ACCOUNTING IN ACTION
ACCT100 Spring 2013 Teresa Chu
What is Accounting?
(1) Identify (2) record & (3) communicate economic events of an organization to interested users Record: provide systematic, chronological diary of economic events
Identify: select business-related economic events Communicate: analyze (use of ratios, %, graphs & charts) and interpret (explain uses, meaning and limitations) financial statements to users
Internal users Individuals inside a company who plan, organize and run the business Require BOTH internal and external reports Managerial accounting provides internal reports Financial accounting provides external reports External users: Individuals or organizations outside a company Require JUST external reports Chapter 1-3
Who Uses Accounting Data?
The Building Blocks of Accounting
Ethics in financial reporting Standards of conduct by which one’s actions are judged as right/wrong, honest/dishonest, fair/not fair Accounting standards International Financial Reporting Standards (IFRS) Used in more than 130 countries including Macau Determined by International Accounting Standards Board (IASB)
Cost Principle or Historical Cost Principle
Two Measurement Principles
Record assets at cost Use COST at time of purchase AND over the time asset is held Faithful representation (factual) Ignore increase/decrease in market value Record assets and liabilities at fair value Relevance (information capable of making difference in decision making)
Fair Value Principle
Monetary Unit Assumption (HOW???) ONLY includes transactions that can be expressed in money ($) Quantify economic events Economic Entity Assumption (WHAT???) Economic entity: any organization/unit Activities of the entity must be separated from activities of owners & other entities ONLY record transactions of the separate entity Chapter 1-6
The Basic Accounting Equation
Assets = Liabilities + Equity
Accounting Equation Provide underlying framework for recording and summarizing economic events 3 Elements: (1) ASSETS (2) LIABILITIES (3) EQUITY Chapter 1-7
• • •
Resources owned by a business
Provide future services or benefits
Examples: Cash, supplies, equipment, building, land, truck, furniture, etc.
• • • •
Claims against assets (debts and obligations) Claims of “creditors” Paid first in liquidation
Examples: Accounts payable (oral promise to pay), note payable (written promise to pay), wages payable, taxes payable, etc.
Claim on total assets 2 components:
Residual Equity = Assets – Liabilities Share capital – ordinary Retained earnings
investment by shareholders for ordinary shares they purchase Revenues: increase in equity from activities for purpose of earning income Expenses: assets consumed or services used in process of earning income (decrease in equity) Dividends: net income that are distributed to shareholders (NOT an expense)
Transactions Economic events of the business to be recorded (1) Business (2) Business-related (3) Personal Record ONLY business transactions Each transaction has a DUAL effect on the accounting equation Each transaction may affect 2 or more items in the accounting equation Accounting equation MUST be in balance Chapter 1-11
Using The Basic Accounting Equation
Transaction Analysis (P1-4A)
Assets Liabilities Equity Retained earnings Date June 1 2 3 5 9 12 15 17 20 23 26 29 30 June 30 + 1,500 - 500 - 250 - 100 - 1,000 $8,200 $3,150 $23,500 Chapter 1-12 $150 $12,000 $9,500 $150 $10,000 $23,500 $5,900 - 100 - 1,000 - $1,850 - $200 - 500 - 250 + 1,250 - 1,250 + 100 + 1,500 - 100 - 200 + 150 + 150 Cash + 10,000 - 2,000 - 500 + 4,400 + 4,400 - 200 + 12,000 + 10,000 - 500 Accounts receivable Supplies Delivery van Notes payable Accounts payable Share capital + 10,000...
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