EC12

Inflation
Persistent increase in the costs of goods and services Persistent decrease in buying power of dollar

Example:
Assuming a 3% inflation rate, you would need more money each year to have the same buying power:

Year 1: $56,000 Year 2: $57,680 Year 3: $59,410 Year 4: $61,193

Your investment would need to earn more than 3% just to beat inflation.

Causes:

1. Cost Push 2. Demand Pull

1. COST PUSH
An increase in costs may lead to an increase in prices.

Examples: Raw material prices ( possibly from abroad) increase... ...Costs to business increase... ...Business still wants to make a profit... ...Business puts its prices up... ...Consumers can buy less with their money... ...Workers demand and receive pay increases... ...Businesses costs increase again... ...Businesses put prices up again

2. DEMAND PULL

If there is too much demand for goods and services in the economy then prices may be forced upwards. Suppliers experience so much demand for their limited number of goods that they decide to put up prices Deflation in economics is a persistent decrease in the general price level of goods and services, when inflation is below zero percent, resulting in an increase in the real value of money - a negative inflation rate.

When the inflation rate slows down (decreases, but remains positive), this is known as disinflation. It is a substantial drop in the price level.

Depression A time of economic crisis or bad times

in commerce, finance, and industry, characterized by falling prices, restriction of credit, low output and investment, many bankruptcies, and a high level of unemployment (many people without jobs). A less severe crisis is usually known as a recession

Types of Capital
Capital is any form of wealth employed to produce more wealth for a firm. It has following three types.

Fixed - used to purchase the permanent or fixed assets of the business (e.g., buildings, land, equipment, etc.) Working - used to support the small companys normal short-term operations (e.g., buy inventory, pay bills, wages, salaries, etc.) Growth - used to help the small business expand or change its primary direction.

Equity and Debt Capital

Equity represents the personal investment of the owner(s) in the business. Does not have to be repaid with interest like a loan does. Debt Capital is the capital that a business raises by taking out a loan. Must be repaid with interest at some future date.

Bond A certificate of debt issued by a

government or corporation guaranteeing payment of the original investment plus interest by a specified future date.
Credit: The giving of goods and services in return for the promise of payment at a future time. The payment usually has interest attached. Dividend: Profits of a firm that are distributed or given out to its investors (stockholders).

Tax: A contribution for the support of a

government required of persons, groups, or businesses. There are many different kinds of taxes including income, sales, state. local, federal taxes. Tariff: A tax on imports or exports by the government.

1. Income taxes 2. Property taxes 3. Sales taxes 4. Excise taxes

What is Accounting?
Accounting is the recording of all business transactions to provide a financial picture of an organization

Different Accounts
I am a copier. My monetary value to the organization might be found in an account called Copiers

I am cash. My value might be found in an account called Cash

I am a bill for rent. The amount the organization owes might be found in an account called Rent Expense

Note: The amount in a particular account can increase or decrease, depending on the business transaction that affected it

Types of Accounts
Assets: things of value an organization owns Liabilities: obligations an organization owes to someone else Expenses: the cost of doing business Revenue: income an organization has earned
At least two of these account types are involved in any transaction! They can be two of the same or two different account types

Debits and Credits

Account Title Goes Here

Debits:
Usually mentioned first Always on the left Must equal credits

Credits:
Always on the right Must equal debits

Debits and Credits

An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account. Double-entry accounting system (two-sided effect). Recording done by debiting at least one account and crediting another.

DEBITS must equal CREDITS.

LO 2 Explain double-entry rules.

Debits and Credits

Account
An arrangement that shows the effect of transactions on an account. Debit = Left Credit = Right

An Account can be illustrated in a T-Account form.

Account Name
Debit / Dr. Credit / Cr.

LO 2 Explain double-entry rules.

Debits and Credits

If Debit entries are greater than Credit entries, the account will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.

Transaction #1
Transaction #3 Balance

$10,000
8,000 $15,000

$3,000

Transaction #2

LO 2 Explain double-entry rules.

Debits and Credits

If Credit entries are greater than Debit entries, the account will have a credit balance.
Account Name
Debit / Dr. Credit / Cr.

Transaction #1

$10,000

$3,000
8,000

Transaction #2
Transaction #3

Balance

$1,000

LO 2 Explain double-entry rules.

Trial Balance
Trial Balance a list of each account and its balance; used to prove equality of debit and credit balances.
Acct. No. 100 105 110 130 200 220 300 330 400 500 Account Cash Accounts receivable Inventory Building Accounts payable Note payable Common stock Retained earnings Sales Cost of goods sold Debit $ 140,000 35,000 30,000 150,000 $ 60,000 150,000 100,000 75,000 30,000 $ 385,000 $ 385,000 Credit

Adjusted Trial Balance Shows the balance of all accounts, after adjusting entries, at the end of the accounting period.

Preparing Financial Statements

Financial Statements are prepared directly from the Adjusted Trial Balance.

Balance Sheet

Income Statement

Preparing Financial Statements

Assume the following Adjusted Trial Balance
Adjusted Trial Balance Cash Accounts receivable Building Note payable Common stock Retained earnings Dividends declared Sales Interest income Cost of goods sold Salary expense Depreciation expense Debit $ 140,000 35,000 190,000 $ 150,000 100,000 38,000 10,000 185,000 17,000 47,000 25,000 43,000 $ 490,000 Credit

Balance Sheet
Balance Sheet Assets Cash Accounts receivable Building Total assets Liabilities Note payable Stockholders' equity Common stock Retained earnings Total liab. & equity $ 140,000 35,000 190,000 $ 365,000 150,000 100,000 115,000 $ 365,000

$ 490,000

Preparing Financial Statements

Assume the following Adjusted Trial Balance
Adjusted Trial Balance Cash Accounts receivable Building Note payable Common stock Retained earnings Dividends declared Sales Interest income Cost of goods sold Salary expense Depreciation expense Debit $ 140,000 35,000 190,000 $ 150,000 100,000 38,000 10,000 185,000 17,000 47,000 25,000 43,000 $ 490,000 Credit

Income Statement
Income Statement Revenues: Sales Interest income Total revenue Expenses: Cost of goods sold Salary expense Depreciation expense Total expenses Net income $ 185,000 17,000 202,000 47,000 25,000 43,000 115,000 $ 87,000

$ 490,000