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General Accounting Principle

Recording Business
Transactions
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Accounting = Recording +
Classifying + Summarizing +
Interpreting of Economic
Transactions.
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 Tools of The Recording Process
Debits and Credits

Journal Entries

Ledger Accounts
First, however, lets look at...

The
Accounting
Cycle
 Steps in The Accounting Cycle

Analyze Journalize Post entries to Prepare a trial

source transactions the accounts balance.
documents. in the general in the general
journal. ledger.

Prepare financial
statements.
 General Ledger Account
T-Account Format

For the sake of

simplicity, we often
use this format in Account Name
teaching accounting Debit Credit
even though it is no
longer used in
practice.
 What Are Debits and Credits?
Tools used for recording transactions
Debit (DR)
Credit (CR)

Debit refers to the LEFT and Credit to the

RIGHT side of the T-Account.
Debit and Credit are neutral terms and do not
connote value judgments. Neither is good or
bad!
 What Are Debits and Credits?
Tools used for recording transactions
Debit (DR)
Credit (CR)

Debit refers to the LEFT and Credit to the

RIGHT side of the T-Account
Account Name

LEFT RIGHT
Types of Ledger Accounts

Assets

Liabilities

Stockholders Equity

Revenues

Expenses
 Using Debits and Credits
Again, debits and credits are used to increase
or decrease account balances.
Determining whether to use a debit or credit
to record an increase or decrease depends on
the type of account in question.
The Balance Sheet equation is the basis for the
determination.
 Balance Sheet Model
(Revisited)

A = L + SE
 Balance Sheet Model
(Revisited)
Assign a T-Account to each element of the
Balance Sheet Model

A = L + SE
Account Name Account Name Account Name
Debit Credit Debit Credit Debit Credit
 Balance Sheet Model
(Revisited)
Debits and credits affect the Balance Sheet
Model as follows:

A = L + SE
Account Name Account Name Account Name
Debit Credit Debit Credit Debit Credit
 Balance Sheet Model
(Revisited)
Debits and credits affect the Balance Sheet
Model as follows:

A = L + SE
ASSETS Account Name Account Name
Debit Credit Debit Credit Debit Credit
for for
Increase Decrease
 Balance Sheet Model
(Revisited)
Debits and credits affect the Balance Sheet
Model as follows:

A = L + SE
ASSETS LIABILITIES Account Name
Debit Credit Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase
 Balance Sheet Model
(Revisited)
Debits and credits affect the Balance Sheet
Model as follows:

A = L + SE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase
 Normal Balances
The normal balances for each of the FIVE types
of accounts are as follows:

Account Name
Debit Balance Credit Balance
Assets Liabilities
Expenses Stockholders
Equity
Revenues
 Alternative Approach #3
A L O R E Acronym
Debit Credit
A (ssets) + -
L (iabilities) - +
O (wners' equity) - +
R (evenues) - +
E (xpenses) + -
 Recording Transactions
Initially, all transactions are recorded in the
General Journal.
Each transaction always affects at least
two different accounts.
One account has a debit effect.
The second account has a credit effect.

This methodology was named double

entry accounting by whom?
Pacioli
 Categories of
General Ledger Accounts
The five types of accounts fall into one of
Three categories

Personal Account

Real Accounts

Nominal Accounts
 Nominal Accounts
Nominal accounts include revenues and
expenses.
Nominal accounts are temporary.
Nominal account balances are closed out to
zero at the end of the fiscal year.
 Numbering Accounts
The listing of all accounts and their account
numbers is called the chart of accounts.
 Numbering Accounts
The listing of all accounts and their account
numbers is called the chart of accounts.
A typical account numbering scheme might
appear as follows: i.e.

Assets 01000001-0100999
Liabilities 14010001-1418000
Expenses 30010001-30070002
 Economics and General Accounting Principles
(Weightage 5%-15%)
 Essential business & accounting terminology:
 Accounts Receivable AR
The amount of money owed by your
customers after goods or services have been
delivered and/or used.
 Accounts Payable AP
The amount of money you owe creditors
(suppliers, etc.) in return for good and/or
services they have delivered.
Assets (Fixed and Current) FA and CA

