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ACCOUNTING
- Is an information system that identifies records and communicates the economic
events of an entity to interested users
- Language of business
- Luca Pacioli, Italian Renaissance Mathematician, a close friend and tutor to
Leonardo Da Vinci and a contemporary of Christopher Colombu
- In the 1494 text, Summa de arithmetica, geometria, proportione et
proportionalite, Pacioli described a system to ensure that financial information
was recorded efficiently and effectively

FINANCIAL INFORMATION

- Is communicated through accounting reports, the most common of which are


financial statements

CORPORATE GOVERNANCE

- The system in which entities are directed or controlled, managed and


administered
- Good corporate governance results to better protection of investors from
opportunistic behaviors of managers who may not act in the best interest of
stakeholders

AGENCY THEORY

- The principal (shareholders) delegates its decision rights to the agent


(management) to act in the principals best interest.

WHO USES ACCOUNTING DATA?

INTERNAL USERS

- Are managers who plan, organize and run a business


- Marketing managers, production supervisors, chief financial officers and other
employees

EXTERNAL USERS

- Investors (owners) use accounting information to make decisions to buy, hold or


sell shares
- Creditors (suppliers and bankers) use accounting information to evaluate the
risks of granting credit or lending money
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BOOKKEEPING

- Usually involves only the recording of economic events


- It is just a part of the accounting process

FINANCIAL ACCOUNTING

- Provides economic and financial information for investors, creditors and other
external users

MANAGEMENT ACCOUNTING

- Provides economic and financial information for managers and other internal
users

ETHICS

- A fundamental business concept


- The standards of conduct by which your actions are judged as right or wrong,
honest or dishonest, fair or not fair

SUSTAINABILITY REPORTING

- The reporting and management of non-financial performance

TRIPLE BOTTOM LINE

o Social bottom line is an indicator on how the entity deals with issues
such as employee working conditions and safety and security, and the
entitys support and contribution to community services

o Environmental bottom line looks at how an entitys products or


operations impact of the environment

o Economic bottom line refers to the entitys profitability and business


strategy ; financial reporting

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

- Rules applicable in any one country

COST PRINCIPLE
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- Assets should be recorded at their cost

ASSUMPTIONS

MONETARY UNIT ASSUMPTION

- Requires that only transaction data that can be expressed in terms of money be
included in the accounting records
- Enables accounting to quantify economic events

ECONOMIC ENTITY ASSUMPTION

- Requires that the activities of the entity be kept separate and distinct from the
activities of its owner and all other economic entities

PROPRIETORSHIP

SOLE PROPRIETORSHIP

- A business owned by one person


- The owner is often the manager/operator of the business
- Usually requires a relatively small amount of money to start a business

PARTNERSHIP

- A business owned by two or more persons associate as partners

COMPANY

- A business organized as a separate legal entity under the corporations law and
having ownership divided into transferable shares
- Shareholders may transfer all or part of their shares to other investors at any time
-

BASIC ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNERS EQUITY

ASSETS

- Are resources controlled by an entity


- Capacity to provide future services or benefits

LIABILITIES

- Are claims against assets


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- Existing debts and obligations

OWNERS EQUITY

- The ownership claim on total assets


- Equal to total assets minus total liabilities

INCREASES IN OWNERS EQUITY

o Investments by owner
- Asses the owner puts into the business
- Credit balance
o Income
- Gross increase in owners equity resulting from activities entered into
for the purpose of earning profit
- Credit balance
Revenue arises in the course of the ordinary activities of a
business ; it is simply a component of income
Gains include gains on disposal of non-current assets and
unrealized gains on revaluing assets

DECREASES IN OWNERS EQUITY

o Drawings
- total withdrawals for each accounting period
- Debit balance
o Expenses
- The cost of assets consumed or services used in the process of
earning income
- Debit balance
Profit revenue exceeds expenses
Loss expenses exceeds revenue

TRANSACTIONS

- Are the economic events of an entity that are recorded


- May be identified as external or internal
o EXTERNAL TRANSACTIONS involve economic events between the
entity and some outside entity
o INTERNAL TRANSACTIONS are economic events that occur entirely
within one entity

FINANCIAL STATEMENTS
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1. Statement of Comprehensive Income presents the income and expenses and


resulting profit or loss for a specific period of time
2. Statement of Changes in Equity summarizes the changes in owners equity for
a specific period of time
3. Statement of Financial Position reports the assets, liabilities and owners equity
at a specific date
4. Statement of Cash Flows summarizes information about the cash inflows
(receipts) and outflows (payments) for a specific period of time

ACCOUNT

- Is an individual accounting record of increases and decreases in a specific asset,


liability or owners equity item

T ACCOUNT

- A simplified format of account that resembles the letter T


- A standard shorthand in accounting that helps make clear the effects of
transactions on individual accounts

