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Transcript of FA CHAP - 1
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2001 Prentice Hall Business
Publishing Financial Accounting,4/e Harrison & Horngren1
FUNDAMENTALS OF
ACCOUNTANCY
MODULE1
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INTRODUCTION Accounting is as old as money itself.
"Double Entry System was developed in Italy in
the 15th Century.
The first known description of the system waspublished there in 1494 by a Franciscan monk
by the name Luca Pacioli.
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Industrial Revolution increased the
necessity of the accounts
Accounting is aptly called the language ofbusiness
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A recent study conducted in United States revealed
that the most common background of chief
executive officers in United States corporations wasfinance and accounting. Interviews with several
corporate executives drew the following comments.My training in accounting and auditing practice has been extremely
valuable to me throughout.
"Knowledge of accounting carries with it understanding of the establishment
and maintenance of sound financial controls- an area which is absolutely
essential to a chief- executive officer."
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Accounts is needed ??... To know the profit or loss
To know the financial position
To know
the financial soundness
To make financial decisions
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DEFINITION OF ACCOUNTING
Accounting has been defined by the
American Accounting Association
Committee as the process of identifyingmeasuring and communicating economic
information to permit informed judgments
and decisions by users of the information.
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Definitions of AccountingAccounting has been defined by the
American Accounting Association
Committee as the process of identifyingmeasuring and communicating economic
information to permit informed judgments
and decisions by users of the information.
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The American institute of certified and public
accountants committee on terminology defined
accounting in 1961 as: accounting is the art of
recording, classifying and summarizing in asignificant manner and in terms of money
transaction and events which are, in part at least
of financial character and interpreting the results
thereof.
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ACCOUNTING - THE BASIS
OF DECISION MAKINGAccounting is the language of business
Accounting is the information system that
Measures business activities
Processes that information into reports
Communicates the results to decision makers
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THE ACCOUNTING SYSTEM:
THE FLOW OF INFORMATION
1. People make decisions
2. Business transactions occur
3. Businesses prepare reports to show theresults of their operations
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ACCOUNTING VS.
BOOKKEEPING Bookkeeping is the procedural element
of accounting that processes the
accounting data
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Individuals
Businesses Investors and Creditors
Government Regulatory Agencies
Taxing Authorities
Nonprofit Organizations
DECISION MAKERS WHO USE
ACCOUNTING INFORMATION
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ACCOUNTING PRINCIPLES
AND CONCEPTS Generally accepted accounting principles
(GAAP) are
The rules that govern how accountants
operate
Based upon a conceptual framework written
by the Financial Accounting Standards Board(FASB)
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ACCOUNTING PRINCIPLES
AND CONCEPTS The FASB works with the SEC (Securities
and Exchange Commission) and the
AICPA (American Institute of CertifiedPublic Accountants)
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ACCOUNTING CONCEPTS
Money Measurement Concept.
Business Entity Concept.
Going Concern Concept.
Cost Concept. Dual Aspect Concept.
Accounting Period Concept.
Matching Concept.
Realization Concept: Accrual Concept.
Objective Evidence Concept.
Legal aspect concept
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ACCOUNTING PRINCIPLES
AND CONCEPTS The entity concept
States that an organization is an
economic entity that keeps its affairsseparate from those of the owner(s)
The reliability (objective) principle
States that accounting records andstatements are based on the most reliabledata available and documented by objectiveevidence
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ACCOUNTING PRINCIPLES
AND CONCEPTS The cost principle
States that acquired assets and services
should be recorded at their actual (historical)cost and should maintain that historical cost
for as long as they are owned
The going-concern concept States that the entity will remain in operation
for the foreseeable future
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ACCOUNTING PRINCIPLES
AND CONCEPTS DUAL ASPECT CONCEPT: This is the
basic concept in -accounting. Every
transaction has two aspects namely (a)the receiving aspect and (b) the giving
aspect.
