EXPANDED ACCOUNTING EQUATION:

ASSETS = LIABILITIES + (CAPITAL - WITHDRAWAL) + REVENUE - EXPENSES)

Analyzing Business Transactions: Revenue and Expense accounts

Revenue and Expenses = directly affect owner's equity. If a business earns revenue, there is an increase in owner's equity. If a business incurs or pays expenses, there is a decrease in owner's equity.

For the present, think of it this way: if the company makes money, the owner's equity is increased. On the other hand, if the company has to pay out money for the costs of doing business, then the owner's equity is decreased.

Revenues and expenses fall under the umbrella of owner's equity: revenue increase owner's equity; expenses decrease owner's equity.

What are Revenue, Expenses, and Profit?

Every business exists primarily to earn a profit. This profit is realized through revenue earned by an organization as a result of the sale of a service or product by that business.

Revenues - Are the amounts earned by a business. Examples of revenues are fees earned for performing services, income from selling merchandise, rent income for providing the use of property, and interest income for lending money.

Revenues - May be in the form of Cash and Credit Card Receipts like those from VISA and MASTER CARD.

Revenue - May also result from credit sales to charge customers, in which case cash will be received at a later time.

Recording Revenue

If revenue of $550 is received by the business, this revenue should be recorded as an increase Cash of $550 and resulting increase in proprietor's capital of $550. Revenue may be received in forms other than cash. An organization may receive payment for services rendered in the form of other assets such as supplies, equipment, and even someone's promise to pay at a future time (accounts receivable). The effects of the accounting equation will still be an increase in the specific asset received and a corresponding increase in capital.

Expenses - Are the costs that relate to the earning of revenue (or the costs of doing business). Examples of expenses are wages expenses for labor performed, rent expense for the use of various media (for example, newspaper, radio, and direct mail).

Expenses - Maybe paid in cash when incurred (that is, immediately) or at a later time.

Expenses - To be paid at a later time involve.

Recording Expenses

Every business, regardless of its nature, must incur certain costs in order to operate. These costs are known as expenses. Expenses are generally referred to as the "costs of doing business." Examples of business expenses are rent expense, insurance expense, salary expense, and supplies expense.

Profit - An excess of revenue over expenses.http://onlinetutorialclass.shehgarlynn.com/

ACCOUNTING CYCLE

STEPS IN ANALYZING TRANSACTION

1. Read the transaction to understand what is happening and how it affects the business. Example, the business has more Revenue, or has more Expenses, or has more Cash, or Owes less to Creditors.
2. Identify the accounts involved, and decide whether the accounts are increased or decrease. Look for Cash first; you will quickly recognize if Cash is coming in or going out.
3. Decide on the Classifications of the accounts involved. (for Example, Equipment is something the business owes, and it's a liability; Rent is an Expense.
4. After recording the transaction, make sure the accounting equation is in balance.

The Five Classification

Accounts Category      Normal Balance           Increase              Decrease

1. ASSETS                         DEBIT                         DEBIT                 CREDIT

2. LIABILITIES                    CREDIT                      CREDIT               DEBIT 

3. OWNER'S EQUITY

    CAPITAL                        CREDIT                      CREDIT               DEBIT

    WITHDRAWALS           DEBIT                         DEBIT                  CREDIT

4. REVENUE                     CREDIT                      CREDIT               DEBIT

5. EXPENSES                   DEBIT                         DEBIT                  CREDIT 

STEPS IN THE ACCOUNTING PROCESS

1. Record the transactions of a business in a JOURNAL book of original entry - the day - by day record of the transactions of a firm). Entry should be based on some source document or evidence that a transaction has occurred, such as an invoice, a receipt, or a check.

2. Post entries to the accounts in the LEDGER. Transfer the amounts from the JOURNAL to the Debit or Credit column of the specified accounts in the LEDGER. Use a cross reference system. Accounts are placed in the LEDGER according to the account numbersassigned to them in the 

CHART OF ACCOUNT.

