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Section 1 Things to remember *This section provides an explanation of rules you will need to remember. These rules will help you to better understand why transactions are analyzed and recorded the way they are.

Use of GAAP What is GAAP? Why is it used? Before a business can record a single transaction, they must follow a set of rules that guide them in identifying transactions, recording transactions, and communicating their accounting activities. These rules are known as Generally Accepted Accounting Principles or GAAP. GAAP principles are made of at least of four simple principles and four assumptions. Below, we have listed these principles and assumptions with their explanations, in order for you to better understand them. Principles 1. Cost Principle- The cost principle simply means that accounting information is based on actual cost. This principle guides a business when recording assets. We will explain later what assets are, but remember that there is a cost associated with recording an asset. 2. Revenue Recognition Principle- This principle helps a business to understand when to record revenue. According to this principle, revenue is recognized when it is earned or when services are rendered. This information is important when communicating how profitable the business is. 3. Expense Recognition Principle (Matching)- This principle requires that a business record or the expenses it incurred to generate revenue. What does this mean? This simply means that a business must MATCH its expenses with the revenue the business earned in the same accounting period. 4. Full Disclosure Principle- This principle requires a company to report the details behind financial statements that would impact a user’s decision. Why? A business should broadcast or openly report details behind a financial statement, to better communicate to the user. Assumptions 1. Going Concern Assumption- This assumption means that the accounting information communicates to others that the business will continue to operate instead of being closed. 2. Monetary Unit Assumption- This assumption means that transactions or events can be expressed in money. The money a business uses depends on the country. 3. Time Period Assumption- This assumption presumes that the life of a business can be divided into time periods. Periods can be divided into months (quarterly) or years (annually) 4. Business Entity Assumption- This assumption means that all accounting information attached to the business is separate from other business entities.

Section 2 THINGS TO REMEMBER *Now that you have an understanding of the rules that guide business transactions, this next section will teach you the following: How to classify accounts Financial statements What statement each account is on Key Concepts such as the accounting equation, debits/credits, and double entry accounting

ASSETS, LIABILITIES, AND EQUITY ASSETS- An Asset is simply a resource that is owned or controlled by a business. Assets are expected to yield future benefits for the business. What does that mean? This often means that a business expects to gain a profit or revenue from owning these assets. In other words, as the business, an asset is WHAT YOU OWN and you expect to make money from what you own. Accounts that are classified as assets are Cash, Land, Building, Office Equipment, Supplies, Accounts Receivable, Land, Prepaid Expenses, and Prepaid Insurance. LIABILITIES- A liability is a creditor’s claim on assets. What does this mean? Businesses do not expect to gain or benefit from liabilities. Liabilities are obligations a company must pay. In other words, Liabilities are WHAT YOU OWE as the business. Accounts that are classified as liabilities are Accounts payable, Insurance payable, Wages payable, Notes Payable, and unearned revenue. EQUITY- An equity account is the owner’s claim on assets and deals with a company’s stock. Equity can also be determined when a business subtract what is OWNS (Assets) from what it OWES (Liabilities) or Assets - Liabilities. Accounts that are classified as equity are Common Stock, Dividends, and Retained Earnings. *ASSETS LIABILITIES AND EQUITY ARE LISTED ON THE BALANCE SHEET

Assets Cash- this account should show the businesses cash balance. A business uses this account when there are increases or decreases to the company’s money. This money can be in the form of cash, coins, or checks. Land- this account refers to any property that the business owns. The business would use this account when it buys or sells land. Building- this account refers to any facilities that business owns. The business would use this account if it purchased or sold a building, factory, or warehouse. Office Equipment and Supplies- this account refers to any equipment or supplies used by the business. The business would use this account if it buys, sells, or uses equipment/supplies for the business. Equipment can be classified as cash registers, printers, or copy machines. Supplies can be classified as store supplies (bags or gift wrapping) or office supplies (pens, pencils, and paper). Accounts Receivable- this account is used when a business makes sales on credit. This is different from when cash is received because someone owes the business if they make a sale on credit. This account is affected when they expect to receive cash or have received cash from the person who owes them. Prepaid Accounts- Prepaid accounts are also known as prepaid expenses, prepaid insurance, or prepaid rent. These accounts are affected when a company pays an expense in advance. This would occur if a company paid the rent for December in the month of May. LIABILITIES Accounts Payable- this account is affected when the business makes a purchase on credit. This account is not the same as Account Receivable. The business made a purchase so now the business owes who they made the purchase with. The business would use this account when a transaction adds to what it owes or subtracts from what it owes. Notes Payable- this account is affected if a business took out a loan and signed a promissory note. When the business pays that promissory note, Notes Payable is decreased. When the note is established, Notes payable is increased. Wages Payable- this account would be affected when the business pays wages to its employees. Employees are considered as liabilities to the company. Paying the employees decreases the company’s assets (cash).

