20140217160231chapter 1-The Basic Framework-chapter1

THE BASIC FRAMEWORKChapter 1

INTRODUCTORY ACCOUNTINGINTRODUCTORY ACCOUNTINGPAF3023PAF3023

THE MOST IMPORTANT THINGS IN LIFE IS FREE

TODAY’S INSPIRATION

PEOPLE AND BUSINESSi. Accounting is something that effect people in their personal lives just as it affects business.

RECORDING ACCOUNTING DATAii. They cannot keep all the details in their minds so they have to keep record of its. -organization record cash received and paid, record goods bought and sold.

WHAT IS ACCOUNTING

CLASSIFYING AND SUMMARISINGiii. Data being organized so as to be most useful to the business. -so as it will be possible to work out how much profit or loss has been made by the business. - possible to show what resources are owned, what resources are owned by the business.

COMMUNICATING INFORMATIONiv. Be able to tell whether or not the business is performing well financially -able to ascertain the strengths and weaknesses of the business.

What is Accounting?

LO 1 Explain what accounting is.LO 1 Explain what accounting is.

The purpose of accounting is to:(1)(1) identifyidentify, recordrecord, and communicatecommunicate

the economic events of an(2) organization to(3) interested users.

Three ActivitiesWhat is Accounting?

LO 1 Explain what accounting is.LO 1 Explain what accounting is.

Illustration 1-1Accounting process

The accounting process includes the bookkeeping function.

WHAT IS BOOKKEEPING

Bookkeeping is a part of accounting that is concerned with recording data.

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

USER OF ACCOUNTING INFORMATION

Owner of the businessA prospective buyerThe bankTax inspectorA prospective partnerInvestorsSuppliersEmployees

Management

Common Questions

Human Resources

IRS

Labor Unions

SECMarketin

g

Finance

Investors

Creditors

Who Uses Accounting Data?

LO 2 Identify the users and uses of accounting.LO 2 Identify the users and uses of accounting.

Customers

Internal Users

External Users

Common Questions Asked User1.Can we afford to give

our employees a pay raise?

Human Resources

2. Did the company earn a satisfactory income?

3. Do we need to borrow in the near future?

4. Is cash sufficient to pay dividends to the stockholders?

5. What price for our product will maximize net income?

Who Uses Accounting Data?

LO 2 Identify the users and uses of accounting.LO 2 Identify the users and uses of accounting.

6. Will the company be able to pay its short-term debts?

Investors

ManagementFinance

Marketing

Creditors

The Building Blocks of AccountingEthics In Financial Reporting

LO 3 Understand why ethics is a fundamental business conceptLO 3 Understand why ethics is a fundamental business concept.

Standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics.

Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others.

Congress passed Sarbanes-Oxley Act of 2002.

Effective financial reporting depends on sound ethical behavior.

THE ACCOUNTING EQUATION

i. The whole of financial accounting based upon this simple idea which known as accounting equation.

ii. Resources supplied by owner = capital Actual resources that are in the business = assets that is: CAPITAL = ASSETS

Liabilities

iii. If people other than the owner have supplied asset we call it as liabilities.

Means liabilities is the amount business owe for these assets.

Assets LiabilitiesLiabilities Owners’ Owners’ EquityEquity= +

Provides the underlying framework for recording and summarizing economic events.

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership claims.

The Basic Accounting Equation

LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.





Resources a business owns.Provide future services or benefits.Cash, Supplies, Equipment, etc.

Assets





Claims against assets (debts and obligations).Creditors - party to whom money is owed.Accounts payable, Notes payable, etc.

Liabilities





Ownership claim on total assets.Referred to as residual equity.Capital, Drawings, etc. (Proprietorship or Partnership).

Owners’ Equity

Owners’ Equity

Revenues result from business activities entered into for the purpose of earning income.

Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.

Illustration 1-6


Owners’ Equity

Expenses are the cost of assets consumed or services used in the process of earning revenue.

Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc.

Illustration 1-6


Using The Basic Accounting Equation

Transactions are a business’s economic events recorded by accountants.

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the accounting equation.

LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.

P1-1A:P1-1A: Barone’s Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May.

