Accounting Concept and Practice Topic 2

Generally Accepted Accounting Principles

What is the primary objective of financial reporting?

To provide information useful for making investment and lending decisions

Basic Concepts

Slide 2-1

Accounting Principles
Money

measurement Entity Going concern Cost Dual aspect

Accounting period Conservatism Realization Matching Consistency Materiality

The Entity Concept

Slide 2-2

The owner of a clothing store removes $100 from the stores cash register for personal use. Should the stores accounting records show that the owner took this cash?

Owner

The Entity Concept

Yes, because of the entity concept. This concept requires that the accounting records of the clothing store show that the business has less cash than it had previously.

Slide 2-3

The Going Concern Concept

The entity will continue to operate in the future.

Question
Assume your company manufactures appliances and sells them to a number of mass merchandisers, such as Jaya Jusco, Carrefour, etc. In reading the financial statements for these customers, why would the going concern assumption be important to you?

The Cost Principle

Assets and services acquired should be recorded at their actual cost.

The Cost Concept--Nonmonetary Assets

Slide 2-6

Land purchased last year for $250,000 has a current market value of $270,000. What amount should be shown in the accounting records to reflect ownership of this land?

The Cost Concept--Nonmonetary Assets

Slide 2-7

The land should be shown at the original purchase price of $250,000 because of the cost concept.

The Cost Concept--Monetary Assets

Slide 2-8

A company invested surplus cash in 100,000 shares of the common stock of General Electric. The cost of per share was $60; therefore, the firm spent $6,000,000. By the end of the fiscal period, the stock had a fair market value of $65 per share. What amount should be shown on the balance sheet?

The Cost Concept--Monetary Assets

The fair value of the stocks is $6,500,000.

Slide 2-9

This is the amount that should be shown for this monetary asset.

Exercise
(1) Timberland Bhd is now in its 30th year of business. The founder of the company is planning to retire at the end of the year and turn the business over to his daughter.

What Makes Accounting Information Useful?

Understandability Relevance

Reliability

Comparability and Consistency

Accounting Limitation (Constraints)

Information limited to quantitative terms. - Matters such as morale of workforce and skill not included Largely confined to analysis of past events - Financial forecast maybe unreliable

Accounting not an exact science Financial statements involve the exercise of judgment and maybe less reliable to users e.g. estimate remaining useful life of machine or the ability of customer who owes the business to pay up
The financial statement is expressed in monetary unit subject to changing in value especially in time of high inflation where the price of goods become very high.

What is an Account?
A record used to summarise all increases and decreases in particular asset, such as cash, or any other type of asset, liability, owners equity, revenue or expenses The famous accounting equation:Assets = Capital + Liabilities

Assets:-Assets are possessions or resources owned by an entity; includes physical or . tangible possessions such as property, plant, machinery, stock, cash. Intangible Assets such as copyright and patent rights and debts owed. Capital:- The amount owners have invested in an entity Liabilities:- Amount owed by the entity to outside parties. Include loans, bank overdrafts, creditors

The Dual-Aspect Concept Assets = Equities Assets = Liabilities + Owners equity

+ $40,000 = + $40,000

Slide 2-10

Ms. Jones opens a bank account for the business by depositing $40,000.

The Dual-Aspect Concept

Slide 2-11

Assets = Liabilities + Owners equity

+ $40,000 = + 15,000 + 15,000 $40,000

The business borrows $15,000 from the bank.

The Dual-Aspect Concept

Slide 2-12

Assets = Liabilities + Owners equity

+ $40,000 = + 15,000 $55,000 + 15,000 $15,000 $40,000 $40,000

Assets = Equities

The Accounting Equation

Assets
=

Liabilities + Owners Equity

Economic Resources

Claims to Economic Resources

The Accounting Equation Assets = Liabilities + Owners Equity

Slide 1-10

Assets are economic resources which are owned by a business and are expected to benefit future operations.

