LECTURE 2 The Accounting Process
Accounting Equation ASSETS = LIABILITIES + OWNERS EQUITY Accounting Equation provides the underlying framework for recording and summarizing economic events. Assets are claimed by either creditors or owners ( Residual Claim ) Claims of creditors must be paid before ownership claims. Assets: Resources a business own Provide future benefits and/or services Example, Cash, Supplies, Inventory, Receivables (Short-term or Current Assets), Property, Plant & Equipment (Long-term or Fixed or Non Current Assets)
Accounting Equation Liabilities: Claims against assets (Debts and Future/Current Obligations) Creditors – Party (Suppliers) to whom money is owed Example, Accounts payable, Wages Payable, (Short-term/Current Liabilities) Notes payable, Bonds Payables, Lease Obligations (Long-term/Non Current Liabilities) Owners Equity: Ownership claim on total assets. Referred to as residual equity Owners Equity = Investment by owners + Profits – Drawings/Dividends Profit = Revenues – Expenses
Accounting Equation Expanded Accounting Equation: Assets = Liabilities + Owners Capital + Revenues – Expenses – Owners Drawings ( for Sole proprietorship) Assets = Liabilities + Common Stock+ Revenues – Expenses – Dividend (for Corporations)
Transactions Transactions (business transactions): are a business’s economic events recorded by accountants Transactions may be external or internal . External transactions: involve economic events between the company and some outside enterprise. For example, purchase of equipment from a supplier, payment rent, and sale of goods or services to customers is external transactions. Internal transactions: are economic events that occur entirely within one company. The uses of equipment to produce goods or services are internal transactions All events are not transactions . If an event fulfills the following features it will be recognized as a transaction It can be measured in monetary terms It will change the financial position of the business Each Transaction must have a dual effect on the accounting equation
Transaction Identification Process
Transaction Analysis (Service Organization) Ray Neal decides to open a computer programming service which he names Softbyte. On September 1, 2012, Ray Neal invests $15,000 cash
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