Transactions (Problem)

+10,000

1. +10,000

CashAccounts

Receivable EquipmentAccounts Payable

Barone, Capital


+ + = +

1. Invested $10,000 cash to start the repair shop.

Investment

Assets Liabilities Equity


+10,000

1. +10,000

CashAccounts


Barone, Capital


2. Purchased equipment for $5,000 cash.

-5,0002. +5,000

+ + = +Investment



+10,000

1. +10,000

CashAccounts



3. Paid $400 cash for May office rent.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

Barone, Capital

Investment



+10,000

1. +10,000

CashAccounts



4. Received $5,100 from customers for repair service.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu

e

Barone, Capital

Investment



+10,000

1. +10,000

CashAccounts



5. Withdrew $1,000 cash for personal use.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu

e-1,0005. -1,000 Drawings

Barone, Capital

Investment



+10,000

1. +10,000

CashAccounts



6. Paid part-time employee salaries of $2,000.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu

e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense

Barone, Capital

Investment



+10,000

1. +10,000

CashAccounts



7. Incurred $250 of advertising costs, on account.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu


+2507. -250 Expense

Barone, Capital

Investment



+10,000

1. +10,000

CashAccounts



8. Provided $750 of repair services on account.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu


+2507. -250 Expense+7508. +750 Revenu

e

Barone, Capital

Investment



+10,000

1. +10,000

CashAccounts



9. Collected $120 cash for services previously billed.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu


+2507. -250 Expense+7508. +750 Revenu

e+1209. -120

Barone, Capital

Investment


6,820 + 630 + 5,000 = 250 + 12,200

EQUALITY OF THE ACCOUNTING EQUATION

Every transaction has effected two items.

Sometimes it changed the assets side and the capital side.

Sometimes it has changed two assets by reducing one and and increasing the other.

Number of transaction as

above

Assets Capital and liabilities

Effects on balance sheet totals

12

34

5

67

++-++-+--+-

+

+

-

Each side added equally.A plus and a minus both on the assetsside cancelling out each other.Each side has equal additions.A plus and a minus both on the assets side cancelling out each other.A plus and a minus both on the assets side cancelling out each other.Each side has equal deductions.A plus and a minus both on the assets side cancelling out each other.

EQUALITY OF THE ACCOUNTING EQUATION

Example of transaction Effect Effect

1. Owner pays capital into the bank2. Buy goods by cheque.

3.Buy goods on credit

4. Sale of goods on credits

5.Sale of goods for cash (cheque)

6. Pay creditor

7.Debtors pays money oeing by cheque.

Increase asset(bank)

Decrease asset(bank)

Increase asset(stock of goods)Decrease asset

(stock of goods)Decrease asset

(stock of goods)Decrease asset

(bank)Increase asset

(bank)

Increase capital

Increase asset(stock of goods)Increase liability

(creditor)Increase asset

(debtors)Increase asset

(bank)Decrease liability

(creditor)Decrease asset

(debtors)

Companies prepare four financial statements from the summarized accounting data:

Balance Sheet

Income Statemen

t

Statement of Cash

Flows

Owners’ Equity

Statement

Financial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

THE BALANCE SHEET AND THEEFFECTS OF BUSINESS TRANSACTIONS

• Balance sheet shows the financial position of an organisation at a point in time.

The introduction of capital

• On 1 May 20x7, B Blake started in business and deposited RM5,000 into a bank account opened specially for the business

The introduction of capital

B BlakeBalance Sheet as at 1 May 20x7

Assets RMCash at bank 5,000Capital 5,000

The purchase of an asset by cheque

• On 3 May 20x7, B Blake buys a building for RM3,000 paying by cheque.

• The effect by this transaction on the balance sheet is that the cash at the bank is decreased and the new asset, building is added;

The purchase of an asset by cheque


Assets RM Building 3,000 Cash at bank 2,000

5,000Capital 5,000

The purchase of an asset and the incurring of a liability

• On 6 May 20x7, Blake buys some goods for RM500 from Smith and agrees to pay for them some time within the next two weeks.

• The effect of this is that a new asset, stock of goods, is acquired, and a liability for the good is created.

• A person to whom money is owed for goods is known as creditor.

The purchase of an asset and the incurring of a liability


Assets RM Building 3,000Stock of goods 500Cash at bank 2,000Capital 5,500Less: creditor ( 500)

5,000Capital 5,000

End – Chapter 1

Documents

20140217160231chapter 1-The Basic Framework-chapter1