Welcome Back
Atef Abuelaish
1
Welcome Back
Time for Any Question
Atef Abuelaish
2
1) Define Accounting
QUESTION:
What is accounting?
ANSWER:
Accounting is the process by which
financial information about a business is
classified, recorded, summarized,
interpreted, and communicated to owners,
managers and other interested parties.
1-3
QUESTION:
What are financial statements?
ANSWER:
Financial statements are periodic reports
of a firm’s financial position and
operating results.
1-4
2) Identify and discuss career opportunities in
accounting
Many jobs are available in the accounting
profession. Some examples are:
Bookkeepers &
Accounting Clerks
Financial Analysts
Financial
Managers
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Accountants generally work in one of
these areas:
• Public accounting
• Managerial accounting
• Governmental accounting
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Public accounting firms provide services
such as:
•Auditing
•Tax accounting
•Management advisory services
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QUESTION:
Who is a certified public accountant?
ANSWER:
A Certified Public Accountant, or CPA, is
an independent accountant who
provides accounting services to the
public for a fee.
1-8
QUESTION:
What is managerial accounting?
ANSWER:
Managerial accounting includes a wide
range of work carried on by an
accountant employed by a single
business in industry.
1-9
QUESTION:
What is governmental accounting?
ANSWER:
Governmental accounting involves
keeping financial records and preparing
financial reports for a federal, state, or
local governmental unit.
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3) Identify the users of financial information
Inside The Business
Outside The Business
Employees
1-11
Sarbanes-Oxley Act
• The Act led to a major
change in the regulatory
environment.
 The Act was designed as
a regulatory crackdown on
corporate fraud and
corruption.
1-12
4) Compare and contrast the three types of
business entities
Three major legal forms of a business entity:
Sole Proprietorship
Partnership
Corporation
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Sole
Proprietorship
Ownership
Life
Responsibility
for business
debts if firm is
unable to pay
Partnership
Corporation
1 owner
Ends when owner:
• is unable to
carry on,
• dies, or
• closes the firm
Owner
1-14
Sole
Proprietorship
Ownership
Life
Responsibility
for business
debts if firm is
unable to pay
1 owner
Ends when owner:
• is unable to
carry on,
• dies, or
• closes the firm
Owner
Partnership
Corporation
2 or more
owners
Ends when
partner(s):
• withdraws,
• dies, or
• closes the firm
Partners
individually
and jointly
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Ownership
Life
Responsibility
for business
debts if firm is
unable to pay
Sole
Proprietorship
Partnership
1 owner
2 or more
Ends when owner:
• is unable to
carry on,
• dies, or
• closes the firm
Owner
Ends when
partner(s):
• dies,
• close the firm
• withdraws
Partners
individually and
jointly
Corporation
Can be one or
thousands
Continues
indefinitely;
ends when:
• business goes
bankrupt
• stockholders
vote to liquidate
Stockholders
can lose only
the amount
invested
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QUESTION:
What is stock?
ANSWER:
Stock is issued in the form of stock
certificates, and represents the ownership
of the corporation.
1-17
QUESTION:
What is the separate entity assumption?
ANSWER:
The separate entity assumption is the
concept of keeping a firm’s financial
records separate from the owner’s
personal financial records.
1-18
5) Describe the process used to develop generally
accepted accounting principles
QUESTION:
What are Generally Accepted Accounting
Principles (GAAP)?
ANSWER:
Generally accepted accounting principles
(GAAP) are accounting standards
developed and applied by professional
accountants.
1-19
Steps to analyze the effect of a
business transaction
1. Describe the financial event.
 Identify the property.
 Identify who owns the property.
 Determine the amount of increase or decrease.
2. Make sure the equation is in balance.
Property (asset) = Financial Interest
(creditors and owners)
2-20
1) Record in equation form the financial effects of a
business transaction
Business Transaction
Carolyn Wells withdrew $100,000 from personal
savings and deposited it in a new checking
account in the name of Wells’ Consulting Services.
Analysis:
(a) The business received $100,000 of property in
the form of cash.
(a) Wells has a $100,000 financial interest in the
business.
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The owner invested cash into the
business
Carolyn Wells now has $100,000 equity
in Wells’Consulting Services.
2-22
The company buys equipment
for $5,000 cash
2-23
The company buys $6,000 of
equipment on account (on credit)
$106,000
=
$106,000
Notice the new claim against the firm’s
property – the creditor’s claim of $6,000.
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The firm purchases supplies for
$1,500 cash
$106,000
=
$106,000
2-25
The firm makes a payment of
$2,500 on account
$103,500
=
$103,500
2-26
The firm makes a payment of
$8,000 rent in advance
$103,500 =
$103,500
2-27
2) Define, identify, and understand the relationship between
asset, liability, and owner’s equity accounts
Assets, Liabilities, and Owner’s
Equity
QUESTION:
What are assets?
ANSWER:
Assets are property owned by a
business.
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Liabilities and Equity
QUESTION:
What are liabilities?
ANSWER:
Liabilities are debts or obligations of a
business
QUESTION:
What is owner’s equity?
ANSWER:
Owner’s equity is the term used by sole
proprietorships. It is the financial interest of
an owner of a business. It is also called
proprietorship or net worth.
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The Balance Sheet
QUESTION:
What is a Balance Sheet?
ANSWER:
A balance sheet is a formal report of the
financial position of a business on a
certain date. It reports the assets,
liabilities, and owner’s equity of the
business
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The Balance Sheet
Assets – the amount and types of property owned by the business
 Liabilities – the amount owed to the creditors


