BBA UST Topic2 Accounting Concept & Practice

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Accounting Concept and Practice

Topic 2



To provide information useful

for making investment andlending decisions

Generally Accepted

Accounting Principles• What is the primary objective of financial

reporting?



Accounting Principles

• Accounting

period

• Conservatism• Realization

• Matching

• Consistency• Materiality

Basic Concepts

• Money

measurement

•Entity

• Going concern

• Cost

• Dual aspect

Slide 2-1



Owner

The Entity Concept

The owner of a clothing store removes $100 from the store’scash register for personal use. Should the store’s accounting

records show that the owner took this cash?

Slide 2-2



The Entity Concept

Yes, because of the entity concept . This conceptrequires that the accounting records of the

clothing store show that the business has less

cash than it had previously.

Slide 2-3



The entity will continue

to operate in the future.

The Going Concern Concept



Question

• Assume your company manufactures

appliances and sells them to a number of

mass merchandisers, such as Jaya Jusco,Carrefour, etc. In reading the financial

statements for these customers, why would

the going concern assumption be importantto you?



Assets and services

acquired

should be recorded

at their actual cost.

The Cost Principle



The Cost Concept--Nonmonetary Assets

Land purchased last year for $250,000 has a current marketvalue of $270,000. What amount should be shown in the

accounting records to reflect ownership of this land?

Slide 2-6



The Cost Concept--Nonmonetary Assets

The land should be shown at the original purchase price of $250,000 because of the cost concept.

Slide 2-7



The Cost Concept--Monetary Assets

A company invested surplus cash in 100,000 shares of thecommon stock of General Electric. The cost of per share was

$60; therefore, the firm spent $6,000,000. By the end of the

fiscal period, the stock had a fair market value of $65 per share.

What amount should be shown on the balance sheet?

Slide 2-8



The Cost Concept--Monetary Assets

The fair value of the stocks is $6,500,000.

This is the amount that should be shown for this monetary asset.

Slide 2-9



Exercise

(1) Timberland Bhd is now in its 30th year of

business. The founder of the company is

planning to retire at the end of the year and turn the business over to his daughter.



Understandability Relevance

Reliability Comparability andConsistency

What Makes Accounting Information

Useful?



Accounting Limitation (Constraints)

• Information limited to quantitative terms.- Matters such as morale of workforce and skill not included

• Largely confined to analysis of past events

- Financial forecast maybe unreliable

• Accounting not an exact science – Financial statementsinvolve the exercise of judgment and maybe less reliable tousers e.g. estimate remaining useful life of machine or theability of customer who owes the business to pay up

• The financial statement is expressed in monetary unit subjectto changing in value especially in time of high inflationwhere the price of goods become very high.



What is an Account?

• A record used to summarise all increases

and decreases in particular asset, such as

cash, or any other type of asset, liability,owners equity, revenue or expenses

• The famous accounting equation:-

Assets = Capital + Liabilities



.

Assets:-Assets are possessions or resources

owned by an entity; includes physical or

tangible possessions such as property, plant,machinery, stock, cash. Intangible Assets such

as copyright and patent rights and debts owed.

Capital:- The amount owners have invested

in an entity

Liabilities:- Amount owed by the entity to

outside parties. Include loans, bank overdrafts,

creditors



The Dual-Aspect Concept Slide 2-10

Ms. Jones opens a bank account for

the business by depositing $40,000.

Assets = Liabilities + Owners’ equity Assets = Equities

+ $40,000 + $40,000 =




The business borrows

$15,000 from the bank.

+ $40,000 = $40,000

Assets = Liabilities + Owners’ equity

+ 15,000 + 15,000



Assets = Liabilities + Owners’ equity


Assets = Equities

+ $40,000 = $40,000

+ 15,000 + 15,000

$55,000 $15,000 $40,000



Economic

Resources

Claims to

Economic

Resources

The Accounting Equation

Assets = Liabilities + Owner’s Equity



Assets are economic resources

which are owned by a business

and are expected to benefit

future operations.

The Accounting Equation Slide 1-10

Assets = Liabilities + Owners’ Equity



The Accounting Equation

Liabilities are obligations

of the entity to outsideparties who have

furnished resources

Slide 1-11

Assets = Liabilities + Owners’ Equity



Owner’s Equity

• What is owner’s equity?

• It is what’s left of the assets after liabilities

have been deducted.

– the same as net assets

– the owner’s claim on the entity’s assets



Transactions that Affect

Owner’s Equity OWNER’S EQUITY

INCREASESOWNER’S EQUITY

DECREASES

Owner Investmentsin the Business

Revenues Expenses

Owner Withdrawalsfrom the Business

Owner’s Equity



Revenues

• What are revenues?

