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ACCOUNTINGIN BUSINESSChapter
1 LECTURE 1 & 2
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LEARNING OBJECTIVES
After studying this chapter, you should be ableto:
1. Describe what is accounting.
2. State the users of the accounting information.
3. Describe the profession of accounting,accounting professional bodies and code ofprofessional conduct & ethics.
4. State the characteristics of the qualitative
accounting information.5. Describe the assumptions, principles and
constraints related to the practice of accounting.
6. Describe the forms and types of business.
7. Describe the elements of financial statements.
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DEFINITIONOF ACCOUNTING
As an information system that provides report tostakeholders about the economic activities andcondition of a business.
So, accounting is the process of:
Identifying
Measuring
Communication economic information to
permit informed judgements, and Decisions by users of the information
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LECTURE 1
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Identifies
Records
CommunicatesRelevant
Reliable
Comparable
IMPORTANCEOF ACCOUNTING
Accountingis a
system that
information
that is
to help users make better
decisions.
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Identifying
Business
Activities
Recording
Business
Activities
Communicating
Business
Activities
ACCOUNTING ACTIVITIES
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IdentifyingSelect transactions and events
RecordingInput, measure and classify
CommunicatingPrepare, analyze and interpret
IMPORTANCEOF ACCOUNTING
Accounting
C 1
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USERSOF ACCOUNTINGINFORMATION
External Users
LendersShareholdersGovernments
Consumer GroupsExternal AuditorsCustomers
Internal Users
ManagersOfficers/DirectorsInternal Auditors
Sales StaffBudget OfficersControllers
C 2
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ExternalUsers
Financial accountingprovides external users
with financial statements.
Internal Users
Managerial accountingprovides information needs
for internal decision-makers.
C 2 USERSOF ACCOUNTINGINFORMATION
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OPPORTUNITIESIN ACCOUNTINGC 2
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Beliefs thatdistinguish right
from wrong
Accepted standardsof good and bad
behavior
Ethics
ETHICS - A KEY CONCEPTC 3
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ETHICS - A KEY CONCEPT
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Financial accounting practice is governed by conceptsand rules known as generally accepted accounting
principles (GAAP).
GENERALLY ACCEPTEDACCOUNTING PRINCIPLES
Relevant Information Affects the decision of its users.
Reliable Information Is trusted by users.
ComparableInformation
Is helpful in contrastingorganizations.
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The Securities and Exchange Commission is thegovernment agency that establishes reporting requirements
for companies that issue stock or shares to the public.
SETTING ACCOUNTING PRINCIPLES
Financial Accounting Standards Boardis the private group that sets both
broad and specific principles.
The International Accounting Standards Board (IASB)issues International Financial Reporting Standards that
identify preferred accounting practices to create harmonyamong accounting practices of different countries.
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INTERNATIONAL STANDARDS
The International Accounting Standards Board (IASB), anindependent group (consisting of 16 individuals from many
countries), issues International Financial Reporting Standards(IFRS) that identify preferred accounting practices.
IASB
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PRINCIPLESAND ASSUMPTIONSOF ACCOUNTING
Cost Principle
Accounting information is based onactual cost. Actual cost is
considered objective.
Revenue Recognition Principle1. Recognize revenue when it is earned.2. Proceeds need not be in cash.3. Measure revenue by cash received
plus cash value of items received.
Matching PrincipleA company must record its expenses
incurred to generate the revenue reported.
Full Disclosure PrincipleA company is required to report thedetails behind financial statementsthat would impact users decisions.
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ACCOUNTING ASSUMPTIONS
Monetary Unit AssumptionExpress transactions and events in
monetary, or money, units.
Business Entity AssumptionA business is accounted for
separately from other businessentities, including its owner.
Time Period AssumptionPresumes that the life of a company can
be divided into time periods, such asmonths and years.
Now Future
Going-Concern AssumptionReflects assumption that the business
will continue operating instead ofbeing closed or sold.
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FORMSOF BUSINESS ENTITIES
SoleProprietorship
Partnership Corporation
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*Proprietorships and partnerships that areset up as LLCs provide limited liability.
