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C1 - 1 Learning Objectives 1.What is Business? 2.Business Stakeholders 3.What is Accounting? 4.History of accounting 5.The relationship between accounting.

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Presentation on theme: "C1 - 1 Learning Objectives 1.What is Business? 2.Business Stakeholders 3.What is Accounting? 4.History of accounting 5.The relationship between accounting."— Presentation transcript:

1 C1 - 1 Learning Objectives 1.What is Business? 2.Business Stakeholders 3.What is Accounting? 4.History of accounting 5.The relationship between accounting and bookkeeping 6.What is the role of Accounting in business? 7.Why do the stakeholders need accounting information? 8.Accounting – An information process 9.Users of accounting information 10.Generally Accepted Accounting Principles 11.Types of business organization 12.Types of business Power Notes Introduction to Accounting and Business Introduction to Accounting and Business Chapter 1 C1

2 C1 - 2 What is a business? Celcom Axiata, TESCO, McDonalds, Sime Darby Provision shops, gift shops, beauty salons, restaurants, law firms, clinics A business is an organisation in which basic resources (inputs) are assembled and processed to provide goods or services (outputs) to customers. Customers pay for these goods or services.

3 C1 - 3 Business stakeholders Owners Employees Customers Creditors Governments

4 C1 - 4 What is Accounting? Accounting is the process of identifying, measuring, recording and communicating economic information to permit informed judgments and decisions by users of the communication

5 C1 - 5 The history of Accounting Accounting began because people needed to : Record business transactions Know if they were being financially successful Know how much they owned and how much they owed

6 C1 - 6 The relationship between Bookkeeping and Accounting Until about 100 years ago all accounting data was kept by being recorded manually in books, so the part of accounting that is concerned with recording data if often known as BOOKKEEPING Nowadays although handwritten books may be used (particularly by smaller organizations)most accounting data is recorded electronically and stored electronically using computers Bookkeeping is the process of recording data relating to accounting transactions in the accounting books

7 C1 - 7 What is the role of accounting in business? Accounting provides information. To who? Owners, managers and other business stakeholders What information? How the business is performing Accounting is the language of business.

8 C1 - 8 Why do the stakeholders need accounting information? Manager – to decide whether to stop or continue a new product Bank – to decide whether to lend money to the business Suppliers – to decide whether to sell to the business on credit Government – to determine the amount of tax on the business

9 C1 - 9 Accounting — An Information Process Accounting — An Information Process Identification of Users

10 C User Information Needs Accounting — An Information Process Accounting — An Information Process Identification of Users

11 C Identification of Users User Information Needs Accounting System Accounting — An Information Process Accounting — An Information Process

12 C Identification of Users User Information Needs Accounting System Economic Data and Activities Accounting — An Information Process Accounting — An Information Process

13 C Identification of Users User Information Needs Accounting System Economic Data and Activities Reports Accounting — An Information Process Accounting — An Information Process

14 C Identification of Users User Information Needs Accounting System Reports Economic Data and Activities User Decisions Accounting — An Information Process Accounting — An Information Process

15 C EXTERNAL USERS Financial Accounting investors creditors regulators customers competitors owners managers employees INTERNAL USERS Managerial Accounting Users of Accounting Information

16 C Internal Users: Those individuals inside a company who plan, organize and run the business. Example: Owners interested in profits earned, financial stability and business growth Managers need accounting information to guide it in business planning, organizing and control Employees interested in business stabilities to know whether the owners can pay increased wages and benefits

17 C External Users: Individuals and organization outside a company who wants financial information about the company. Direct financial interest: Investors who use accounting information to make decision to buy, hold or sell the stock Creditors (suppliers/bankers) use accounting information to evaluate the risk of granting credits or lending money Indirect financial interest: Government use accounting information for taxes and others regulatory requirements. Public (customers) interested in whether a company will continue to honor products warranties and support its product line

18 C Business entity concept Historical cost concept Objectivity concept Unit of measure concept Generally Accepted Accounting Principles

19 C Business Entity Concept Business Owner Business’ cash Business is separate from the owner Owner’s cash

20 C Historical Cost concept Historical Cost Concept 130, , ,000 Transactions are recorded at the cost at the point of transaction $150,000

21 C Historical Cost concept Objectivity Concept 130, , ,000 Accounting records are based on objective evidence $150,000

22 C Accounting records are based on objective evidence Objectivity Concept

23 C Unit of Measure concept For example kilogram is used to measure weight Money is used for measurement in accounting Unit of measure Concept

