Accounts section

Investment

2009-05-30T12:14:00.000-07:00

Short term Investment

2009-05-30T11:21:00.000-07:00

Short Term Investment

Companies with large amounts of liquid resources often hold most of these resources in the form of marketable securities rather than cash.

Marketable securities consist primarily of investments in bonds and in the capital stock of publicly owned corporations. These marketable securities are trade daily on organized securities exchanges, such as the New York stock Exchange, the Tokyo stock exchanges. A basic characteristics of all marketable securities is that they are readily marketable – meaning that they can be purchased or sold quickly and easily at quoted market prices.

Mark to Market:

Accounting principles are not carved in stone. Rather, they evolve and change as the accounting profession seeks to increase the usefulness of accounting information. A 1993 change in the way companies account for short term investments provides an excellent case in point.

Short term investments once appeared in the balance sheet at the lower of their cost or current market value. This valuation method reflected the cost principle, tempered by conservatism. But in 1993, the FASB changed the rules.

Marketable securities are classified as one of three types: (1) available for sale securities (2) trading securities (3) held-to-maturity securities. These classifications are based in large part on management’s intent regarding the length of time the securities will be held. Most corporations classify their marketable securities as available for sale. In view of this fact, the remainder of our discussion focuses exclusively on this particular classification.

To achieve the objective of presenting marketable securities classified as available for sale at current market value, the balance sheet valuation of these investments is adjusted to market value at the balance sheet date. Hence, this valuation principle often is called mark to market. When the value of marketable securities is adjusted to current market value, an offsetting entry is made to an account entitled Unrealized Holding Gain on Investments. This account appears as a special stockholders’ equity account in the balance sheet.

Unrealized holding gains and losses are not subject to income taxes. Income taxes are levied on gains and losses only when the investments are sold. Nonetheless, unrealized gains and losses are shown in the balance sheet net of the expected future income tax effects. These expected future tax effects are included in the company’s tax liability rather than in the amount shown as unrealized holding gain or loss. Such “deferred tax adjustments” are beyond the scope of our introductory discussion and are addressed in later accounting courses.

Our Assessment of Mark to Market:

The authors of this text commend the FASB on this recent change in accounting principles. Reporting short term investments at market value substantially enhances the usefulness of the balance sheet in evaluating the solvency of a business.

Johnny Cash

2009-05-29T03:24:00.000-07:00

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Cash

2009-05-29T02:23:00.000-07:00

Cash

Accountant defined cash as money on deposit in bank sand any items that bank will accept for deposit. These items include not only coins and paper money, but also checks, money orders, and traveler’s checks. Bank also accepts drafts signed by customer using bank credit cards, such as visa and master card. Thus sales to customers using bank cards are cash sales, the enterprise that makes the sale.

A cash subsidiary ledger includes separate accounts corresponding to each bank account and each supply of cash on hand within the organization.

Reporting Cash in the balance sheet:

Cash is listed first in the balance sheet because it is most liquid of all current assets. For the purposes of balance sheet presentation, the balance of the cash controlling account is combined with that of the controlling account for cash equivalents.

Cash Equivalents:

Some short term investments are so liquid that they are termed cash equivalents. Examples include money market funds. U.S, treasury bills. These assets are considered so similar to cash that they are combined with the amount of cash in the balance sheet. Therefore, the first asset listed in the balance sheet often is called Cash and Cash Equivalents.

Restricted Cash:

Some banks accounts are restricted as to their use, so they are not available to meet the normal operating needs of the company. For example, a bank account may contain cash specifically marked for the acquisition of plant assets. Bank accounts in foreign countries are restricted by laws that prohibited transferring the money to another country. Cash that is not available in for paying current liabilities should not be viewed as a current asset. Therefore, restricted cash should be listed just below the current asset sections of the balance sheet in the section entitled “Investments and Funds”.

Cash Management:

The term cash management refers to planning, controlling, and accounting for cash transactions and cash balances. Because cash moves so readily between banks accounts and other financial assets, cash managements really means the management of all financial resources. The basic objectives of cash management are as follows:

· Provide accurate accounting for cash receipts, cash disbursements, and cash balances. Many of the total transactions of a business involve the receipt or disbursement of cash.

