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    ACCOUNTINGIN BUSINESSChapter

    1 LECTURE 1 & 2

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    LEARNING OBJECTIVES

    After studying this chapter, you should be ableto:

    1. Describe what is accounting.

    2. State the users of the accounting information.

    3. Describe the profession of accounting,accounting professional bodies and code ofprofessional conduct & ethics.

    4. State the characteristics of the qualitative

    accounting information.5. Describe the assumptions, principles and

    constraints related to the practice of accounting.

    6. Describe the forms and types of business.

    7. Describe the elements of financial statements.

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    DEFINITIONOF ACCOUNTING

    As an information system that provides report tostakeholders about the economic activities andcondition of a business.

    So, accounting is the process of:

    Identifying

    Measuring

    Communication economic information to

    permit informed judgements, and Decisions by users of the information

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    LECTURE 1

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    Identifies

    Records

    CommunicatesRelevant

    Reliable

    Comparable

    IMPORTANCEOF ACCOUNTING

    Accountingis a

    system that

    information

    that is

    to help users make better

    decisions.

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    Identifying

    Business

    Activities

    Recording

    Business

    Activities

    Communicating

    Business

    Activities

    ACCOUNTING ACTIVITIES

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    IdentifyingSelect transactions and events

    RecordingInput, measure and classify

    CommunicatingPrepare, analyze and interpret

    IMPORTANCEOF ACCOUNTING

    Accounting

    C 1

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    USERSOF ACCOUNTINGINFORMATION

    External Users

    LendersShareholdersGovernments

    Consumer GroupsExternal AuditorsCustomers

    Internal Users

    ManagersOfficers/DirectorsInternal Auditors

    Sales StaffBudget OfficersControllers

    C 2

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    ExternalUsers

    Financial accountingprovides external users

    with financial statements.

    Internal Users

    Managerial accountingprovides information needs

    for internal decision-makers.

    C 2 USERSOF ACCOUNTINGINFORMATION

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    OPPORTUNITIESIN ACCOUNTINGC 2

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    Beliefs thatdistinguish right

    from wrong

    Accepted standardsof good and bad

    behavior

    Ethics

    ETHICS - A KEY CONCEPTC 3

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    C 3

    ETHICS - A KEY CONCEPT

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    Financial accounting practice is governed by conceptsand rules known as generally accepted accounting

    principles (GAAP).

    GENERALLY ACCEPTEDACCOUNTING PRINCIPLES

    Relevant Information Affects the decision of its users.

    Reliable Information Is trusted by users.

    ComparableInformation

    Is helpful in contrastingorganizations.

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    The Securities and Exchange Commission is thegovernment agency that establishes reporting requirements

    for companies that issue stock or shares to the public.

    SETTING ACCOUNTING PRINCIPLES

    Financial Accounting Standards Boardis the private group that sets both

    broad and specific principles.

    The International Accounting Standards Board (IASB)issues International Financial Reporting Standards that

    identify preferred accounting practices to create harmonyamong accounting practices of different countries.

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    INTERNATIONAL STANDARDS

    The International Accounting Standards Board (IASB), anindependent group (consisting of 16 individuals from many

    countries), issues International Financial Reporting Standards(IFRS) that identify preferred accounting practices.

    IASB

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    PRINCIPLESAND ASSUMPTIONSOF ACCOUNTING

    Cost Principle

    Accounting information is based onactual cost. Actual cost is

    considered objective.

    Revenue Recognition Principle1. Recognize revenue when it is earned.2. Proceeds need not be in cash.3. Measure revenue by cash received

    plus cash value of items received.

    Matching PrincipleA company must record its expenses

    incurred to generate the revenue reported.

    Full Disclosure PrincipleA company is required to report thedetails behind financial statementsthat would impact users decisions.

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    ACCOUNTING ASSUMPTIONS

    Monetary Unit AssumptionExpress transactions and events in

    monetary, or money, units.

    Business Entity AssumptionA business is accounted for

    separately from other businessentities, including its owner.

    Time Period AssumptionPresumes that the life of a company can

    be divided into time periods, such asmonths and years.

    Now Future

    Going-Concern AssumptionReflects assumption that the business

    will continue operating instead ofbeing closed or sold.

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    FORMSOF BUSINESS ENTITIES

    SoleProprietorship

    Partnership Corporation

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    *Proprietorships and partnerships that areset up as LLCs provide limited liability.