CHARACTERISTICSOF BUSINESSES
Characteristic Proprietorship Partnership Corporation
Business entity yes yes yes
Legal entity no no yes
Limited liability no no yesUnlimited life no no yes
Business taxed no no yes
One owner allowed yes no yes
**
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Owners of a corporation are calledshareholders (or stockholders). Shareholders arenot personally liable for corporate acts. When acorporation issues only one class of shares, we
call it ordinary shares (or share capital).
CORPORATIONC 4
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TRANSACTION ANALYSISANDTHEACCOUNTING EQUATION
Assets = Liabilities + Equity
Accounting Equation
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Land
Equipment
Buildings
Cash
Vehicles
StoreSupplies
NotesReceivable
AccountsReceivable
ASSETS
A 1
Resourcesowned or
controlled bya company
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TaxesPayable
WagesPayable
NotesPayable
AccountsPayable
LIABILITIES
Creditorsclaims on
assets
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EQUITY
OwnersClaims onAssets
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LECTURE 2
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TRANSACTION ANALYSIS EQUATION
The accounting equation MUST remain inbalance after each transaction.
Liabilities EquityAssets = +
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TRANSACTION 1: INVESTMENTBY OWNERS
The accounts involved are:(1) Cash(asset)
(2) Owner Capital(equity)
On December 1, Chas Taylor invests$30,000 cash to start a consulting business.
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TRANSACTION 2: PURCHASESUPPLIESFOR CASH
The accounts involved are:
(1) Cash(asset)
(2) Supplies(asset)
Chas Taylors company, FastForwardpurchases supplies paying $2,500 cash.
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TRANSACTION 3: PURCHASEEQUIPMENTFOR CASH
The accounts involved are:
(1) Cash(asset)(2) Equipment(asset)
FastForward purchases equipment for$26,000 cash.
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TRANSACTION 4: PURCHASESUPPLIESON CREDIT
The accounts involved are:
(1) Supplies(asset)
(2) Accounts Payable(liability)
FastForward purchases Supplies of $7,100 onaccount.
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TRANSACTION 5: PROVIDESERVICESFOR CASH
The accounts involved are:
(1) Cash(asset)
(2) Revenues(equity)
The company provides consulting servicesreceiving $4,200 cash.
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TRANSACTION 6AND 7: PAYMENTOF EXPENSESIN CASH
The accounts involved are:
(1) Cash(asset)
(2) Expenses(equity)
The company pays $1,000 rent and $700 insalary to the companys only employee.
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TRANSACTION 8Provide services and facilities for credit
Fastforward provides consulting services of $1,600and rents its test facilities for $300 to a podiayricservice centre.
(1) Account receivable (Asset)
(2) Consulting Service (Revenue)
(3) Rent Service (Revenue)
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TRANSACTION 9Receipt of Cash from accounts receivable
The client in transaction 8 (podiatric centre) pays$1900 to FastForward 10 days after it is billed forconsulting services.
(1) Cash (Asset)
(2) Account receivable (Asset)
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TRANSACTIO 10Payment of accounts payable
FastForward pays CalTech Supply $900 cash aspartial payment for its earlier $7,100 purchase ofsupplies (transaction 4).
(1) Cash (Asset)
(2) Account Payable (Liability)
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TRANSACTION 11Withdrawal of cash by owner
The owner of FastForward withdraws $200 cashfor personal use.
(1) Cash (Asset)(2) Withdrawal (Equity)
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SUMMARYOF TRANSACTIONS
Other transactions were executed during December and the summary ofall transactions is shown below:
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FINANCIAL STATEMENTS
Lets prepare the financial statements reflectingthe transactions we have recorded.
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Income statement (Statement of
comprehensive income) Statement of changes in equity
Balance sheet (Statement of financial
position)
Statement of cash flows
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The income statementdescribes a companys revenues andexpenses along with the resulting net income or loss over a
period of time due to earnings activities.
INCOME STATEMENTP 2
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STATEMENT OF CHANGES IN EQUITYP 2
FASTFORWARD
Statement of Changes in Equity
For Month Ended December 31, 2011
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TheBalance Sheetdescribes a companys financialposition at a point in time.
BALANCE SHEETP 2
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End of Chapter 1