Part B:Lesson 1

Accounting and Business Transactions

At the end of Lesson 1, learners are expected to: 1. apply the accounting concepts, principles and accounting equation for constructing financial statements 2. explain accounts, journals and ledgers as they relate to recording transactions and describe common accounts 3. evaluate the accounting transaction recording process

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1.
2. 3.

4.
5. 6.

Accounting Concepts and Principles Accounting Equation Financial Statements The Accounts, the Journal and the Ledger Debit and Credit Transaction Recording Process

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1.

Measures business activity Processes data into reports

2.
3.

Communicates results to decision makers

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End product of accounting process Report on business in monetary terms

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Individuals

Businesses

Investors

Creditors

Taxing Authorities

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Financial Accounting

Managerial Accounting

Provides information for external decision makers

Provides information for internal decision makers

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Apply accounting concepts and principles

Generally Accepted Accounting Principles Goal is to provide useful information to those making investment and lending decisions

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Entity Concept

Reliability

Cost

Going Concern

Monetary Unit

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Entity Concept
A business is separate from its owners

Reliability
Accounting information is accurate and free from bias

Cost
Assets are recorded at purchase price

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Going concern
Assumption that business will continue indefinitely

Monetary Unit
In Malaysia. amounts are recorded in RM
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Define and use the accounting equation

Assets =

Liabilities + Stockholders equity

Economic Resources

Claims to Economic Resources

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Economic resources that have a future benefit

Claims to Assets:

Liabilities
Debts payable to outsiders

Owners equity
Owners claims to the assets of the business In a corporation, stockholders equity

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Assets =

Liabilities + Stockholders equity

Paid-in capital

Retained earnings

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Stockholders equity

Paid-in capital Common stock

Retained earnings + Net income - Dividends

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Retained earnings
+ Net income

Revenues

- Expenses

- Dividends

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Amounts earned by delivering goods or services to customers

Outflows of assets or increasing liabilities in the course of delivering goods or services to customers

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Assets

Liabilities Stockholders equity

Nice Cuts Love Dry Cleaners Hudson Gift and Cards

$? ? 85,000 102,000

$25,000 ? ? 49,000

$43,000 54,000 ??

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Assets

Liabilities Stockholders equity

Nice Cuts Love Dry Cleaners Hudson Gift and Cards

$68,000

$25,000 ? $31,000 49,000

$43,000 54,000 ? $53,000

85,000 102,000

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An event that affects the financial position of a particular entity Can be recorded reliably Every transaction impacts at least two items The accounting equation balances before and after each transaction

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Explain and prepare financial statements

Income Statement Retained Earnings Statement

Balance Sheet Cash Flow Statement

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Reports on profitability of business

Revenues
equals

Expenses

Net income

If expenses > revenue =

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Summary of changes in an entitys retained earnings during a specific period

Beginning Retained earnings Plus: Net income (or minus net loss) Less: Dividends Equals: Ending Retained earnings

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Reports the entitys assets, liabilities, and stockholders equity as of a specific date
Balance Sheet
Liabilities

Assets

Equity

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Reports cash receipts and cash payments during a period

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Goth Inc. Income Statement Month ended September 30, 2011 Revenue: Service revenue Expenses: Rent expense Advertising expense Total expenses Net income $1,000 300 1,300 $ $5,400

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Goth Inc. Statement of Retained Earnings Month ended September 30, 2011 Retained earnings, September 1, 2011 Add: Net Income Less: Dividends Retained earnings, September 30, 2011

$ 8,000 4,100 $ 12,100 (2,200) $ 9,900

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Goth Inc. Balance Sheet

September 30, 2011
Assets Cash Accounts receivable Supplies Land $8,500 Accounts payable 5,200 Stockholders' Equity 16,700 9,900 26,600 Liabilities $ 700

600 Common stock 13,000 Retained earnings Total stockholders' equity

Total assets

Total liabilities & stockholders' equity

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Income Statement

Revenues - Expenses

Net Income

Statement of Retained Earnings

Increased by Net Income

Decreased by Dividends

Balance Sheet

Assets

Liabilities + Equity
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Income Statement