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ACCOUNTING CONVENTIONS
Convention Of Materiality Convention Of Conservatism
Convention Of Consistency
Convention Of Full Disclosure
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Convention Of Materiality
This convention means that in accounting
a detailed record is made of only those
business transactions which are material(i.e. important). Material means significant.
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Convention Of Conservatism
According to this convention Financial
Statements are drawn up conservatively.
Showing a position better than what is or showing a dismal picture, though the
position is good, is not permitted.
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Convention Of Consistency
The convention of consistency signifies
that the accounting practices and methods
should remain consistent (i.e., unchanged)from one accounting year to another.
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Convention Of Full Disclosure
The convention of full disclosure means,
that all material facts must be disclosed in
the financial statements.
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THE ACCOUNTING EQUATION The accounting equation presents the
resources of the business and the claims
to those resources
Economic Resources = Claims to Economic Resources
Assets = Liabilities + Owners Equity
or
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INFORMATION REPORTED
ON THE FINANCIAL
STATEMENTS
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INCOME STATEMENT
The income statement (statement of
earnings) reports the companys
revenues, expenses, and net income ornet loss for the period
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A IR & S E A T R A V E L , IN C .In c o m e S t a te m e n t
M o n t h E n d e d A p r il 3 0 , 2 0 0 1
R e v e n u e :S e r v ic e r e v e n u e $ 8 ,5 0 0
E x p e n s e s :S a la r y e x p e n s e $ 1 ,2 0 0R e n t e x p e n s e 1 ,1 0 0U t i l i t ie s 4 0 0T o ta l e x p e n s e s 2 ,7 0 0
N e t In c o m e $ 5 ,8 0 0
INCOME STATEMENT
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Revenues are
Increases in retained earnings from delivering
goods or services to customers or clients
Expenses are
Decreases in retained earnings that result
from operations
INCOME STATEMENT
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Expenses include
Cost of goods sold (cost of sales)
The cost of the goods that a company sold to itscustomers
Operating expenses
The costs of operating the business
INCOME STATEMENT
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Operating expenses
Advertising
The cost to promote the companys products
Depreciation The expense of using company-owned buildings,
equipment, and furniture
Other operating expenses
The costs of salaries, utilities, rent, and supplies Interest expense
The cost of borrowed money
INCOME STATEMENT
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BALANCE SHEET
The balance sheet (statement of financial
position) reports the companys assets,
liabilities, and owners equity
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BALANCE SHEET
Liabilities Rs. Assets Rs.
Equity Share Capital (5000shares of Rs.lOO each) 5,00,000 Goodwill 30,000
Reserve Fund 1,00,000 Building 3,00,000P & LAIc 50,000 Machinery 2,70,000
10% debentures 2,00,000 Investments 1,50,000
Creditors 1,00,000 Stock 2,00,000
Dividend Provision 50,000 Debtors 60,000
Tax Provision 50,000 Cash 40,000
10,50,000 10,50,000
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ASSETS
Current assets are Those assets which the company expects to
convert to cash, sell, or consume during the next12 months orwithin the business's normaloperating cycle if longer than a year
Current assets include Cash
Accounts receivable
Merchandise inventory
Prepaid expenses
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ASSETS
Long-term assets are
Those assets which the company expects to
hold longer then the next 12 months or thebusinesss normal operating cycle if longer
than one year
Long-term assets include Property
Equipment
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ASSETS
Intangible assets are
Those with no physical form
Trademarks
Patents
Other assets are
Those with small values which do not fallwithin any other standard asset category
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LIABILITIES
Current liabilities are
Debts payable within one year orwithin the
businesss normal operating cycle if longer than a
year Current liabilities include
Notes payable, short term
Accounts payable
Accrued expenses payable
Income taxes payable
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LIABILITIES
Long-term liabilities are
Debts not payable within one year orwithin
the businesss normal operating cycle iflonger than a year
Long-term liabilities include
Notes payable, long term Bonds payable
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OWNERS EQUITY
Owners equity
Represents the shareholders ownership of
the assets of the business
Owners equity of a corporation consists
of
Common stock Retained earnings
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END OF CHAPTER 1