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REVISION

ACCOUNTING - THE LANGUAGE OF BIZ


Accounting is the information system that...

measures business activities, processes data into reports, and


communicates results to decision makers.

ACCOUNTING ACTIVITIES
Identifying Business Activities

Recording Business Activities


Communicating Business Activities

The accounting process

Economic activities

Accounting links decision makers Accounting with economic information activities & with the results of their decisions
Decision makers

Actions (decisions)

Financial Accounting - Chapter 1

ACCOUNTINGS ROLE IN BIZ


Accounting helps banks decide to whom they will lend money.

Accounting provides information that helps investors pick stocks.

Accounting helps legislators define the effect of law on budgets.

USERS OF ACCOUNTING INFORMATION


External Users Internal Users

Lenders Governments

External Auditors Managers

Sales Staff

Shareholders Customers

Officers

Budget Officers

Internal Auditors Controllers

OVERVIEW OF ECONOMIC ACTIVITIES


Financing Activities
Raising the fund to start the business

Operating Activities
Generating income via sales and services

Investing Activities
Buying resources (assets)
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TYPES OF ACCOUNTING

Tax
Financial Managerial
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ELEMENTS OF FINANCIAL STATEMENTS


Assets; Liabilities; Equity; Revenue; Expenses.

ASSETS
Cash

Accounts Receivable Vehicles

Notes Receivable

Resources owned or controlled by a company


Equipment

Land Buildings

Store Supplies

LIABILITIES
Notes Payable

Accounts Payable

Creditors claims on assets


Taxes Payable

Wages Payable

Other Payable

EQUITY
Owner Investments/ Capital paid- in Owners claims on assets Owner Withdrawals

Retained earnings

COMPONENT OF RETAINED EARNINGS


Revenues for the period

Start of the period Beginning balance of retained earnings

Expenses for the period


= Net income + (or Net loss) or for the period Dividends for the period

End of the period

Ending balance of retained earnings

THE ACCOUNTING EQUATION


ECONOMIC RESOURCES = CLAIMS TO ECONOMIC RESOURCES

Assets
(Economic resources)

Liabilities Owners Equity

Creditors claims Owners claims

ASSETS = LIABILITIES + OWNERS EQUITY

INFO ON THE FINANCIAL STATEMENTS


Question
1.How well did the company perform (or operate) during the period?

Answer
Revenues Expenses = Net income (Net loss) Assets = Liabilities + Owners equity
Operating cash flows Investing cash flows Financing cash flows Increase or decrease in cash during the period

Financial Statement
Income statement

2.What is the companys financial position at the end of the period?


3.How much cash did the company generate and spend during the period?

Balance sheet Statement of cash flows

T-FORM OF CLASSIFIED B/S


City Traders: Statement of financial position as at 30 June 2005 Current assets Cash at bank Debtors Stock 3,000 5,000 20,000 Current liabilities Creditors Loan 5,000 5,000 10,000

28,000 Non-current liabilities

Loan (due 30/6/07) Non-current assets


Office equipment Vehicles Total assets 4,000 18,000 Owners equity 22,000 Capital K.Wilson 50,000 Total liabilities & equity

5,000

35,000

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50,000

NARRATIVE FORM OF CLASSIFIED B/S


Current assets Cash at bank Debtors Stock 3,000 5,000 20,000 4,000 18,000 22,000 $50,000 5,000 5,000 10,000 5,000 35,000 $50,000 28,000

Non-current assets
Office equipment Vehicles Total assets Current liabilities Creditors Loan

Non-current liabilities
Loan (due 30/6/07) Owners equity Capital K.Wilson Total liabilities & equity

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Relationships between statements

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ACCRUAL VS CASH BASIS


Cash Basis Accrual Basis When Earned When Incurred

Revenue is Recognized
Expense is Recognized

When Cash Is Received When Cash Is Paid

Recognition is the process of recording (incorporating) an item into the financial statements as an asset, liability, revenue, expense, etc.

EXAMPLE OF ACCRUAL VS CASH BASIS


Emma prints 30 T-shirts in her first month of trading (May) at a cost of $5 each. She paid all by cash. Emma sells all of them for $10 each, a third in cash and the rest on credit: Cash principle: Profit =

Accrual principle:
Profit =

EXAMPLE OF ACCRUAL & MATCHING


Emma prints 20 T-shirts in her first month of trading (May) at a cost of $5 each. Emma sells all of them for $10 each: Profit =

Emma only sells 18 T-shirts @ $10 each: Profit =

THE ACCOUNT
5 types of Accounts are: Assets, Liability, Equity, Revenue and Expense Assets = Liabilities + Stockholders' Equity

Stockholders' Equity = Paid-in capital + Retained earning


Retained earning = Net income - Dividend

T-ACCOUNTS
Account Title Debit LEFT SIDE
Accounting Equation: Rules of Debit and Credit:

Credit RIGHT SIDE


=
Stockholders + Equity

Assets

Liabilities

Debit Credit

Debit Credit +

Debit Credit +

T - ACCOUNTS
Assets = Liabilities + Owners Equity
Assets
Increases Decreases Liabilities Decreases Increases

Owners Equity Decreases Expense Increases

Revenue

Increases Decreases

Decreases Increases

DOUBLE-ENTRY ACCOUNTING
Vehicles

Cash at bank
Mar 1 Vehicles 18,000 Mar 4 Wages 400

Mar 1 Cash at bank

18,000

Wages
Mar 4 Cash at bank 400

REVENUE AND EXPENSE TRANSACTION


Revenue and expense accounts are a part of Retained Income. Net Income
Profit Loss Expense Credit

Revenue
Debit

Debit Credit Increase Increase

ADJUSTING JOURNAL ENTRY


4 main types of AJEs: Deferred expense: results when cash is paid before expense is incurred (prepaid expenses); Accrued expense: results when expense is incurred before cash is paid (payables); Deferred revenue: results when cash is received before revenue is earned (unearned revenues); Accrued revenue: results when revenue is earned before cash is received (receivables).

END OF REVISION. THANK YOU!

Financial Accounting - Chapter 1

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