Accounting – semester 2 IBM
TABLE OF CONTENTS
1. Accounting in Action
2. The Recording Process
3. Adjusting the Accounts
4. Completing the Accounting Cycle
5. Accounting for Merchandising Operations
6. Accounting for Receivables
7. Plant Assets, Natural Recourses and Intangible Assets
CHAPTER 1 – Accounting in Action
1. Identify the activities and users associated with accounting.
ACCOUNTING CONSISTS OF THREE BASIC ACTIVITIES:
WHO USES ACCOUNTING DATA?
è Internal Users:
- Marketing: What price should apple charge for an iPod to maximise the company’s net income?
- Management: Which PepsiCo product line is the most profitable? Should any products be
eliminated?
- Finance: Is cash sufficient to pay dividends to Microsoft stockholders?
- Human Recourses: Can General Motors afford to give its employees pay raises this year?
è External Users:
- Creditors: Will United Airlines be able to pay its debts as they come due?
- Investors: Is General Electric earning satisfactory income?
- Investors: How does Disney compare in size and profitability with Time Warner?
2. Explain the building blocks of accounting: ethics, principles, and assumptions.
ETHICS: Are the standards of conduct by which actions are judged as right or wrong. Effectively
financial reporting depends on sound ethical behaviour.
- Sarbanes-Oxley Act (SOX): Law passed by Congress intended to reduce unethical corporate
behaviour.
Accounting 1 1 IBM
,GAAP:
à Generally accepted accounting
principles are a common set of
standards used by accountants. The
primary accounting standard-setting
body in the United states is the
Financial Accounting Standards
body.
MEASUREMENT PRINCIPLES:
- Historical cost principle: An accounting principle that states that companies should record assets
at their cost.
- Fair value principle: An accounting principle stating that assets and liabilities should be reported
at fair value (the price received to sell an asset or settle a liability).
ASSUMPTIONS:
- Monetary unit assumption: An assumption stating that companies include in the accounting
records only transaction data that can be expressed in terms of money.
- Economic entity assumption: An assumption that requires that the activities of the entity be
kept separate and distinct from the activities of its owner and all other economic entities.
§ Proprietorship
§ Partnership Forms of Business Ownership
§ Corporation
3. State the accounting equation, and define its components.
BASSIC ACCOUNTING EQUATION:
- Provides the underlying framework for recording and summarising economic events.
- Assets are claimed by either creditors or owners.
- If a business is liquidated, claims of creditors must be paid before ownership claims.
ASSETS:
- Recourses a business owns
- Provide future services or benefits
- Cash, Supplies, Equipment, etc.
LIABILITIES:
- Claims against assets (debts and obligations)
- Creditors (party to whom money is owed)
- Accounts Payable, Notes Payable, Salaries and Wages Payable, etc.
OWNER’S EQUITY
Increases in owner’s equity:
- Investments by owner are the assets the owner puts into the business.
- Revenues results from business activities entered into for the purpose of earning income.
o Common sources of revenue: Sales, fees, services, commissions, interest, dividends,
royalties, and rent.
Accounting 2 1 IBM
,Decreases in owner’s equity:
- Drawings, an owner may withdraw cash or other assets for personal use.
- Expenses are the cost of assets consumed or services used in the process of earning revenue.
o Common expenses: Salaries expense, rent expense, utilities expense, tax expense, etc.
4. Analyse the effects of business transactions on the accounting equation.
TRANSACTIONS: are a business’s economic events recorded by accountants.
- May be external or internal.
- Not all activities represent transactions.
- Each transaction has a dual effect on the accounting equation.
1. Investment by owner
2. Purchase of equipment for cash
3. Purchase supplies on credit
4. Services performed for cash
5. Purchase of advertising on credit
6. Services performed for cash and credit
7. Payment of expenses
8. Payment of accounts payable
9. Receipt of cash on account
10. Withdrawal of cash by owner
è The two sides of the equation must always be equal.
5. Describe the four financial statements and how they are prepared.
INCOME STATEMENT:
à Reports revenues and expenses for a
specific period.
à Lists of revenues first, followed by expenses.
à Shows net income (or net loss).
à Does not include investments and withdrawal
transactions between the owner and the
business in measuring net income.
OWNER’S EQUITY STATEMENT:
Reports the changes in the owner’s equity for a
specific period. à
The time period is the same as that covered by
the income statement. à
Accounting 3 1 IBM
, BALANCE SHEET:
à Reports the assets, liabilities, and owner’s
equity at a specific date.
à Lists assets at the top, followed by liabilities
and owner’s equity.
à Total assets must equal total liabilities and
owner’s equity.
à Is a snapshot of the company’s financial
condition at a specific moment in time (usually
the month-end or year-end).
CHAPTER 2 – The Recording Process
1. Describe how accounts, debits, and credits are used to record business transactions.
THE ACCOUNT:
- Record of increases and decreases in a specific asset, liability, owner’s equity, revenue, or
expense item.
- Debit = “left”
- Credit = “right”
An account can be illustrated in a T-account form.
DOUBLE ENTRY SYSTEM:
- Each transaction must affect two or more accounts to keep the basic accounting equation in
balance.
- Recording done by debiting at least one account and crediting at least one other account.
- DEBITS must equal CREDITS.
