Principles of Accounting, Session 1 PDF

Principles of Accounting Session 1 Accounting Concepts and Equations Session Objectives 1. To describe the purposes and importance role of accounting in business. 2. To explain the organizational accounting department in a business. 3. To explain the accounting process in a...

Principles of Accounting Session 1 Accounting Concepts and Equations Session Objectives 1. To describe the purposes and importance role of accounting in business. 2. To explain the organizational accounting department in a business. 3. To explain the accounting process in a business.  Why do you study Accounting? Why is Accounting important to a business? Definition of Accounting Accounting is NOT Bookkeeping Bookkeeping : recording of financial transactions and events, either manually or electronically. Accounting : identifying, measuring, recording, reporting, and analyzing business events and transactions, and helps information users to make economic decisions. Accounting category Accounting Managerial Accounting Financial Accounting Information for decision making, Published financial statements planning, directing, and and other financial reports controlling Users of accounting External users Internal Users Lenders: Whether the firm can repay the money. Marketing : target customers, set Shareholders: whether to buy, hold, or sell price, monitor sales. stocks. Production : monitor cost and Governments: whether the firm pay all due tax. ensure quality. Customers: whether the firm can exist to provide Purchasing : what, when and where post-sale services. to purchase materials. External Auditors: whether the financial Human resource : employees’ statements are prepared according to GAAP. performance and compensation. Accounting and business Accounting process Economic Accounting activities information Decision making  Accounting process = information system Business data Accounting Process Accounting information Principles and Rules  Accounting Process Business data Business Transactions Post-Closing Double Entry System Trial Balance Journalise Debit and Credit Cleaning up for the next cycle Sale and receipt Closing entry Posting A/P Purchasing Management & Owner Inventory and store Analysis A/R Accounting information Financial Trial Salary payment Report balance Depreciation Reports Adjusted trial Adjusting External Users Updating balance entry  Accounting Functions What are the accounting works in a business?  Accounting Functions Director of Finance Accounting Manager Revenue Expenditure A/P A/R Cost control Revenue auditor Purchasing Cash control Salary General accounting Credit Inventory and asset Importance of accounting To prepare an essential information for decision making To promote the business negotiations for maximizing the outcomes To reflect the performance To analyse To forecast To communicate with external authorities Benefits of accounting To record the transactions To acknowledge the business performance To realise the financial status To collect the information and statistics To prevent the mistakes and errors To support in planning and decision To realise the capability in debt payment To support the tax calculation Recap 1 1. What is accounting? 2. Who are the main users of accounting? 3. What is accounting process? 4. Explain the accounting functions in a business. 5. Why a business need a proper accounting system?  Accounting equation Revenue Expense Assets = Liabilities Owner’s Equity Resources Owner What does the “Resources” mean ? A resource is a source or supply from which a benefit is produced and that has some utility. Why do you need resources? Why does a business need resources?  Resources in a business Asset Asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity (IASB Framework). Assets : An economic resource that is expected to be beneficial in the future. Tangible: Cash, Product, Machine, Building, Land, etc. Intangible: Trademark, License, Patent, Goodwill, Leasing, Franchising, etc.  Asset Resources in a business Current Long-term Cash Land, Building Tangible Inventory, Supply Furniture, Equipment Debtor One year usage Debtor Debtor Trademark, License, Intangible Prepayment Patent, Goodwill, Leasing  How does a business get all those resources? Liability Buy, Exchange, Sale, etc. (Business operations) Equity  Not owned Liability A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits (IASB Framework). Liabilities : An economic obligation (a debt) payable to an individual or an organization outside the business.  Liability Not owned Current Long-term Creditor Creditor Bank loan Tangible One year pay-off Business loan Mortgage Creditor Intangible Advance receipt  Equity Owned Equity: The amount of the owner(s) to be claimed in the business. Capital: Amount invested into business by the owner(s). Withdrawal: Amount removed from business by the owner(s). Retained Earning: Amount from the result of business operations; profit or loss. Revenue - Expense  Revenues may come from different sources: Revenue - Service revenue - Sale revenue - Interest revenue Revenue is an increasing in - Gain on sale (sell an asset) economic benefits in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity (IASB Framework). Revenues : Amounts earned by doing business operations.  Expenses may come from different sources: Expense - Rent / Salary / Administration - Cost of goods sold (COGS) - Interest expense Expenses are the decreases in economic benefits in the form of outflows or - Taxation depletions of assets or incurrences of - Loss on sale (sell an asset) liabilities that result in decreases in equity - Sale discount (IASB Framework). - ETC. Expenses : Amounts occurred from using assets or increasing liabilities in the course of business operations. Recap 2 1. What is the accounting equation? 2. Describe the business assets, liabilities, equity, revenue and expense End of Session Next: Business Transaction