what is accounting ii
TRANSCRIPT
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Business Transactions and
Accounting Equation
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JOIN KHALID AZIZ
MA ECONOMICS EXTERNALCOACHING CLASSES.
MICRO ECONOMICS, STATISTICS &MACRO ECONOMICS.
GUESS PAPERS ANDNOTES AREAVAILABLE
0322-3385752
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JOIN KHALID AZIZ
ECONOMICS OFICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTINGOFICMAP STAGE1,3,4 ICAP MODULE B, B.COM, BBA, MBA &PIPFA.
COST ACCOUNTINGOFICMAP STAGE 2,3ICAP MODULE D, BBA, MBA & PIPFA.
CONTACT: 0322-3385752 R-1173,ALNOOR SOCIETY
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Outline
Enterprises
Accounting Transactions, Accounting
Events, and Accounting Circumstances Economic Activities and Accounting
Elements
Accounting Equation
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Opening Story
Funding and Spending at College
Assets of a college student
Cash
CD player
Computer
Funding these assets
Sponsored by parents Sponsored by relatives
Borrowed from relatives and acquaintance
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Opening Story (continued
We could deal with the above-mentionedfinancial issues from the following perspectives
How do we fund our daily expenditures and
possessions How do we spend the funds which we have sourced
What about the relationship between the fundswhichwe have sourced and our daily expenditures and
possessions
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Forms of Enterprise
There are three major forms of enterprise:
Sole-proprietorship
PartnershipCorporations
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Sole proprietorships
Single person owns the business
Not separate from its owner in terms of
responsibility and liability The business is the owner and the owner
is the business
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Partnership
Owned by two or more people
Similar to a sole proprietorship
Not separate from the owners in terms ofresponsibility and liability
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Corporations
Legally separate and financially separatefrom the owners
Ownership in a corporation is divided intounits called shares of capital stock
Owners are called shareholders orstockholders
Corporations are separate legal entities
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Characteristics of Enterprise
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Four Types of Enterprise
Service organization provides services (doessomething for you) rather than selling something
Merchandising business buys goods, adds
value to them, then sells them to customers
Manufacturer makes the products it sells
Financial services company doesnt make
tangible products and doesnt sell productsmade by other companies; deals in servicesrelated to money
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Resources in an Enterprise
Major resources
Human resources
Properties,plant and equipment,supplies, rawmaterials, finished products or inventories
Financing
In cash or bank deposits
In material forms
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An example-Beauty Photo Store
Movements of Material Resources
in an Enterprise
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Movements of Material Resources
in an EnterpriseMovements in a manufacturingenterprise cash/bank depositraw materials work-in-
processfinished productsfincash/bankdeposit
Movements in a merchandisingenterprise
cash/bank depositinventory cash/bankdeposit
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Activities of Enterprise
Three major phases of businessactivities:
InceptionOperating
Liquidation
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Inception and investment of funds
External funding
State, legal persons, privates or foreign
investors
Financing from banking institutions, other legal
persons or privates
Ownersequity and liabilities
Inception of Enterprise
InvestmentInvestment
of ownersof ownersFinancing ofFinancing of
creditorscreditorsTotal funds of a firmTotal funds of a firm
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Inception of Enterprise
Forms ofInvestment
Monetary(cash/bank deposits)
Property, plants and equipment Raw materials and goods,etc.
Sources and changes of funds
Increase of ownersequity or liabilities
Increase of assets
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Operating activities and changes of asset
Changes of assets in Beauty Photo Store
Connections between Beauty Photo Store and
Suppliers, clients, etc.
Operating Activities
cashcash
2 cameras2 cameras
lenslens
producingproducingequipmentequipment
suppliessupplies
photosphotos cashcash
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Liquidation of Enterprise
Liquidation of enterprise and payoff offunds Payment of taxes
Distribution of profits Declaration of dividends
Payoff of borrowings
Withdrawals and changes of funds Decrease of assets
Decrease of liabilities or ownersequity
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Accounting Transactions
A business transaction is an event that
affects the financial position of a business
and may be reliably recorded
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Economic Activities and AccountingElements
Accounting element
Uses of funds and assets
cash equipment,etc.
Resources of funds and equity Borrowings and equity of creditors-liabilities
Investments and ownersequity
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Uses ofFunds
Uses and changes of funds
Beauty Photo Store
From cash to equipment Using equipment to produce photos
From photos to cash
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Circulation ofFunds
Circulation of funds:
Uses of funds
Beauty Photo Store Cost of equipment
Cost of supplies
Human costs
Uses and payoff of funds What are the operating purposes for
Beauty Photo Store
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Payoff ofFunds
Payoff ofFunds and Revenues
Cash receptions and revenues by BeautyPhoto Store
Net increase of funds and profit
Difference between uses and payoff ofcash
Nature of profit?
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Accounting Transactions
Accounting transactions-Economicexchange between two differentaccounting entities
Mutual exchange
A purchases an asset,paying cash or bearing theresponsibility of paying cash in future
B sells the asset, earning the rights of receiving orcollecting cash
One-way transaction
Investments or donations to another accounting
entity
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Accounting Events
Accounting events-internal transferring ofresources among departments of a sameentity
allotments of raw materials for plants
Damages caused by earthquakes
External versus internal events
Between different entities
Within a same entity
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Accounting Circumstances
Accounting circumstances-usually an outcomeof collaboration of multiple events
Circumstances and their impacts
Changes in prices,exchange rates
How to determine these changes
E.g. uncollectability of receivables due to the
liquidation of the debtor Unpredictability
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Accounting Elements
Assets
Liabilities
Ownersequity Revenues
Expenses
Profits
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Further Thoughts on Assets
Human resources as an asset
Value and labor of Manager of Beauty PhotoStore
Cameramen and shop
assistants
Natural resources as an asset?
