Week 1 and_2_power_point-acct_101

ACCT 101 Accounting and
Financial Management
Week #1 and #2
ACCT101-Week 1 and 2 1

WEEK 1 and 2- TOPICS
• Differences Between Not-for-Profit and For
Profit Organizations
• Importance/Purpose of Accounting
• Language and Terminology of Accounting
• The Double-Entry System (Recording
transactions in the Accounting System)

WEEK 1 and 2 - TOPICS
• The Accounting Equation
• Accrual accounting vs Cash Basis
Accounting
• Standard Setting for Financial Reporting
• Audit Report
3ACCT101-Week 1 and 2

Differences Between Nonprofit and
For Profit Organizations
Nonprofit For-Profit
Owners None Stockholders
Primary Mission Provide Service needed
by society
Earn profit for the
Stockholders
Tax Status Exempt from Income
Taxes if approved by IRS
under code 501(c)(3)
Corporation and/or their
owners are subject to
Income taxes
Example of Revenue Donor contributions,
grants, membership
dues, program revenue
Sales of products or
services, investment
income, and gains
Excess of Revenue over
Expenses (Profit)
Reinvested to further the
purpose of the
organization
Distributed to owners as
dividend or reinvested
into the business

Example of Nonprofit
Organizations
• Section 501(c)(3) -- the famous one -- describes
[nonprofit!] (1) serving charitable, religious,
scientific or educational purposes (2) no part of
the income of which "inures to the benefit of"
anyone.
• Some Examples are:
• Religious, Educational, Charitable, Scientific, Literary,
Testing for Public Safety, to Foster National or
International Amateur Sports Competition, or Prevention
of Cruelty to Children or Animals Organizations.

Importance Of Accounting
Information
Accounting provides financial information
that is used by:
Members, Donors, Managers, Investors,
Financial Analysts, Creditors, Regulators,
Employees, etc.
They need to understand the current
financial status of an organization, and the
events that caused a change in that status.

Purpose of the Accounting
System
The purpose of accounting is to:
 identify, record, and communicate the economic
events of an organization to interested users.
In another words
 Its goal is to collect, summarize, and report
information concerning the impact of various
business events on an organization’s financial
status and financial performance.

The Accounting Cycle
• STEP 1: ANALYZE TRANSACTIONS FROM SOURCE
DOCUMENTS
• STEP 2: RECORD TRANSACTIONS IN A JOURNAL
• STEP 3: POST FROM THE JOURNAL TO THE LEDGER
• STEP 4: PREPARE A TRIAL BALANCE OF THE
LEDGER
• STEP 5: DETERMINE NEEDED ADJUSTMENTS
• STEP 6: PREPARE A WORKSHEET
• STEP 7: PREPARE FINANCIL STATEMENTS FROM A
COMPLETED WORKSHEET

Financial Statements
Main Financial Statements required by U.S. GAAP
(GAAP = Generally Accepted Accounting Principles )
GAAP also requires the presence of Notes to the Financial Statements
Nonprofit Organizations For-Profit Corporations
Statement of Activities or Statement
of Functional Expenses
Income Statement or Statement of
Operations
Statement of Financial Position Balance Sheet
Statement of Cash Flows Statement of Cash Flows

Accounting Language and
Terminology
Transaction
• Definition: A business/organization event, expressed in
monetary terms, that is entered into the accounting
records.
• Examples: Purchasing equipment, paying staff
members, and recording a sale are all examples of
accounting transactions.
• For each transaction, one must decide:
1. Which accounts are affected by the transaction
2. Whether the accounts were increased or decreased
3. How to increase or decrease the accounts affected

Terminology
Assets
• Definition: What the business owns and future
economic benefits it is entitled to.
• Examples: Cash, contributions receivable,
accounts receivables, inventory, property,
buildings, equipment, and investments are
examples of what a business owns. Prepaid
insurance is an example of a future economic
benefit the business is entitled to.

Terminology
Liabilities
• Definition: Amount owed to the creditors in the
form of debts or other obligations. Think of
liabilities as simply “money that you owe.”
• Examples: Accounts payable, accrued
expenses, Debts, deferred income.

Terminology
Net Assets
• Definition: the difference between the assets and
liabilities of a not-for-profit organization.
• Examples: Unrestricted, Temporarily Restricted
and Permanently Restricted.
• Note: It is equivalent to stockholders' equity in
the commercial, or for profit world and a
measure of net worth in our personal financial
world.

Terminology
Revenues
• Definition: Inflows or their enhancements of assets of an
entity or settlement of its liabilities (or a combination of
both) from delivering or producing goods, receiving
services, or other activities that constitute the entity's on
going or central operations. Think of revenues as
Inflows.
• Examples: Not-for-profit organizations generally have
two primary sources of revenue- contributions
(sometimes called “support and contributions”) and fee-
for-services activities.

Terminology
Expenses:
• Definition: Outflows or other using up of assets or
incurrence of liabilities (or a combination of both) from
delivering or producing goods, rendering services, or
carrying out other activities that constitute the entity’s
ongoing major or central operations. Think of expenses
as Outflows.
• Examples: Program expenses, Fundraising expenses,
General and Administrative expenses.