· Prevent or minimize losses from theft or fraud. Cash is more susceptible to theft than any other asset and, therefore, requires physical protection.

· Anticipate the need for borrowing and assure the availability of adequate amounts of cash for conducting business operations. Every business organization must have sufficient cash to meet its financial obligations as they come due.

Prevent unnecessarily large amounts of cash from sitting idle in bank accounts that produce no revenue. Well-managed companies frequently review their bank balances for the purpose of transferring any excess cash into cash equivalents or other investments that generates revenue

Merchandising

2009-05-26T09:08:00.000-07:00

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Merchandising Activities

2009-05-26T07:48:00.000-07:00

MERCHANDISING COMPANIES

In the preceding chapters we examined organizations that render services to their customers. Merchandising companies earn most of their revenue by selling goods. Goods that are purchased fro purpose of resale to customers are called inventory. The success of most merchandising companies depends on their ability to acquire, distribute, and sell inventory quickly.

The Operating Cycle of a Merchandising Company:
The series of transactions through which a business generates its revenue and its cash receipts from customers are called operating cycle. The operating cycle of a merchandising company consists of the following basic transactions: (1) purchase of merchandise (2) sales of merchandise (3) collection of the accounts receivable from customers. As the word cycle suggests, this sequence of transactions repeats continuously. Some of the cash collected from the customers is used to purchase more merchandise. And the cycle begins a new. This continuous sequence of merchandising transactions is illustrated below.

Comparing Merchandising Activities with Manufacturing Activities:
Most merchandising companies purchase their inventories from other business organization is ready to sell condition. Companies that manufacture their inventories. Such as General Motors, IBM is called manufacturers. Rather than merchandisers. The operating cycle of a merchandising company.

Retailers and Wholesalers:
Merchandising companies including both retailers and wholesalers. A retailer is a business that sells merchandise directly to the public. Retailers may be small or large; they vary in size from giant department stores chains; such as sears and Wal-Mart to small neighborhood businesses, such as gas stations and convenience stores. In fact, more businesses engage in retail sales than in any other type of business activity.
The other major type of merchandising company is the wholesaler. Wholesalers buy large quantities of merchandise from several different manufacturers and then resell this merchandise to many different retailers.

Income Statement of a Merchandising Company:
Selling merchandise introduces a mew and major cost of doing business; the cost to the merchandising company of the goods that it resells to its customers. This cost is term the cost of goods sold. In essence, the cost of goods sold is an expense; however, this item is of such importance to the merchandising company that it is shown separately fro other expenses in the income statement. The difference between revenue from sale of cost of goods sold is called gross profit.
Gross profit is a useful means of measuring the profitability of sales transactions, but it does not represent the overall profitability of the business. A merchandising company has many expenses other than the cost of goods sold. Examples include salaries, rent, advertising and depreciation. The company earns a net income only if its gross profit exceeds the sum of its other expenses.

Career Accounting

2009-05-23T09:20:00.000-07:00

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Careers in Accounting

2009-05-23T08:29:00.000-07:00

Careers in Accounting

Accounting – along with such fields as architecture, engineering, law, medicine and theology – is recognized as profession? What distinguish a profession from other disciplines? There is no widely recognized definition of a profession, but all of these fields have several characteristics in common.

First, all professions involve a complex and evolving body of knowledge. In accounting the complexity and the ever changing nature of the business world, financial reporting requirements, management demands for increasingly complex information and income tax laws certainly meet this criterion.

In all profession, practitioners must use their professional judgment to resolves many problems and dilemmas. Throughout this text. We will point out situations requiring accountants to exercise professional judgment.

Accountings tend to specialize in specific fields, as do the members of the other professions. In terms of career opportunities, accounting may be divided into four broad areas: (1) public accounting (2) management accounting (3) governmental accounting (4) accounting education

Public Accounting

Certified public accountants offer a variety of accounting services to the public. These individuals may work in a CPA firm or as sole practitioners.

The work of public accountants consists primarily of auditing financial statements, income tax work, and management advisory services.

Management Accounting

In contrast to the public accountant who serves many clients, the management accountant works for one enterprise. Management accountants develop and interpret accounting information designed specifically to meet the various needs of management.