Equity – the owner’s interest
2-31
Liabilities +
Assets
Property
Financial
Owner’s
Equity
Interest
Property equals Financial Interest
2-32
Revenues
QUESTION:
What is revenue?
ANSWER:
A revenue is an inflow of money or
other assets that results from the
sales of goods or services or from
the use of money or property. It is
also called income.
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Expenses
QUESTION:
What is an expense?
ANSWER:
An expense is an outflow of cash,
use of other assets, or incurring of a
liability.
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The firm receives $36,000 in cash
for services provided to clients
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The company performs services
on account for $11,000
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Collection of $6,000 from
customers on account
2-37
The firm pays $8,000 in salaries
expense for the month
2-38
The firm pays $650 for utilities
expenses
2-39
The firm records a withdrawal by
the owner of $5,000
2-40
4) Prepare an Income Statement
QUESTION:
What is an income statement?
ANSWER:
An income statement is a formal report
of business operations covering a
specific period of time. It is also called
a profit and loss statement or a
statement of income and expenses.
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The income statement has
a three-line heading
Revenue
Fees Income
Wells’ Consulting Services
Income Statement
Month Ended December 31, 2016
Expenses
Salaries Expense
Utilities Expense
Total Expenses
Net Income
The third line shows that the report covers
operations over a period of time
$47,000.00
$8,000.00
650.00
8,650.00
$ 38,350.00
2-42
The income statement reports revenue
Wells’ Consulting Services
Income Statement
Month Ended December 31, 2016
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Total Expenses
Net Income
$47,000.00
8,000.00
650.00
8,650.00
$ 38,350.00
2-43
The income statement also reports expenses
Wells’ Consulting Services
Income Statement
Month Ended December 31, 2016
Revenue
Fees Income
$47,000.00
Expenses
Salaries Expense
Utilities Expense
Total Expenses
Net Income
8,000.00
650.00
8,650.00
$ 38,350.00
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The result is net income or net loss for the period
Wells’ Consulting Services
Income Statement
Month Ended December 31, 2016
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Total Expenses
Net Income
$47,000.00
8,000.00
650.00
8,650.00
$ 38,350.00
2-45
5) Prepare a Statement of Owner’s Equity and Balance
Sheet
A Statement of Owner’s Equity
Wells’ Consulting Services
Statement of Owner’s Equity
Month Ended December 31, 2016
Carolyn Wells, Capital, December 1, 2016
Net Income for December
$38,350.00
Less Withdrawals for December
5,000.00
Increase in Capital
Carolyn Wells, Capital, December 31, 2016
$100,000.00
33,350.00
$133,350.00
37
2-46
The Balance Sheet
Wells’ Consulting Services
Balance Sheet
December 31, 2016
Assets
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Total Assets

