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ACCT1111 Chapter 1 Business, Accounting and You Notes (Class)
ACCOUTING (ACCT1111)
香港中文大學
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SCHOOL OF ACCOUNTANCY ACCT1111 FOUNDATIONS IN FINANCIAL ACCOUNTING CHAPTER 1 – BUSINESS, ACCOUNTING AND YOU Readings: Chapter 1, pages 4 – 11; 15 - 35 TOPIC I BACKGROUND: CLASSIFICATION OF STREAMS OF ACCOUNTING Note: Internal users may also need to use information from financial accounting; e. the board of directors definitely needs to monitor closely the financial performance of the firm. 1 SCHOOL OF ACCOUNTANCY ACCT1111 FOUNDATIONS IN FINANCIAL ACCOUNTING CHAPTER 1 – BUSINESS, ACCOUNTING AND YOU TOPIC II SOME IMPORTANT ACCOUNTING TERMS On the balance sheet (or statement of financial position) I. ASSETS – economic resources (i) a business own; (ii) are expected to benefit future operations and (iii) normally result in positive future cash flows (Why?). Examples: i. Cash ii. Accounts receivable: arising from goods sold/services rendered but the bill has been “on account” II. iii. Inventories iv. Plant, property and equipment LIABILITIES – claims against assets, i. existing debts and obligations, by creditors; normally result in negative future cash flows. i. Examples: Accounts payable: arising from purchase of goods/services but the amount has not been paid to creditors ii. Other payable, for example, wage payable to employees, tax payable to tax authorities iii. Notes payable: similar to accounts payable; BUT, it involves a written promise; normally call for the payment of interest III. STOCKHOLDERS’ EQUITY – claims against assets by owners / stockholders (residual after creditors’ claim, i. liabilities) i. Paid-in capital: arising from investment of cash or other assets by stockholders (increase stockholders’ equity) ii. Retained earnings: 1. Dividends: distribution to stockholders (decrease retained earnings) 2. Revenues (increase retained earnings) 3. Expenses (decrease retained earnings) Note 1: Revenues and expenses for the period are first included in the income statement, forming the “net income/loss”. The “net income/loss” will then be closed to (or included in) the “retained earnings” on the balance sheet under the “stockholders’ equity” section. Note 2: Dividends, though decrease retained earnings, should not be treated as “expenses”. Note 3: Investments, though increase stockholders’ equity, should not be treated as “revenues”. 2 SCHOOL OF ACCOUNTANCY ACCT1111 FOUNDATIONS IN FINANCIAL ACCOUNTING CHAPTER 1 – BUSINESS, ACCOUNTING AND YOU (c) Andrew Co. incurred $1,200 advertising expense on account to promote its new products. Effect (1): Effect (2): Any effect to income statement? (d) Andrew Co. paid $1,200 for a one-year insurance policy in advance. Effect (1): Effect (2): Any effect to income statement? Note: This is an example for “prepaid expense”. We will cover such situation in detail in Chapter 3. (e) Andrew Co. paid creditors the balance for the purchase of goods in (b) above. Effect (1): Effect (2): Any effect to income statement? (f) Andrew Co. paid rental $500 for its office premises and $300 for utilities. Effect (1): Effect (2): Any effect to income statement? Illustration 3: Provision of services to customers (a) Andrew Co. provided consultancy services to customers relating to inventory management. Andrew Co. completed a consultancy project and earned $5,000 from such services, of which $2,000 was received in cash which the remaining balance was billed on account. Effect (1): Effect (2): Effect (3): Any effect to income statement? (b) Andrew Co. received $1,000 cash advance for a project to be commenced next month. Effect (1): Effect (2): Any effect to income statement? Note: This is an example for “unearned revenue”. We will cover such situation in detail in Chapter 3. 4 SCHOOL OF ACCOUNTANCY ACCT1111 FOUNDATIONS IN FINANCIAL ACCOUNTING CHAPTER 1 – BUSINESS, ACCOUNTING AND YOU Illustration 4: Borrowings and signing of notes (a) Andrew Co. approached the bank for borrowings to expand its operating capacity. Due to its good credit rating, Andrew Co. successfully borrowed $4,000 by signing a note, which is interest-bearing (10% p.) and will be paid in three months. Effect (1): Effect (2): Any effect to income statement? (b) Andrew Co. purchased equipment costing $2,000 by signing a 3-month, 10% note payable. Effect (1): Effect (2): Any effect to income statement? Illustration 5: Distribution of dividends (a) Andrew Co. paid $200 in cash dividends. Effect (1): Effect (2): Any effect to income statement? Note: Please consider carefully whether there is any financial impact for each business event. Remember that the financial reporting initiates by the step of identifying economic events as transactions which will affect the financial record. Some business event will not have any financial impact, for example: (1) Hiring staff; and (2) Placing orders with suppliers. Note: Please consider carefully whether the transaction is a business transaction. Activities of the entity must be kept separate from the activities of the owner and of other entities (Business Entity Concept): The following activities should NOT be reflected in the financial records of the entity: (1) Owner’s own investments; and (2) Expenses incurred by senior management for their own. 5 SCHOOL OF ACCOUNTANCY ACCT1111 FOUNDATIONS IN FINANCIAL ACCOUNTING CHAPTER 1 – BUSINESS, ACCOUNTING AND YOU Step 3: Balance sheet – reports the assets, liabilities and stockholders’ equity at a specific date ANDREW CO. Showing the assets, liabilities and stockholders’ equity at a specific date REMEMBER to take into account the ending balance of previous period BALANCE SHEET AS AT [DATE] ---------------------------------------------------------------------------------------------------------------------------------$ List in the order of liquidity of assets Assets $ Cash [ ] Accounts receivable [ ] [ ] [ ] [ ] [ ] [ ] [ ] Check if these two subtotals equal (remember the accounting equation) Inventories Plant, property and equipment Total assets Liabilities and Stockholders’ Equity Liabilities Accounts payable [ ] Notes payable [ ] [ ] [ ] Stockholders’ equity Match with ending balance of retained earnings in Step 2 Common stock Retained earnings Total liabilities and stockholders’ equity Step 4: Statement of cash flows Step 5: Explanatory notes to the financial statements RECAP Assets = Liabilities Stockholders’ equity Retained earnings Net income Income statement : + Stockholders’ equity = Paid-in capital + Retained earnings = Beginning retained earnings + = Revenues - Net income - Dividends Expenses covers a period of time; net income / loss will be closed to retained earnings on the balance sheet; all figures will be “refreshed” and start from the beginning for the next period. Balance sheet : shows the results at a particular date; all figures brought forward from previous period (ending balance) 7
ACCT1111 Chapter 1 Business, Accounting and You Notes (Class)
Course: ACCOUTING (ACCT1111)
University: 香港中文大學
