C1 - 1 Learning Objectives 1.What is Business? 2.Business Stakeholders 3.What is Accounting?...

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Learning Objectives1. What is Business?

2. Business Stakeholders

3. What is Accounting?

4. History of accounting

5. The relationship between accounting and bookkeeping

6. What is the role of Accounting in business?

7. Why do the stakeholders need accounting information?

8. Accounting – An information process

9. Users of accounting information

10. Generally Accepted Accounting Principles

11. Types of business organization

12. Types of business

Power Notes Introduction to Accounting and Business Introduction to Accounting and Business

Chapter 1

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What is a business?

• Celcom Axiata, TESCO, McDonalds, Sime Darby• Provision shops, gift shops, beauty salons,

restaurants, law firms, clinics• A business is an organisation in which basic

resources (inputs) are assembled and processed to provide goods or services (outputs) to customers. Customers pay for these goods or services.

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Business stakeholders

• Owners

• Employees

• Customers

• Creditors

• Governments

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What is Accounting?

• Accounting is the process of identifying, measuring, recording and communicating economic information to permit informed judgments and decisions by users of the communication

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The history of Accounting

Accounting began because people needed to :

• Record business transactions

• Know if they were being financially successful

• Know how much they owned and how much they owed

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The relationship between Bookkeeping and Accounting

• Until about 100 years ago all accounting data was kept by being recorded manually in books, so the part of accounting that is concerned with recording data if often known as BOOKKEEPING

• Nowadays although handwritten books may be used (particularly by smaller organizations)most accounting data is recorded electronically and stored electronically using computers

• Bookkeeping is the process of recording data relating to accounting transactions in the accounting books

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What is the role of accounting in business?

• Accounting provides information.

• To who? Owners, managers and other business stakeholders

• What information? How the business is performing

• Accounting is the language of business.

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Why do the stakeholders need accounting information?

• Manager – to decide whether to stop or continue a new product

• Bank – to decide whether to lend money to the business

• Suppliers – to decide whether to sell to the business on credit

• Government – to determine the amount of tax on the business

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Accounting — An Information Process Accounting — An Information Process

Identificationof Users

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UserInformation

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UserInformation

AccountingSystem

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UserInformation

AccountingSystem

Economic Dataand Activities

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UserInformation

AccountingSystem

Reports

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UserInformation

AccountingSystem

Reports

UserDecisions

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EXTERNAL USERS

Financial AccountingFinancial Accounting• investors• creditors• regulators• customers• competitors

• owners• managers• employees

INTERNAL USERS

ManagerialManagerial AccountingAccounting

Users of Accounting InformationUsers of Accounting InformationUsers of Accounting InformationUsers of Accounting Information

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• Internal Users: Those individuals inside a company who plan, organize and run the

business.

Example: Owners interested in profits earned, financial stability and business

growth

Managers need accounting information to guide it in business planning, organizing and control

Employees interested in business stabilities to know whether the owners can pay increased wages and benefits

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• External Users:Individuals and organization outside a company who wants financial

information about the company.

Direct financial interest:Investors who use accounting information to make decision to buy, hold or sell the stockCreditors (suppliers/bankers) use accounting information to evaluate the risk of granting credits or lending money

Indirect financial interest:Government use accounting information for taxes and others regulatory requirements. Public (customers) interested in whether a company will continue to honor products warranties and support its product line

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• Business entity concept

• Historical cost concept

• Objectivity concept

• Unit of measure concept

Generally Accepted Accounting Principles

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Business Entity Concept

BusinessOwner

Business’ cash

• Business is separate from the owner

Owner’s cash

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Historical Cost concept Historical Cost Concept

130,000170,000

175,000

• Transactions are recorded at the cost at the point of transaction

$150,000

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Historical Cost concept Objectivity Concept

130,000

170,000175,000

•Accounting records are based on objective evidence

$150,000

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• Accounting records are based on objective evidence

Objectivity Concept

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Unit of Measure concept

• For example kilogram is used to measure weight

• Money is used for measurement in accounting

Unit of measure Concept

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Types of business organisations

• Sole proprietorship

• Partnership

• Company

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A business is normally organized as one of three different forms:

1.Sole proprietorship / Sole Trader – business is owned by a single or sole owner. The owner is responsible for all the losses and liabilities of the business.

