Accounting for non-accountants

Introduction to Accounting
GEE5208

Lecture 2

1-1
 Dividends Vs. Expenses?
They BOTH reduce equity.
Distributions of dividends
➢ do NOT aid in generating income.
➢ represent return on investment to owners (or
shareholders).
Expenses are costs of earning revenue.

Assets Vs. Expenses?

Assets are expected to benefit future and may become
future expenses! (Lecture 4, e.g. Supplies to Supplies
Expense)
Expenses are costs within an accounting period. 1-2
 The Accounting Equation

Classify the following items as issuance of

shares, dividends, revenues, or expenses.
Then indicate whether each item increases or
decreases equity.
Classification Effect on Equity

1. Rent expense Expense Decrease

2. Service revenue Revenue Increase

3. Dividends Dividends Decrease

4. Salaries expense Expense Decrease

1-3
 Transactions

Transactions are a business’s economic events recorded

by accountants.

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the accounting

equation.

1-4
 Transactions
Are the following events recorded in the
accounting records?

Computer is Discuss Dividends are

Event purchased product design paid to
on account with customer shareholders

Criterion Is the financial position (assets, liabilities, or

equity) of the company changed?

Record/
Don’t Record

1-5
 Transactions Analysis

The accounting equation must remain in balance

after recording each transaction.

Assets = Liabilities + Equity

Liabilities
Assets & Equity

1-6
 Transactions
Discussion Question
In February 2011, Paula Kwok invested $10,000 in
Hardy Company. Hardy’s accountant, Lance Jiang,
recorded this receipt as an increase in cash and
revenues. Is this treatment appropriate? Why or
why not?

Answer:
No, this treatment is not correct. While the transaction does
involve a receipt of cash, it does not represent revenues S.25 .
This transaction is simply an additional investment made by a
shareholder of the business.
1-7
 Transactions Analysis
1. On Sept. 1, 2011, Ray & Barbara Ng invested
$15,000 cash for 15,000 ordinary shares to open a
computer programming company that they incorporate
as Softbyte Inc. The effect of this transaction on
the accounting equation is:

Assets = Liabilities + Equity

Accounts Accounts Share Retained
Cash + Receivable + Supplies + Equipment = Payable + Capital + Earnings

(1) +15,000 +15,000

Issued Shares

1-8
 Transactions Analysis
2. Purchased Computer Equipment for $7,000 cash on
the same date.

Assets = Liabilities + Equity

Accounts Accounts Share Retained
Cash + Receivable + Supplies + Equipment = Payable + Capital + Earnings

(1) +15,000 = +15,000

(2) -7,000 +7,000

1-9
 Transactions Analysis
3. Purchased on Sept. 3 for $1,600 on account (pay
later) from Acme Supply Company computer paper
and other supplies* which expected to last several
months.
Assets = Liabilities + Equity
Accounts Accounts Share Retained
Cash + Receivable + Supplies + Equipment = Payable + Capital + Earnings

(1) +15,000 = +15,000

(2) -7,000 +7,000 =

(3) +1,600 +1,600

* Supplies: items that are needed and are available to be used. As

supplies is expected to last several months (for future benefit), it is
regarded as an asset, not an expense.
1-10
 Transactions Analysis
4. Softbyte received $1,200 cash from customers on
Sept. 4 for programming services it has provided.

Assets = Liabilities + Equity

Retained Earning
Accounts A/C Share
Cash + Receivable + Supplies + Equipment = Payable + Capital + Rev. - Exp. - Div.

(1) +15,000 = +15,000

(2) -7,000 +7,000 =

(3) +1,600 = +1,600

(4) +1,200 +1,200

Service
Revenue

1-11
 Transactions Analysis
5. Softbyte received a bill for $250 from Daily
News on Sept. 5 for advertising but postponed
payment until a later date.
Assets = Liabilities + Equity
Retained Earning
Accounts A/C Share
Cash + Receivable + Supplies + Equipment = Payable + Capital + Rev. - Exp. - Div.

(1) +15,000 = +15,000

(2) -7,000 +7,000 =

(3) +1,600 = +1,600

(4) +1,200 = +1,200

(5) +250 - 250

Advertising
Expense
Bal 9,200 + 1,600 + 7,000 = 1,850 + 15,000 + 1,200 - 250

$17,800 = $17,800 1-12

 Transactions Analysis
6. Softbyte provided $3,500 of programming services
for customers. The company received cash of
$1,500 from customers, and it billed the balance of
$2,000 on account on Sept. 6.
Assets = Liabilities + Equity
Retained Earning
Accounts A/C Share
Cash + Receivable + Supplies + Equipment = Payable + Capital + Rev. - Exp. - Div.

