Revision of Commercial Correspondence

7/28/2019 Revision of Commercial Correspondence

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REVISION

1


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Accounting is the information system that...

measures business activities,

communicates results to decisionmakers.

processes data into reports, and

ACCOUNTING - THE LANGUAGE OF BIZ


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ACCOUNTING ACTIVITIES

IdentifyingBusinessActivities

RecordingBusinessActivities

CommunicatingBusinessActivities


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Financial Accounting - Chapter 1 6

Accountinginformation

Theaccounting

process

Decision

makers

Economicactivities

Actions(decisions)

Accounting links decision makerswith economic

activities & withthe results of their

decisions


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Accounting helps banks decideto whom they will lend money.

Accounting provides informationthat helps investors pick stocks.

Accounting helps legislators definethe effect of law on budgets.

ACCOUNTING S ROLE IN BIZ


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USERS OF ACCOUNTING INFORMATION

External Users

Lenders Shareholders Governments

External Auditors Customers

Internal Users

Managers Officers Internal Auditors

Sales Staff Budget Officers Controllers


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OVERVIEW OF ECONOMIC ACTIVITIES

FinancingActivities

InvestingActivitiesOperatingActivities

Raising the fund tostart the business

Buying resources (assets)Generating income via sales

and services


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TYPES OF ACCOUNTING

Financial Accounting - Chapter 1 11

Managerial

Tax

Financial


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ELEMENTS OF FINANCIAL STATEMENTS Assets; Liabilities; Equity; Revenue; Expenses.


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Land

EquipmentBuildings

Cash

Vehicles

StoreSupplies

NotesReceivable

AccountsReceivable

Resourcesowned orcontrolled by

a company

ASSETS


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TaxesPayable Other

Payable

NotesPayableAccountsPayable

Creditors claimson assets

WagesPayable

LIABILITIES


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Owner

sclaims

onassets

Retained earnings

OwnerInvestments/Capital paid- in

OwnerWithdrawals

EQUITY


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COMPONENT OF RETAINED EARNINGS

Revenues forthe period

Expenses forthe period

=

Net income(or Net loss)

for theperiod

Dividends

for theperiod

Endingbalance ofretainedearnings

End ofthe period

Start ofthe periodBeginningbalance ofretainedearnings

+

or

=


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AssetsOwners Equity

Liabilities

ECONOMIC RESOURCES = CLAIMS TO ECONOMIC RESOURCE

THE ACCOUNTING EQUATION

Creditor s claims

(Economicresources) Owners

claims

ASSETS = LIABILITIES + OWNER S EQUITY


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1.How well did thecompany perform (oroperate) during theperiod?

Revenues Expenses= Net income (Net loss)

Incomestatement

Question Answer FinancialStatement

Assets= Liabilities

+ Owners equity

Balancesheet

2.What is the company sfinancial position at theend of the period?

3.How much cash didthe company generateand spend during theperiod?

Operating cash flows Investing cash flows Financing cash flowsIncrease or decrease in

cash during the period

Statementof

cashflows

INFO ON THE FINANCIAL STATEMENTS


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T-FORM OF CLASSIFIED B/S

City Traders: Statement of financial position as at 30 June 2005

Current assets Current liabilities

Cash at bank 3,000 Creditors 5,000

Debtors 5,000 Loan 5,000 10,000

Stock 20,000 28,000 Non-current liabilities

Loan (due 30/6/07) 5,000

Non-current assets

Officeequipment

4,000 Owner s equity

Vehicles 18,000 22,000 Capital K.Wilson 35,000

Total assets 50,000 Total liabilities & equity 50,00016

NARRATIVE FORM OF CLASSIFIED B/S


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NARRATIVE FORM OF CLASSIFIED B/SCurrent assetsCash at bank 3,000

Debtors 5,000Stock 20,000 28,000Non-current assetsOffice equipment 4,000

Vehicles 18,000 22,000Total assets $50,000Current liabilitiesCreditors 5,000

Loan 5,000 10,000Non-current liabilitiesLoan (due 30/6/07) 5,000Owner

s equity

Capital

K.Wilson 35,000Total liabilities e uit 50 00017


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21

Relationships between statements


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ACCRUAL VS CASH BASIS

When CashIs Received

WhenEarned

When CashIs Paid WhenIncurred

Cash Basis Accrual BasisRevenue isRecognizedExpense isRecognized

Recognition is the process of recording(incorporating) an item into the financialstatements as an asset, liability, revenue,expense, etc.


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Emma prints 30 T-shirts in her first month oftrading (May) at a cost of $5 each. She paid allby cash.Emma sells all of them for $10 each, a third incash and the rest on credit: Cash principle:

Profit =

Accrual principle:Profit =

EXAMPLE OF ACCRUAL VS CASH BASIS


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Emma prints 20 T-shirts in her first month oftrading (May) at a cost of $5 each. Emma sells all of them for $10 each:

Profit =

Emma only sells 18 T-shirts @ $10 each:Profit =

EXAMPLE OF ACCRUAL & MATCHING


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Assets = Liabilities + Stockholders' Equity

5 types of Accounts are: Assets, Liability,Equity, Revenue and Expense

THE ACCOUNT

Stockholders' Equity = Paid-in capital + Retainedearning

Retained earning = Net income - Dividend


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Account TitleDebit

LEFT SIDE RIGHT SIDE

Credit

AccountingEquation: Assets = Liabilities +

Stockholders

Equity

Rules ofDebit andCredit: Debit

+Debit

Debit

Credit

Credit

+Credit

+

T-ACCOUNTS


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Assets = Liabilities + Owners

EquityAssets

Increases Decreases

Liabilities

Decreases Increases

Owners Equity

Decreases Increases

T - ACCOUNTS

Expense

Increases Decreases

Revenue

IncreasesDecreases


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Cash at bankVehicles

Wages

Mar 1 Vehicles 18,000Mar 4 Wages 400

Mar 1 Cash at bank 18,000

Mar 4 Cash at bank 400

DOUBLE-ENTRY ACCOUNTING


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4 main types of AJEs: Deferred expense: results when cash is paidbefore expense is incurred (prepaid expenses); Accrued expense: results when expense isincurred before cash is paid (payables); Deferred revenue: results when cash isreceived before revenue is earned (unearned

revenues); Accrued revenue: results when revenue isearned before cash is received (receivables).

ADJUSTING JOURNAL ENTRY


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Financial Accounting Chapter 1 31

END OF REVISION.THANK YOU!

Revision of Commercial Correspondence

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