3. Prepare a TRIAL BALANCE. Record the balances of the LEDGER accounts in the appropriate Debit or Credit column of the Trial balances form. Prove that the total of the debit balances equals the total of the credit balances.

RECORDING BUSINESS TRANSACTION

To repeat Business transactions are events that have a direct effect on the operations of an economic unit or enterprise and are expressed in terms of money. Each business transaction must be recorded in the accounting records. As one records business transactions, one has to change the amounts listed under the headings Assets, Liabilities, and Owners Equity. However, the total of one side of the fundamental accounting equation should always equal the total of the other side.

SUMMARY OF TRANSACTIONS

Summarizing each individual ledger account and listing these accounts and their balances to test for accuracy in recording the transactions.

1. Name of the company

2. Title

3. Date

4. Account Name (In order - Chart of Account)

5. Two Column Debit - Credit

CHART OF ACCOUNTS

A numbering system of accounts that list account titles and accounts numbers to be used by a company.

Before recording transactions for new business, the accountant must first think of all the possible types of transactions that the company will carry out. Based on this variety of possible transactions, the company's accountant makes a list of account titles to be use to record the company's transactions.

Chart of Account - Is the official list of the ledger accounts in which transactions of a business are to be recorded. Assets are listed, Liabilities, Owners Equity, Revenue, and Expenses.

Accounting Theory

Accounting Theory is to provide a logical framework for accounting practice. The basic assumptions, definitions, principles and concepts and how we derive them. It is concerned with improving financial accounting and reporting broad perspective, it includes a conceptual framework, accounting legislation, concepts, valuation models, and hypotheses and theories that allow researchers to analyze accounting in order to explain or predict phenomena related to accounting, such as how users employ accounting data or how preparers choose accounting methods.

The Early History of Accounting

Accounting records dating back several thousand years have been found in various parts of the world. These records indicate that all levels of development people desire information about their efforts and accomplishments.

According to Hain, "The Zenon papyri give evidence of a surprisingly elaborate accounting system which had been used in Greece since the fifth century B.C. and which, in the wake of Greek trade or conquest, gradually spread throughout the Eastern Mediterranean and Middle East." Zenon's accounting system contained provisions for responsibility accounting, a written record of all transactions, a personal account for wages paid to employees, inventory records, and all records of asset acquisitions and disposals. In addition, there is evidence that all the accounts were audited.

There were no organized professions or standards of qualifications, and accountant were trained through an apprenticeship system. Later, private commercial colleges began to emerge as the training grounds for accountants.

These institutions emphasized the quality of value, and discussions of the nature of value in accounting education. Subsequently, widespread speculation in the securities markets, watered stocks, and large monopolies that controlled segments of the U.S. economy resulted in the establishment of the progressive movement at the end on the nineteenth century.

Although most accountants did not necessarily subscribe to the desirability of the progressive reforms, the progressive movement conferred specific social obligations on accountants.

Accountants generally came to accept three general levels of progressiveness:

1. A fundamental faith in democracy, a concern for morality and justice, and a broad acceptance of the democracy, a concern for morality and justice, and a broad acceptance of the efficiency of education as a major tool in social amelioration;
2. An increased awareness of the idea of the social obligation of all segments of society and introduction of the idea of the public accountability of business and political leaders; and
3. An acceptance of pragmatism as the most relevant operative philosophy of the day.

During the period 1900-1915, the concept of income determination was not well developed. There was, however, a debate over which financial statement should be viewed as more important, the balance sheet or the income statement.

The 1904 International Congress of Accountants marked the initial development of the organized accounting profession in the United States, although there had been earlier attempts to organize and several states had state societies. At this meeting, the American Association of Public Accountants was formed as the professional organization of accountants in the United States.

