9,000
$12,000
$12,000
$2,000
$6,000
$9,000
Journal Entry
Short-term investments
Cash
9,000
9,000
29
P2-3
f.
Hired a new president at the end of the year. The contract was for $85,000 per
year plus options to purchase company stock at a set price based on company
performance.
No Recordable Economic Effect
Journal Entry
No Journal Entry
30
P2-3
g. Purchased a patent (an intangible asset) for $3,000 cash.
Assets
Cash
Intangibles
$21,000
$7,000
$20,000
$6,000
$3,000
$3,000
$9,000
$3,000
Journal Entry
Intangibles (patent)
Cash
3,000
3,000
31
P2-3
h. Returned defective equipment to the manufacturer and received a (full) refund
of $1,000.
Assets
Cash
Equipment
$21,000
$7,000
$12,000
$6,000
$12,000
$9,000
$1,000
$48,000
$18,000
$1,000
$3,000
Journal Entry
Cash
1,000
Equipment
1,000
32
P2-3
i.
Built an addition to the factory for $25,000; paid $9,000 cash and signed
a three-year note for the balance
Assets
Cash
$21,000
$12,000
$12,000
$1,000
$46,000
Liabilities
Long Term Note Payable
Factory Building
$7,000
$6,000
$9,000
$48,000
$90,000
$16,000
$25,000
$3,000
$9,000
$34,000
$12,000
How much cash is left?
Journal Entry
Factory Building
25,000
Cash
9,000
Long-term Note Payable
16,000
33
Balance Sheet at the beginning of
2010
Injection Plastics Company
Balance Sheet
As of Dec. 31, 2011
Cash
Investments (short-term)
Accounts receivable
Inventory
Notes receivable (long-term)
Equipment
Factory building
Intangibles
$12,000 Accounts Payable
11,000 Accrued liabilities payable
3,000 Notes payable (short-term)
24,000 Long-term notes payable
$15,000
2,000
31,000
64,000
8,000
65,000 Contributed capital
115,000 Retained earnings
102,000
30,000
6,000
$244,000
$244,000
34
Next Class
• Income Statement
• Cash versus Accrual Basis Accounting
35

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