Liabilities
111,350.00
5,000.00
1,500.00
8,000.00
11,000.00
136,850.00
Accounts Payable
3,500.00
Owner’s Equity
Carolyn Wells, Capital
Total Liabilities and Owner’s Equity
133,350.00
136, 850.00
A single line shows that the amounts above it are being added or
subtracted.

A double line indicates final amounts for the column or section of a
report.
2-47
Financial statements are
prepared in a specific order:
1st Income Statement
2nd Statement of Owner’s equity [Retained Earnings]
3rd Balance Sheet
2-48
Financial statements :
Net income (or loss) is
transferred to the statement
of owner’s equity.
The ending capital
balance is transferred to
the balance sheet.
2-49
The Accounting Equation
ASSETS
The property a
business owns
=
LIABILITIES
The debts of
the business
+
OWNER’S
EQUITY
The owner’s financial
interest in the business
3-50
Classification of Accounts

Asset Accounts
Asset accounts show the property a business
owns.

Liability Accounts
Liability accounts show the debts of the
business.

Owner’s Equity Accounts
Owner’s equity accounts show the owner’s
financial interest in the business.
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Set up T accounts for assets, liabilities and owner’s equity
T Accounts
ASSETS
=
+ OWNER’S EQUITY
LIABILITIES
+
-
-
+
Record
Increases
Record
Decreases
Record
Decreases
Record
Increases
LEFT
SIDE
RIGHT
SIDE
LEFT SIDE
RIGHT
SIDE
-
+
Record
Record
Decreases Increases
LEFT SIDERIGHT SIDE
3-52
1) Initial Investment
Carolyn Wells withdrew $100,000 from personal
savings and deposited it in the new business
checking account for Wells’ Consulting Services.

LEFT
Increases to asset accounts are recorded on the
left side of the T account.

RIGHT
Increases to owner’s equity accounts are
recorded on the right side of the T account.
Cash
(a) 100,000
Carolyn Wells, Capital
(a) 100,000
3-53
2) Business Transaction
Wells’ Consulting Services issued a $5,000 check to
purchase a computer and other equipment.
Analysis:
(b) The asset account, Equipment, is increased by $5,000.
(b) The asset account, Cash, is decreased by $5,000.
Equipment
(b) 5,000
Cash
(b) 5,000
3-54
3) Purchase of Equipment on Account
The firm bought office equipment for $6,000 on account
from Office Plus.
Analysis:
(c) The asset account, Equipment, is increased by $6,000.
(c) The liability account, Accounts Payable, is increased by $6,000.
Equipment
(c) 6,000
Accounts Payable
(c) 6,000
3-55
4) Purchase of Supplies for Cash
Wells’ Consulting Services issued a check for $1,500 to
Office Delux Inc. to purchase office supplies.
Analysis:
(d) The asset account, Supplies, is increased by $1,500.
(d) The asset account, Cash, is decreased by $1,500.
Supplies
(d) 1,500
Cash
(d) 1,500
3-56
5) Payment of a Liability
Wells’ Consulting Services issued a check in the
amount of $2,500 to Office Plus.
Analysis:
(e) The asset account, Cash, is decreased by $2,500.
(e) The liability account, Accounts Payable, is decreased by $2,500.
Accounts Payable
(e) 2,500
Cash
(e) 2,500
3-57
6) Prepayment of Rent
Wells’ Consulting Services issued a check for $8,000 to
pay rent for the months of December and January.
Analysis:
(f) The asset account, Prepaid Rent, is increased by $8,000.
(f) The asset account, Cash, is decreased by $8,000.
Prepaid Rent
(f) 8,000
Cash
(f) 8,000
3-58
Determine the balance of an account
An account balance is the difference between
the amounts recorded on the two sides of an
account.
A footing is a small pencil figure written at the
base of an amount column showing the sum of
the entries in the column.
3-59
Recording Account Balances
IF