Bal 9,200 + 1,600 + 7,000 = 1,850 + 15,000 + 1,200 - 250

(6) +1,500 +2,000 +3,500

Service
Revenue

1-13
 Transactions Analysis
7. Softbyte paid the following expenses in cash for
September: store rent $600, salaries of employee
$900, and utilities $200 on Sept. 27.
Assets = Liabilities + Equity
Retained Earning
Accounts A/C Share
Cash + Receivable + Supplies + Equipment = Payable + Capital + Rev. - Exp. - Div.

Bal 9,200 + 1,600 + 7,000 = 1,850 + 15,000 + 1,200 - 250

(6) +1,500 +2,000 = +3,500

(7) -600 - 600

-900 - 900
-200 - 200

Remember that the balance in the expense accounts 

But, equity actually  because expenses reduce equity.
1-14
 Transactions Analysis
8. Softbyte paid its $250 Daily News bill in cash on
Sept. 28.
Assets = Liabilities + Equity
Retained Earning
Accounts A/C Share
Cash + Receivable + Supplies + Equipment = Payable + Capital + Rev. - Exp. - Div.

Bal 9,200 + 1,600 + 7,000 = 1,850 + 15,000 + 1,200 - 250

(6) +1,500 +2,000 = +3,500

(7) -1,700 = - 600

= - 900

= - 200

(8) -250 -250

1-15
 Transactions Analysis
9. On Sept 29 Softbyte received $600 in cash from
customers who had been billed for services in
Transaction 6.
Assets = Liabilities + Equity
Retained Earning
Accounts A/C Share
Cash + Receivable + Supplies + Equipment = Payable + Capital + Rev. - Exp. - Div.

Bal 9,200 + 1,600 + 7,000 = 1,850 + 15,000 + 1,200 - 250

(6) +1,500 +2,000 = +3,500

(7) -1,700 = - 600

= - 900

= - 200

(8) -250 = -250

(9) +600 -600

1-16
 Transactions Analysis
10. Softbyte paid a dividend of $1,300 in cash to Ray &
Barbara Ng, the shareholders of Softbyte on Sept. 30.
Assets = Liabilities + Equity
Retained Earning
Accounts A/C Share
Cash + Receivable + Supplies + Equipment = Payable + Capital + Rev. - Exp. - Div.

Bal 9,200 + 1,600 + 7,000 = 1,850 + 15,000 + 1,200 - 250

(6) +1,500 +2,000 = +3,500

(7) -1,700 = - 600

= - 900

= - 200

(8) -250 = -250

(9) +600 -600 =

(10) -1,300 - 1,300

$18,050 = $18,050
Remember that dividends decrease equity. 1-17
 Transactions Analysis: Summary
Assets = Liabilities + Equity
Retained Earning
Accounts A/C Share
Cash + Receivable + Supplies + Equipment = Payable + Capital + Rev. - Exp. - Div.

(1) +15,000 = +15,000

(2) -7,000 +7,000 =

(3) +1,600 = +1,600

(4) +1,200 = +1,200

(5) = +250 - 250

(6) +1,500 +2,000 = +3,500

(7) -1,700 = - 600

= - 900

= - 200

(8) -250 = -250

(9) +600 -600 =

(10) -1,300 = - 1,300

_________ __________ ________ ________
________ __________ ________ ________ ________ ________
Bal $8,050 + $1,400 + $1,600 + $7,000 = $1,600 + 15,000 + $4,700 - $1,950 - $1,300
========= ========== ======== ========= ========= ======== ======== ======== ========

Equity = 16,450 Net Income = $4,700 – 1,950 = $2,750

1-18
 Financial Statements

Companies prepare four financial statements from

the summarized accounting data:

Retained
Earnings Statement
Statement of Financial Statement
Income (Owner’s Equity Position of Cash
Statement Statement for (or Balance Flows
proprietorship
Sheet)
& partnership)

1-19
 Transaction & Assumptions
Review Question
Richard Lee spent $500m to buy a house for
his girlfriend. How should this event be
recorded in the book of Richard Lee’s
company?

1-20
 Introduction to Accounting

The Building The Basic Using the Financial

What is Basic Statements
Blocks of Accounting
Accounting? Accounting
Accounting Equation Equation (Topic 2)

3 activities Generally Assets Transaction Income

Who use accepted Liabilities analysis statement
accounting accounting Summary of Retained
Equity
data principles transactions earnings
Cost principle statement
Assumptions Statement of
financial
position
Statement of
cash flows

1-21
Examples - Accounting for Business Transactions
1 Chan invests $30,000 to begin Wing In eTravel.
2 Chan purchases an office location, paying $20,000 in cash.
3 He buys office supplies, agreeing to pay $500 in 30 days.
4 He earns and collects $5,500 revenues.
5 Chan performs services, and the client agrees to pay $3,000
within one month.
6 During the month, he pays $3,100 for expenses incurred.
7 Chan pays $300 to the store from which he purchased $500
worth of supplies in Transaction 3.
What is the effect of these transactions on the accounting
equation?
22
 Accounting for Business
Transactions

Chan invests $30,000 to begin Wing In eTravel

Assets = Liabilities + Capital

(1) Cash + 30,000 = + 30,000

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 Accounting for Business
Transactions

Chan purchases an office location,

paying $20,000 in cash.