SUMMARY OF DEBIT/CREDIT RULES:
Accounting 4 1 IBM
TABLE OF CONTENTS
1. Accounting in Action
2. The Recording Process
3. Adjusting the Accounts
4. Completing the Accounting Cycle
5. Accounting for Merchandising Operations
6. Accounting for Receivables
7. Plant Assets, Natural Recourses and Intangible Assets
CHAPTER 1 – Accounting in Action
1. Identify the activities and users associated with accounting.
ACCOUNTING CONSISTS OF THREE BASIC ACTIVITIES:
WHO USES ACCOUNTING DATA?
è Internal Users:
- Marketing: What price should apple charge for an iPod to maximise the company’s net income?
- Management: Which PepsiCo product line is the most profitable? Should any products be
eliminated?
- Finance: Is cash sufficient to pay dividends to Microsoft stockholders?
- Human Recourses: Can General Motors afford to give its employees pay raises this year?
è External Users:
- Creditors: Will United Airlines be able to pay its debts as they come due?
- Investors: Is General Electric earning satisfactory income?
- Investors: How does Disney compare in size and profitability with Time Warner?
2. Explain the building blocks of accounting: ethics, principles, and assumptions.
ETHICS: Are the standards of conduct by which actions are judged as right or wrong. Effectively
financial reporting depends on sound ethical behaviour.
- Sarbanes-Oxley Act (SOX): Law passed by Congress intended to reduce unethical corporate
behaviour.
Accounting 1 1 IBM
,GAAP:
à Generally accepted accounting
principles are a common set of
standards used by accountants. The
primary accounting standard-setting
body in the United states is the
Financial Accounting Standards
body.
MEASUREMENT PRINCIPLES:
- Historical cost principle: An accounting principle that states that companies should record assets
at their cost.
- Fair value principle: An accounting principle stating that assets and liabilities should be reported
at fair value (the price received to sell an asset or settle a liability).
ASSUMPTIONS:
- Monetary unit assumption: An assumption stating that companies include in the accounting
records only transaction data that can be expressed in terms of money.
- Economic entity assumption: An assumption that requires that the activities of the entity be
kept separate and distinct from the activities of its owner and all other economic entities.
§ Proprietorship
§ Partnership Forms of Business Ownership
§ Corporation
3. State the accounting equation, and define its components.
BASSIC ACCOUNTING EQUATION:
- Provides the underlying framework for recording and summarising economic events.
- Assets are claimed by either creditors or owners.
- If a business is liquidated, claims of creditors must be paid before ownership claims.
ASSETS:
- Recourses a business owns
- Provide future services or benefits
- Cash, Supplies, Equipment, etc.
LIABILITIES:
- Claims against assets (debts and obligations)
- Creditors (party to whom money is owed)
- Accounts Payable, Notes Payable, Salaries and Wages Payable, etc.
OWNER’S EQUITY
Increases in owner’s equity:
- Investments by owner are the assets the owner puts into the business.
- Revenues results from business activities entered into for the purpose of earning income.
o Common sources of revenue: Sales, fees, services, commissions, interest, dividends,
royalties, and rent.
Accounting 2 1 IBM
,Decreases in owner’s equity:
- Drawings, an owner may withdraw cash or other assets for personal use.
- Expenses are the cost of assets consumed or services used in the process of earning revenue.
o Common expenses: Salaries expense, rent expense, utilities expense, tax expense, etc.
4. Analyse the effects of business transactions on the accounting equation.
TRANSACTIONS: are a business’s economic events recorded by accountants.
- May be external or internal.
- Not all activities represent transactions.
- Each transaction has a dual effect on the accounting equation.
1. Investment by owner
2. Purchase of equipment for cash
3. Purchase supplies on credit
4. Services performed for cash
5. Purchase of advertising on credit
6. Services performed for cash and credit
7. Payment of expenses
8. Payment of accounts payable
9. Receipt of cash on account
10. Withdrawal of cash by owner
è The two sides of the equation must always be equal.
5. Describe the four financial statements and how they are prepared.
INCOME STATEMENT:
à Reports revenues and expenses for a
specific period.
à Lists of revenues first, followed by expenses.
à Shows net income (or net loss).
à Does not include investments and withdrawal
transactions between the owner and the
business in measuring net income.
OWNER’S EQUITY STATEMENT:
Reports the changes in the owner’s equity for a
specific period. à
The time period is the same as that covered by
the income statement. à
Accounting 3 1 IBM
, BALANCE SHEET:
à Reports the assets, liabilities, and owner’s
equity at a specific date.
à Lists assets at the top, followed by liabilities
and owner’s equity.
à Total assets must equal total liabilities and
owner’s equity.
à Is a snapshot of the company’s financial
condition at a specific moment in time (usually
the month-end or year-end).
CHAPTER 2 – The Recording Process
1. Describe how accounts, debits, and credits are used to record business transactions.
THE ACCOUNT:
- Record of increases and decreases in a specific asset, liability, owner’s equity, revenue, or
expense item.
- Debit = “left”
- Credit = “right”
An account can be illustrated in a T-account form.
DOUBLE ENTRY SYSTEM:
- Each transaction must affect two or more accounts to keep the basic accounting equation in
balance.
- Recording done by debiting at least one account and crediting at least one other account.
- DEBITS must equal CREDITS.
SUMMARY OF DEBIT/CREDIT RULES:
Accounting 4 1 IBM