The chief accounting officer of an organization usually is called chief financial officer (CFO) or controller. The term controller has been used to emphasize the fact that one basic purpose of accounting data is to aid in controlling business operations. The CFO or controller is the part of top management team, which is responsible for running the business, setting its objectives and seeing that these objectives are met.

Governmental Accounting

Governmental agencies use accounting information in allocating their resources and in controlling their operations. Therefore, the need for management accountants in governmental agencies is similar to that in business organizations.

Accounting Education

Some accountants, including your instructor and authors of text book have chosen to pursue careers in accounting education. A position as accounting faculty members offers opportunities for teaching, research, consulting, and as usual degree of freedom in developing skills. Accounting educators contribute to the accounting profession in many ways. One, of course, lies in effective teaching; another, in publishing significant research findings; and a third, in influencing top students to pursue careers in accounting.

Periodic Inventory System

2009-05-22T00:12:00.000-07:00

Periodic Inventory System

2009-05-21T23:32:00.000-07:00

Periodic Inventory Systems

A periodic inventory system is an alternative to a perpetual inventory system. In a periodic inventory system no effort is made to keep up-to-date records of rather the inventory or the cost of goods sold. Instead, these amounts are determined only periodically – usually at the end of the each year.

Operation of a periodic inventory system

A traditional periodic inventory system operates as follows. When merchandise is purchased, its account is debited to an account entitled purchases, rather than to the inventory account. When merchandise is sold, an entry is made to recognize the sale revenue, but no entry is made to record the cost of goods sold or to reduce the balance of the inventory account. As the inventory records are not updated as transactions occur there is no inventory subsidiary ledger.

The foundation of periodic inventory system is the taking of the complete physical inventory at the end-year. This physical count determines the amount of inventory appearing in the balance sheet. The cost of goods sold for the entire year then is determined by a short computation.

Recording inventory and the cost of goods sold

A special occasion has now determined its inventory at the end of 2001 and its cost of goods sold for the year. But neither of these amounts has yet been recorded in the company’s accounting records.

In a periodic system, the ending inventory and the cost of goods sold are recorded during the company’s year-end closing procedures.

Closing process in a periodic inventory system

There are several different ways of recording the ending inventory and cost of goods sold in a periodic system, but they all produced the same results. One approach is to create a sold of goods sold account with the proper balance as part of the closing process. Once this account has been created, the company can complete its closing procedures is the same manner as if a perpetual inventory system had been in use.
Complete the closing process

Special occasions may now complete its closing process in the same manner as a company using a perpetual accounting system. The company will make the usual four closing entries, closing the (1) revenue accounts (2) expense accounts (including cost of goods sold) (3) income summary account, and (4) dividends account.

Cash flow statement

2009-05-19T21:57:00.000-07:00

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Statement of Cash Flows

2009-05-19T21:54:00.000-07:00

Statement of Cash Flows

We already have established the importance of cash flows to investors and creditors and that the cash flows of the company are important consideration in investors and creditors assessment of cash flows to them. As a result, a second set of information that a particularly important concerning hot the financial position changed between two points in time (that is, the beginning and end of a month or year) is cash flow information.

We can use the entire cash column of the previous analysis to create for overnight auto service a statement of cash flows. That statement will classify the various cash flows into three categories – operating, investing and financing – and relate these categories to the beginning and ending cash balances. Cash flows from operating activities are the cash effects of revenue and expense transactions that are included in the income statement. Cash flows from investing activities are the cash effects of purchasing and selling assets. Cash flows from financial activities are the cash effects of the owner investing in the company and creditors loaning money to the company and the repayment of either or both.

