Exhibit 5

T-accounts Cash	Accounts payable
(a) 5,000 Balance 13,400 (c) 30,000	(b) 600 (d) 16,000 (f) 3,000 (g) 2,000		Balance 1,000 (d) 1,000
Accounts Receivable	Not Payable
(c) 2,000 Balance 2,000			Balance 5,000 (g) 5,000
Service Supplies	Owner’s Equity Account
(b) 600 Balance 600	(e) 500	(f) 3,000	Balance 2,000 (a) 5,000
Land	Service Revenues
(g) 7,000 Balance 7,000			Balance 32,000 (c) 32,000
		Operating Expenses
		(d) 17,000 (e) 500 Balance 17,500

Requirement 2 – Periodic financial statements:   ADC SERVICE COMPANY Income Statement For the Year Ended December 31, 19A
	Revenues: Service revenues................... $32,000 Expenses: Operating expenses............... 17,000 Net income........................... $14,500

ADC SERVICE COMPANY Balance Sheet At December 31, 19A
Assets	Liabilities
Cash....................................... Accounts recievable.............. Service supplies..................... Land.......................................	$13,400 2,000 7,000	Accounts payable................... Note payable.......................... Total liabilities..................	$ 1,000 5,000 6,000
		Owner’s Equity
		Owners equity account...... Net income (Req. 2)............ Total owner’s equity..... Total liabilities and owner’s equity..................................	$ 2,000 14,500	16,500 $ 22,500

ADC SERVICE COMPANY Statement of Changes in Financial Position, Cash Basis For the Year Ended December 31, 19A
Sources of cash (inflow): From operations: Revenues Less: Cash used for expenses ($16,000 + $600) Cash inflow form operations From financing: Investment by owner (cash) Total cash sources during the year (inflows)		$30,000 16,600 13,400   5,000 18,400
Uses of cash (outflows): For finances – to pay cash to owner (withdrawals) For investing – to pay on land purchased Total cash used during the year (outflows)   Change: Increase in cash during the year   *Agrees with the increase in cash from a beginning zero balance to $13,400 on the balance sheet above.	$3,000 2,000	5,000 $13,400*

Some Misconceptions

Some people confuse a bookkeeper with an accountant and bookkeeping with accounting. In effect, they confuse one of the parts with the whole of account­ing. Bookkeeping involves the routine and clerical part of accounting and re­quires only minimal knowledge of the accounting model and its application. A bookkeeper may record the repetitive and uncomplicated transactions in most businesses and may maintain the simple records of a small business. In contrast, the accountant is a highly trained professional competent in the design of information systems, analysis of complex transactions and economic events, interpretation and analysis of financial data, financial reporting, financial advising, auditing, taxation, and management consulting.

Another prevalent misconception is that all of the financial affairs of an entity are subject to precise and objective measurement each period and that the accounting results reported in the financial statements are exactly what hap­pened that period. In contrast, accounting numbers are influenced by estimates as illustrated in subsequent chapters. Many people believe that accounting should measure and report the market value of the entity (including its assets), but accounting does not attempt to do this. To understand financial statements and to interpret them wisely for use in decision making, the user must be aware of their limitations as well as their usefulness. One should understand what the financial statements do and do not try to accomplish.

Finally, financial statements are often thought to be inflexible because of their quantitative nature. As you study accounting, you will learn that it requires considerable professional judgment in application on the part of the accountant to capture the economic essence of complex transactions. Thus, accounting is stimulating intellectually; it is not a cut-and-dried subject. Rather, it calls upon your intelligence, analytical ability, creativity, and judgment. Accounting is a communication process involving an audience (users) with a wide diversity of knowledge, interest, and capabilities; therefore, it will call upon your ability as a communicator. The language of accounting uses concisely written phrases and symbols to convey information about the resource flows measured for specific organizations.

As you study accounting and later as a decision maker, you must be wary of these misconceptions. To understand financial statements and to be able to interpret the "figures" wisely, you must have a certain level of knowledge of the concepts and the measurement procedures used in the accounting process. You should learn what accounting "is really like" and appreciate the reasons for using certain procedures. This level of knowledge cannot be gained by reading a list of the "concepts" and a list of the misconceptions. Neither can a generalized mdiscussion of the subject matter suffice. A certain amount of involvement, primarily problem solving (similar to the requirement in mathematics courses), is essential in the study of accounting focused on the needs of the user. There­fore, we provide problems aimed at the desirable knowledge level for the user (as well as the preparer) of financial statements.

