Introduction to the Accounting Environment and Accounting Equation Chapter 1 1 1 1 1 1

Learning Outcomes Understand the importance of financial information in business Understand the basic concepts and purpose of financial accounting Understand the objective and characteristics of financial statements Identify the users of financial statements and their information needs Identify the differences and changes between assets, liabilities and capital

ACCOUNTING Definition: an information system that provides report to stakeholders about the economic activities and condition of a business. So, accounting is the process of: - Identifying - Measuring - Communicating economic information to permit informed judgments and decisions by users of the information

Tutorial 1: Basic Accounting Concepts Business Entity Going Concern Historical Cost Objectivity Consistency Conservatism Accounting Period Accrual Concept Matching Principle Types of Business Units

Transaction Analysis Equation The accounting equation must remain in balance after each transaction. Liabilities Equity Assets = +

Let’s discuss the components of the equation

Balance Sheet Statement that lists all the assets, owner’s equity and liabilities at a particular date. Current items are those expected to come due (both collected and owed) within the longer of one year or the company’s normal operating cycle.

Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle.

Long-term investments are expected to be held for the longer of one year or the operating cycle.

Plant assets are tangible long-lived assets used to produce or sell products and services.

Intangible assets are long-term resources used to produce or sell products and services and that lack physical form.

Current liabilities are obligations due within the longer of one year or the company’s operating cycle.

Long-term liabilities are obligations not due within the longer of one year or the company’s operating cycle.

Equity is the owner’s claim on the assets.

Example of Transaction Analysis 1. J. Scott, the owner, contributed $20,000 cash to start the business. The accounts involved are: (1) Cash (asset) (2) J. Scott, Capital (equity) 21

J. Scott, the owner, contributed $20,000 cash to start the business. Continue… J. Scott, the owner, contributed $20,000 cash to start the business. 21

2. Purchased supplies (Ali) paying $1,000 cash. Continue… 2. Purchased supplies (Ali) paying $1,000 cash. The accounts involved are: (1) Cash (asset) (2) Supplies-Ali (asset) 25

Purchased supplies paying $1,000 cash. Continue… Purchased supplies paying $1,000 cash. 25

3. Purchased equipment for $15,000 cash. Continue… 3. Purchased equipment for $15,000 cash. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) 29

Purchased equipment for $15,000 cash. Continue… Purchased equipment for $15,000 cash. 29

Continue… 4. Purchased Supplies on credit of $200 and Equipment of $1,000 also in credit. The accounts involved are: (1) Supplies-Purchases (asset) (2) Equipment (asset) (3) Accounts Payable (liability) 30

Purchased Supplies of $200 and Equipment of $1,000 on account. Continue… Purchased Supplies of $200 and Equipment of $1,000 on account. 30

5. Borrowed $4,000 from 1st American Bank. Continue… 5. Borrowed $4,000 from 1st American Bank. The accounts involved are: (1) Cash (asset) (2) Notes payable-Loan (liability)

Borrowed $4,000 from 1st American Bank. Continue… Borrowed $4,000 from 1st American Bank.

Continue… The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Now let’s look at transactions involving revenue, expenses and withdrawals. 32

6. Rendered consulting services (buss. xtvt) receiving $3,000 cash. Continue… 6. Rendered consulting services (buss. xtvt) receiving $3,000 cash. The accounts involved are: (1) Cash (asset) (2) Revenues-I/S (equity) 32

Rendered consulting services receiving $3,000 cash. Continue… Rendered consulting services receiving $3,000 cash. 32

7. Paid salaries of $800 to employees. Continue… 7. Paid salaries of $800 to employees. The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Remember that the balance in the salaries expense account actually increases. But, equity actually decreases because expenses reduce equity.

Paid salaries of $800 to employees. Continue… Paid salaries of $800 to employees. Remember that expenses decrease equity.

8. J. Scott withdrew $500 from the business for personal use. Continue… 8. J. Scott withdrew $500 from the business for personal use. The accounts involved are: (1) Cash (asset) (2) J. Scott, Withdrawals (equity) Remember that the balance in the J. Scott, Withdrawals account actually increases. But, equity actually decreases because withdrawals reduce equity.

J. Scott withdrew $500 from the business for personal use. Continue… J. Scott withdrew $500 from the business for personal use. Remember that withdrawals decrease equity.

Tutorial 2: Write the accounting equation and the balance sheet Apr. 1 Karen commenced business by depositing cash $25000 in the bank as capital 4 A motor vehicle was purchased and paid with company cheque, $20 000 10 Furniture $4 500 was purchased on credit from Home Style Pte Ltd. 18 Karen withdrew cash $1000 from the business account to pay for his private expenditure 25 A cheque $2500 was paid to Home Style Pte Ltd., as part of the payment for amount owing 30 Karen paid Home Style Pte Ltd. For the balance of the amount owing with his personal cheque

End of Chapter 1