2. Partnership – business is owned at lest (two) owners. The partnership is formed with a partnership agreement.

3. Company / Corporation – A company owned by many owners known as shareholders. A company is formed by statute. Company can divided into two type; limited liability and unlimited liability

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Types of businesses

• Manufacturing business

• Trading business

• Service business

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Learning Objectives

1. The Accounting Equation

2. The relationship between Accounting Equation and the layout of the Balance Sheet

3. The meaning of the term Asset, Liabilities, Capital (Owner’s Equity), Accounts Receivables and Accounts Payable.

4. How accounting transactions affect the items in the accounting equation.

5. The meaning of the revenue and expenses

6. Relationship of the profit to the accounting equation

7. Financial Statement (will be discussed more in Chapter 6)

Power Notes Accounting Classification and Equation Accounting Classification and Equation

Chapter 2

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Assets

Resources = Sources

The Accounting EquationThe Accounting Equation

What are the sources of the assets?

Cost of resources usedin the business

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Assets

Liabilities

Owner’sEquity

Resources = Sources

Cost of resources usedin the business

Resources supplied by

creditors and owners

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Assets = Liabilities and Owner’s Equity

Assets - Liabilities = Owner’s Equity

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RESOURCE SUPPLIED BY THE OWNER

RESOURCES IN THE BUSINESS

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The relationship between Accounting Equation and the layout of the Balance Sheet

• The introduction of capital

On 1 May 2007, B Blake started in business and deposited £60,000 into a bank account opened specially for the business. The balance sheet would show :

B Blake

Balance Sheet as at 1 May 2007

Assets: Cash at banks 60,000

Capital 60,000

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• The purchase of an asset by cheque

On 3 May 2007, Blake buys a small shop for £32,000 paying by cheque

B Blake

Assets

Shop 32,000

Cash at bank 28,00060,000

Capital 60,000

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• The purchase of an asset incurring of a liability

On 6 May 2007 Blake buys some goods for £7,000 from D Smith and agrees to pay from them some time within the next two weeks

B Blake

Assets

Shop 32,000

Inventory 7,000

Less : Account Payable (7,000)

60,000

Capital 60,000

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• Sale of an asset on credit

On 10 May 2007 goods which cost £600 were sold to J Brown for the same amount, the money to be paid letter.

B Blake

Assets

Shop 32,000

Inventory 6,400

Accounts receivable 600

60,000

Capital 60,000

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• Sale of an asset for immediate payment

On 13 May 2007, goods which cost £400 were sold to D Daley for the same amount.

B Blake

Assets

Shop 32,000

Inventory 6,000

60,000

Capital 60,000

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• The payment of liability

On 15 May 2007, Blake pays a cheque for £3,000 to D Smith in the part payment of the amount owing.

B Blake

Assets

Shop 32,000

Inventory 6,000

60,000

Capital 60,000

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• Collection of asset

J Brown who owed Blake £600, makes part payment of £200 by cheque on 31 May 2007.

B Blake

Assets

Shop 32,000

Inventory 6,000

60,000

Capital 60,000

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• What are your assets?

AssetsAssets

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• Resources owned by the business

• Cash, land, buildings, equipment

AssetsAssets

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Assets are economic resources owned by a business that are expected to benefit future operations.

Monetary items.Non-monetary physical things.

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Liability

• Say you borrowed $5 from your friend for lunch. You have a liability or debt of $5. You friend is your creditor.

LiabilitiesLiabilities

Your friendYou

Liability- $5 Your creditor

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• Liabilities are amounts due or the present obligations of a business to pay cash, transfer assets, or provide services to other parties in the future.

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Owner’s equity

• Amounts belonging to the owner.

• Say Sally puts $10,000 into the business. Therefore $10,000 of the business belongs to Sally. Owner’s equity = $10,000

Owner’s EquityOwner’s Equity

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• Owners’ equity represents the claims by the owners of a business to the assets of the business.

• Owners’ equity is the residual equity that remains after deducting liabilities from assets.

• OE = Assets - Liabilities.• Assets = Liabilities + OE.• OE = Contributed Capital + Retained Earnings.

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Account Receivable = Debtor

• Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year.

On a public company's balance sheet, accounts receivable is often recorded as an asset because this represents a legal obligation for the customer to remit cash for its short-term debts

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• An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.

