Financial Accounting

WHAT IS ACCOUNTING Accounting is an information system that Identifies （确认）, records（记录）, and communicates （沟通） the economic events transactions 业务 of an organization to interested us

Financial Accounting

财务会计

March 2010

Lecturer

夏明会

CPA China CPA Australia

Question

Chapter 1

ACCOUNTING MATTERS

Study Objectives

• What accounting is

• Uses and users of accounting

• Ethics as a fundamental business concept

• GAAP

• Monetary unit & economic entity assumptions

• The accounting equation

• How business transactions affect the

accounting equation

• Basic financial statements

WHAT IS ACCOUNTING

Accounting is an information system that

Identifies （确认）, records（记录）, and

communicates （沟通） the economic events

(transactions 业务) of an organization to

interested users

记录、分类

总结

Accounting Reports

Accounting

is called the language of business

Why do we need accounting information

Making decisions !

The bigger the decision, the greater the

need

QUESTIONS ASKED BY INTERNAL USERS

• Is cash sufficient to pay bills

• Can we afford to give employee pay

raises this year

• What is the cost of manufacturing each

unit of product

• Which product line is the most profitable

QUESTIONS ASKED BY EXTERNAL USERS

• Is the company earning satisfactory

income?

• How does the company compare in size

and profitability with its competitors

• Will the company be able to pay its debts

Accounting and bookkeeping

Field of Accounting 会计领域

• Accounting can be divided into two fields

• Financial accounting (财务会计):

provides information for people outside

the company, such as investors and

creditors

• Managerial accounting (管理会计) :

focuses on information for internal

company

- SEC(美国证监会): regulate security markets

- AICPA(美国注册会计师协会): regulate Certified Public Accountants 注册会计师

- IMA: regulate Certified Management

Accountants 注册管理会计师

www.fasb.org

Reliable information

• There are so many ways to keep

accounting information reliable

- SEC requires firms to have their financial statements audited 审计 by independent accountants

- Accounting information must be prepared under the standards and the principles

standards and the principles

These standards and the principles are

viewed as the building blocks of

THE BUILDING BLOCKS OF ACCOUNTING

会计的基石

which one’s actions are deemed right

or wrong, honest or dishonest

• Most individuals in business are ethical

Their actions are both legal and

responsible

ETHICS 道德

• Steps for solving an ethical dilemma

- Recognize an ethical situation and the

Ethic case

• After three interviews, Warren Filler, a senior at

Great Northern College, received two office

interview invitations from the Baltimore offices of

two large firms

expenses

• He scheduled the interview for both firms on the

same day, one in morning and one in the afternoon

At the each interview, he submitted to both firms

his total out-of-pocket expenses $254 He got it

from the two firms

Ethic case

• Who are the stakeholders in this situation?

• What are the ethical issues in case ?

• What would you do in this situation?

Ethic case

• Warren Filler, Baltimore Firms, Great

Northern College

• Is it proper that Warren charged both the

firms for the total travel costs rather than

splits the actual amount of $254 between the two firms?

• Is collecting $508 ethical behavior?

• Did Warren deceive both firms or neither firm?

ETHICS 道德

• Ethics in accounting are so important!

• Most corporations also set standards of ethical conduct for employees

• Truth is always better than dishonesty in accounting, in business, and in life

THE BUILDING BLOCKS OF

ACCOUNTING

of standards generally accepted and

会) in US

example, Chinese GAAP

THE BUILDING BLOCKS OF

ACCOUNTING ASSUMPTIONS

• MONETARY UNIT ASSUMPTION:

- Only transaction data that can be

expressed in terms of money is included

in the accounting records

- The unit of measure (the dollar in the

USA) is assumed to remain constant in value

MONETARY UNIT ASSUMPTION

ACCOUNTING ASSUMPTIONS

• ECONOMIC ENTITY ASSUMPTION

- An economic entity includes any

organization or unit in society

- All activities of an entity are kept

separate from the activities of its owners and other economic entities

ECONOMIC ENTITY ASSUMPTION

• Entity decides boundary边界 of accounting

- Example: Jeff obtained $5000 from the bank loan to start Amazon.com

- Following the entity concept, Jeff would

account for the $5000 separately from his

personal assets

Jeff Amazon.com

Types of Business Organizations

Proprietorships 独资企业 Partnerships 合伙企业

Corporations 公司

Proprietorship

• Has a single owner, who is often the

manager

• Small retail stores

• From accounting viewpoint , each

proprietorship is distinct from its

proprietor

• From legal perspective , the business is the proprietor

Proprietorship

• What are some advantages

– total undivided authority

– no restrictions on type of business – must

Partnership

• Joins two or more individual as co-owners

• Each owner is a partner合伙人

• Professional organizations such legal firm

• Generally small or medium-sized

• Accounting treats partnership as a separate organization, distinct from partners

