Professional Documents
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11 July Accounting
11 July Accounting
Chapter 2
What
How do How do
business
specific companies
activities cause
activities keep track of
changes in
affect each balance sheet
the balance
balance? amounts?
sheet?
Primary Characteristics
Qualitative Characteristics Elements of Statements
•Relevancy: predictive value,
Relevancy feedback value,Asset
and timeliness.
Reliability •Reliability: verifiability,
Liability
representational faithfulness,
Comparability Stockholders’ Equity
and
Consistency neutrality. Revenue
Expense
Secondary Characteristics
•Comparability:Gain across
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AFTERSCHOOOL Loss
MATERIAL FOR PGPSE PARTICIPANTS
The Conceptual Framework
Asset: economic resource with
probable future Objective
benefit. of Financial Reporting
Liability:
To provideprobable future economic
useful sacrifices of information to external users
economic resources.
for decision making and for assessing future cash flows.
Stockholders’ Equity: financing
provided by owners and operations.
Revenue: increase
Qualitative in assets or
Characteristics Elements of Statements
settlement of liabilities from ongoing
operations. Relevancy Asset
Expense: decrease in assets or
Reliability Liability
increase in liabilities from ongoing
operations.Comparable Stockholders’ Equity
Gain: increase in assets or settlement
Consistent Revenue
of liabilities from peripheral
activities. Expense
Loss: decrease in assets or Gain
increase in liabilities from peripheral
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activities. Loss
AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS
Assumptions
The Conceptual Framework
Separate entity: Activities of the business are
separate from activities of owners.
Continuity: The entity will not go out of
business in the near future.
Unit-of-measure: Accounting measurements
will be in the national monetary unit ($).
Principle
Historical cost: Cash equivalent cost given up
is the basis for initial recording of
elements.
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Learning Objectives
Identify what constitutes a business transaction
and recognize common balance sheet account
titles used in business.
Borrow cash
Loss due to
fire damage.
Cash Inventory
Notes
Equipment Payable
Revenues Expenses
Sales Revenue Cost of Goods Sold
Fee Revenue Wages Expense
Interest Revenue Rent Expense
Rent Revenue Interest Expense
Depreciation Expense
Advertising Expense
Insurance Expense
Repair Expense
Income Tax Expense
A = L + SE
(Assets) (Liabilities) (Stockholders’
Equity)
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Duality of Effects
Most
transactions with
external parties
involve an
exchange where
the business
entity gives up
something but
receives
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Balancing the Accounting
Equation
Accounts and effects
• Identify the accounts affected and classify them by
type of account (A, L, SE).
• Determine the direction of the effect (increase or
decrease) on each account.
Balancing
A = L + SE
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The company borrows $6,000 from the local
bank, signing a three-year note.
A = L + SE
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Papa John’s purchases $10,000 of new equipment,
paying $2,000 in cash and signing a two-year note
payable for the rest.
A = L + SE
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Papa John’s lends $3,000 to new
franchisees who sign five-year notes
agreeing to repay the loan.
Identify & Classify the Accounts
1. Cash (asset).
2. Notes Receivable (asset).
A = L + SE
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Papa John’s purchases $1,000 of stock in
other companies as an investment.
A = L + SE
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Papa John’s board of directors declares and
pays $3,000 in dividends to shareholders.
A = L + SE
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Learning Objectives
Determine the impact of using two basic tools,
journal entries and T-accounts.
Prepare a complete
End of the period: set of financial statements.
Adjust revenues and expenses Disseminate statements
and related balance sheet accounts. to users.
Journal entries
T-accounts
Account Name
Left Right
Account Name
Left Right
Debit Credit
A = L + SE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase
A = L + SE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase
GENERAL JOURNAL
Posted
Date Account Titles and Explanation Ref. Debit Credit
GENERAL JOURNAL
Posted
Date Account Titles and Explanation Ref. Debit Credit
Jan. 1 Cash 20,000
Contributed Capital 20,000
GENERAL JOURNAL
Posted
Date Account Titles and Explanation Ref. Debit Credit
Jan. 1 Cash 20,000
Contributed Capital 20,000
GENERAL JOURNAL
Ledger
Posted
Date Account Titles and Explanation Ref.
Jan. 1 Cash
Debit
20,000
Credit
Post
Contributed Capital 20,000
(a)
8,000 3,000
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The company borrows $6,000 from the local
bank, signing a one-year note.
(b)
14,000 152,000
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Papa John’s purchases $10,000 of new equipment,
paying $2,000 in cash and signing a two-year note
payable for the rest.
(c)
256,000
12,000 160,000
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Balance Sheet Preparation
It is possible to
prepare a balance
sheet at any point in
time from the
balances in the
accounts.