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Governing bodies influencing GAAP
Financial Accounting standards boards
Securities and exchange commission
American institute of certified public accountants
FASB emerging tasks force
Cost accounting standard board
Internal revenue service
American accounting Association
International accounting standards board
Governmental accounting standard board
Public company accounting oversight board
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Accounting equation and double entry system
Classification of Accounts:
Permanent Account
Temporary Account
All assets, liabilities and stockholders equity
All revenues and expenses
Permanent Account Temporary Account
(Debit) Increase
(Credit) Decrease
(Debit) Decrease
(Credit) Increase
(Debit) Decrease
(Credit) Increase
(Debit) Decrease
(Credit) Increase
(Debit) Decrease
(Credit) Increase
(Debit) Increase
(Credit) Decrease
(Debit) Increase
(Credit) Decrease
Assets = Liabilities + Stockholder’s Equity
Asset Accounts Liability Accounts Capital Stock Accounts
Retained Earnings
Revenue Accounts
Expense Accounts
Dividend Accounts
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Accounting Cycle
* Income statements, Owners’s equity statements, Balance Sheet
Analyze business transactions
Journalize the transactions
Post to ledger
accounts
Prepare a trial balance
Journalize and post adjusting entries: Deferrals/ Accruals
Prepare an adjusted trial
balance
Prepare Financial
statements*
Journalize and post
closing entries
Analyze business
transactions
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9 1
2
3
4
5
6
7
Optional Steps: If a worksheet is prepared, steps 4, 5 and 6 are incorporated in the worksheet. If reversing entries are prepared, they occur between steps 9 and 1 as discussed below.
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Forms of Business Organization
Partnerships
Corporations
Sole Proprietorship
Owned by single person (proprietor) and owner is personally liable for debts of business
Unincorporated business jointly owned by two or more people, which is not a separate legal entity
Perpetual separate legal entity, with limited liability, where ownership exist in transferrable shares.
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Key Financial Statements
Income Statement
The income statement shows a company’s revenue, expenses,
gains and losses appear on this financial
statement.
Balance Sheet
The balance sheets lists the company’s assets, liabilities and equity
Cash Flow Statement
This financial statement reveals how a company
is bringing in and spending its cash.
Partnership
Partner’s equity is used instead of Owner's Equity
and listed separately
Proprietorship
The equity section contains only the equity of
the proprietor
Corporation
Shareholders equity is divided into capital stock
and retained earnings.
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Income Statement
Revenue Cost of goods sold
Gross Profit Operating Expense
Non-Operating Income
Operating Income
Components of Income Statement
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Pro forma: Income Statement Multi-step income statement
Ruth's Place
Income Statement
For Year Ended December 31, 2001
Sales
Less: Sales discounts -
Net sales -
Cost of goods sold
Gross profit -
Operating expenses:
Selling expenses:
Total selling expenses -
General and administrative expenses:
Total general and administrative expenses
Total operating expenses -
Net income
-
$
-
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Main Components of Balance Sheet
• Assets are economic resources that are owned by a business and are expected to benefit future operations.
• Examples: buildings, machinery, accounts receivable.
• Valued at cost value... that is what you paid for the asset, not what it is worth today.
Assets
• Debts of a business
• All businesses have debts. It is convenient to buy with credit
• The purchase of goods of services for credit is an account payable
• When money is borrowed it is a note payable
Liabilities • Represents the resources
invested by the owner
• Residual claim because claims of creditors come first
• Equal to the total assets minus the total liabilities
• Increase in Owner's Equity comes from Investment and Earnings
• Decreases come from Withdrawals and Losses
Owners’ Equity
Assets Liabilities Owner's Equity
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Performa: Balance Sheet Note As at 31 December
2011 2010
ASSETS
Non-current assets
Property, plant and equipment
Intangible assets
Deferred income tax assets
Trade and other receivables
Total non-current assets 0 0
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents (excluding bank overdrafts)
Total current assets 0 0
TOTAL ASSETS 0 0
EQUITY AND LIABILITIES
Equity
Share capital
Share premium
Other reserves
Retained earnings
Total equity 0 0
Liabilities
Non-current liabilities
Borrowings
Deferred income tax liabilities
Provisions for other liabilities and charges
Total non-current liabilities 0 0
Current liabilities
Trade and other payables
Current income tax liabilities
Borrowings
Provisions for other liabilites and charges
Total current liabilities 0 0
Total liabilities 0 0
TOTAL EQUITY AND LIABILITIES 0 0
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Journal Entry
An amount entered on the right side of an account, which cause
increase in revenue and gains and decrease in assets and expenses
Each bookkeeping or accounting entry will involve at least two accounts: at
least one account will be debited, one account will be credited.
An amount entered on the left side of an account, which causes increase in assets and expenses and decrease in liabilities and revenue.
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Basic Ledgers Used in Accounting
Accounts Receivable
Accounts Payable
Notes Receivable
Petty Cash Account
Cash Account
Inventory
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Accounts Receivable
Accounts Receivable
Journal entry to create allowance for doubtful account
Uncollectible Accounts Expense XXX
Allowance for Doubtful accounts XXX
Allowance for Doubtful Accounts will appear on the balance sheet as a deduction from A/R
Accounts Receivable XXX
Allowance for doubtful accounts XXX
Final A/R Amount XXX
Journal entry to record bad debt entry
Allowance for Doubtful Accounts XXX
Accounts Receivable (Simons) XXX
Any product sold on credit creates an asset which is yet to receive , thus termed as Account Receivable.
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Cash Account and Cash Management
Listed first because it is available to meet obligations.
Assets are listed in order of liquidity and it is most liquid asset.
Some short term investments are combined with cash on the balance sheet because of
their liquidity.
Creditors are interested in how cash compares with accounts payable, i.e.
Solvency
Cash Account
Creation of Petty cash Funds Petty Cash XXX Cash XXX
Replenishing Cash Funds
Office Supply Expenses XXX Entertainment Expense XXX Cash XXX