lecture 2. entity principle a business entity is an economic unit that engages in identifiable...
TRANSCRIPT
Entity Principle
A business entity is an economic unit that engages in identifiable business activities
Separate from the personal affairs of its owner
The Concept of Business Entity
Current Assets◦ Cash and cash equivalents◦ Accounts receivables, trade receivables◦ Prepaids and advances◦ Inventory◦ Financial assets such as trading securities, investment
securities
Non-Current/Fixed Assets◦ Property, Plant and Equipment◦ Investment property◦ Intangible assets (patents, trademarks, licenses, copyright,
goodwill)◦ Loans receivables
Assets
The Cost Principle◦ The Going Concern Assumption◦ The Objectivity Principle◦ The Stable-Dollar Assumption
Asset Valuation
Short Term/Current Liabilities◦ Accounts payable – Generally payable to suppliers/vendors◦ Notes Payable – Interest bearing loan, less than a year maturity◦ Provisions or accrued liabilities◦ Unearned revenue◦ Interest payable◦ Notes Payable – Short term, interest bearing loan
Long Term/Non-Current Liabilities◦ Debt payable/Long term loan◦ Bonds/Debentures◦ Notes Payable – Interest bearing loan, more than a year
maturity
Liabilities
Increases through◦ Investments of cash or other assets by the owner◦ Earnings from profitable operation of the business
Decreases through◦ Withdrawals of cash or other assets by the owner◦ Losses from unprofitable operation of the business
Owner’s Equity
Assets = Liabilities + Owner’s Equity
The effects of Business Transactions◦ Exercise 2.6
The Accounting Equation
Revenues◦ Revenue, sales◦ Gains◦ Investment income (e.g., interest and dividends)
Expenses◦ Cost of Goods Sold◦ Selling, general, and administrative expenses (‘SG&A’) ◦ Rent, utilities, salaries and advertising expenses◦ Depreciation and amortization◦ Interest expense◦ Tax expense◦ Losses
Net Income
Net income is an increase in owners’ equity resulting from the profitable operation of the business
Net Income always results in the increase of Owner’s Equity
Net Income
Net Income is reported to the Owner’s Equity Section of the Balance Sheet
How is Income Statement related to Balance Sheet
The sequence of accounting procedures used to record, classify, and summarize accounting information in financial reports at regular intervals is often termed the accounting cycle
The Accounting Cycle
Analyzing and recording transactions via journal entries
Posting journal entries to ledger accounts Preparing unadjusted trial balance Preparing adjusting entries at the end of the
period Preparing adjusted trial balance Preparing financial statements Closing temporary accounts via closing entries Preparing post-closing trial balance
The Accounting Cycle
An account is a means of accumulating in one place all the information about changes in specific financial statement items, such as a particular asset or liability e.g. Cash, Notes Payable
The Use of Accounts
Debits refer to the left side of an account, and credits refer to the right side of an account
Debit and Credit Entries
Debit/Credit Relationships
Account Debit (Dr.) Credit (Cr.)Assets Increase Decrease
Contra Assets Decrease Increase
Liabilities Decrease Increase
Equity Decrease Increase
Revenue Decrease Increase
Expenses Increase Decrease
Distributions Increase Decrease
The information about each business transaction is initially recorded in an accounting record called the journal
This information is later transferred to the appropriate accounts in the general ledger
The journal is a chronological (day-by-day) record of business transactions
Example
The Journal
Basic characteristics of the general journal entry:
1. The name of the account debited is written first, and the dollar amount to be debited appears in the left-hand money column.
2. The name of the account credited appears below the account debited and is indented to the right. The dollar amount appears in the right-hand money column.
3. A brief description of the transaction appears immediately below the journal entry.
General Journal
The entire group of accounts is kept together in an accounting record called a ledger
The transactions from the journal are posted in separate accounts and are accumulated to form a ledger
Example
The Ledger
If the debit total exceeds the credit total, the account has a debit balance; if the credit total exceeds the debit total, the account has a credit balance
Debit Balances in Asset Accounts
Credit Balances in Liability and Owners’ Equity Accounts
Determining the Balance of a T-Account