The Double Entry Accounting
(Dual Aspect of Accounting)
• Every financial transaction, without exception, is
recording at least two pieces of information. If we receive
cash, there are reasons we received the cash:
• Double-entry accounting is the distillation of a financial
transaction into a set of debits and credits that, when
added together, equal zero. The debit entries must
equal the credit entries.
• Debits are left-hand entries
• Credits are right-hand entries.

Account Name
Debit / Dr. Credit / Cr.
• Accounts: Record of increases and decreases in a specific asset,
liability, Net Asset, revenue, or expense item.
• Debit = “Left”
• Credit = “Right”
An Account can be illustrated in a T-Account form.
The Double Entry Accounting
(Dual Aspect of Accounting)

How Each of the Account is affected by
the Double Entry Accounting
Asset Account
• To increase an Asset account, debit it; to decrease it,
credit it.
Liability or Net Asset Account
• To increase a Liability or Net Asset account, credit it; to
decrease it, debit it.
Revenue Account
• To increase a Revenue account, credit it; to decrease it,
debit it.
Expenses Account
• To increase an Expense account, debit it; to decrease it,
credit it.

Examples of Recording
Transactions
January Transaction
• Transaction 1. On January 31, a donor contributes
$10,000, without restriction, for the operation of the
Church. This transaction affects the general ledger
accounts as follows:
Date Account Name Debit Credit
Jan-31 Cash 10,000
Revenue-Contribution General 10,000
Contribution received

Transactions
February Transactions
• Transaction 2. On February 1, the Church rents worship
space. A check is written for $2,000. This covers a one-
time security deposit of $1,000 plus the February rent of
$1,000.
Feb-01 Security Deposit 1,000
Rent Expenses 1,000
Cash 2,000
Security deposit and rent payment

Transactions
• Transaction 3. On February 2, a $400 check is written
to the utility as a one-time security deposit for electricity
and heat service.
Feb-02 Security Deposit 400
Cash 400
Security deposit for utilities

Transactions
• Transaction 4. On February 19, the Church receives a
contribution of $8,000 that the donor specifies must be
used for the purchase of furniture. The contribution is
deposited into a money market account. This transaction
affects the general ledger accounts as follows:
Feb-19 Cash-Money Market Account 8,000
Contribution-Temporarily Restricted 8,000
Contribution received for furniture

Transactions
• Transaction 5. The electricity and heating invoice has
not arrived. It is estimated that the amount for February's
usage was $350, so the following accrual adjusting entry
is recorded on February 28:
Feb-28 Electricity, Heat and Water Expenses 350
Accrued Expenses 350
Estimated utilities for Feb

Accounting Equation
Using Elements of the Statement of Financial Position (SOFP)
Assets = Liabilities + Net Assets
Liabilities
• Accounts Payable
• Accrued Expenses
• Debt, Short-term
• Deferred Income
• Debt, long-term
Assets
• Cash
• Cash Equivalents
• Contributions
Receivable
• Accounts Receivable
• Other Receivables
• Investments (Chapter 5)
• Inventory
• Property Plant and
Equipment (PP&E)
• Other Fixed Assets
• Other Assets
Net Assets
• Unrestricted
• Temporarily Restricted
• Permanently Restricted

Accounting Equation
Example # 1
• Let’s assume that our not-for-profit organization purchased
Equipment for $3,000 on credit. This transaction has two effects
on the accounting elements:
• Since an asset was acquired, equipment, assets increased
• Since the asset was purchased on credit (Accounts Payable),
liabilities also increased
• Assets = Liabilities + Net Assets
• +$3,000 +$3,000
• Assets ( on one side of the equation) increased by $3,000, while
liabilities ( on the other side of the equation, also increased by
$3,000, thus maintaining the equation in balance. Every business
transaction has at least two effects on the accounting equation.

Accounting Equation
Example # 2
• Let’s assume that our not-for-profit organization paid $2,000 Cash
of the $3,000 the Account Payables. This transaction has two
effects on the accounting elements:
• Since payment was made with Cash, assets decreased
• Since debt was paid (Accounts Payable), liabilities also decreased
• - $2,000 -$2,000
• Assets ( on one side of the equation) decreased by $2,000, while
liabilities ( on the other side of the equation, also decreased by
$2,000, thus maintaining the equation in balance. Every business
transaction has at least two effects on the accounting equation.

