Basic Accounting Richard Mross [phone] revised 02/19/2008

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 Cha
nge in Value Guesses Other Events
Documents Income Statement Balance Sheet List
Reports Transaction Reports Budgets Projections I
nvoices 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
Bobs 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
Revenue Sales
Liability Accounts Payable Notes Payable
Expense Cost of Good Sold Electricity Depreciation
Expense
Equity Bobs Equity
Profit/Loss No account here
Contra-Asset
15
Chart of Accounts (General Ledger)

• 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

Asset Liability Equity Revenue Expense

Balance Sheet Accounts
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
Debit
Account
Date
Credit
Event
18
Debit
Account
Date
Credit
Event
10,000
12/01
Cash in bank
10,000
12/01
Bobs Equity
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
Revenue 0
Liability 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
Debit
Account
Date
Credit
Event
21
General Journal
Debit
Account
Date
Credit
Event
6000
1400
12/02
Wrote check for hot dog stand
1020
6000
12/02
100
1200
12/02
Bought 100 hot dogs on credit
2000
100
12/02
200
1000
12/02
Withdrew 200 cash from bank
1020
200
12/02
T Account
Credit
Debit
1000 - Cash On Hand
1400 Hot Dog Stand
2000 Accounts Payable
1020 - Cash In Bank
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
100
6000
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

Revenue 0
Liability Acct Payable 100
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
Debit
Account
Date
Credit
Event
26
General Journal
Debit
Account
Date
Credit
Event
100
1000
12/03
Sold 50 hotdogs for cash
4000
100
12/03
5000
12/03
Cost of hot dog inventory in the sales
50
1200
50
12/03
100
2000
12/03
He pays vendor for hot dogs with check
1020
100
12/03
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
100
200
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

Revenue 100
Liability Acct Payable 0
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
Debit
Account
Date
Credit
Event
31
General Journal
Debit
Account
Date
Credit
Event
80
1000
12/04
Sold 40 hotdogs on account
4000
80
12/04
5000
12/04
Cost of hot dog inventory in the sales
40
1200
40
12/04
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
Debit
Account
Date
Credit
Event
12/31
34
General Journal
Debit
Account
Date
Credit
Event
6500
12/31
Bob recognized depreciation on stand
100
1410
100
12/31
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
Debit
Account
Date
Credit
Event
01/02
37
Debit
Account
Date
Credit
Event
6200
01/02
Bob gets 20 electric bill for December
20
2000
20
01/02
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
Revenue Sales 180
Liability Accounts Payable 20 Notes Payable
0 Total 20
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
Debit
Account
Date
Credit
Event
01/03
41
Debit
Account
Date
Credit
Event
4000
12/31
Closes books for the year
180
5000
90
12/02
6200
20
12/02
6500
100
12/02
3000
12/02
30
5000 Cost of Goods Sold
3000 BHS Equity
90
10000
6200 Electricity Expense
4000 Sales
20
180
6500 Depreciation Expense
100
42
5000 Cost of Goods Sold
3000 BHS Equity
30
90
10000
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
Revenue Sales 0
Liability Accounts Payable 20 Notes Payable
0 Total 20
Expense Cost of Good Sold 00 Electricity
0 Depreciation Expense 000
Equity Bobs Equity 9,970
Profit/Loss Profit/Loss 00
Contra-Asset
45

• On January 5, Bob gets his bank statement for
  December 2007.
• He needs to do a bank rec.

National Bank of America - Bank Statement BHS
Company Starting Balance 12/01/2006 0.00 De
posits 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
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
Debit
Account
Date
Credit
Event
10
6100
01/07
Bank Charge Expense
1020
10
Cash
1020
Close Books Bank Expense
10
3000
10
Close Books Equity
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
Revenue Sales 180
Liability Accounts Payable 20 Notes Payable
0 Total 20
Expense Cost of Good Sold 90 Electricity 20 Ban
k 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