Current assets are those that will be used within one

year. Typically this could be cash, inventory or
accounts receivable. Fixed assets (non current) are
more long-term and will likely provide benefits to a
company for more than one year, such as a building,
land or machinery.
 Balance Sheet BS
A financial report that summarizes a
company's assets (what it owns), liabilities
(what it owes) and owners equity at a given
time.
 Capital CAP
A financial asset and its value, such as cash or
goods. Working capital is calculated by taking
your current assets subtracted from current
liabilities.
 Cash Flow CF
The revenue or expense expected to be
generated through business activities (sales,
manufacturing, etc.) over a period of time.
Having a positive cash flow is essential in
order for businesses to survive in the long run.
 Cost of Goods Sold COGS
The direct expense related to producing the
goods sold by a company. This may include
the cost of the raw materials (parts) and
amount of employee labor used in production.
Expenses (Fixed, Variable, Accrued, Operation)
FE, VE, AE, OE
The fixed, variable, accrued or day-to-day
costs that a business may incur through its
operations. Examples of expenses include
payments to banks, suppliers, employees or
equipment.
 Generally Accepted Accounting
Principles GAAP
A set of rules and guidelines developed by the
accounting industry for companies to follow
when reporting financial data. Following these
rules is especially critical for all publicly traded
companies.
 General Ledger GL

A complete record
of the financial transactions over the life of a
company. Consolidation of Sub ledger.
 Liabilities (Current and Long-Term)
CL and LTL
A company's debts or financial obligations it
incurred during business operations. Current
liabilities are those debts that are payable
within a year, such as a debt to suppliers.
Long-term liabilities are typically payable over
a period of time greater than one year. An
example of a long-term liability would be a
bank loan.
 Net Income NI
A company's total earnings, also called net
profit or the bottom line. Net
income is calculated by subtracting totally
expenses from total revenues.
 Owner's Equity OE
An owners equity is typically explained in
terms of the percentage amount of stock a
person has ownership interest in the
company. The owners of the stock are
commonly referred to as the shareholders.
 Present Value PV
The value of how much a future sum of
money is worth today. Present value helps us
understand how receiving $100 now is worth
more than receiving $100 a year from now.
 Profit and Loss Statement P&L
A financial statement that is used to
summarize a companys performance and
financial position by reviewing revenues,
costs and expenses during a specific period of
time; such a quarterly or annually.
 Return on Investment ROI
A measure used to evaluate the financial
performance relative to the amount of money
that was invested. The ROI is calculated by
dividing the net profit by the cost of the
investment. The result is often expressed as a
percentage.
 Cost classification & analysis
Cost is a sacrifice of resources to obtain a benefit or
any other resource. For example in production of a
car, we sacrifice material, electricity, the value of
machine's life (depreciation), and labor wages etc.
Thus these are our costs.
Product Costs Vs. Period Costs
Fixed Costs Vs. Variable Costs
 Interest & time value of money
Interest is payment from a borrower or deposit-taking financial institution
to a lender or depositor of an amount above repayment of the principal
sum (i.e. the amount borrowed). It is distinct from a fee which the
borrower may pay the lender or some third party.
The time value of money (TVM) is the idea that money available at the
present time is worth more than the same amount in the future due to its
potential earning capacity. This core principle of finance holds that,
provided money can earn interest, any amount of money is worth more
the sooner it is received. TVM is also referred to as present discounted
value.
 Cost benefit analysis (CBA)
sometimes called benefit cost analysis (BCA), is a systematic approach to
estimating the strengths and weaknesses of alternatives (for example in
transactions, activities, functional business requirements); it is used to determine
options that provide the best approach to achieve benefits while preserving
savings. The CBA is also defined as a systematic process for calculating and
comparing benefits and costs of a decision, policy (with particular regard
to government policy) or (in general) project.
 Risk analysis
Risk analysis is the study of the underlying uncertainty of a given course of action.
Risk analysis refers to the uncertainty of forecasted future cash flows streams,
variance of portfolio/stock returns, statistical analysis to determine the probability
of a project's success or failure, and possible future economic states.
Risk analysts often work in tandem with forecasting professionals to minimize
future negative unforseen effects.
Risk manage model: TARA
 Investment decisions
investments are funds invested in a firm or enterprise for the purposes of
furthering its business objectives. Capital investment may also refer to a
firm's acquisition of capital assets or fixed assets such as manufacturing
plants and machinery that are expected to be productive over many
years. Sources of capital investment are manifold and can include equity
investors, banks, financial institutions, venture capital and angel investors.
While capital investment is usually earmarked for capital or long-life
assets, a portion may also be used for working capital purposes.
 Demand Analysis
Demand analysis is a marketing study used to determine what
type of customers are willing to buy a particular product and
how many units they are likely to buy and at what price
range. This information is then used to plan advertising
strategies, determine selling cost and make product
modifications.
 Sales forecasting
Sales forecasting is the process of estimating future sales.
Accurate sales forecasts enable companies to make informed
business decisions and predict short-term and long-term
performance. Companies can base their forecasts on past
sales data, industry-wide comparisons, and economic trends.
 Capital and Revenue Expenditure
Capital expenditures represent major investments of capital that a
company makes to maintain or, more often, to expand its business and
generate additional profits. Capital expenses are for the acquisition
of long-term assets, such as facilities or manufacturing equipment.
Revenue expenses are shorter-term expenses required to meet the
ongoing operational costs of running a business, and thus are essentially
the same as operating expenses.
 Capitalization
Capitalization, in accounting, is when the costs to acquire an asset are
expensed over the life of that asset rather than in the period it was
incurred. In finance, capitalization is the sum of a corporation's
stock, long-term debt and retained earnings. Capitalization also refers to
the number of outstanding shares multiplied by share price.
 Depreciation and subsidy
Depreciation is an accounting method of allocating the cost of a tangible
asset over its useful life. Businesses depreciate long-term assets for both
tax and accounting purposes. For tax purposes, businesses can deduct the
cost of the tangible assets they purchase as business expenses; however,
businesses must depreciate these assets in accordance with IRS rules
about how and when the deduction may be taken.

