100%(6)6 out of 6 people found this document helpful
This preview shows page 1 - 4 out of 117 pages.
1PRINCIPLES OF ACCOUNTING IILECTURENOTESSTUDYSECTION 11.Element of Financial Statements2.Understanding the Accounting Cycle3.Accounting for merchandising Business4.Accounting for Inventories, InternalControl, and CashINTERNAL USE ONLYLECTURED BY: PHAM NHAT DONGHOCHIMINH CITY, JULY 2014
2STUDYSECSION 01+2Element of Financial StatementsUnderstanding the Accounting Cycle1.1 INTRODUCTIONAccounting is often referred to as the “language of business” It is a process whose goals arethe recording, summarizing, classifying of financial information. The input to this processesare the transactions that are company engages in; the output is the financial statements.The financial statements of a sole proprietorship or partnership consist of the balancesheet, the income statement, the capital statement and the statements of cash flows.The recording aspect of the accounting process is based on a fundamental equation, whichstates:Assets – Liabilities = Capital (Owners’ Equity)OrA-L = CAssets are probable future benefits obtained by a company as a result of past transactions.Thus anything owned by a company (cash, machines, buildings, land, merchandise,paperclips,….) and anything owned to it (accounts receivable) is an asset.Liabilities are debts that the company owes to others. Thus, accounts payable, wagespayable, expense payable and notes payable are all examples of liabilities.Capital is the amount left over from the asset “pie” to be kept (or “eaten”) by the ownersafter the liabilities have been paid.Example 1:If assets are $1,000 and liabilities are $700, capital is $300Some people express the accounting equation in a slightly different form, as follows:Assets = Liabilities + capital (Owners’ Equity)A= L +CIn a corporation the owners are the stockholders. Therefore, the equation is expressed inthe formAssets - Liabilities = Stockholders’ EquityOrAssets = Liabilities + Stockholders’ Equity1.2 THE NATURE OF ACCOUNTSIn accounting, we keep track of assets, liabilities and capital by recording them in a specialrecord called an account (that’s why this subject is called accounting).These accounts resemblethe letter “T” and therefore are referred to as T-accounts.
3The left side of the T is called the debit side; the right side is called the credit side.The word debit is simply a synonym for “left”; the word credit is a synonym for “right”There are three types of accounts, and they are all kept in a special book called the generalledger. The three types of accounts: asset accounts, liability accounts, and capital accounts.The rules of debits and credits are quite simply:Assets accounts are debited for increases and credited for decreases; liability and capitalaccounts work in the opposite manner. These rules are illustrated by the following T-accountsNotice that the word debit is abbreviated DR, and the word credit is abbreviated CRAll companies have expenses, revenue, and drawings (withdrawals by the owner of assets forpersonal use). Let‘s remember an important rule regarding these items: Revenue increases