• From a legal point, a partnership is the

partners

Partnership

• What are some advantages

- better credit standing – possibly

- more brain power, but consultation with partners required

• What are some disadvantages

– unlimited personal liability for general partners

– need for written partnership agreement

Corporations

• What are some advantages

– separate legal existence

– limited liability of stockholders 有限责任

– transferability of ownership relatively easy

• What are some disadvantages

– Taxes: possible double taxation

– extensive governmental regulation

THE BASIC ACCOUNTING EQUATION

owners’

residual claim on total assets

How to use money How to get money

Assets Liabilities + Equities

Your Personal Balance sheet

Assets Liabilities +equities

assets

business

• They are things of value used in carrying

out such activities as production,

consumption and exchange

• The common characteristics possessed

by all assets is the capacity to provide

future services or benefits to the entities that use them

Is reputation an asset?

Liability

• They are existing debts 债务and

THE BASIC ACCOUNTING EQUATION

As of December 31, 2005, Tick Company has

assets of $3,500 and stockholders’

equity of $2,000 What are the liabilities for

Tick Company as of December 31, 2005?

Answer: $1,500

Assets – Liabilities = Equity

$3,500 = Liabilities + $2,000

Liabilities = $1,500

PAID-IN CAPITAL

• Paid in Capital represents the total amount invested by stockholders in a corporation

• Stockholders invest cash or other assets in

exchange for common or preferred stock

RETAINED EARNINGS

• Retained earnings represents cumulative profits (or losses) retained in the business over time

• Three items make up the balance in retained

earnings:

- REVENUES 收入

- EXPENSES 费用

- DIVIDENDS 股息

REVENUES

• Revenues are the gross increases in

stockholders’ equity from engaging in

business activities entered into for the purpose

of earning income

• Revenues result from sales of merchandise,

performance of services, rental of property, or lending of money

• Revenues usually result in an increase in an

asset

EXPENSES

• Expenses开支消费 are the decreases in

stockholders’ equity that result from

operating the business

revenue

• Examples are: utility expense公用事业费

用, rent expense, supplies expense, tax

expense, insurance expense, depreciation expense

• Dividends are NOT considered an expense of the corporation

INCREASES & DECREASES

Expenses

Assuming no additional investment or

distributions During the period, what is the net

income for the period?

TRANSACTION ANALYSIS

events of the enterprise

• They may be identified as external or

internal

- External transactions 外部业务 involve

economic events between the company and some outside enterprise or party

- Internal transactions 内部业务 are economic

events that occur entirely within one company

HOW BUSINESS TRANSACTIONS AFFECT THE ACCOUNTING EQUATION

• Every transaction 业务 must have a dual

effect on the accounting equation

TRANSACTION IDENTIFICATION PROCESS

Events

Purchase computer Answer phone Pay rent

Record Do not record Record

Criterion

Is the financial position (assets, liabilities, and

stockholders’ equity) of the company changed

TRANSACTION 1

computer programming company to be

• They invest $15,000 cash in exchange for

$15,000 of common stock普通股

There is an increase in the asset Cash , $15,000 , and an

TRANSACTION 2

for $7,000 cash

Cash is decreased $7,000 and the asset Equipment is

$15,000

Equity

TRANSACTION 3

other supplies expected to last several

$1,600

Softbyte to pay this bill in October, a

month later

• This transaction is often referred to as a

信用采购

The asset Supplies is increased $1,600 and the liability

Accounts Payable is increased by the same amount

$16,600 (3) +$1,600 +$1,600

TRANSACTION 4

customers for programming services it

has provided

• This transaction represents the principal

Cash is increased $1,200 and Retained Earnings is

Assets = Liabilities + Stockholders’ Equity

Accounts Common Cash + Supplies + Equipment = Payable + Stock Old Bal $8,000 $1,600 $7,000 $1,600 $15,000

New Bal $9,200 + $1,600 + $7,000 = $1,600 + $15,000

$17,800 $17,800

Retained Earnings

$1,200 (4) +1,200 +1,200 revenue

TRANSACTION 5

Daily News for advertising the opening of its business but postpones payment of

the bill until a later date

Accounts Payable is increased $250 , and Retained

Earnings is decreased $250

Assets = Liabilities +

Accounts Cash + Supplies + Equipment = Payable + Old Bal $9,200 $1,600 $7,000 $1,600 $15,000

New Bal $9,200 + $1,600 + $7,000 = $1,850 + $15,000

$17,800 $17,800

Stockholders’ Equity Common

Stock

Retained Earnings

$ 950

$1,200 (5) +250 -250 expense

TRANSACTION 6

of $3,500 for customers

• Cash amounting to $1,500 is received

from customers, and the balance of

$2,000 is billed to customers on account

Accounts Accounts Common Retained Cash + Receivable + Supplies + Equipment = Payable + Stock + Earnings Old Bal $ 9,200 $1,600 $7,000 $1,850 $15,000 $ 950