The Accounting Equation Assets = Liabilities + Owners Equity

Slide 1-11

Liabilities are obligations of the entity to outside parties who have furnished resources

Owners Equity
What is owners equity? It is whats left of the assets after liabilities have been deducted. the same as net assets the owners claim on the entitys assets

Transactions that Affect Owners Equity

OWNERS EQUITY INCREASES OWNERS EQUITY DECREASES Owner Withdrawals from the Business Owners Equity

Owner Investments in the Business

Revenues

Expenses

Revenues
What are revenues? They are amounts received or to be received from customers for sales of products or services. sales performance of services rent interest

Expenses
What are expenses? They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. salaries and wages utilities supplies used advertising

Accounting for Business Transactions

What is a transaction? It is any event that both affects the financial position of the business and can be reliably recorded.

Accounting for Business Transactions

1 Gay Gillen invests $30,000 to begin Gay Gillen eTravel. 2 Gillen purchases an office location, paying $20,000 in cash. 3 She buys office supplies, agreeing to pay $500 in 30 days. 4 She earns and collects $5,500 revenues.

Accounting for Business Transactions

5 Gillen performs services, and the client agrees to pay RM 3,000 within one month. 6 During the month, she pays RM 3,100 for expenses incurred. 7 Gillen pays RM 300 to the store from which she purchased RM 500 worth of supplies. What is the effect of these transactions on the accounting equation?

Accounting for Business Transactions

Assets 1) Cash 2) Cash Land 3) Supplies 4) Cash 5) Receivable 6) Cash 7) Cash Totals +RM30,000 20,000 + 20,000 + 500 + 5,500 + 3,000 3,100 300 + RM35,600

Owners = Liabilities + Equity

+RM30,000

+ 500 + + 300 + 200 5,500 3,000 3,100

+RM35,400

Accounting for Business Transactions

Notice that the equation always stays in balance. Each transaction affects at least two accounts, sometimes more. Some transactions affect only one side of the equation; some affect both sides.

Accounting for Business Transactions

Other transactions that took place were as follows: The business collected $1,000 from the client. She sold some land at cost for $9,000. She withdrew $2,100 from the business.

Financial Statements...
are the final product of the accounting process. tell how the business is performing and where it stands.

Financial Statements
income statement balance sheet statement of cash flows

Financial Statement Objectives

Financial reporting should provide information:

Slide 1-13

Useful to present and potential investors and creditors in making rational investment and credit decisions Comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence About the economic resources of an enterprise, the claims to those resources, and the effects of transactions and events that change resources and claims to those resources About an enterprises financial performance during a period

NET SOLUTIONS INCOME STATEMENT For the Month Ended November 30. 2005

$ Fees earned Operating expenses Wage expense Rent expense Supplies expense Utilities expense Miscellaneous expense Total operating expenses Net Income

$ 7500.000 2125.000 800.000 800.000 450.000 275.000 4450.000 3050.000

NET SOLUTIONS STATEMENT OF OWNER'S EQUITY For the Month Ended November 30. 2005 Chris Clark, capital, November 1, 2005 $ $ Investment on November 1, 2005 25000.00 Net Income for November 3050.00 28050.00 Less withdrawals 2000.00 Increase in owner's equity 26050.00 Chris Clark, capital November 30, 2005 26050.00

NET SOLUTIONS BALANCE SHEET NOVEMBER 30,2005 Assets Cash Supplies Land Liabilities 5900.00 Accounts Payable 550.00 20000.00 Owner's Equity Chris Clark, capital 26450.00 Total Liabilities and Owner's equity

400.00

26050.00 26450.00

Total Assets

NET SOLUTIONS INCOME STATEMENT For the Month Ended November 30. 2005

$ Fees earned Operating expenses Wage expense Rent expense Supplies expense Utilities expense Miscellaneous expense Total operating expenses Net Income

$ 7500.000 2125.000 800.000 800.000 450.000 275.000 4450.000 3050.000

NET SOLUTIONS STATEMENT OF OWNER'S EQUITY For the Month Ended November 30. 2005 Chris Clark, capital, November 1, 2005 $ $ Investment on November 1, 2005 25000.00 Net Income for November 3050.00 28050.00 Less withdrawals 2000.00 Increase in owner's equity 26050.00 Chris Clark, capital November 30, 2005 26050.00
NET SOLUTIONS BALANCE SHEET NOVEMBER 30,2005 Assets Cash Supplies Land Liabilities 5900.00 Accounts Payable 550.00 20000.00 Owner's Equity Chris Clark, capital 26450.00 Total Liabilities and Owner's equity

400.00

26050.00 26450.00

Total Assets

End of Topic 2