The Accounting Cycle: Capturing Economic Events
Lecture 2
Entity Principle
A business entity is an economic unit that engages in identifiable business activities
Separate from the personal affairs of its owner
Current Assets
◦ Cash and cash equivalents
◦ Accounts receivables, trade receivables
◦ Prepaids and advances
◦ Inventory
◦ Financial assets such as trading securities, investment securities
Non-Current/Fixed Assets
◦ Property, Plant and Equipment
◦ Investment property
◦ Intangible assets (patents, trademarks, licenses, copyright, goodwill)
◦ Loans receivables
The Cost Principle
◦ The Going Concern Assumption
◦ The Objectivity Principle
◦ The Stable-Dollar Assumption
Short Term/Current Liabilities
◦ Accounts payable – Generally payable to suppliers/vendors
◦ Notes Payable – Interest bearing loan, less than a year maturity
◦ Provisions or accrued liabilities
◦ Unearned revenue
◦ Interest payable
◦ Notes Payable – Short term, interest bearing loan
Long Term/Non-Current Liabilities
◦ Debt payable/Long term loan
◦ Bonds/Debentures
◦ Notes Payable – Interest bearing loan, more than a year maturity
Increases through
◦ Investments of cash or other assets by the owner
◦ Earnings from profitable operation of the business
Decreases through
◦ Withdrawals of cash or other assets by the owner
◦ Losses from unprofitable operation of the business
Sole Proprietorship
Partnership
Corporation
Exercise 2.3
Exercise 2.8
Assets = Liabilities + Owner’s Equity
The effects of Business Transactions
◦ Exercise 2.6
Revenues
◦ Revenue, sales
◦ Gains
◦ Investment income (e.g., interest and dividends)
Expenses
◦ Cost of Goods Sold
◦ Selling, general, and administrative expenses (‘SG&A’)
◦ Rent, utilities, salaries and advertising expenses
◦ Depreciation and amortization
◦ Interest expense
◦ Tax expense
◦ Losses
Net income is an increase in owners’ equity resulting from the profitable operation of the business
Net Income always results in the increase of
Owner’s Equity
Net Income is reported to the Owner’s Equity
Section of the Balance Sheet
The sequence of accounting procedures used to record, classify, and summarize accounting information in financial reports at regular intervals is often termed the accounting cycle
Analyzing and recording transactions via journal entries
Posting journal entries to ledger accounts
Preparing unadjusted trial balance
Preparing adjusting entries at the end of the period
Preparing adjusted trial balance
Preparing financial statements
Closing temporary accounts via closing entries
Preparing post-closing trial balance
An account is a means of accumulating in one place all the information about changes in specific financial statement items, such as a particular asset or liability e.g. Cash, Notes
Payable
Debits refer to the left side of an account, and credits refer to the right side of an account
Account
Assets
Contra Assets
Liabilities
Equity
Revenue
Expenses
Distributions
Debit (Dr.)
Increase
Decrease
Decrease
Decrease
Decrease
Increase
Increase
Credit (Cr.)
Decrease
Increase
Increase
Increase
Increase
Decrease
Decrease
The information about each business transaction is
initially recorded in an accounting
record called the journal
This information is
later transferred to the appropriate accounts in
the general ledger
The journal is a chronological (day-by-day) record of business transactions
Example
Basic characteristics of the general journal entry:
1.
2.
The name of the account debited is written first, and the dollar amount to be debited appears in the left-hand money column.
The name of the account credited appears below the account debited and is indented to the right. The dollar amount appears in the right-hand money column.
3.
A brief description of the transaction appears immediately below the journal entry.
The entire group of accounts is kept together in an accounting record called a ledger
The transactions from the journal are posted in separate accounts and are accumulated to form a ledger
Example
If the debit total exceeds the credit total, the account has a
credit balance debit balance; if the credit total exceeds the debit total, the account
has a
Debit Balances in Asset Accounts
Credit Balances in Liability and Owners’ Equity
Accounts
Every transaction is recorded by equal dollar amounts of debits and credits
