What is Accounting II

8/3/2019 What is Accounting II

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Business Transactions and

Accounting Equation


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JOIN KHALID AZIZ

MA ECONOMICS EXTERNALCOACHING CLASSES.

MICRO ECONOMICS, STATISTICS &MACRO ECONOMICS.

GUESS PAPERS ANDNOTES AREAVAILABLE

0322-3385752


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JOIN KHALID AZIZ

ECONOMICS OFICMAP, ICAP, MA-ECONOMICS, B.COM.

FINANCIAL ACCOUNTINGOFICMAP STAGE1,3,4 ICAP MODULE B, B.COM, BBA, MBA &PIPFA.

COST ACCOUNTINGOFICMAP STAGE 2,3ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT: 0322-3385752 R-1173,ALNOOR SOCIETY


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Outline

Enterprises

Accounting Transactions, Accounting

Events, and Accounting Circumstances Economic Activities and Accounting

Elements

Accounting Equation


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Opening Story

Funding and Spending at College

Assets of a college student

Cash

CD player

Computer

Funding these assets

Sponsored by parents Sponsored by relatives

Borrowed from relatives and acquaintance


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Opening Story (continued

We could deal with the above-mentionedfinancial issues from the following perspectives

How do we fund our daily expenditures and

possessions How do we spend the funds which we have sourced

What about the relationship between the fundswhichwe have sourced and our daily expenditures and

possessions


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Forms of Enterprise

There are three major forms of enterprise:

Sole-proprietorship

PartnershipCorporations


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Sole proprietorships

Single person owns the business

Not separate from its owner in terms of

responsibility and liability The business is the owner and the owner

is the business


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Partnership

Owned by two or more people

Similar to a sole proprietorship

Not separate from the owners in terms ofresponsibility and liability


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Corporations

Legally separate and financially separatefrom the owners

Ownership in a corporation is divided intounits called shares of capital stock

Owners are called shareholders orstockholders

Corporations are separate legal entities


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Characteristics of Enterprise


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Four Types of Enterprise

Service organization provides services (doessomething for you) rather than selling something

Merchandising business buys goods, adds

value to them, then sells them to customers

Manufacturer makes the products it sells

Financial services company doesnt make

tangible products and doesnt sell productsmade by other companies; deals in servicesrelated to money


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Resources in an Enterprise

Major resources

Human resources

Properties,plant and equipment,supplies, rawmaterials, finished products or inventories

Financing

In cash or bank deposits

In material forms


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An example-Beauty Photo Store

Movements of Material Resources

in an Enterprise


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Movements of Material Resources

in an EnterpriseMovements in a manufacturingenterprise cash/bank depositraw materials work-in-

processfinished productsfincash/bankdeposit

Movements in a merchandisingenterprise

cash/bank depositinventory cash/bankdeposit


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Activities of Enterprise

Three major phases of businessactivities:

InceptionOperating

Liquidation


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Inception and investment of funds

External funding

State, legal persons, privates or foreign

investors

Financing from banking institutions, other legal

persons or privates

Ownersequity and liabilities

Inception of Enterprise

InvestmentInvestment

of ownersof ownersFinancing ofFinancing of

creditorscreditorsTotal funds of a firmTotal funds of a firm


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Inception of Enterprise

Forms ofInvestment

Monetary(cash/bank deposits)

Property, plants and equipment Raw materials and goods,etc.

Sources and changes of funds

Increase of ownersequity or liabilities

Increase of assets


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Operating activities and changes of asset

Changes of assets in Beauty Photo Store

Connections between Beauty Photo Store and

Suppliers, clients, etc.

Operating Activities

cashcash

2 cameras2 cameras

lenslens

producingproducingequipmentequipment

suppliessupplies

photosphotos cashcash


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Liquidation of Enterprise

Liquidation of enterprise and payoff offunds Payment of taxes

Distribution of profits Declaration of dividends

Payoff of borrowings

Withdrawals and changes of funds Decrease of assets

Decrease of liabilities or ownersequity


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Accounting Transactions

A business transaction is an event that

affects the financial position of a business

and may be reliably recorded


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Economic Activities and AccountingElements

Accounting element

Uses of funds and assets

cash equipment,etc.

Resources of funds and equity Borrowings and equity of creditors-liabilities

Investments and ownersequity


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Uses ofFunds

Uses and changes of funds

Beauty Photo Store

From cash to equipment Using equipment to produce photos

From photos to cash


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Circulation ofFunds

Circulation of funds:

Uses of funds

Beauty Photo Store Cost of equipment

Cost of supplies

Human costs

Uses and payoff of funds What are the operating purposes for

Beauty Photo Store


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Payoff ofFunds

Payoff ofFunds and Revenues

Cash receptions and revenues by BeautyPhoto Store

Net increase of funds and profit

Difference between uses and payoff ofcash

Nature of profit?


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Accounting Transactions

Accounting transactions-Economicexchange between two differentaccounting entities

Mutual exchange

A purchases an asset,paying cash or bearing theresponsibility of paying cash in future

B sells the asset, earning the rights of receiving orcollecting cash

One-way transaction

Investments or donations to another accounting

entity


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Accounting Events

Accounting events-internal transferring ofresources among departments of a sameentity

allotments of raw materials for plants

Damages caused by earthquakes

External versus internal events

Between different entities

Within a same entity


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Accounting Circumstances

Accounting circumstances-usually an outcomeof collaboration of multiple events

Circumstances and their impacts

Changes in prices,exchange rates

How to determine these changes

E.g. uncollectability of receivables due to the

liquidation of the debtor Unpredictability


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Accounting Elements

Assets

Liabilities

Ownersequity Revenues

Expenses

Profits


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Further Thoughts on Assets

Human resources as an asset

Value and labor of Manager of Beauty PhotoStore

Cameramen and shop

assistants

Natural resources as an asset?


