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CHAPTER 2 BASIC OF ACCOUNTING, DEFINE "the process of identifying,…
CHAPTER 2
BASIC OF ACCOUNTING
ASSETS
-A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit
-property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.
Two major asset classes
TANGIBLE assets
Tangible assets contain various subclasses, including current assets and fixed assets. Current assets include cash, inventory, accounts receivable, while fixed assets include land, buildings and equipment.
INTANGIBLE assets
An intangible asset is an asset that does not have any physical existence like tangible assets, you cannot touch or feel them but they have a current and future value. They are long-term assets of a company having a useful life greater than one year
Examples of Assets
Cash
Receivable
Supplies
Machinery
Land
Inventory held for sale
LIABILITY
A company's legal debts or obligations that arise
during the course of business operations
Liabilities are settled over time through the transfer of economic benefits including money goods or services.
Liabilities are a vital aspect of a company's operations because they are used to finance operations and pay for large expansions.
Examples of Liabilities
Accounts Payable
Notes Payable
Bank Loan Payable
Mortgage Payable
How accounting information helps businesses be accountable.
1) Providing a record of assets owned, amounts owed to others and monies invested.
6) Enables potential investors or funders to evaluate an organisation and make decisions.
3) Helps management actually manage the organisation.
4) Provides a way of measuring an organisation's effectiveness.
5) Helps stakeholders monitor an organisations activities and performance.
2) Providing reports showing the financial position of an organisation and the profitability of its operations.
OWNER EQUITY
Owner's equity is an owner's ownership in the business, that is, the value of the business assets owned by the business owner. It's the amount the owner has invested in the business minus any money the owner has taken out of the company. Only sole proprietor businesses use the term "owner's equity," because there is only one owner
Owner's Equity = Assets - Liabilities
EXPENSES
An expense is the cost of operations that a company incurs to generate revenue. As the popular saying goes, “it costs money to make money.” Common expenses include payments to suppliers, employee wages, factory leases, and equipment depreciation.
Examples of Expense
Accounts
Advertising Expense
Supplies Expense
Telephone Expense
Utilities Expense
Wages Expense
Rent Expense
Insurance Expense
TWO BROAD TYPES OF ACCOUNTING INFORMATION.
FINANCIAL ACCOUNTS
Geared toward external users of
accounting information
MANAGEMENT ACCOUNTS
Aimed more at internal
users of accounting information
MAIN FINANCIAL ACCOUNTING SATEMENTS
A particular point in time and to show how that business has performed over a specific period.
The field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders,supllier,banks,employees, goverment, agencies,owners, and other stakeholders.
REVENUE
Revenue is the
money generated from normal business operations, calculated as the average sales price times the number of units sold. It is the top line (or gross income) figure from which costs are subtracted to determine net income. Revenue is also known as sales on the income statement.
Examples of Revenue
Accounts
O Sales
O Commissions Earned
O Professional Fees Earned
O Rent Revenue
O Interest Earned
Main financial accounting
statements.
The profit and loss account for the reporting period
A balance sheet for the business at the end of the
A cash flow statement for the reporting period
DEFINE
"the process of identifying, measuring
and communicating economic
information to permit informed judgements and decisions by users of the information”.
PURPOSE OF FINANCIAL STATEMENT
1) To report on the financial position of anentity (e.g. a business, an organisation)
2) To show how the entity has performed(financialy) over a particulary peirof of time9