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Accounting Basis

 

Objective Learn the basics of accounting because to do cost analysis you use accounting data and have to deal with accountants. Helpful to be able to understand the accounting system being used and communicate

 

An Additional Comment

The emphasis here is not to train individuals to become accountants but rather enable them to understand financial information provided by suppliers, employers, customers and firms seeking investors.

 

Purpose of Accounting
To record all transactions done in the course of operating an enterprise that affects it financially
This is a historical database that can be used to determine:
  1. Profit and Loss Statement
  2. Statement of Financial Condition
  3. Operating & Product Cost
  4. Assets & Liabilities
  5. Product & Item Costs

 

Two basic types of accounting:
  1. Financial and Management Method employed
  2. Double Entry Bookkeeping

  

Its Rules and Methodology
  1. There are 5 types of accounts
  1. Assets and prepaid assets
  2. Liabilities
  3. Net Worth of reserve accounts
  4. Revenue
  5. Expense
  1. To record a transaction you have to debit one of the accounts and credit another one.
  2. A debit is when the transaction is recorded on the left-hand side of an account and a credit is when it is recorded on the right-hand side.
  3. To indicate increases and decreases in an account the following rules apply. 

     

    Increase

    Makea

    		 Increase

    Makea
    When the transaction indicates that
    An Asset Debit Entry Credit Entry
    A Liability Credit Entry Debit Entry
    A Revenue Credit Entry Debit Entry
    An Expense Debit Entry Credit Entry
    Net Worth/Reserve Depreciation Credit Entry Debit Entry

    4.  

  4. Primary account categories.

     

    Assets Cash, accounts receivable, inventories, building, machinery, prepaid assets
    Liabilities Accounts payable, notes payable, long term debts, taxes payable
    Revenue  Sales revenue, rental income, dividend income
    Expense Utility expense, payroll expense, rent expense, insurance expense, depreciation expense
    Net Worth/Reserve & Depreciation Paid in capital, retained earnings, allowance for depreciation, SS taxes payable

    5.  

  5. Key rule whenever an account is debited another account has to be credited for example, a customer pays $1,000 owed the firm.  This decreases Accounts Receivable (an asset) and increases Cash.  This is shown by crediting Accounts Receivable and debiting Cash.
  6. Books are balanced when
    Total Assets/Debit side Balances   = (Total Liabilities+NetWorth) / Credit side balances

                                                                                      OR

                                                         (Total Assets - Total Liabilities) = Net Worth 

 

Illustration of how to utilize accounting (double entry bookkeeping) to record financial transaction and use this data to prepare a profit and loss statement and balance sheet for the firm for a particular time period.

Since existing firm must start with set of balanced books:

Gaffney Books

Balanced as on July 31

 

 

Debit

Credit

Cash

14,500

 

Accounts Receivable

27,650

 

Allowance for bad debts

 

1,500

Inventory Software

58,900

 

Notes Payable

 

16,000

Accounts Payable

 

34,675

Capital Stock

 

65,000

Retained Earnings

 

15,425

Prepaid Rent

6,000

 

Furniture

6,000

 

ACC Depreciation on furniture

 

1,150

Computers

24,000

 

ACC Depreciation on computers

 

3,000

 

137,050

137050

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