THEN
the total on the right side is larger
than the total on the left side,
the balance is recorded on the right
side.
the total on the left side is larger,
the balance is recorded on the left
side.
an account shows only one amount,
that amount is the balance.
an account contains entries on only
one side,
the total of those entries is the
account balance.
3-60
Computing the
Account Balance
Cash
(a) 100,000
Bal. 83,000
(b)
(d)
(e)
(f)
5,000
1,500
2,500
8,000
----------17,000
Footing
(100,000 – 17,000)
3-61
Summary of Account Balances
ASSETS
Cash
=
LIABILITIES
Accounts Payable
+
OWNER’S EQUITY
Carolyn Wells, Capital
(a) 100,000 (b) 5,000
(d) 1,500
(e) 2,500
(f)
8,000
Bal. 83,000
17,000
( e) 2,500 (c) 6,000
(b)
Account balances
for
Carter
Consulting
Bal. 3,500
Services
100,000
Supplies
SUMMARY OF ACCOUNT BALANCES
(d) 1,500
ASSETS
Prepaid Rent
(f)
8,000
= LIABILITIES + OWNER’S EQUITY
83,000
1,500
8,000
11,000
3,500
100,000
Equipment
103,500
=
3,500
+
100,000
(b) 5,000
(c) 6,000
Bal. 11,000
3-62
T-Account for Revenue
Owner’s Equity
Decrease
Increase
Side
Side
Revenue
Decrease
Increase
Side
Side

Revenues increase owner’s equity.

Increases in owner’s equity appear on the right side
of the T account.

Therefore, increases in revenue appear on the right
side of revenue T accounts.
3-63
Revenue
Decrease
Increase
Side
Side
The right side of the revenue account shows
increases and the left side shows decreases.
Decreases in revenue accounts are rare but might
occur because of corrections or transfers.
3-64
Set up T accounts for revenues and expenses
7) Recording Revenue from Services
Sold for Cash
Cash
Fees Income
(g) 36,000
Bal. 83,000
(g) 36,000
$36,000 is entered on the
left (increase) side of the
asset account Cash.
$36,000 is entered on the
right side of the Fees
Income account.
3-65
8) Recording Revenue from Services
Sold on Credit
In December, Wells’ Consulting Services earned
$11,000 from various charge account clients.
Analysis:
(h) The asset account, Accounts Receivable, is increased
by $11,000.
(h) The revenue account, Fees Income, is increased by
$11,000.
Accounts Receivable
(h) 11,000
Fees Income
(h) 11,000
3-66
9) Receipt of Payments on Account
Charge account clients paid $6,000, reducing the
amount owed to Wells’ Consulting Services.
Analysis:
(i) The asset account, Cash, is increased by $6,000.
(i)
The asset account, Accounts Receivable, is decreased by
$6,000.
Cash
(i) 6,000
Accounts Receivable
(i) 6,000
3-67
Expenses
Owner’s Equity
Decrease
Side
Increase
Side
Expense
Increase
Side
Decrease
Side
Revenue
Decrease
Side
Increase
Side

Expenses decrease owner’s equity.