DEBITS AND CREDITS

1. Debit
- Indicates left
- Dr (debere)
- Debtor
2. Credit
- Indicates right
- Cr (credere)
- Creditor

DEBIT AND CREDIT PROCEDURE

Double-entry system

- based on the equality of debits and credits


- the dual (two-sided) effect of each transaction is recorded in appropriate
accounts
- provides a logical method for recording transactions

EXPANSION OF THE BASIC EQUATION


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ASSETS + DRAWINGS + EXPENSES = LIABILITIES + INVESTMENTS + REVENUE

STEPS IN THE RECORDING PROCESS


1. Identify the transaction from source documents
2. Analyze each transaction for its effects on the accounts
3. Enter the transaction information in a journal (book of original entry)
4. Transfer the journal information to the appropriate accounts in the ledger (book of
accounts)

JOURNALS

- Where transactions are initially recorded in chronological order before being


transferred to the accounts
- Book of original entry

Contributions:

1. It discloses in one place the complete effects of a transaction


2. It provides a chronological record of transactions that cross references to both
the source document and the ledger entry
3. It helps to prevent or locate errors because the debit and credit amounts for
each entry can be readily compared

GENERAL JOURNAL

- The most basic form of journal


- Has specs for dates, account titles and explanations, references and two
amount columns

JOURNALIZING

- Entering transaction data in the journal

A complete journal entry consists of:

- Date of transaction
- Accounts and amounts to be debited and credited
- A brief explanation of the transaction

LEDGER

- Entire group of accounts maintained by the business


- Keeps in one place all the information about changes in specific account
balances
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GENERAL LEDGER

- Contains all the assets, liabilities and owners equity accounts

STANDARD FORM OF ACCOUNT

- Three-column form of account


- A widely used form of account
- Has three money columns debit, credit and balance
- The balance in the account is determined after each transaction

POSTING

- The procedure of transferring journal entries to the ledger accounts


- Should be performed in chronological order
- Should be made on a timely basis to ensure that the ledger is up to date

CHART OF ACCOUNTS

- List of accounts and their respective account numbers that identify their
location in the ledger

TRIAL BALANCE

- Is a list of accounts and their balances at a given time


- Is prepared at the end of an accounting period
- To prove (check) that the debits equal the credits after posting

CORRECTING ERRORS

1. If the error is 1, 10, 100 or 1000, re-add the trial balance columns and recalculate
the account balances.
2. If the error is divisible by 2, scan the trial balance to see whether a balance equal
to half the error has been entered in the wrong column.
3. If the error is divisible by 9, retrace the account balances on the trial balance to
see whether they have been incorrectly copied from the ledger
4. If the error is not divisible by 2 or 9 (for example 365), scan the ledger to see
whether an account balance of 365 has been omitted from the trial balance, and
scan the journal to see whether a 365 posting has been omitted

TIME PERIOD ASSUMPTION

- The division of the economic life of the business into artificial time periods
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Interim periods monthly and quarterly time periods

Financial year (1 July 30 June)

Calendar year (1 January 30 December)

ACCRUAL BASIS VS CASH BASIS ACCOUNTING

Accrual- Basis

- Transactions that change an entitys financial statements are recorded in the


periods in which the events occur

Cash Basis

- Revenue is recorded when cash is received, and an expense is recorded


when cash is paid
- Often leads to misleading financial statements
- Fails to record revenue that has been earned but for which cash has not been
received and expenses are not recognized when incurred

REVENUE RECOGNITION PRINCIPLE

- Dictates that revenue be recognized in the accounting period when an


increase in future economic benefits has occurred

EXPENSE RECOGNITION PRINCIPLE

- Dictates that expenses be recognized in the accounting period when a


decrease in future economic benefits has occurred

*The two principles can be applied once the economic life of a business has been
divided into artificial time periods

TYPES OF ADJUSTING ENTRIES

PREPAYMENTS

1. Prepaid expense
- Expenses paid in cash and recorded as assets before they are used or
consumed
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- Asset and liability are overstated while expense and revenue are understated
before adjustment

PREPAID EXPENSE XXX

CASH XXX

Depreciation

- Is the allocation of the cost of an asset to expense over its useful life in
a rational and systematic manner and represents the future economic
benefit that has been used in the period
- Need for depreciation adjustment: to recognize the cost that has been
expired (expense) during the period and to report the unexpired cost
(asset) at the end of the period
- (cost salvage value) / estimated useful life

Contra Asset Account

- Is one that is offset against an asset account on the statement of


financial position

Carrying Amount

- The difference between the cost of any depreciable asset and its
related accumulated depreciation