A subsidy is a benefit given by the government to groups or individuals,

usually in the form of a cash payment or a tax reduction. The subsidy is
typically given to remove some type of burden, and it is often considered
to be in the overall interest of the public.
 Procurement procedures
 Free on board (FOB)
Free on board (FOB) is a trade term that indicates whether
the seller or the buyer has liability for goods that are damaged
or destroyed during shipment between the two parties. "FOB
shipping point" (or origin) means that the buyer is at risk
while the goods are shipped, and "FOB destination" states
that the seller retains the risk of loss until the goods reach the
buyer.
 Cost, insurance and freight (CIF)
Cost, insurance and freight (CIF) is a trade term
requiring the seller to arrange for the carriage of
goods by sea to a port of destination, and provide
the buyer with the documents necessary to obtain
the goods from the carrier.
 Liquidated damages
Liquidated damages (also referred to as liquidated
and ascertained damages) are damages whose
amount the parties designate during the formation
of a contract for the injured party to collect as
compensation upon a specific breach (e.g., late
performance).
 A letter of credit
A letter of credit is a letter from a bank guaranteeing that a buyer's
payment to a seller will be received on time and for the correct amount. In
the event that the buyer is unable to make payment on the purchase, the
bank will be required to cover the full or remaining amount of the
purchase. Due to the nature of international dealings, including factors
such as distance, differing laws in each country, and difficulty in knowing
each party personally, the use of letters of credit has become a very
important aspect of international trade.
 Insurance
Insurance is a means of protection from financial
loss. It is a form of risk management primarily used
to hedge against the risk of a contingent, uncertain
loss.
 An invoice
An invoice is a commercial document that itemizes a
transaction between a buyer and a seller. If goods or services
were purchased on credit, the invoice usually specifies the
terms of the deal, and provide information on the available
methods of payment. An invoice is also known as a bill or
sales invoice.
 Bid Security
The deposit of cash, certified check, cashiers check, bank draf
t, money order, or bid
bond submitted with a bid andserving to guarantee to the ow
ner that the bidder, if awarded the contract, will execute such
contract in accordancewith the bidding requirements and the
contract documents.
 A performance bond
A performance bond is issued to one party of a contract as a
guarantee against the failure of the other party to meet
obligations specified in the contract. It is also referred to as a
contract bond. A performance bond is usually provided by a
bank or an insurance company to make sure a contractor
completes designated projects.
 Competitive bidding.
A competitive bid is a step in the initial public offering process
whereby an underwriter submits a sealed bid to a company
that is making its first issue of stock. After collecting
competitive bids from several underwriters, the issuer awards
the contract to the underwriter with the best price and
contract terms. Competitive bidding is considerably less
common than negotiated bidding, the other main method by
which issuing companies contract with underwriters.