    CHARACTERISTICSOF BUSINESSES

    Characteristic Proprietorship Partnership Corporation

    Business entity yes yes yes

    Legal entity no no yes

    Limited liability no no yesUnlimited life no no yes

    Business taxed no no yes

    One owner allowed yes no yes

    **

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    Owners of a corporation are calledshareholders (or stockholders). Shareholders arenot personally liable for corporate acts. When acorporation issues only one class of shares, we

    call it ordinary shares (or share capital).

    CORPORATIONC 4

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    TRANSACTION ANALYSISANDTHEACCOUNTING EQUATION

    Assets = Liabilities + Equity

    Accounting Equation

    A 1

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    Land

    Equipment

    Buildings

    Cash

    Vehicles

    StoreSupplies

    NotesReceivable

    AccountsReceivable

    ASSETS

    A 1

    Resourcesowned or

    controlled bya company

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    TaxesPayable

    WagesPayable

    NotesPayable

    AccountsPayable

    LIABILITIES

    Creditorsclaims on

    assets

    A 1

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    EQUITY

    OwnersClaims onAssets

    A 1

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    LECTURE 2

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    TRANSACTION ANALYSIS EQUATION

    The accounting equation MUST remain inbalance after each transaction.

    Liabilities EquityAssets = +

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    TRANSACTION 1: INVESTMENTBY OWNERS

    The accounts involved are:(1) Cash(asset)

    (2) Owner Capital(equity)

    On December 1, Chas Taylor invests$30,000 cash to start a consulting business.

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    TRANSACTION 2: PURCHASESUPPLIESFOR CASH

    The accounts involved are:

    (1) Cash(asset)

    (2) Supplies(asset)

    Chas Taylors company, FastForwardpurchases supplies paying $2,500 cash.

    P 1

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    TRANSACTION 3: PURCHASEEQUIPMENTFOR CASH

    The accounts involved are:

    (1) Cash(asset)(2) Equipment(asset)

    FastForward purchases equipment for$26,000 cash.

    P 1

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    TRANSACTION 4: PURCHASESUPPLIESON CREDIT

    The accounts involved are:

    (1) Supplies(asset)

    (2) Accounts Payable(liability)

    FastForward purchases Supplies of $7,100 onaccount.

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    TRANSACTION 5: PROVIDESERVICESFOR CASH

    The accounts involved are:

    (1) Cash(asset)

    (2) Revenues(equity)

    The company provides consulting servicesreceiving $4,200 cash.

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    TRANSACTION 6AND 7: PAYMENTOF EXPENSESIN CASH

    The accounts involved are:

    (1) Cash(asset)

    (2) Expenses(equity)

    The company pays $1,000 rent and $700 insalary to the companys only employee.

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    TRANSACTION 8Provide services and facilities for credit

    Fastforward provides consulting services of $1,600and rents its test facilities for $300 to a podiayricservice centre.

    (1) Account receivable (Asset)

    (2) Consulting Service (Revenue)

    (3) Rent Service (Revenue)

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    TRANSACTION 9Receipt of Cash from accounts receivable

    The client in transaction 8 (podiatric centre) pays$1900 to FastForward 10 days after it is billed forconsulting services.

    (1) Cash (Asset)

    (2) Account receivable (Asset)

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    TRANSACTIO 10Payment of accounts payable

    FastForward pays CalTech Supply $900 cash aspartial payment for its earlier $7,100 purchase ofsupplies (transaction 4).

    (1) Cash (Asset)

    (2) Account Payable (Liability)

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    TRANSACTION 11Withdrawal of cash by owner

    The owner of FastForward withdraws $200 cashfor personal use.

    (1) Cash (Asset)(2) Withdrawal (Equity)

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    SUMMARYOF TRANSACTIONS

    Other transactions were executed during December and the summary ofall transactions is shown below:

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    FINANCIAL STATEMENTS

    Lets prepare the financial statements reflectingthe transactions we have recorded.

    P 2

    Income statement (Statement of

    comprehensive income) Statement of changes in equity

    Balance sheet (Statement of financial

    position)

    Statement of cash flows

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    The income statementdescribes a companys revenues andexpenses along with the resulting net income or loss over a

    period of time due to earnings activities.

    INCOME STATEMENTP 2

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    STATEMENT OF CHANGES IN EQUITYP 2

    FASTFORWARD

    Statement of Changes in Equity

    For Month Ended December 31, 2011

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    TheBalance Sheetdescribes a companys financialposition at a point in time.

    BALANCE SHEETP 2

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    End of Chapter 1