Balance + 30,000 = + 30,000

(2) Cash – 20,000
Office + 20,000
30,000 = + 30,000
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 Accounting for Business
Transactions

He buys office supplies, agreeing to

pay $500 in 30 days.

Balance + 30,000 = + 30,000

(3) Supplies + 500 = + 500
30,500 = 500 + 30,000
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 Accounting for Business
Transactions

He earns and collects $5,500 revenues.

Balance + 30,500 = 500 + 30,000

(4) Cash + 5,500 = + 5,500
36,000 = 500 + 35,500
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 Accounting for Business
Transactions

Chan performs services, and the client

agrees to pay $3,000 within one month.

Balance + 36,000 = 500 + 35,500

(5) Receivable + 3,000 = + 3,000
39,000 = 500 + 38,500
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 Accounting for Business
Transactions

During the month, he pays $3,100

for expenses incurred.

Balance + 39,000 = 500 + 38,500

(6) Cash - 3,100 = - 3,100
35,900 = 500 + 35,400
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 Accounting for Business
Transactions

Chan pays $300 to the store from which he

purchased $500 worth of supplies in Transaction 3.

Balance + 35,900 = 500 + 35,400

(7) Cash - 300 = - 300
35,600 = 200 + 35,400
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 Accounting for Business
Transactions - summary
Assets
Accounts Office
Cash + Receivable + Supplies + Office
(1) + 30,000
(2) – 20,000 + 20,000
(3) + 500
(4) + 5,500
(5) + 3,000
(6) – 3,100
(7) – 300
Bal. 12,100 3,000 500 20,000

30
 Accounting for Business
Transactions - summary
Liabilities + Owners’ Equity
Accounts Type of Capital
Payable + Capital + Profit Transaction
(1) + 30,000 Investment
(2)
(3) + 500
(4) + 5,500 Service revenue
(5) + 3,000 Service revenue
(6) – 3,100 Expenses
(7) – 300
Bal. 200 30,000 5,400

31
 Accounting for Business
Transactions - summary
Assets = Liabilities + Capital + (Revenue - Expense
Cash + Office + Supplies + Receivable

1) +$30,000 + $30,000
2) – 20,000
+ 20,000
3) +500 + 500
4) + 5,500 + 5,500
5) +3,000 + 3,000
6) – 3,100 – (+3,100)
7) – 300 – 300
T 12,100 + 20,000+500+3,000 = + 200 + $30,000 + 8,500 - 3,100

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Expansion of The Accounting Equation
Assets = Liabilities + Capital

A = L + C, or
Assets = Liabilities + [Capital + (Revenue – Expenses)]
e.g. Asset accounts total $35,600
Liability accounts total $ 200
Capital accounts total $ 30,000
Revenue accounts total $ 8,500
Expense accounts total $ 3,100
➢ $35,600 = $200 + $30,000 + $8,500 - $3,100 or
➢ $35,600 = $200 + $35,400 33
Remarks: Accounting for Business
Transactions
A. Notice that the equation always stays in
balance.
B. Each transaction affects at least two accounts,
sometimes more.
C. Some transactions affect only one side of the
equation; some affect both sides.

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 Additional Examples - Accounting for
Business Transactions

Other transactions that took place were as

follows:
8 Chan remodel his home at a cost of $10,000,
paying cash from his personal funds.
9 The business collected $1,000 from the client
in transaction 5.
10 Chan sold part of the office at cost for $9,000.
11 Chan withdrew $2,100 from the business.
35
 Accounting for Business
Transactions
Assets
Accounts Office
Cash + Receivable + Supplies + Office
(1) + 30,000
(2) – 20,000 + 20,000
(3) + 500
(4) + 5,500
(5) + 3,000
(6) – 3,100
(7) – 300
(8) Not a transaction of the business
(9) + 1,000 - 1,000
(10) + 9,000 - 9,000
(11) - 2,100
Bal. 20,000 2,000 500 11,000

36
33,50
 Accounting for Business
Transactions
Liabilities + Owners’ Equity
Accounts Type of Capital
Payable + Capital + Profit Transaction
(1) + 30,000 Investment
(2)
(3) + 500
(4) + 5,500 Service revenue
(5) + 3,000 Service revenue
(6) – 3,100 Expenses
(7) – 300
(8)
(9)
(10)
(11) -2,100 Withdrew
Bal. 200 27,900 5,400

37
33,50
END
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