Statement of Retained Earnings

Balance Sheet

Demonstrates profitability

Shows changes in Retained earnings

Displays financial position

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Explain accounts, journals, and ledgers as they relate to recording transactions and describe common accounts

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Basic summary device Detailed record of increases and decreases in specific assets, liabilities, or stockholders equity accounts during a period

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Journal
Ledger

Listing of all accounts and their balances

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Assets

Liabilities

Equity

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Economic resources that will benefit the business in the future

debt (something owed)

Owners

claim to the assets

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All Individual Accounts Combined Make Up the Ledger

Accounts payable Cash

Common stock

Liability accounts

Ledger

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Define debits, credits, and normal account balances. Use double entry accounting and T-accounts.

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Record dual effects of each transaction Each transaction has a:

Receiving side Giving side

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Account Name (Left Side) (Right Side)

Debit
Abbreviated dr

Credit
Abbreviated cr

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Whether an account is increased by debit or a credit is determined by the account type Debits are not good or bad

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Assets
Debit

Liabilities
Debit

Stockholders equity
Debit

Credit

Credit

Credit

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Assets
Debit Credit

Liabilities
Debit Credit

Equity
Debit Credit

Normal Balance

Normal Balance

Normal Balance

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Retained earnings Debit Credit Dividends

Revenues
Debit

Debit

Credit

Credit

Expenses
Debit Credit

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Retained earnings
Retained earnings
Debit

Dividends
Debit Credit

Revenues
Debit Credit

_ Expenses
Debit Credit

Credit

Normal Balance

Normal Balance

Normal Normal Balance Balance

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Assets Dividends Expenses

Liabilities Retained earnings Common stock Revenues

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Cash

$20,000 $?

$12,000

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List the steps of the transaction recording process

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Identify each account affected and its type

Determine if each account is increased or decreased

Record transaction in the journal

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Four parts:
Date of transaction Title of account debited with dollar amount Title of account credited with dollar amount Brief explanation of transaction

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Transaction Date

Accounts Affected Page 1 Debit Credit 30,000 30,000

Date Apr1 Cash Common stock Issued stock

Journal Description

Explanation of transaction

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Dollar amount of debits and credits

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Journalizing transactions and posting [10-15 min]

Jonathan Law Firm performed legal services for a client who could not pay immediately. The business expected to collect the $9,000 the following month. Later, the business received $5,400 cash from the client. Requirement: 1. Record the two transactions for Jonathan Law Firm. Include an explanation for each transaction. 2. Open these T-accounts: Cash; Accounts receivable; Service revenue. Post to all three accounts. Compute each T-accounts balance, and denote as Bal.
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Prepare the trial balance from the T-accounts

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Summary of the ledger Lists all accounts with their balances Accuracy check
Debits should equal credits

NOT a balance sheet

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Search for missing account

Divide the difference between total debits and total credits by two Divide out of balance amount by nine

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GENERAL JOURNAL
DATE DESCRIPTION
REF

DEBIT

CREDIT

Apr 1

Cash Common stock

30,000 30,000

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GENERAL JOURNAL
DATE DESCRIPTION
POST REF

Page 1
DEBIT CREDIT

Apr
1

Cash Common stock

2 CASH Account No. 101
Jrnl. Ref. Credit

101 301
4

30,000 30,000

Date

Jrnl. Ref.

Debit

Date

1-Apr

J.1.

30,000

3 5

COMMON STOCK
Date Jrnl. Ref. Debit Date

Account No. 301

Jrnl. Ref. Credit

1-Apr

J.1.

30,000

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1.
2.

3.

4.

5.

Comprehend Chapters 1 and 2 from HHO Complete E1-46 and E2-63 (send via email before Friday) Presentation and submission: Case Kim Fuller (Group 1) Read article Finance Functions in a Global Corporation, Harvard Business Review, Jul-Aug, 2008 Watch video 1

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Comprehend Chapters 3 and 4 from HHO Complete E3-42 and E4-37 Analyse and prepare for presentation/participation for submission: Cases 1 and 2 Sherman Lawn and Dave and Reba Gue Watch Video 2

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Briefing on MyAccountingLab
Date: 17th July 2010 Time: 10 a.m. Venue: DKZ

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