Accounts payable are often referred to as "payables".

Another common usage of AP refers to a business department or division that is responsible for making payments owed by the company to suppliers and other creditors.

Account Payable = Creditor

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HOW ACCOUNTING TRANSACTIONS AFFECT THE ITEMS IN THE ACCOUNTING

EQUATION

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a. Chris Chee deposits $25,000 in a bank account for NetSolutions.

ASSETS

Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions

OWNER’S EQUITY

LIABILITIES

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ASSETS

OWNER’S EQUITYCash Cash 25,00025,000

LIABILITIES

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ASSETS

OWNER’S EQUITYCash Cash 25,00025,000

LIABILITIES

Chris Chris CheeChee, , Capital Capital 25,00025,000

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b. NetSolutions buys land for $20,000.

ASSETS

=OWNER’S EQUITY

LIABILITIES

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (20,000)(20,000)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (20,000)(20,000)

Land Land 20,00020,000

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ASSETS

=OWNER’S EQUITY

LIABILITIES

c. NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Supplies Supplies 1,3501,350

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Accounts PayableAccounts Payable1,3501,350

Supplies Supplies 1,3501,350

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ASSETS

=OWNER’S EQUITY

LIABILITIES

d. NetSolutions earns fees of $7,500, receiving cash.

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash 7,5007,500

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash 7,5007,500

Fees Earned Fees Earned 7,5007,500

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ASSETS

=OWNER’S EQUITY

LIABILITIES

e. NetSolutions paid: salaries, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (3,650)(3,650)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (3,650)(3,650)

ExpensesExpenses(3,650)(3,650)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

f. NetSolutions pays $950 to creditors on account.

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (950)(950)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (950)(950)

Accounts PayableAccounts Payable(950)(950)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

g. At the end of the month, the cost of supplies on hand is $550.

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Supplies Supplies (800)(800)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Supplies Supplies (800)(800)

Supplies ExpenseSupplies Expense(800)(800)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

h. Chris Chee withdraws $2,000 in cash.

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (2,000)(2,000)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (2,000)(2,000)

Chris Chris CheeChee, , DrawingDrawing(2,000)(2,000)

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Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary

ASSETS

= OWNER’S EQUITY

LIABILITIES

CashCash 5,9005,900SuppliesSupplies 550550LandLand 20,00020,000

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ASSETS

= OWNER’S EQUITY

LIABILITIES

Accts. PayableAccts. Payable 400400

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ASSETS

= OWNER’S EQUITY

LIABILITIES

26,45026,450

Accts. PayableAccts. Payable 400400

C. C. CheeChee, Capital, Capital 25,00025,000C. C. CheeChee, Drawing, Drawing (2,000)(2,000)Fees EarnedFees Earned 7,5007,500SalariesSalaries Expense Expense (2,125)(2,125)Rent ExpenseRent Expense (800)(800)Supplies ExpenseSupplies Expense (800)(800)Utilities ExpenseUtilities Expense (450)(450)Misc. ExpenseMisc. Expense (275)(275)

26,05026,050

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The meaning of Revenue and Expenses

• REVENUES

It represent the gross increase in owners’ equity resulting from business activities entered into for the purpose of earning income. Trading businesses derived their revenue from the sale of goods whilst service businesses derived their main form of revenue from the performance of services

• EXPENCES

The cost of assets consumed or services used in the process of earning revenues. A business must incur expenses items which are necessary for the continuing operation of the business but for which no long term benefit will be obtained.

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Relationship of Profit to the Accounting Equation

• Profit is the difference between revenues and expenses

• Since profit belongs to the owner of the businesses, it should be added to the capital of the business.

A = C + P + L

IF PROFIT (P) = REVENUES (R) - EXPENCES (E)

A = C + R - E +L

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The expanded accounting equation is :

ASSET + EXPENCES = CAPITAL + REVENUES +LIABILITIES

(Refer to the page 11 and 12)

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OWNER’S EQUITY

Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity

Owner’s withdrawals

Expenses

decreased bydecreased by

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OWNER’S EQUITY

Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity

Owner’s withdrawals

Expenses

Owner’s investments

Revenues

decreased bydecreased by increased byincreased by

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End of Chapter 1 and 2

C1 - 1 Learning Objectives 1.What is Business? 2.Business Stakeholders 3.What is Accounting?...

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