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Liabilities

Liabilities are creditors claims to theassets. Liabilities are obligations to

outsiders


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OwnersEquity

Owners Equity is the owners claim tothe assets. It is the amount of assets

that remains after subtracting theliabilities.


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Revenue

Revenues (sales) are increases in owners'equity arising from increases in assetsreceived in exchange for the delivery ofgoods or services to customers.

Revenues are increases in economicresources, either through increases to

assets or reductions to liabilities


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Revenue Recognition

Revenue should be recognized in the financial

statement when:

the performance has been achieved

there is reasonable assurance regarding themeasurement and collectability of theconsideration


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Expense

Expenses are decreases in owners' equity thatarise because goods or services are delivered tocustomers.

Expenses are decreases in economic resources,either through outflows or the using-up of assetsor incurrence of liabilities from delivering orproducing goods, rendering services, or carryingout other activities that constitute the entitysnormal business


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Expense Recognition

Cost, expenditure, and expense

General recognition criteria

Approaches to expense recognition


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General Recognition Criteria

Recognized items must:

meet the definition of a financial statementelement

have a valid measurement basis and amount

Financial statement elements are based

on future economic benefits or sacrifices;these must be probable for recognition tobe appropriate


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General Recognition Criteria (cont)

Expenses are decreases in economicresources, either by way of outflows orreductions of assets or incurrence of

liabilities, resulting from an entitysordinary revenue generating or servicedelivery activities [CICA 1000.38]

Asset or expense? if the asset recognitioncriteria are met, an asset is recorded. Ifnot, an expense is recorded


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Approaches toExpense Recognition

Definitional approach: expenses arecreated either through the reduction of anasset or the increase in a liability

Matching approach: once revenues aredetermined in conformity with the revenueprinciple for any reporting period, the

expenses incurred in generating therevenue should be recognized in thatperiod


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Profit / Loss

Income (profit or earnings) is the excess ofrevenues over expenses


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Accounting Equation

Assets Liabilities = Owners Equity

Net Assets = Owners Equity

Every accounting transaction has an equal affect

on both sides of the equation. Purchase a $20,000 car for cash.

Increase asset car and decrease asset cashby $20,000. No net change to assets.

Purchase a $20,000 car on credit. Increase asset car and increase liabilities by

$20,000.


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Dual Aspect of

Accounting Equation Assets = Liabilities + Owners equity. LHS = RHS.

First view:

Resources = Obligations to creditors or claims onresources + Residual claim.

Second view:

Amounts invested in resources = how these

amounts were financed. Resources = financed by creditors + financed by

owners.


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Changes to the accounting equation ofBeauty Photo Store

Beauty Photo Store

-- AnI

llustration

Asset:130000Asset:130000 Liability:30000Liability:30000 Equity:100000Equity:100000

Liabilities30000Liabilities30000Owners equityOwners equity

10000010000060006000

AssetsAssets130000130000150001500090009000

Profit:6000Profit:6000Revenue:15000Revenue:15000 Expense:9000Expense:9000


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Summary

Economic resources in the enterprise-human,financial and material resources

Economic transactions derive from the operatingactivities of an enterprise

Accounting elements are basic components ofeconomic transactions

Accounting elements comprise ofassets,liabilities, ownersequity, revenues,

expenses and profit Economic transactions are viewed in the formsof increase or decrease in accounting elements

Accounting equationALOE


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Case forDiscussion

Marks and Spencer In 1882, a Russian refugee named Michael Marks came

to the North East of England. Needing work, he put atray round his neck and started selling haberdashery inthe villages around Leeds. Two years later he borrowed5 from his friend Isaac Dewhirst to buy stock, and wasable to open a stall in Leeds market.

Within ten years Markss success as a trader hadenabled him to establish a chain of stalls in marketsthroughout North East England. In 1894, Marks realized

that his business was getting too large for him tomanage effectively on his own. He decidedto form a partnership withTom Spencer and Marks& Spencer was born.


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Case forDiscussion (cont)

The business continued to thrive and grow, so in 1903 Marksand Spencer registered their partnership as a private limitedcompany. This allowed more people to become involved withmanaging the growing company and increase its finances bybuying shares in the company. One shareholder was Israel

Sieff, who became chairman of the company in 1917. Sieffcan be credited with shaping the future of Marks & Spencer.By 1926, Marks & Spencer had opened 125 stores. In order tocontinue its successful development the company finallyregistered as a public limited company (plc) in order to obtainas much capital as possible to finance its continued growth.

And the rest, as they say,is history.


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Attention Commerce Students

ACCOUNTING(FINANCIAL & COST) OF

ICMAP STAGE 1,2,3,4 (NEW CLASSES)

CA..MODULE B,C,D

PIPFA (FOUNDATION,INTERMEDIATE,FINAL)

ACCA-F1,F2,F3BBA,MBA

B.COM(FRESH),M.COM

MA-ECONOMICS..O/A LEVELS

KHALID AZIZ..0322-3385752http://finance.groups.yahoo.com/group/cost-

accountants

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What is Accounting II