Decreases in owner’s equity appear on the left side of
the T accounts.
3-68
10) Payment of Salaries
In December, Wells’ Consulting Services paid $8,000 in
salaries.
Analysis:
(j) The asset account, Cash, is decreased by $8,000.
(j) The expense account, Salaries Expense, is increased by
$8,000.
Salaries Expense
(j) 8,000
Cash
(j) 8,000
3-69
11) Payment of Utilities
Wells’ Consulting Services issued a check for $650 to
pay the utilities bill.
Analysis:
(k) The asset account, Cash, is decreased by $650.
(k) The expense account, Utilities Expense, is increased by
$650.
Utilities Expense
(k)650
Cash
(k) 650
3-70
Owner’s Withdrawals
Owner’s Equity
Decrease Side
Expense
Increase Side
Decrease Side
Increase Side
Revenue
Decrease Side
Increase Side
Owner Drawing
Increase Side


Decrease Side
Drawing decreases owner’s equity.
Decreases in owner’s equity appear on the left side of the
T accounts.
3-71
12) The Owner Withdraws Funds
Carolyn Wells wrote a check to withdraw $5,000 cash for
personal use.
Analysis:
(l) The asset account, Cash, is decreased by $5,000.
(l) The owner’s equity account, Carolyn Wells, Drawing, is
increased by $5,000.
Carolyn Wells, Drawing
(l) 5,000
Cash
(l) 5,000
3-72
The Rules of Debit and Credit
• A debit is an entry on the left side of an account.
• A credit is an entry on the right side of an account.
• A double-entry system is an accounting system that
involves recording the effects of each transaction as
debits and credits in separate accounts.
• Every transaction in a Double entry accounting
system has at least one debit and one credit.
•The total of the debits and credits recorded in the
separate accounts must be EQUAL.
3-73
Any Account
Left Side
Right Side

Accountants refer to the left side of an account as the debit side
instead of saying the left side.

The right side of the account is called the credit side.
3-74
Rules for Debits and
Credits
3-75
Prepare a trial balance from T accounts
1. Use the proper heading to include who, what,
and when information.
2. List the accounts in chart of account order or in
the same order as they appear in the financial
statement.
3. Enter the ending balance of each account in the
appropriate Debit or Credit column.
4. Total the Debit column.
5. Total the Credit column.
6. Compare the column totals. They should be
equal.
3-76
The Trial Balance
3-77
Errors
Some common errors in a trial balance are:
 Adding trial balance columns incorrectly
 Recording only half a transaction – for example, recording
a debit but not recording a credit, or vice versa
 Recording both halves of a transaction as debits or credits
rather than recording one debit and one credit
 Recording the incorrect amount for a transaction
 Recording a debit for one amount and a credit for a
different amount
 Mathematical errors in calculating account balances
 Forgetting to carry over an account balance to the Trial
Balance
3-78
Wells’ CONSULTING SERVICES
Income Statement
Month Ended December 31, 2016
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Total Expenses
Net Income
47,000.00
8,000.00
650.00
8,650.00
38,350.00
Wells’ CONSULTING SERVICES
Statement Of Owner’s Equity
Month Ended December 31, 2016
Carolyn Wells, Capital, Dec. 1, 2016
100,000.00
Net Income for December
38,350.00
Less Withdrawals for December
5,000.00
Increase in Capital
33,350.00
Carolyn Wells, Capital, Dec. 31, 2016
133,350.00
ASSETS
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Total Assets
Wells’ CONSULTING SERVICES
Balance Sheet
December 31, 2016
LIABILITIES
111,350.00
Accounts Payable
5,000.00
1,500.00
8,000.00
OWNER’S EQUITY
11,000.00
Carolyn Wells, Capital
136,850.00
Total Liabilities and Owner’s Equity
3,500.00
133,350.00
136,850.00
3-79
3-80
Permanent and Temporary Accounts
A Permanent account is an account
that is kept open from one
accounting period to the next.
A Temporary account is an account
whose balance is transferred to
another account at the end of an
accounting period. A temporary
account is “zeroed out” at the end of
the accounting period.
3-81
Homework assignment
• Using Connect – LS 20 Points, Quiz 20 Points, and EX. 60
Points.
• Prepare chapter 5 “Adjustments
and the
Worksheet.”
Happiness is having all
homework up to date
Atef Abuelaish
82
Thank you, and see
you, Monday at the
same time