Notice that the operating, investing, and financing categories include both positive and negative cash flows. (The negative cash flows are in parentheses.) Also notice that the combined total of the three categories of the statement explains the total change from the beginning to the end of the month. From November, the beginning balance was zero because the company was started in November. For December, Overnight’s beginning cash balance will be $16000, and the statement of cash flows will explain how that numbers either increased to a higher balance or was reduced to a lower balance, as a result of its cash activities during that month. Notice also that several transactions and parts of transactions had no cash effects, therefore are not included in the statement of cash flows. For example, on November 5, overnight purchased land for $36000 only $6000 of which was paid in cash. The remaining $30000 is not included in the statement of cash flows. Similarly, on November 17, overnight purchased tolls and equipment for $13800 paying no cash at that time. That transactions has no cash effects on November 17, although the cash payment of $6800on November 26, which is a continuation of that transaction, did affect cash is included in the statement of cash flows. Transactions that did not affect cash are called non cash investing and financing transactions. In a formal statement of cash flows, such transactions are required to be noted as we explain later in this text, even though they do not affect the actual flow of cash into and out of the company.

Partnership video

2009-05-19T12:16:00.000-07:00

Partnership

2009-05-19T09:04:00.000-07:00

Partnership

A partnership is an unincorporated business owned by two or more partners. A partnership often is referred to as firm.

Partners are the least common form of business organization – probably because they often wind up with “to many bosses”. However they are widely used for professional practices, such as medicine, law, and public counting. Partnerships also used for many small businesses, especially those that are family owned. Most partnerships are small businesses – but certainly not all.

For accounting purposes, we view a partnership as entity separate from the other activities of its owners. But under the law, the partnership is not “separate” from its owner. Rather, the law regards the partners as personally – and jointly - responsible for the activities of the business.

The assets of a partnership do not belong to the business – they belong jointly to all of the partners. Unless special provisions are made, each partner has the unlimited personal liability fro the debts of the business. The partnership itself pays no income taxes, but the partners include their respective shares of the firm’s income in their personal income tax returns.

From a legal standpoint, partnerships have limited lives. A partnership ends upon the withdrawal or death of an existing partner. Admission of a new partner terminates the previous partnership and creates a new legal entity. However, this is only a distinction. Most partnership has continuity of existence extending beyond the participation of individuals partners. Partnership agreements often have provisions that make the retirement of partners and the admission new partners routine events that do not effect the operations of the business.

The term “partnership” actually includes three distinct types of organizations: general partnerships, limited partnerships, and limited liability partnerships

General Partnerships:

In a general partnership, each partner has rights and responsibilities similar to those of a sole proprietor. For example, each partner can withdraw cash and many other assets from the business at will. Also, each partner has the full authority of an owner to negotiate contracts binding upon the business. This concept is called mutual agency. Every partner has also has unlimited personal liability for the debts of the firm.

Combining the characteristics of unlimited personal liability and mutual agency makes a general partnership a potentially dangerous form of business organization. Assume, for example, that you enter into a general partnership with tom Jones. You agree to split profits and losses “50-50”. While you are on vocation. Jones commits the partnership to a contract that is simply does not have the resources to complete. Your firm’s failure to complete the contract causes large financial losses to the customer. The customer sues your firm and is awarded the judgment of 55 million by the court.

Limited Partners:

A limited partnership has one or more general partners and one or more limited partners. The general partners are partners in the traditional sense, with unlimited personal liability for the debts of the business and the right to make managerial decisions.

The limited partners are basically passive investors. They share in the profits and losses of the business, but they do not participate actively in management and are not personally liable for the debts of the business.

Limited liability partner:

A limited liability partnership is a relatively new form of business organization. States traditionally have required professionals, such as doctors, lawyers and accountants to organize their practices either as sole proprietor ships or as partnerships. The purpose of this requirement was to ensure that these professionals had unlimited liability of their professional activities.
Over the years, many professionals’ partnerships have grown in size. Several public accounting firms, for example, now have thousands of partners and operate in countries all over the world. Also, lawsuits against professionals firms have increased greatly in number and in dollar amount. To prevent these lawsuits from bankrupting innocent partners, the concept of the limited liability partnership has emerged. In this type of partnership, each partner has unlimited personal liability for his her own professionals activities, but not for the actions of other partners. Unlike a limited partnership, all of the partners in a limited liability partnership may participate in management of the firm.

How to start Sole proprietorship

2009-05-19T08:55:00.000-07:00

Sole propretorship

2009-05-19T07:52:00.000-07:00

Sole Proprietorship

A sole proprietorship is an unincorporated business owned by one person. Proprietorships are the most common form of business organization because they are so easy to start.
Creating a sole proprietorship requires no authorization from any governmental agency. For example, a youngster with a paper route. Or lawn mowing business has a sole proprietorship. On a larger scale, sole proprietorships are widely used for farms, services businesses, small retail stores, restaurants, and professional practices.