Accounting Equation
Practice A-1
• Practice Exercise A-1: Fill in the Blanks
• 1. $40,000 $25,000 $___________
• 2. $________ $38,000 $52,000
• 3. $70,000 $_______ $48,000
• 4. $75,000 $ -0- $________

The Accounting Equation - Joining the Pieces
_________Net Assets________________
Assets = Liabilities + (Beg. Nets Assets + Revenue - Expenses)
Things that Money that Net Assets=Assets minus Inflows that Outflows that
are owned you owe Liabilities increase decrease assets
as well as assets or or increase
future reduce liabilities
economic liabilities
benefits
entitled to
Examples: Examples: Examples Examples: Examples:
Cash Accounts payable Unrestricted Contributions Salary
Cash equivalents Accrued expenses Temporarily Restricted Fees for services Rent
Investments Deferred income Permanently Restricted Utilities
Receivables Depreciation
Inventories
Property, Plant
and Equipment
Prepaid Expenses

Example # 1
• Let’s assume that our not-for-profit organization paid salaries of
employees, $1,500. This transaction has two effects on the
accounting elements:
• Since an expense was incurred, Salaries, expenses increased.
• Since the salaries were paid, an asset, Cash, decreased.
………… Net Assets…………………….
• Assets = Liabilities + ( Beg. Net Assets + Revenue - Expense)
• -$1,500 -$1,500
• Assets ( on one side of the equation) decreases by $1500, Net
Assets ( on the other side of the equation, also decreased $1500,
thus maintaining the equation in balance.

Example # 2
• Let’s assume that our not-for-profit organization received a
general contribution of $5,000 in cash. This transaction has two
effects on the accounting elements:
• Since Cash was received, Assets increased.
• Since General contribution was received, Revenue increased.
………… Net Assets…………………….
• +$5,000 +$5,000
• Assets ( on one side of the equation) increases by $5,000, Net
Assets ( on the other side of the equation, also increased $5,000,
thus maintaining the equation in balance.

Practice A-2
• Practice Exercise A-2: Fill in the Blanks
………… Net Assets…………………….
• 1. $15,000 $_______ $5,000 $7,000 $6,000
• 2. $45,000 $20,000 $11,000 $_______ $12,000
• 3. $60,000 $17,000 $_______ $32,000 $25,000
• 4. $75,000 $29,000 $40,000 $65,000 $________
• 5. $_______ $22,000 $30,000 $43,000 $47,000

Accrual vs. Cash Basis Accounting
Accrual- Required by GAAP
• Revenues are recognized when they are earned,
regardless of when the cash is actually collected.
• Revenues must be realizable, i.e. the organization
must at some time in the future be able to convert any
receivables resulting from revenue recognition to cash.
• Match expenses to the revenue they generate, as
applicable.
• Recognize some expenses in the fiscal year or
accounting period in which they are used by the
organization, i.e. organization receives the benefit of
the expense, as applicable.
• Recognize some expenses using a systematic
allocation of costs to accounting periods (classic
example: depreciation expense)

Accrual vs. Cash Basis Accounting
Cash Basis
• Transactions are only recorded when cash is received or
disbursed.
• Terms to use are cash receipts and disbursements, not
revenues and expenses
• Pure application of cash basis of accounting, only asset
would be balance in cash account. There would be no
liabilities, and the cash balance would equal the total net
assets.
• In actual practice, pure cash basis is seldom used.
More often, a modified cash basis is used.
– Property, plan and equipment and long-term debt are recorded.
– Certain payables and receivables are recorded.

The Institutional Setting and
Development of Financial Reporting
Standards
• Foundation of accounting consists of a set of what are called
generally accepted accounting principles, or GAAP, for short
• Currently, these principles are established by Financial Accounting
Standards Board, FASB
- Created in 1973
- Consists of seven leading accountants and a
professional staff
-nongovernmental organization, private
-financially controlled and supported by the
Financial Accounting Foundation (FAF)
-FAF funded by contributions from business
firms and the accounting profession
-FAF also oversees the Governmental Accounting Standards Board
(GASB), which sets GAAP for governmental entities.

American Institute of Certified
Accountants (AICPA)
• National, professional organization for all Certified Public
Accountants
• Mission: provide resources, information and leadership
to its members
• Organization has also issued accounting guidance in the
past that is part of the accounting principles that
comprise GAAP for not-for-profit organizations
• Specifically
- Advocacy
- Certification and Licensing
- Communications
- Recruiting and Education
- Standards and Performance

The Internal Revenue Service (IRS)
• Has certain powers given by Congress to
regulate the ways in which taxable income
is calculated for purposes of assessing
income taxes
• Specific Filing Requirements for Not-for-
Profit Organizations
• Specific Reporting Requirements for Not-
for-Profit Organizations

The Audit Report
• Who is responsible for preparing the financial
statements that are being audited?
• What is the independent auditor hired to do?
• Types of opinions on the financial statements
issued by the auditor:
- unqualified ( aka “ a clean opinion)
-qualified ( i.e. financial statements are prepared
in accordance with GAAP , with some
exceptions)
-adverse (i.e. Financial statements are not
prepared in accordance with GAAP)

The Audit Report
• It is the responsibility of the not-for-profit organization’s
management to prepare the financial statements
• Independent auditors are hired to perform an audit and
issue an opinion as to whether or not the financial
statements are prepared in accordance with GAAP
• The financial statements include:
- Statement of Financial Position (For-Profit: Balance
Sheet)
- Statement of Activities ( For-Profit: Income
Statement
- Statement of Cash Flows ( For-Profit: the same
- Notes to the Financial Statements (For-Profit: the
same.

Week 1 and_2_power_point-acct_101

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