• They are amounts received or to be

received from customers for sales of products or services.

– sales

– performance of services – rent

– interest



Expenses

• What are expenses?

• They are amounts that have been paid or

will be paid later for costs that have beenincurred to earn revenue.

– salaries and wages

– utilities – supplies used

– advertising



Accounting for Business

Transactions• What is a transaction?

• It is any event that both affects the financial

position of the business and can be reliablyrecorded.




Transactions1 Gay Gillen invests $30,000 to begin Gay

Gillen eTravel.

2 Gillen purchases an office location, paying$20,000 in cash.

3 She buys office supplies, agreeing to pay

$500 in 30 days.

4 She earns and collects $5,500 revenues.




Transactions5 Gillen performs services, and the client

agrees to pay RM 3,000 within one month.

6 During the month, she pays RM 3,100 for expenses incurred.

7 Gillen pays RM 300 to the store from whichshe purchased RM 500 worth of supplies.

• What is the effect of these transactions onthe accounting equation?



Owner’s Assets = Liabilities + Equity

1) Cash +RM30,000 +RM30,000

2) Cash – 20,000Land + 20,000

3) Supplies + 500 + 500

4) Cash + 5,500 + 5,500

5) Receivable + 3,000 + 3,0006) Cash – 3,100 – 3,100

7) Cash – 300 – 300

Totals + RM35,600 + 200 +RM35,400


Transactions




Transactions• Notice that the equation always stays in

balance.

• Each transaction affects at least twoaccounts, sometimes more.

• Some transactions affect only one side of

the equation; some affect both sides.




Transactions• Other transactions that took place were

as follows:

• The business collected $1,000 from theclient.

• She sold some land at cost for $9,000.

• She withdrew $2,100 from the business.



– are the final

product of theaccounting process.

– tell how the business is performing

and where it stands.

Financial Statements...



Financial Statements

– income statement

– balance sheet

– statement of cash flows

F i i l St t t Obj ti



Useful to present and potential investors and creditorsin making rational investment and credit decisions

Comprehensible to those who have a reasonable

understanding of business and economic activities andare willing to study the information with reasonablediligence

About the economic resources of an enterprise, theclaims to those resources, and the effects of

transactions and events that change resources andclaims to those resources

About an enterprise’s financial performance during aperiod

F inancial Statement Objectives Financial reporting should provide

information:

Slide 1-13



NET SOLUTIONS

INCOME STATEMENTFor the Month Ended November 30. 2005

$ $

Fees earned 7500.000

Operating expenses

Wage expense 2125.000Rent expense 800.000

Supplies expense 800.000

Utilities expense 450.000

Miscellaneous expense 275.000

Total operating expenses 4450.000

Net Income 3050.000



NET SOLUTIONS

STATEMENT OF OWNER'S EQUITYFor the Month Ended November 30. 2005

Chris Clark, capital, November 1, 2005 $ $Investment on November 1, 2005 25000.00

Net Income for November 3050.0028050.00

Less withdrawals 2000.00Increase in owner's equity 26050.00Chris Clark, capital November 30, 2005 26050.00



NET SOLUTIONS

BALANCE SHEETNOVEMBER 30,2005

Assets Liabilities

Cash 5900.00 Accounts Payable 400.00

Supplies 550.00Land 20000.00 Owner's Equity

Chris Clark, capital 26050.00

Total Assets 26450.00 Total Liabilities and Owner's equity 26450.00

NET SOLUTIONSINCOME STATEMENT



NET SOLUTIONS

BALANCE SHEETNOVEMBER 30,2005

Assets Liabilities

Cash 5900.00 Accounts Payable 400.00

Supplies 550.00

Land 20000.00 Owner's Equity

Chris Clark, capital 26050.00

Total Assets 26450.00 Total Liabilities and Owner's equity 26450.00

NET SOLUTIONS

STATEMENT OF OWNER'S EQUITY

For the Month Ended November 30. 2005

Chris Clark, capital, November 1, 2005 $ $

Investment on November 1, 2005 25000.00

Net Income for November 3050.00

28050.00

Less withdrawals 2000.00

Increase in owner's equity 26050.00

Chris Clark, capital November 30, 2005 26050.00

For the Month Ended November 30. 2005

$ $

Fees earned 7500.000

Operating expensesWage expense 2125.000

Rent expense 800.000

Supplies expense 800.000Utilities expense 450.000

Miscellaneous expense 275.000

Total operating expenses 4450.000

Net Income 3050.000



End of Topic 2

BBA UST Topic2 Accounting Concept & Practice

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