Unearned Revenue- this account is affected when a customer pays for a service in advance. The revenue is considered unearned because the business hasn’t yet provided the service. REMEMBER According to the revenue recognition principle, revenue can’t be recognized until it is earned. EQUITY Common Stock- this account is affected when an owner invests into the business. When in owner makes an investment into the business, the owner makes an exchange for common stock. This account has a positive effect on equity. Dividends- this account is used when assets are distributed to stockholders. What does this mean? When a business pays dividends to its stockholders, that business is paying out cash dividends. Therefore the business is losing cash (an asset) when it pays its stockholders. In other words, a dividend is the opposite of an owner investment. This account has a negative effect on equity. Revenue and Expenses also have an effect on equity even though these accounts aren’t listed on the balance sheet. *REVENUE AND EXPENSES ARE LISTED ON THE INCOME STATEMENT

CHART CHARTOF OFACCOUNTS ACCOUNTS Illustrated below is a typical chart of accounts. A chart of accounts is simply a list of all a business’s accounts and their balances. Every business has its own accounts and numbering system specific to their business. Asset accounts are usually 100-199. Liability accounts are usually 200-299. Equity accounts are typically 300-399. This chart is usually listed with values but, we listed it with description to further your understanding of accounts.


Cash 101 Land 102 Building 103

DESCRIPTION Cash, Coins, or Checks Property owned by the Business Warehouses, Factories, Stores, or any other building owned by the business

Office Equipment 104 Supplies 105 Accounts Receivable 106 Prepaid Expenses 107 Accounts Payable 201 Notes Payable 202 Wages Payable 203 Unearned Revenue 204 Common Stock 301 Retained earnings 302 Dividends 303

Computers, Copy Machines, or Cash Registers Writing utensils, Paper, or Tape When a business makes a sale on credit and expects to receive When a business makes a payment in advance When a company makes a purchase on credit Effected when a company makes a payment on a promissory note When a business pays wages to its employees Effected when a business receives money for future services. This money hasn’t been earned When an owner invests in the business What the owner has after net income is added and dividends are subtracted. Payments to stock holders

Key Concepts Accounting Equation

Assets = Liabilities + Equity This means that total liabilities and total equity added together, should equal total assets. This equation is important when considering how financial statements are related. There is also an extended form of this equation.

Debits and Credits- Debits and Credits can be used increase or decrease an account depending on the transaction. Debits and Credits do NOT simply mean to increase or decrease, it all depends on the transaction. There are transactions where a debit increase the credit decreases. For transactions where a credit increases, the debit decreases. A T account represents a ledger account and is a tool used to determine the effects of transactions on accounts. The left side of a t account is the debit side and the right side is the credit side. Below is an illustration of a t account.

(Left Side) Debits

Account Title (Right Side) Credit

Another important thing to remember is the normal side for accounts. The normal side for Assets and Expenses is the debit side. The normal side for Liabilities, Equity, and Revenue is the credit side

Double Entry Accounting- This concept means that each transaction requires at least one debit and one credit. Furthermore, the total amount debited should be equal to the total amount credited. This does NOT mean that a business has to have the same amount of debit accounts as credit accounts in each transaction.

FINANCIAL STATEMENTS There are 4 different financial statements. These statements are the income statement, statement of retained earnings, balance sheet, and statement of cash flows. Although there are 4 statements we are going to focus on 3 in this workshop. Income Statement-A business uses this statement to report its net income/loss. Net income/loss is determined by subtracting expenses from revenue (Revenue- Expenses.) Revenue and Expense accounts are found on the income statement. The income statement is for a period in time. Net income is then used on the statement of retained earnings. Statement of Retained Earnings- the statement of retained earnings shows any changes in retained earnings by adding net income to beginning retained earnings and subtracting dividends. This is the equation to find retained earnings: Beginning retained earnings +Net income-Dividends= Ending Retained Earnings Ending Retained earnings is then used on the Balance Sheet. Balance Sheet- the balance sheet reports the current balances of assets, liabilities, and equity at any point in time. Assets are totaled, and then liabilities and equity are also totaled. After a business has totaled everything on the balance sheet, the business has to make sure the totals agree with the accounting equation.