24 C Types of business organisations Sole proprietorship Partnership Company

25 C A business is normally organized as one of three different forms: 1.Sole proprietorship / Sole Trader – business is owned by a single or sole owner. The owner is responsible for all the losses and liabilities of the business. 2. Partnership – business is owned at lest (two) owners. The partnership is formed with a partnership agreement. 3. Company / Corporation – A company owned by many owners known as shareholders. A company is formed by statute. Company can divided into two type; limited liability and unlimited liability

26 C Types of businesses Manufacturing business Trading business Service business

27 C Learning Objectives 1.The Accounting Equation 2.The relationship between Accounting Equation and the layout of the Balance Sheet 3.The meaning of the term Asset, Liabilities, Capital (Owner’s Equity), Accounts Receivables and Accounts Payable. 4.How accounting transactions affect the items in the accounting equation. 5.The meaning of the revenue and expenses 6.Relationship of the profit to the accounting equation 7.Financial Statement (will be discussed more in Chapter 6) Power Notes Accounting Classification and Equation Accounting Classification and Equation Chapter 2 C2

28 C Assets Resources = Sources The Accounting Equation What are the sources of the assets? Cost of resources used in the business

29 C Assets Liabilities Owner’s Equity Resources = Sources Cost of resources used in the business Resources supplied by creditors and owners The Accounting Equation

30 C The Accounting Equation Assets = Liabilities and Owner’s Equity Assets - Liabilities = Owner’s Equity

31 C RESOURCE SUPPLIED BY THE OWNER = RESOURCES IN THE BUSINESS

32 C The relationship between Accounting Equation and the layout of the Balance Sheet The introduction of capital On 1 May 2007, B Blake started in business and deposited £60,000 into a bank account opened specially for the business. The balance sheet would show : B Blake Balance Sheet as at 1 May 2007 £ Assets: Cash at banks60,000 Capital60,000

33 C The purchase of an asset by cheque On 3 May 2007, Blake buys a small shop for £32,000 paying by cheque B Blake Balance Sheet as at 3 May 2007 £ Assets Shop32,000 Cash at bank28,000 60,000 Capital60,000

34 C The purchase of an asset incurring of a liability On 6 May 2007 Blake buys some goods for £7,000 from D Smith and agrees to pay from them some time within the next two weeks B Blake Balance Sheet as at 6 May 2007 £ Assets Shop32,000 Inventory 7,000 Cash at bank28,000 67,000 Less : Account Payable(7,000) 60,000 Capital60,000

35 C Sale of an asset on credit On 10 May 2007 goods which cost £600 were sold to J Brown for the same amount, the money to be paid letter. B Blake Balance Sheet as at 6 May 2007 £ Assets Shop32,000 Inventory 6,400 Accounts receivable 600 Cash at bank28,000 67,000 Less : Account Payable(7,000) 60,000 Capital60,000

36 C Sale of an asset for immediate payment On 13 May 2007, goods which cost £400 were sold to D Daley for the same amount. B Blake Balance Sheet as at 6 May 2007 £ Assets Shop32,000 Inventory 6,000 Accounts receivable 600 Cash at bank28,400 67,000 Less : Account Payable(7,000) 60,000 Capital60,000

37 C The payment of liability On 15 May 2007, Blake pays a cheque for £3,000 to D Smith in the part payment of the amount owing. B Blake Balance Sheet as at 6 May 2007 £ Assets Shop32,000 Inventory 6,000 Accounts receivable 600 Cash at bank25,400 64,000 Less : Account Payable(4,000) 60,000 Capital60,000

38 C Collection of asset J Brown who owed Blake £600, makes part payment of £200 by cheque on 31 May B Blake Balance Sheet as at 6 May 2007 £ Assets Shop32,000 Inventory 6,000 Accounts receivable 400 Cash at bank25,600 64,000 Less : Account Payable(4,000) 60,000 Capital60,000

39 C What are your assets? Assets

40 C Asset Resources owned by the business Cash, land, buildings, equipment Assets

41 C Assets are economic resources owned by a business that are expected to benefit future operations. Monetary items. Non-monetary physical things.

42 C Liability Say you borrowed $5 from your friend for lunch. You have a liability or debt of $5. You friend is your creditor. Liabilities Your friend You Liability- $5 Your creditor

43 C Liabilities are amounts due or the present obligations of a business to pay cash, transfer assets, or provide services to other parties in the future.

44 C Owner’s equity Amounts belonging to the owner. Say Sally puts $10,000 into the business. Therefore $10,000 of the business belongs to Sally. Owner’s equity = $10,000 Owner’s Equity

45 C Owners’ equity represents the claims by the owners of a business to the assets of the business. Owners’ equity is the residual equity that remains after deducting liabilities from assets. OE = Assets - Liabilities. Assets = Liabilities + OE. OE = Contributed Capital + Retained Earnings.