SUMMARY OF CHAPTER

This chapter discussed the fundamental accounting model and illustrated its application in the accounting system for a business. For accounting purposes, transactions were defined as (a) exchanges between the business and other individuals and organizations, and (b) certain events that exert a direct effect on the entity (such as a fire loss), and events caused by the passage of time (such as depreciation of a building).

Application of the model—Assets = Liabilities + Owners' Equity—was illustrated for a small business. The application involved: (a) transaction analy­sis, (b) journal entries, and (c) the accounts (T-account format).

An extended illustration, Exhibit 2-4, was presented. This exhibit demon­strated that each transaction caused at least two different accounts to be affected because the economic position of the entity in terms of the fundamental account­ing model—Assets = Liabilities + Owners' Equity—always has a dual effect. This characteristic of the model is the reason its application often is referred to as a double-entry system.

The fundamental accounting model and the mechanics of the debit-credit concept in T-account format can be summarized as follows, where + means increase and - means decrease:

Assets =	Liabilities +	Owners' Equity
Debit	Credit	Debit	Credit	Debit	Credit
+	-	-	+	-	+

Revenue (increase in owners' equity)
Debit	Credit
	(To Record)

Expenses (decrease in owners' equity)
Debit	Credit
(To Record)

An increase in revenue (a credit) represents an increase in owners' equity When a revenue is earned, the resources (i.e., assets) of the business an increased (or liabilities may be decreased), and because of the dual effect, owners' equity is increased by the same amount. In contrast, when an expense is incurred, the net resources of the business are decreased (i.e., assets are de­creased and/or liabilities increased), and because of the dual effect, owners' equity is decreased by the same amount.

IMPORTANT TERMS DEFINED IN THIS CHAPTER

Account A standardized format used to accumulate data about each financial statement element. It provides for recording increases and decreases in these elements caused by transactions.

Accrual Basis Accounting All financial statement elements—assets, liabilities, revenues, expenses, etc.—are recognized (recorded) when the related transac­tion occurs. In contrast, cash basis accounting is not appropriate because it recognizes only cash transactions.

Business (Source) Document A document that evidences (supports) a business transaction.

Cash Basis Accounting See accrual basis accounting.

Debits and Credits Debit is the name for the left side of a T-account. Debits represent increases in assets and decreases in liabilities and owners' equity. Credit is the name for the right side of a T-account. Credits represent decreases in assets and increases in liabilities and owners' equity.

Elements of Financial Statements Items that are reported on financial state­ments, such as revenues, expenses, assets, liabilities, and owners' equity.

Journal Entry An accounting method of expressing the results of transaction analysis in a Debits = Credits format.

Periodic Financial Statements The financial statements that must be prepared each reporting period for external parties—balance sheet, income statement, and statement of changes in financial position.

Transaction An exchange between a business and one or more external parties and certain other events, such as a fire loss.

Transaction Analysis The process of studying a completed transaction to deter­mine its economic effect on a business in terms of the fundamental accounting model: Assets = Liabilities + Owners' Equity.

[1] A narrow definition of a transaction limits it to the first category; that is, events between the entity and one more parties other than the entity. This definition is useful in certain circumstances and is conceptually correct. However, accounting recognizes a number of events that are not transactions in the strict sense. Therefore, we have defined the term in the broader sense to generalize our terminology.

[2] Owner’s equity usually is designated to indicate the kind of ownership arrangement used as as follows:

Corporation............................ Shareholders’ equity

Sole proprietorship............... Owner’s capital

Partnership............................ Partners’ capital

[3] Handwritten or manually maintained acoounts in the formats shown here are used in small businesses. Highly mechanized and computerized systems retain the concept of the account but not this format. T-accounts are useful primarily for instructional purposes.

[4] Historically, and today, accountants refer to the left side as the debit side and to the right side as the credit side. For accounting purposes, the terms debit and credit have no other meanings. The words to debit and to credit should not be confused with “increase” or “decrease”, as will become clear in the next few paragraphs. Contrary to what some people think, there is no implication of “goodness” attached to credits or “vadness” attached to debits (or vice versa).

[5] To “charge an account” is a frequently used expression meaning to debit an account. Thus, the word debit is used as both a verb and a noun.

Дата добавления: 2015-10-21