New Bal $10,700 + $2,000 + $1,600 + $7,000 = $1,850 + $15,000 + $4,450

(6) +1,500 +2,000 +3,500 revenue

$3,500

Stockholders’ Equity Assets = Liabilities +

TRANSACTION 7

• Expenses paid in cash for September are

$900 , and utilities, $200

Accounts Accounts Common Retained Cash + Receivable + Supplies + Equipment = Payable + Stock + Earnings Old Bal $10,700 $2,000 $1,600 $7,000 $1,850 $15,000 $4,450

TRANSACTION 8

bill of $250 in cash

Stockholders’ Equity Assets = Liabilities +

(9) +600 -600

Accounts Accounts Common Retained Cash + Receivable + Supplies + Equipment = Payable + Stock + Earnings Old Bal $8,750 $2,000 $1,600 $7,000 $1,600 $15,000 $2,750 New Bal $9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $2,750

decreased by the same amount

Stockholders’ Equity Assets = Liabilities +

TRANSACTION 10

• The corporation pays a dividend of

$1,300 in cash to Ray and Barbara Neal, the stockholders of Softbyte, Inc

Cash is decreased $1,300 and Stockholders’ Equity is

Accounts Accounts Common Retained Cash + Receivable + Supplies + Equipment = Payable + Stock + Earnings Old Bal $9,350 $1,400 $1,600 $7,000 $1,600 $15,000 $2,750

New Bal $8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $1,450

Stockholders’ Equity Assets = Liabilities +

(10) -1,300 -1,300 Dividends

BASIC FINANCIAL STATEMENTS

• After all transactions for the period are

and that summary data is used to

generate the basic financial statements

Financial Statements

– Income statement (收益表,statement of

earnings , statement of operations) :

summary of an entity’s revenues and expenses for specific period of time 特别 的期间

– Net income = revenues – expenses

Financial Statements

– Balance sheet(资产负债表): list all the

entity’s assets, liabilities and equity as of

– Statement of owner’s equity(权益表):

shows the changes in owner’s equity

during a specific time period

Financial Statements

– Statement of cash flows(现金流量表):

reports the cash coming in and cash

going out during a period

– Each financial statement headings: name

of business, name of the financial

statement, date or time period covered by the statement

Softbyte

Income statement For the Month ended September 30, 2006

Softbyte

Statement of retained earnings

For the Month ended September 30,2006

Cash 8050 Accounts receivable 1400

common stock 15000 retained earnings 1450 Total liabilities and stockholders’ equity 18,050

Softbyte Balance Sheet September 30, 2006

Cash flows from operating activities

Net cash flows from operating activities 1350

Cash flows from investment activities

purchase equipment (7000)

Cash flows from financing activities

Net cash flows from financing activities 13,700

Net cash increase 8050

Softbyte

Statement of cash flows

For the Month ended September 30,2006

THE ACCOUNTING PROFESSION

• In public accounting 公众会计 , you would offer expert service to the general public

• Areas of public accounting

- Auditing 审计

- Taxation 税务

- Management consulting 管理咨询

Public Accounting

• Certified Public Accountant (CPA):

examines financial statements of company and expresses an opinion as to the fairness

of presentation

Junior accountant 2-4 years Senior accountant 6-8 years

Manager 10 years

Partner

THE ACCOUNTING PROFESSION

• In private accounting 私人会计 , you would

be involved in one of the following

Junior accountant 2-4 years Senior accountant 6-8 years

Controller 10 years

CFO (Chief Financial Officer)

THE ACCOUNTING PROFESSION

• Not-for profit organizations 非盈利组织 also need sound financial reporting and control

• Donors want information about how well the organization has met its objectives and

whether continued support is justified

• Hospitals and colleges must make decisions about the allocation of funds

• Governmental units must provide information

to citizens, employees, creditors and

legislators

Homework

• P1-1A, P1-3A

• E1-3, E1-7

Chapter 2

THE RECORDING PROCESS

记账过程

Study Objectives

• Account

• Debits and Credits

• Identify the basic steps in the

recording process

• Explain what a journal is and how it helps in the recording process

Study Objectives

• Explain what a ledger is and how it helps

in the recording process

• Explain what posting is and how it helps

in the recording process

• Prepare a trial balance and explain its

purpose

How to record transactions’ information

Using Account!

THE ACCOUNT 账户

• An account is an individual accounting

specific asset, liability, or stockholders’ equity item

• A company will have separate accounts

for such items as cash , salaries expense ,

Cash

accounts payable

T ACCOUNT T型账户

• In its simplest form, an account consists

of:

- the title of the account 账户的名称

- a left or debit side 账户的借方(左边)

- a right or credit side 账户的贷方(右边)