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THE BASIC FRAMEWORKChapter 1
THE BASIC FRAMEWORKChapter 1
PERAKAUNAN AWALANPERAKAUNAN AWALANPAF1013PAF1013
PERAKAUNAN AWALANPERAKAUNAN AWALANPAF1013PAF1013
THE MOST IMPORTANT THING IN LIFE IS FREETHE MOST IMPORTANT THING IN LIFE IS FREE
INSPIRASI HARI INIINSPIRASI HARI INI
PEOPLE AND BUSINESSi. Accounting is something that effect people in their personal lives just as it affects business.
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.
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 ACCOUNTINGWHAT 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.
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.
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?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 Activities
What is Accounting?What 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 INFORMATIONUSER OF ACCOUNTING INFORMATION
Owner of the businessA prospective buyerThe bankTax inspectorA prospective partnerInvestorsSuppliersEmployees
Owner of the businessA prospective buyerThe bankTax inspectorA prospective partnerInvestorsSuppliersEmployees
Management
Common Questions
Human Resources
IRS
Labor Unions
SEC
Marketing
Finance
Investors
Creditors
Who Uses Accounting Data?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?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
Management
Finance
Marketing
Creditors
The Building Blocks of AccountingThe Building Blocks of Accounting
Ethics 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 EQUATIONTHE ACCOUNTING EQUATION
i. The whole of financial accounting based upon this simple idea which known as 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
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.
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.
AssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwners’ Owners’ EquityEquity
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 EquationThe 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.
AssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwners’ Owners’ EquityEquity
Owners’ Owners’ EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
The Basic Accounting EquationThe 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.
AssetsAssets
AssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwners’ Owners’ EquityEquity
Owners’ Owners’ EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
The Basic Accounting EquationThe 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.
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
LiabilitiesLiabilities
AssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwners’ Owners’ EquityEquity
Owners’ Owners’ EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
The Basic Accounting EquationThe 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.
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or Partnership).
Owners’ EquityOwners’ Equity
Owners’ EquityOwners’ 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
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.
Owners’ EquityOwners’ 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
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.
Using The Basic Accounting EquationUsing 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)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
Barone, Capital
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
+ + = +
1. Invested $10,000 cash to start the repair shop.
Investment
Assets Liabilities Equity
Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
Barone, Capital
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
2. Purchased equipment for $5,000 cash.
-5,0002. +5,000
+ + = +
Investment
Assets Liabilities Equity
Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
3. Paid $400 cash for May office rent.
-5,0002. +5,000
+ + = +
-4003. -400 Expense
Barone, Capital
Investment
Assets Liabilities Equity
Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
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
Assets Liabilities Equity
Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
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
Assets Liabilities Equity
Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
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
Assets Liabilities Equity
Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
7. Incurred $250 of advertising costs, on account.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
+2507. -250 Expense
Barone, Capital
Investment
Assets Liabilities Equity
Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
8. Provided $750 of repair services on account.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
+2507. -250 Expense+7508. +750 Revenu
e
Barone, Capital
Investment
Assets Liabilities Equity
Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
9. Collected $120 cash for services previously billed.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
+2507. -250 Expense+7508. +750 Revenu
e+1209. -120
Barone, Capital
Investment
Assets Liabilities Equity
6,820 + 630 + 5,000 = 250 + 12,200
EQUALITY OF THE ACCOUNTING EQUATIONEQUALITY 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.
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
1
2
3
4
5
6
7
+
+
-
+
+
-
+
-
-
+
-
+
+
-
Each side added equally.
A plus and a minus both on the assets
side 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 EQUALITY OF THE ACCOUNTING EQUATION
Example of transaction Effect Effect
1. Owner pays capital into the bank
2. 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:Companies prepare four financial statements from the summarized accounting data:
Balance Sheet
Income Statemen
t
Statement of Cash
Flows
Owners’ Equity
Statement
Financial StatementsFinancial 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 Blake
Balance Sheet as at 1 May 20x7
Assets RM
Cash at bank 5,000
Capital 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
B Blake
Balance Sheet as at 3 May 20x7
Assets RM
Building 3,000
Cash at bank 2,000
5,000
Capital 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
B Blake
Balance Sheet as at 6 May 20x7
Assets RM
Building 3,000
Stock of goods 500
Cash at bank 2,000
Capital 5,500
Less: creditor ( 500)
5,000
Capital 5,000
End – Chapter 1