Foundations of Accounting Thought
“When You Add You Subtract”
Accounting: the recording, measurement, and
Accounting is the collection, analysis, and
communication of financial information.
Initial Records
• Sales invoices
• Cash receipts
• Purchases
• Credit sales
Intermediate Records
• Cash
• Accounts /
receivable
• Accounts / payable
Financial Records
• Cash
• Accounts /
receivable
• Accounts / payable
• Inventory
Financial Statements
• Balance sheet
• Income statement
• Statement of cash
Flow
Collection
Analysis
Communication
Accounting
The Accounting Cycle
Transaction is recorded (a sale,
salary earned, purchase
goods)
Journal entries are posted
to ledger by type of
account and balances are
totaled
Transactions are posted
to a journal as they
occur
Internal reports for
decision makers are
prepared (sales, debt,
inventory)
Financial statements for
decision makers inside and
outside the company are
prepared (balance sheet,
income statement, statement
of cash flow)
How Accounting Information is Used
Current Investors
Evaluate prospective borrower’s ability to repay principal and interest.
Evaluate income and cash flow generated by the company; evaluate
management's performance.
Determine allocation of resources; evaluate management’s performance;
compare actual results with budgeted plans.
Estimate the company’s future growth potential and the risk of investing in
the company.
Potential Investors
Managers
Unions
Government
Agencies
Creditors
Review company’s financial condition in order to negotiate benefits and
wages.
“Who does nothing makes no mistakes;
who makes no mistakes learns nothing.”
Pacioli, Summa De Arithmetica, Geometria,
Proportioni et Proportionalita (1494)
Debit means an entry on the left side of
an account. Credit means an entry on
the right side of an account. … A debit
or charge indicates (1) an increase in an
asset, (2) a decrease in a liability, or (3)
a decrease in a shareholders’ equity
item. A credit indicates (1) a decrease
in an asset, (2) an increase in a liability,
or (3) an increase in a shareholders’
equity item.”
Sportswear International, Inc.
Income Statement
For the Year Ended December 31, 1998
Revenues:
Gross Revenue 1,480,000
Less: Sales returns and Allowance 35,000
Net Revenue 1,515,000
Cost of Sales:
Beginning Inventory 150,000
Purchases 1,210,000
Cost of Goods Available for Sale 1,360,000 Less: Ending Inventory 145,000
Cost of Sales 1,215,000 Gross Profit 300,000 Operating Expenses: Selling Expense 65,000 Advertising 30,000 95,000 General and Administrative Expenses:
Adminstrative Salaries 30,000
Rent 25,000
Utilities 10,000
Insurance 3,000
Depreciation 12,250
Total General Expense 80,250
Total Operating Expense 175,250
Income from Operations 124,750
Interest Expense 9,850
Income Before Taxes 114,900
Income Tax Expense ( 36% ) 41,364
Net Income $ 73,536
Balance Sheets
Sportswear International, Inc.
Balance Sheet
At December 31, 1998
Assets Current Assets: Cash 332,000 Accounts Receivable 72,500Less: Allowance for Doubtful
Accounts 15,000 57,500
Inventory 42,000
Total Current Assets 431,500
Fixed Assets:
Store Equipment 47,000
Less Accumulated Depreciation 13,500 33,500
Furniture and Fixtures 140,000
Less Accumulated Depreciation 55,000 85,000
Total Fixed Assets 118,500
Total Assets $550,000 Liabilities Current Liabilities: Accounts Payable 110,000 Long-term Liabilities: Notes Payable in 2003 350,000 Total Liabilities 460,000 Owner's Equity Capital Stock 65,000 Retained Earnings 25,000
Total Owner's Equity 90,000