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Accounting Methods and Periods

There are two major methods of accounting: the cash methods and the accrual methods, both of which are described below. The vast majority of taxpayers use the cash method. Also, taxpayers may file their tax returns using the calendar year or a fiscal year. The vast majority use the calendar year. Thus, in this courses, you may assume all information is based on the cash method of accounting and the calendar year unless otherwise specified.

Cash Method of Accounting

When the cash method of accounting is used, income is reported in the tax year it is constructively or actually received, and deductions are claimed in the tax year paid. Constructively received means that the income is available to the taxpayer, regardless of whether it is actually in his possession. Constructively received income includes income credited to an account, income and reinvested by an agent of the taxpayer, a check or other payment received before the end of the year even if not deposited or converted to cash, and income for which the date of receipt is controlled by the taxpayer (for example, income due and payable from an activity owned or controlled by the tax payer who elects to defer receipt).

Example: Shehgarlynn had $150 interest credited to her savings account by her bank during 2007. Shehgarlynn left the $150 on deposit. Even though she did not use the money, Shehgarlynn constructively received the interest during 2007 and must report it on her 2007 tax return.

Calendar Year

The calendar year is January 1 through December 31.The normal due date for filing a calendar-year tax return (including the final return of a taxpayer who died during the tax year) is April 15 following the end of the tax year. Taxpayers may receive an automatic extension until August 15 filing Form 4868 by April 15. If April 15 falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day.

Other Accounting Methods And Periods 

Accrual Method of Accounting

When the accrual method of accounting is used, income is reported in the tax year earned, whether or not received. Deductions are claimed in the tax year incurred, whether or not paid.

Example:

Shehgarlynn, an accrual-basis taxpayer, earned $750 for services performed on December 28, 2007. She was not paid until January 10, 2008. Shehgarlynn must report the 750 on her 2007 return.

Hybrid Method of Accounting

A hybrid accounting method is a combination of methods, usually of the accrual and cash methods. Business often use a hybrid method because the accrual method is required on tax returns for inventory accounting, but the cash method is more convenient for operating expenses.

Fiscal Year

Instead of the calendar year, a few tax-payers report their income using a fiscal year. A fiscal year may end on the last day of any month except December.

Once a taxpayer chooses an accountingmethod and an accounting period, he cannot change either one without the consent of the IRS. Taxpayers may use a different accounting method for each separate and distinct business. A married couple may use different accounting methods and still file a joint return, but they must use the same accounting period.

What is Income?

Generally speaking, income is financial gain derived from labor (work), capital (money) or a combination of the two. Unless specifically exempt or excluded by law, all income is subject to income tax and is reported on the tax return.

Gross income is total worldwide income received in the form of money, property, or services that is subject to the tax. There are two types of gross income:

• Earned income is received for services performed. Some examples are wages, commissions, tips, and generally, farming and other business income.
• Unearned income is taxable income that does not meet the definition of earned income. It includes money received for the investment of money or other property, such as interest, dividends, and royalties. It also includes pension, alimony, unemployment compensation, and other income that is not from performing service.

Non taxable income is by law exempt from tax. Exempt income includes child support, municipal bond interest, welfare benefits, VA benefits, various military allowances, workers' compensation, gifts, and life insurance proceeds paid to the death of the insured.

Gross Income

There are two aspects to determining gross income:

1. Who owns the income, and
2. What income should be reported on a tax return.

Ownership of income is determined by state law. The laws regarding the ownership of income and property in most states are based on British common law. These states are called separate property states. In separate property states, income belongs to the person who earned it or who owns the property that produced the income.

Nine states are community property states. With the exception of Wisconsin, the laws of community property states are based on Spanish civil law. Generally, in community property states, income received by a married couple for services performed is considered to belong half to the husband and half to the wife regardless of which of them earned the income. The laws regarding the ownership of income from property vary among these states. The nine community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Generally, ownership of the income of a married couple needs to be determined only if they file separate returns.

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