BlocherChenLin

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Basic Accounting Concepts The Balance Sheet
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Part One Financial Accounting

• The McGraw-Hill Companies, Inc., 1999

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Basic Concepts
Slide 2-1

• Accounting period
• Conservatism
• Realization
• Matching
• Consistency
• Materiality

• Money measurement
• Entity
• Going concern
• Cost
• Dual aspect

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The Entity Concept
Slide 2-2
The owner of a clothing store removes 100 from
the stores cash register for personal use.
Should the stores accounting records show that
the owner took this cash?

• Owner

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The Entity Concept
Slide 2-3
Yes, because of the entity concept. This concept
requires that the accounting records of the
clothing store show that the business has less
cash than it had previously.
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The Going -Concern Concept
Slide 2-4
A thriving blue jeans manufacturing firm has
jeans in various stages of production. If the
firm had to cease operations and liquidate today,
the jeans would have little, if any, value. If
today is the last day of the accounting period,
should the jeans be shown at liquidation value?
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The Going -Concern Concept
Slide 2-5
Because of the going-concern concept, the firm
would not value the jeans at what they are
currently worth--the liquidation value.
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The Cost Concept--Nonmonetary Assets
Slide 2-6
Land purchased last year for 250,000 has a
current market value of 270,000. What amount
should be shown in the accounting records to
reflect ownership of this land?
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The Cost Concept--Nonmonetary Assets
Slide 2-7
The land should be shown at the original purchase
price of 250,000 because of the cost concept.
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The Cost Concept--Monetary Assets
Slide 2-8
A company invested surplus cash in 100,000 shares
of the common stock of General Electric. The
cost of per share was 60 therefore, the firm
spent 6,000,000. By the end of the fiscal
period, the stock had a fair market value of 65
per share. What amount should be shown on the
balance sheet?
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The Cost Concept--Monetary Assets
Slide 2-9
The fair value of the stocks is 6,500,000.
This is the amount that should be shown for this
monetary asset.
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The Dual-Aspect Concept
Slide 2-10
Assets Equities
Assets Liabilities Owners equity
40,000
Ms. Jones opens a bank account for the business
by depositing 40,000.
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The Dual-Aspect Concept
Slide 2-11
Assets Liabilities Owners equity
40,000
40,000
15,000
15,000
The business borrows 15,000 from the bank.
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The Dual-Aspect Concept
Slide 2-12
Assets Liabilities Owners equity
40,000
40,000
15,000
15,000
55,000 15,000
40,000
Assets Equities
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The Balance Sheet--The Heading
Slide 2-13

• Name of entity
• Name of statement
• Moment of time

GARSDEN CORPORATION Balance Sheet As of December
31, 1998
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The Balance Sheet--Assets
Slide 2-14

• Current assets
• Cash 3,448,891
• Marketable securities 246,221
• Accounts receivable 5,954,588
• Inventories 12,623,412
• Prepaid expenses 377,960
• Total current assets 22,651,072
• Property, plant, and equipment
• Land 642,367
• Building and equipment, at cost 26,303,481
• Less accumulated depreciation 13,534,069 12,76
  9,412
• Other assets
• Investments 110,000
• Intangible assets 63,214 173,214
• Total assets 36,236,065

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The Balance Sheet--Liabilities and
Shareholders Equity
Slide 2-15
Current liabilities Accounts payable
6,301,442 Taxes payable 1,672,000 Accrued
expenses 640,407 Deferred revenues 205,240 Curre
nt portion of long-term debt 300,000 Total
current liabilities 9,119,089 Long-term
debt 3,000,000 Total
liabilities 12,119,089 Shareholders
equity Paid-in capital 5,000,000 Retained
earnings 19,116,976 Total shareholders
equity 24,116,976 Total liabilities and
shareholders equity 36,236,065
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Account Categories--Current Assets
Slide 2-16

• Cash Funds that are readily available for
  distribution
• Marketable securities Investments that are
  both readily marketable and expected to be
  converted into cash within one year
• Accounts receivable Amounts owed to the
  entity by its customers

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Account Categories--Current Assets
Slide 2-17

• Inventories Aggregate of items either held
  for sale in the ordinary course of the
  business, in process of production for such sale,
  or soon to be consumed in production
• Prepaid expenses Assets, usually of an
  intangible nature, whose usefulness will expire
  in the near future

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Account Categories--Current Liabilities
Slide 2-18

• Accounts payable Claims of suppliers arising
  from their furnishing goods or services to
  the entity for which they have not been paid
• Taxes payable Amount the entity owes
  governmental agencies

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Account Categories--Current Liabilities
Slide 2-19

• Accrued expenses Amounts earned by outside
  parties but have not been paid by the entity
• Deferred revenues Liabilities that arise
  because the entity receives advanced payments
  for services the entity has agreed to render in
  the future
• Current portion of long-term debt

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Music Mart
Slide 2-20
On January 1, John Smith starts an incorporated
CD and tape store called Music Mart, Inc. He
deposits 25,000 of his own funds in a bank
account that he opened in the name of the entity.
In return, he takes 25,000 of stock
certificates.
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Music Mart
Slide 2-21
On January 1, John Smith starts an incorporated
CD and tape store called Music Mart, Inc. He
deposits 25,000 of his own funds in a bank
account that he opened in the name of the entity.
In return, he takes 25,000 of stock
certificates.
MUSIC MART Balance Sheet As of January 1
Assets
Liabilities and Owners Equity
Cash 25,000 Paid-in capital 25,000
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Music Mart
Slide 2-22
On January 2, Music Mart borrows 12,500 from a
bank the loan is evidence by a legal document
called a note.
MUSIC MART Balance Sheet As of January 1
Assets
Liabilities and Owners Equity
Cash 25,000 Paid-in capital 25,000
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Music Mart
Slide 2-23
On January 2, Music Mart borrows 12,500 from a
bank the loan is evidence by a legal document
called a note.
MUSIC MART Balance Sheet As of January 1
Assets
Liabilities and Owners Equity
Cash 37,500 Notes payable 12,500 Paid-in
capital 25,000 Total 37,500 Total 37,500
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Music Mart
Slide 2-24
On January 3, the business buys inventory in the
amount of 5,000, paying cash.
MUSIC MART Balance Sheet As of January 1
Assets
Liabilities and Owners Equity
Cash 32,500 Notes payable 12,500 Inventory 5,000
Paid-in capital 25,000 Total 37,500 Total 37,50
0
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Music Mart
Slide 2-25
On January 4, the business sells merchandise that
cost 500 for 750. Cash was received.
MUSIC MART Balance Sheet As of January 1
Assets
Liabilities and Owners Equity
Cash 33,250 Notes payable 12,500 Inventory 4,500
Paid-in capital 25,000 Retained
earnings 250 Total 37,750 Total 37,750
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Chapter 2
The End