Section 3 *OK! Now that you’ve learned about classifying accounts, financial statements, and important key concepts, let’s discuss the most important aspect of this workshop, the accounting cycle. In order for you to have a better understanding of the accounting cycle, we created a fictitious company, Sneaker World, and showed you how they would go through an accounting cycle.

Analyze Transactions The accounting process begins with analyzing transactions. The company first looks at the source documents that describe the transactions and events. Source documents can be either hard copy or electronic. Some examples of source documents include bank statements, checks, and purchase orders. We listed all of the transactions Sneaker World’s would make in the period below: Jan 1, 2012

Owners invested $650,000 cash and $150,0000 building into the business in exchange for common stock.

Jan 2, 2012

Sneaker World purchased cash registers for the business for $3000.

Jan 5, 2012

Sneaker World paid its utilities in advance for the next 8 months $10,000.

Jan 6, 2012

Sneaker World purchased supplies for the business $2200.

Jan 9, 2012

Sneaker World customized sneakers for LA Lakers $82,000.

Jan 11, 2012

Sneaker World paid it’s rent for the month of January 1,000.

Jan 12, 2012

Sneaker World paid its insurance premium $2000.

Jan 12, 2012

Customized sneakers for the NY Knicks for $4000 on account.

Jan 13, 2012

Sneaker World purchased computers for the office for $450

Jan 13, 2012

Customized socks for Chicago Bulls for $700

Jan 15, 2012

Sneaker World paid to restore the front of the store $200.

Jan 15, 2012

Sneaker World purchases cleaning supplies for $800

Jan 15, 2012

Milwaukee Bucks order shoes for game vs. Lakers on January 24th for $15,000

Jan 16, 2012

Customized shoes Miami heat for $5,000

Jan 16, 2012

Sneaker World purchases bags on account $725

Jan 17, 2012

Sneaker World pays off insurance $2000

Jan 17, 2012

Sneaker World pays employee wages $2,100

Jan 18, 2012

Customized shoes for Boston Celtics for $3,800 on account

Jan 19, 2012

Milwaukee Bucks pay for shoes ordered on the 15th

Jan 20, 2012

Sneaker World pays for the bags purchased on the 16th

Journalize The General Journal gives a complete record of each transaction and the debits and credits for each one. Every company uses a general journal. This includes the date of the transaction, the titles of the accounts affected in the transactions that company have , the amount of each debit and credit, and, if needed an explanation for the transaction. This process is repeated for each transaction the company makes. Debits are always listed first, and the credits follow after with indecation. Recording entries in a general journal is referred to as journalizing. When the company journalizes the accountant or how over does the books to apply the rules of double-entry accounting. Think of that double-entry accounting means that each transaction must be recorded in at least two accounts and that the debits must equal the credits. Below we put Sneaker World’s transactions for the period into General Journal format.

Date 1

2 3 4 5 6 7 8 9 10

Accounts Cash Building Common Stock Equipment Cash Pre-paid Expenses Cash Supplies Cash Cash Fees Earned Rent Expense Cash Pre-paid Insurance Cash Accounts Receivable Fees Earned Office Equipment (computer) Cash Cash Fees Earned

Amount $650,000 $150,000 $800,000 $3,000 $3,000 $10,000 $10,000 $2,200 $2,200 $82,000 $82,000 $1,000 $1,000 $2,000 $2,000 $4,000 $4,000 $450 $450 $700 $700

11 12 13 14 15 16 17 18 19


Miscellaneous Expenses Cash Cleaning Supplies Cash Accounts Receivable Unearned Revenue Cash Fees Earned Supplies (bags) Cash Insurance Expense Pre-paid insurance Wage Expense Cash Accounts Receivable Unearned Revenue Cash Unearned Revenue Fees Earned Accounts Receivable Accounts Payable Cash

$200 $200 $800 $800 $15,000 $15,000 $5,000 $5,000 $725 $725 $2,000 $2,000 $2175 $2175 $3,800 $3,800 $15,000 $15,000 $15,000 $15,000 $725 $725

Posting Posting involves taking information from the journal entries to the general ledger. A general ledger is the collection of all the accounts the company has in one predominant location.