A sole proprietorship provides an excellent model for demonstrating accounting principles because it is a simplest form of business organization. But in the business world you will seldom encounter financial statements for these organizations.

Most sole proprietorships are relatively small business with few if any financial reporting obligations. Their needs for accounting information consists primarily of data used in daily business operations the balance in the company’s bank account and the amounts receivable and payable. In fact, most sole proprietorships do not prepare formal financial statements unless some special needs arise.

Characteristics:

1. Ease of information
2. Business assets actually belong to the proprietor. As the Business is not a legal entity, it cannot own property. The Business actually belong to the proprietor, not to the business. Therefore, the proprietor may transfer assets in or out of business at will.
3. The business pays no income taxes. Tax laws do not view a sole proprietorship as separate from the other financial activities of its owner. Therefore, the proprietorship does not file an income tax return or pay income taxes.
4. The Business pays no salary to the owner. The owner of the sole proprietorship is not working for salary. Rather, the owner’s compensation consists of the entire net income of the business.
5. The owner is personally liable for the debts of the business. This concept called unlimited personal liability. Is too important to be treated as just one item in a list. It deserves special attention from us and from you.

Accounting Particles of Sole Proprietorship:

In the balance sheet of a sole proprietorship, total owner’s equity is represented by the balance in the owner’s capital account. Investments of assets by the owner are recorded by crediting account. Withdrawals of the assets by the owner are recording by debiting the owner’s drawing account. At the end of the accounting period, the drawing account and the income summary account are closed into the owner’s capital account.

The only financial reporting obligation of much sole proprietorship is the information that must be included in the owner’s personal income tax return. For this reason, much sole proprietorship bases their accounting procedures on income tax rules, rather than generally accepted accounting principles.

Evaluating the Financial statements of a proprietorship:

Sole proprietorship does not recognize any salary expense relating to the owner or any interest expense on the capital that the owner has invested in the business. Thus, if the business is to be considered successful, its net income should at least provide the owner with the reasonable compensation for any personal services and equity capital that the owner has provided to the business.
In addition, the net income of a sole proprietorship should be adequate to compensate the owner to take the significant risks. Many small businesses fail. The owner of the sole proprietorship has unlimited personal liability for the debts of the business. Therefore, if a sole proprietorship sustains large losses, the owner can lose much more than the amount of his or her equity investment.

In summary the net income of a sale proprietorship should be sufficient to compensate the owner for three factors: (1) personal service rendered to the business (2) capital invested (3) the degree of financial risk that the owner is taking.

Introductory Lecture about accounting

2009-05-19T06:36:00.000-07:00

Accounting System Information

2009-05-19T06:22:00.000-07:00

The Accounting Information System

Learning Objectives

Understand basic accounting terminology.
Explain double-entry rules.
Identify steps in the accounting cycle.
Record transactions in journals, post to ledger accounts, and prepare a trial balance.
Explain the reasons for preparing adjusting entries.
Prepare financial statement from the adjusted trial balance.
Prepare closing entries.
Explain how to adjust inventory accounts at year-end.

Accounting Information System

Accounting Information System

Basic terminology
Debits and credits
Basic equation
Financial statements and ownership structure

The Accounting Cycle

Identification and recording
Journalizing
Posting
Trial balance
Adjusting entries
Adjusted trial balance
Preparing financial statements
Closing
Post-closing trial balance
Reversing entries
Financial statements for merchandisers

Accounting Information System

An Accounting Information System (AIS)

Collects and processes transaction data and
Disseminates the information to interested parties.

Accounting Information System

Helps management answer such questions as:

How much and what kind of debt is outstanding?
Were sales higher this period than last?
What assets do we have?
What were our cash inflows and outflows?
Did we make a profit last period?

Basic Terminology

Event
Posting
Trial Balance
Adjusting Entries
Financial Statements
Closing Entries
Journal
Transaction
Account
Real Account
Nominal Account
Ledger