Professional Documents
Culture Documents
Accounting In Action
What is Accounting?
Bookkeeping and
accounting
Accounting and you
Accounting In Action
Accounting In Action
Transaction analysis
Summary of transactions
PREVIEW OF CHAPTER 1
Accounting In Action
Financial Statements
Income Statement
Balance Sheet
Prepare accounting
reports
SOFTBYTE
Select economic events Record, classify Annual Report
Will the company be able to pay its debts as they come due?
BOOKKEEPING DISTINGUISHED
FROM ACCOUNTING
Accounting
1 Includes bookkeeping
2 Also includes much more
Bookkeeping
1 Involves only the recording of economic
events
2 Is just one part of accounting
STUDY OBJECTIVE 3
INCREASES DECREASES
Investments Withdrawals
by Owner by Owner
Owner’s
Equity
Revenues Expenses
STUDY OBJECTIVE 7
Yes No Yes
Don’t
Record Record
Record
TRANSACTION ANALYSIS
TRANSACTION 1
Softbyte
TRANSACTION ANALYSIS
TRANSACTION 1 SOLUTION
$15,000
(2) -7,000 +$7,000
Softbyte
TRANSACTION ANALYSIS
TRANSACTION 3 SOLUTION
$16,600 $16,600
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TRANSACTION ANALYSIS
TRANSACTION 4 SOLUTION
$17,800 $17,800
Softbyte Bill
Daily News
TRANSACTION ANALYSIS
TRANSACTION 5 SOLUTION
$17,800 $17,800
Softbyte
Bill
TRANSACTION ANALYSIS
TRANSACTION 6 SOLUTION
$600
$900
Softbyte
$200
TRANSACTION ANALYSIS
TRANSACTION 7 SOLUTION
Softbyte
Daily News
TRANSACTION ANALYSIS
TRANSACTION 8 SOLUTION
$19,350 $19,350
Softbyte
TRANSACTION ANALYSIS
TRANSACTION 9 SOLUTION
$1,300
Softbyte
TRANSACTION ANALYSIS
TRANSACTION 10 SOLUTION
$18,050 $18,050
SOFTBYTE
Income Statement
For the Month Ended September 30, 2002
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income 2,750
SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2002
Capital, September 1 $ –0–
Add: Investments $ 15,000
Net income 2,750 17,750
17,750
Less: Drawings 1,300
Capital, September 30 $ 16,450
SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2002
Capital, September 1 $ –0–
Add: Investments $ 15,000
Net income 2,750 17,750
17,750
Less: Drawings 1,300
Capital, September 30 $16,450
Net income of $2,750 carried forward from the income statement to the
owner’s equity statement. The owner’s capital of $16,450 at the end of the
reporting period is shown as the final total of the owner’s equity column of the
Summary of Transactions (Illustration 1-7).
ILLUSTRATION 1-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE
Balance Sheet
September 30, 2002
Assets
Cash $ 8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $ 18,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable $ 1,600
Owner’s equity
SOFTBYTE
Balance Sheet
September 30, 2002
Assets
Cash $ 8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $ 18,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable $ 1,600
Owner’s equity
R. Neal, capital
Total liabilities and owner’s equity $ 18,050
Cash of $8,050 on the balance sheet is reported on the statement of cash flows.
ILLUSTRATION 1-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE
Statement of Cash Flows
For the Month Ended September 30, 2002
Cash flows from operating activities
Cash receipts from revenues $ 3,300
Cash payments for expenses (1,950)
Net cash provided by operating activities 1,350
Cash flows from investing activities
Purchase of equipment (7,000)
Cash flows from financing activities
Investment by owners $ 15,000
Withdraws by owners (1,300)
Net cash provided by financing activities 13,700
Net increase in cash 8,050
Cash at the beginning of the period –0–
Cash at the end of the period
$ 8,050
Cash of $8,050 on the balance sheet and statement of cash flows is shown as the
final total of the cash column of the Summary of Transactions (Illustration 1-7).
MANAGEMENT ACCOUNTING
BASICS
FINANCIAL ACCOUNTING
Primary Users of Reports
External users: stockholders, creditors, and regulatory.
Types and Frequency of Reports
Classified financial statements.
Issued quarterly and annually.
Purpose of Reports
General-purpose information for all users.
ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
FINANCIAL ACCOUNTING
Content of Reports
Pertains to business as a whole and is highly aggregated (condensed).
Limited to double-entry accounting system and cost data.