Cash (Left Side) Debits

(Right Side) Credit Building

(Left Side) (Right Side) Debits Credit Common Stock (Left Side) (Right Side) Debits Credit Equipment (Left Side) (Right Side) Debits Credit Pre-paid Expenses (Left Side) (Right Side) Debits Credit

Supplies (Left Side) (Right Side) Debits Credit Merchandise Inventory (Left Side) (Right Side) Debits Credit Accounts Payable (Left Side) (Right Side) Debits Credit Rent Expense (Left Side) (Right Side) Debits Credit Pre-paid insurance (Left Side) (Right Side) Debits Credit Accounts Receivable (Left Side) (Right Side) Debits Credit Sales (Left Side) (Right Side) Debits Credit COGS (Left Side) (Right Side) Debits Credit Unearned Revenue (Left Side) (Right Side) Debits Credit Miscellaneous Expenses (Left Side) (Right Side) Debits Credit Insurance Expense (Left Side) (Right Side) Debits Credit Wages Expense (Left Side) (Right Side) Debits Credit

To confirm that the company’s debits equal the credits, an unadjusted trial balance is prepared. A trial balance is a list of all accounts and their balances at a point in time.

Preparing an unadjusted trial balance A trial balance is a tool that company uses to make sure of all debit account balances are equal to the sum of a credit balances. It is a list of accounts and their balances at any point in time. On the trial balance there should never be a number in both the debit and the credit column for an account. The total in the debit column should always be equal to the total in the credit column. If the two are different then you have made a mistake somewhere. You will have to go back up to your t-accounts or to your journal entries to see where you made your mistake. After going back through to check where the mistake has occupied; then check one more time to see if you have made any other mistakes. Then you should be ready to prepare for any adjusting that might come up before the end of your accounting period.

Adjusting entries Adjusting entries encompass taking an asset or liability account balance to its current amount and also bring up-to-date revenue or expense account. Adjusting entries are recorded in the general journal and then posted to another trial Balance. All adjusting entries are made at the end of the accounting time period. After the adjusting entries have been posted, then you will prepare another trial balance that is called the Adjusted Trail Balance.

Preparing an adjusted trial balance. This trial balance is called the adjusted trial balance because it is organized after the adjusting entries have been arranged. adjust and verify that the debits equal the credits after the adjusting entries and it is also used to prepare the financial statements. Now that the adjusted trial balance has been prepared the next step is to prepare the financial statements. The first trial balance prepared is the unadjusted trial balance; it is prepared before the adjustments are recorded. After the adjustments are recorded, the adjusted trial balance is prepared. After the adjusted trial balance is prepared, financial statements can be arranged directly from these numbers.

Preparing Statements The financial statements must be arranged in a precise order. The direction of financial statements is the income statement, statement of retained earnings, and the balance sheet. This order is important because information provided in the income statement is used in the statement of retained earnings, and information from the statement of retained earnings is used in the balance sheet.

The Closing Process The closing process occurs after the financial statements have been completed. This process is mostly important because all temporary accounts for the ending accounting period must be closed out before the start of the next accounting cycle. To close out accounts the closing entries must be made in

the general journal. In closing process, only certain accounts are close which are the temporary accounts. Temporary accounts are revenue, expense, and dividends account. The balances are reset to zero to make sure that the amount of income and dividends recorded for the next accounting period is accurate. We also have accounts that are called permanent accounts. Permanent Accounts are balance sheet accounts that are not closed and permanent accounts ending balances will carry on into one or more future accounting periods. Permanent accounts are asset, liability, equity, common stock and retained earnings accounts that are not closed out at the end of the accounting cycle. After temporary accounts are closed out and the permanent accounts are summarized a post-closing trial balance must be prepared.

Recording Closing Entries Because retained earnings should be a reflection of the revenues expenses, and dividends of prior periods, closing entries are essential. In order to close these accounts, the balances of these three accounts are transferred to the Income Summary account. This is a temporary account used only during the closing process and includes a credit for the total amount of all revenues/gains and a debit for the total amount of all expenses/losses. It is equivalent to net income (or net loss) and is later transferred to retained earnings. After the dividends account is also transferred to the retained earnings account, the revenue expense, dividends, and income summary accounts are said to have zero balances and are closed or cleared.

Preparing a post-closing trial balance to check the accounts When the closing entries are completed, the post-closing trial balance will need to be prepared. Post closing trial balance lists all permanent accounts and their balances after all the adjustments have been made and the closing entries have been posted. It includes assets, liabilities, and equity. It supports that the total number for debits and credits are equal and all the temporary accounts now have a balance of zero. A post-closing trial balance should only contain the debit and credit balance for permanent accounts, because these are the only accounts that are remaining after the closing process have concluded. The purpose of this trial balance is to ensure that the debits equal the credits in the permanent accounts and that all temporary accounts have a zero balance. For many companies this is the last step in the accounting cycle, the company is now ready to start the new accounting cycle.


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