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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!
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