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Liabilities
Liabilities are creditors claims to theassets. Liabilities are obligations to
outsiders
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OwnersEquity
Owners Equity is the owners claim tothe assets. It is the amount of assets
that remains after subtracting theliabilities.
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Revenue
Revenues (sales) are increases in owners'equity arising from increases in assetsreceived in exchange for the delivery ofgoods or services to customers.
Revenues are increases in economicresources, either through increases to
assets or reductions to liabilities
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Revenue Recognition
Revenue should be recognized in the financial
statement when:
the performance has been achieved
there is reasonable assurance regarding themeasurement and collectability of theconsideration
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Expense
Expenses are decreases in owners' equity thatarise because goods or services are delivered tocustomers.
Expenses are decreases in economic resources,either through outflows or the using-up of assetsor incurrence of liabilities from delivering orproducing goods, rendering services, or carryingout other activities that constitute the entitysnormal business
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Expense Recognition
Cost, expenditure, and expense
General recognition criteria
Approaches to expense recognition
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General Recognition Criteria
Recognized items must:
meet the definition of a financial statementelement
have a valid measurement basis and amount
Financial statement elements are based
on future economic benefits or sacrifices;these must be probable for recognition tobe appropriate
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General Recognition Criteria (cont)
Expenses are decreases in economicresources, either by way of outflows orreductions of assets or incurrence of
liabilities, resulting from an entitysordinary revenue generating or servicedelivery activities [CICA 1000.38]
Asset or expense? if the asset recognitioncriteria are met, an asset is recorded. Ifnot, an expense is recorded
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Approaches toExpense Recognition
Definitional approach: expenses arecreated either through the reduction of anasset or the increase in a liability
Matching approach: once revenues aredetermined in conformity with the revenueprinciple for any reporting period, the
expenses incurred in generating therevenue should be recognized in thatperiod
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Profit / Loss
Income (profit or earnings) is the excess ofrevenues over expenses
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Accounting Equation
Assets Liabilities = Owners Equity
Net Assets = Owners Equity
Every accounting transaction has an equal affect
on both sides of the equation. Purchase a $20,000 car for cash.
Increase asset car and decrease asset cashby $20,000. No net change to assets.
Purchase a $20,000 car on credit. Increase asset car and increase liabilities by
$20,000.
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Dual Aspect of
Accounting Equation Assets = Liabilities + Owners equity. LHS = RHS.
First view:
Resources = Obligations to creditors or claims onresources + Residual claim.
Second view:
Amounts invested in resources = how these
amounts were financed. Resources = financed by creditors + financed by
owners.
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Changes to the accounting equation ofBeauty Photo Store
Beauty Photo Store
-- AnI
llustration
Asset:130000Asset:130000 Liability:30000Liability:30000 Equity:100000Equity:100000
Liabilities30000Liabilities30000Owners equityOwners equity
10000010000060006000
AssetsAssets130000130000150001500090009000
Profit:6000Profit:6000Revenue:15000Revenue:15000 Expense:9000Expense:9000
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Summary
Economic resources in the enterprise-human,financial and material resources
Economic transactions derive from the operatingactivities of an enterprise
Accounting elements are basic components ofeconomic transactions
Accounting elements comprise ofassets,liabilities, ownersequity, revenues,
expenses and profit Economic transactions are viewed in the formsof increase or decrease in accounting elements
Accounting equationALOE
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Case forDiscussion
Marks and Spencer In 1882, a Russian refugee named Michael Marks came
to the North East of England. Needing work, he put atray round his neck and started selling haberdashery inthe villages around Leeds. Two years later he borrowed5 from his friend Isaac Dewhirst to buy stock, and wasable to open a stall in Leeds market.
Within ten years Markss success as a trader hadenabled him to establish a chain of stalls in marketsthroughout North East England. In 1894, Marks realized
that his business was getting too large for him tomanage effectively on his own. He decidedto form a partnership withTom Spencer and Marks& Spencer was born.
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Case forDiscussion (cont)
The business continued to thrive and grow, so in 1903 Marksand Spencer registered their partnership as a private limitedcompany. This allowed more people to become involved withmanaging the growing company and increase its finances bybuying shares in the company. One shareholder was Israel
Sieff, who became chairman of the company in 1917. Sieffcan be credited with shaping the future of Marks & Spencer.By 1926, Marks & Spencer had opened 125 stores. In order tocontinue its successful development the company finallyregistered as a public limited company (plc) in order to obtainas much capital as possible to finance its continued growth.
And the rest, as they say,is history.
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Attention Commerce Students
ACCOUNTING(FINANCIAL & COST) OF
ICMAP STAGE 1,2,3,4 (NEW CLASSES)
CA..MODULE B,C,D
PIPFA (FOUNDATION,INTERMEDIATE,FINAL)
ACCA-F1,F2,F3BBA,MBA
B.COM(FRESH),M.COM
MA-ECONOMICS..O/A LEVELS
KHALID AZIZ..0322-3385752http://finance.groups.yahoo.com/group/cost-
accountants