Fair value

- The price at which the asset could be sold in the market place
2. Unearned revenue
- Cash received and recorded as liabilities before revenue is earned

CASH XXX

UNEARNED REVENUE XXX

ACCRUALS

1. Accrued expense expenses incurred but not yet paid in cash or recorded

__________ EXPENSE XXX


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__________ PAYABLE XXX

2. Accrued revenue revenue earned but not yet received in cash or recorded

__________RECEIVABLE XXX

__________ REVENUE XXX

SUMMARY OF BASIC RELATIONSHIPS

TYPE OF REASON FOR ACCOUNTS ADJUSTING


ADJUSTMENT ADJUSTMENT BEFORE ENTRY
ADJUSTMENT
1. PREPAID Prepaid expenses Assets O Dr Expenses
EXPENSES originally recorded Expenses - U Cr Assets
in asset accounts
have been used
2. UNEARNED Unearned revenue Liabilities O Dr Liabilities
REVENUE initially recorded in Revenue - U Cr Revenue
liability accounts
has been earned
3. ACCRUED Revenue has been Assets O Dr Assets
REVENUE earned but not yet Revenue U Cr Revenue
received in cash or
recorded
4. ACCRUED Expenses have Expenses O Dr Expenses
EXPENSES been incurred but Liabilities U Cr Liabilities
not yet paid in cash
or recorded

WORKSHEET

- Is a multicolumn form that may be used in the adjustment process and in


preparing financial statements
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- A working tool
- Is not a permanent accounting record
- A device used to make it easier to prepare adjusting entries

STEPS IN PREPARING A WORKSHEET

1. Prepare a trial balance on the worksheet


2. Enter the adjustments in the adjustments columns
3. Enter adjust balances in the adjust trial balance columns
4. Extend adjusted trial balance amounts to appropriate financial statement
columns
5. Total the statement columns, calculate the profit (or loss) and complete the
worksheet

STATEMENT POST
ADJUSTMENT ADJUSTE
TRIAL INCOME OF CLOSING CLOSIN
ACCOUN S D TRIAL
BALANCE STATEMENT FINANCIAL ENTRIES G
T TITLES BALANCE
POSTITION ENTRIES
DR CR DR CR DR CR DR CR DR CR DR CR DR CR
XXX
XXX

CLOSING THE BOOKS

Temporary or Nominal Accounts

- Relate only to a given accounting period


- Income statement accounts and owners drawings

Permanent or Real Accounts

- Relate to one or more future accounting periods


- All statement of financial position accounts including owners capital
- Balances are carried forward into the next accounting period

Closing Entries

- Formally recognize in the ledger the transfer of profit (or loss) and owners
drawings to owners capital
- Results are shown in the statement of changes in equity

Profit and Loss Summary

- A temporary account wherein revenue and expense accounts are closed

Post-closing Trial Balance


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- Lists permanent accounts and their balances after closing entries have been
journalized and posted
- To prove the equality of the permanent account balances that are carried
forward into the next accounting period

REVERSING ENTRIES

- Is made at the beginning of the next accounting period


- An exact opposite of the adjusting entry made in the previous period

CORRECTING ENTRIES

- An avoidable step
- Errors should be corrected as soon as they are discovered by journalizing
and posting correcting entries
- If the accounting records are free of errors, no correcting entries are
necessary

CURRENT ASSETS

- Are cash and other resources that are reasonably expected to be realized in
cash or sold or consumed in the business within 1 year of the reporting date
or the businesss operating cycle, whichever is longer

OPERATING CYCLE

- Is the average time that is required to go from cash to cash in producing


revenue

FINANCIAL ASSETS

- Cash and accounts receivable (current)

INVESTMENT PROPERTY

- Reports investments in non-current assets other than financial assets

PROPERTY, PLANT AND EQUIPMENT

- Tangible resources of a relatively permanent nature that are used in the


business and not intended for sale
- Land, buildings, machinery and equipment, delivery equipment, furniture and
fixtures

INTANGIBLE ASSETS
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- Are non-current resources that do not have physical substance


- Recorded at cost, and this cost is expensed over the useful life of the
intangible asset
- Patents, copyrights, and trademarks or trade names that give the holder
exclusive right of use for a specified period of time

CURRENT LIABILITIES

- Listed first in the liabilities and owners equity section of the statement of
financial position
- It expects to settle the liability in its normal operating cycle
- Holds the liability primarily for the purpose of trading
- Due and settled within 12 months after the end of the reporting period
- The entity does not have an unconditional right to defer settlement to the
liability for at least 12 months after the reporting period

NON CURRENT LIABILITIES

- Obligations expected to be paid after 1 year or after an operating cycle


- Bonds payable, mortgages payable, long term notes, lease liabilities and
obligations under superannuation plans