46 C Account Receivable = Debtor Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year. On a public company's balance sheet, accounts receivable is often recorded as an asset because this represents a legal obligation for the customer to remit cash for its short-term debts

47 C An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities. Accounts payable are often referred to as "payables". Another common usage of AP refers to a business department or division that is responsible for making payments owed by the company to suppliers and other creditors. Account Payable = Creditor

48 C HOW ACCOUNTING TRANSACTIONS AFFECT THE ITEMS IN THE ACCOUNTING EQUATION

49 C a.Chris Chee deposits $25,000 in a bank account for NetSolutions. ASSETS = Business Transactions OWNER’S EQUITY LIABILITIES

50 C a.Chris Chee deposits $25,000 in a bank account for NetSolutions. ASSETS = Business Transactions OWNER’S EQUITY Cash25,000 LIABILITIES

51 C a.Chris Chee deposits $25,000 in a bank account for NetSolutions. ASSETS = Business Transactions OWNER’S EQUITY Cash25,000 LIABILITIES Chris Chee, Capital 25,000

52 C Business Transactions b.NetSolutions buys land for $20,000. ASSETS = OWNER’S EQUITY LIABILITIES

53 C Business Transactions b.NetSolutions buys land for $20,000. ASSETS = OWNER’S EQUITY LIABILITIES Cash(20,000)

54 C Business Transactions b.NetSolutions buys land for $20,000. ASSETS = OWNER’S EQUITY LIABILITIES Cash(20,000) Land20,000

55 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES c.NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.

56 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Supplies1,350 c.NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.

57 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES c.NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future. Accounts Payable 1,350 Supplies1,350

58 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES d.NetSolutions earns fees of $7,500, receiving cash.

59 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash7,500 d.NetSolutions earns fees of $7,500, receiving cash.

60 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash7,500 Fees Earned 7,500 d.NetSolutions earns fees of $7,500, receiving cash.

61 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES e.NetSolutions paid: salaries, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

62 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash(3,650) e.NetSolutions paid: salaries, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

63 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash(3,650) Expenses(3,650) e.NetSolutions paid: salaries, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

64 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES f.NetSolutions pays $950 to creditors on account.

65 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash(950) f.NetSolutions pays $950 to creditors on account.

66 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash(950) Accounts Payable (950) f.NetSolutions pays $950 to creditors on account.

67 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES g.At the end of the month, the cost of supplies on hand is $550.

68 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Supplies(800) g.At the end of the month, the cost of supplies on hand is $550.

69 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Supplies(800) Supplies Expense (800) g.At the end of the month, the cost of supplies on hand is $550.

70 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES h.Chris Chee withdraws $2,000 in cash.

71 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash(2,000) h.Chris Chee withdraws $2,000 in cash.

72 C Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash(2,000) Chris Chee, Drawing (2,000) h.Chris Chee withdraws $2,000 in cash.

73 C Transaction Summary ASSETS = OWNER’S EQUITY LIABILITIES Cash5,900 Supplies550 Land20,000

74 C Transaction Summary ASSETS = OWNER’S EQUITY LIABILITIES Cash5,900 Supplies550 Land20,000 Accts. Payable400

75 C Transaction Summary ASSETS = OWNER’S EQUITY LIABILITIES Cash5,900 Supplies550 Land20,000 26,450 Accts. Payable400 C. Chee, Capital25,000 C. Chee, Drawing(2,000) Fees Earned7,500 Salaries Expense(2,125) Rent Expense(800) Supplies Expense(800) Utilities Expense(450) Misc. Expense(275) 26,050

76 C The meaning of Revenue and Expenses REVENUES It represent the gross increase in owners’ equity resulting from business activities entered into for the purpose of earning income. Trading businesses derived their revenue from the sale of goods whilst service businesses derived their main form of revenue from the performance of services EXPENCES The cost of assets consumed or services used in the process of earning revenues. A business must incur expenses items which are necessary for the continuing operation of the business but for which no long term benefit will be obtained.

77 C Relationship of Profit to the Accounting Equation Profit is the difference between revenues and expenses Since profit belongs to the owner of the businesses, it should be added to the capital of the business. A=C+P+L IF PROFIT (P) = REVENUES (R)- EXPENCES (E) THUS, A=C+R-E +L

78 C The expanded accounting equation is : ASSET + EXPENCES = CAPITAL + REVENUES +LIABILITIES (Refer to the page 11 and 12)

79 C OWNER’S EQUITY Effects of Transactions on Owner’s Equity Owner’s withdrawals Expenses decreased by

80 C OWNER’S EQUITY Effects of Transactions on Owner’s Equity Owner’s withdrawals Expenses Owner’s investments Revenues decreased by increased by

81 C End of Chapter 1 and 2


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