Reporting standard is generally accepted accounting principles.
Verification Process
Annual independent audit by certified public accountant.
ILLUSTRATION 20-1
DIFFERENCES BETWEEN FINANCIAL
AND MANAGERIAL ACCOUNTING
MANAGEMENT ACCOUNTING
Primary Users of Reports
Internal users: officers, department heads, managers, and
supervisors.
Types and Frequency of Reports
Internal reports.
Issued as frequently as needed.
Purpose of Reports
Special-purpose information for a particular user for a specific decision.
Accounting Concepts
1. Separate Entity Concept
Every business is a separate entity from the proprietor. Business and
owners are distinct.
2. Dual aspect Concept: Every business transation has two aspects –
Debit. For example “Cash Received from Mr. Samtha Rs. 5000” has two
aspects “Cash” – Real account and “Mr.Samtha” – Personal Account.
3. Going Concern Concept
It is assumed that the business will exist for an indefinite period of time
and transactions are recorded from this point of view.
4. Money Measurement Concept
Those transactions and events are recorded in accounting only when they
can be expressed in terms of money. Accounting records only financial
character of the business
6. Cost Concept: All transactions are to be recorded in the books of
accounts at their Cost Price when purchased, not on Market Price.
7. Matching Concept: At the end of the financial year all costs (expenses)
of the organisation are to be matched against the revenues of the
organization of the current year. Increments made by the business during
a period can be measured only when the revenue earned during a period
is compared with the expenses incurred for earning that revenue.
8. Accounting Period Concept: Uniformity in accounting period should
be maintained in order to provide for intra firm comparison.
Performance of one year can be compared with other only when
uniformity in accounting period is maintained.
9. Accrual concept / Realisation Concept: Transaction should be recorded
on due basis. Expenses / Incomes are recognised and recorded on
accrual basis. Actual receipt/payment is irrelevant for recognizing
income/expense.
Accounting Conventions
1. Materiality
An accountant should disclose all the material facts and
should ignore insignificant details. Accounting records
should consist only of such events as are significant from the
point of view of income determination.
2. Consistency
Accounting procedures or practices should remain the
same(consistent) from one year to another.
3. Conservatism
An accountant should be conservative and prudent. Profits
are not to be expected and provision should be made to
encounter losses. Valuing stock at Cost Price or Market
Price whichever is lower, and creating provision for doubtful
debts are the examples of applications of the principle of
conservatism.
Types of Accounts
1. Personal Account: Dr. the receiver and Cr.
the giver
2. Real/Properties Account: Dr. what comes
in and Cr. what goes out.
3. Nominal/Fictitious Account: Dr. all
expenses and losses and all incomes and
gains.
Journal Entries
• Transactions:
1. Started business with Bank balance Rs.2000000 and machinery
Rs.500000.
2. Withdrawn Rs.300000 from bank.
3. Purchased equipment Rs.100000 by paying 40% in cash and 60% on
credit.
4. Purchased raw material Rs.200000 by paying through bank Rs.100000,
Rs.20000 for cash and remaining on credit.
5. Paid salary Rs.50000 through Bank.
6. Paid rent for the premises Rs.75000 for cash.
7. Sold goods for Rs.500000 and received Rs.300000 through bank,
Rs.50000 for cash and remaining on credit.
8. Destroyed good in transportation Rs.5000.
9. Withdrawn back cash by owner for personal use Rs.10000.
10. Paid utility bills and taxes Rs.20000 through bank.
JOURNAL BOOK
Date Particulars L/F Dr. Amount Cr. Amount
1 Bank a/c Dr. 2000000
Machinery a/c Dr. 500000
To Capital a/c Cr. 2500000
(Being introduced Capital)
2 Cash a/c Dr. 300000
To Bank a/c 300000
(Being withdrawn cash)
3 Equipment a/c Dr. 100000
To Cash a/c 40000
To Creditor’s a/c 60000
(Being Purchased equipment)
Date Particulars L/F Dr. Amount Cr. Amount
4 Raw material a/c Dr. 200000
To Bank a/c 100000
To Cash a/c 20000
To Creditors a/c 80000
(Being Purchased raw material)
5 Salary a/c Dr. 50000
To Bank a/c 50000
(Being paid salary)
6 Rent a/c Dr. 75000
To Cash a/c 75000
(Being paid rent)
7 Bank a/c Dr. 300000
Cash a/c Dr. 50000
Debtors a/c Dr. 150000
To Sales a/c 500000
(Being sold goods)
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