Lecture 2

 Entity Principle  A business entity is an economic unit that engages in identifiable business activities  Separate from the personal affairs of its owner

 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

 The Cost Principle ◦ The Going Concern Assumption ◦ The Objectivity Principle ◦ The Stable-Dollar Assumption

 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

 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

 Sole Proprietorship  Partnership  Corporation

 Exercise 2.3  Exercise 2.8

 Assets = Liabilities + Owner’s Equity  The effects of Business Transactions ◦ Exercise 2.6

 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 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 is reported to the Owner’s Equity Section of the 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

 Analyzing and recording transactions via journal entriesjournal entries  Posting journal entries to ledger accountsledger accounts  Preparing unadjusted trial balanceunadjusted trial balance  Preparing adjusting entries at the end of the periodadjusting entries  Preparing adjusted trial balanceadjusted trial balance  Preparing financial statementsfinancial statements  Closing temporary accounts via closing entriesclosing entries  Preparing post-closing trial balancepost-closing trial balance

 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

 Debits refer to the left side of an account, and credits refer to the right side of an account

AccountDebit (Dr.)Credit (Cr.) AssetsIncreaseDecrease Contra Assets Decrease Increase Liabilities DecreaseIncrease Equity DecreaseIncrease Revenue DecreaseIncrease ExpensesIncreaseDecrease DistributionsIncreaseDecrease

 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

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.

 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

 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

 Every transaction is recorded by equal dollar amounts of debits and credits