ch2 - Class 2 Chapter 2: Investing and Financing Decisions...

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(c) Mikhail B. Pevzner and George Mason University Class 2 Chapter 2: Investing and Financing Decisions and the Balance Sheet (c) Mikhail B. Pevzner and George Mason University Recording economic transactions • As economic transactions occur, they are recorded on firms’ books (recognized). • This process leads to constant changes in firms’ assets, liabilities, and equity accounts. Balance sheet provides a “snapshot”, i.e. a picture of balances in assets, liabilities, and equity accounts in the end of the accounting period, a particular date, e.g. end of the fiscal year or quarter. (c) Mikhail B. Pevzner and George Mason University Resources (e.g. cash, equipm ent, etc.) Convert Resources into Productive Assets D iv id e n d s In te re t a P rin c ip a l o B o r w F u
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(c) Mikhail B. Pevzner and George Mason University Transactions and fundamental accounting equation • All economic transactions do not come from thin air, i.e. “there is no free lunch”. Thus, if a firm gets cash, it must give something in exchange: either give up another asset, or increase shareholders’ share in a firm. Thus, all transactions must accord to the fundamental accounting equation: Assets=Liabilities+Shareholders’ Equity (c) Mikhail B. Pevzner and George Mason University Principles of double-entry book- keeping • A process of recording accounting transactions is called double-entry book-keeping. Its basic principles are: • An accounting transaction always has two sides. • An accounting equation always stays in balance. You can think of these principles as an analogy for the Third Newton’s law in physics: for every action there is a reaction . Or, there is no free lunch. Assets don’t come from thin air-they have to be purchased with something-either other assets, or increased liabilities or equity. (c) Mikhail B. Pevzner and George Mason University Examples: • A firm buys a machine for $1,000 cash. • A firm buys a machine for $1,000 on credit • In both cases, assets go up by $1,000 (cost of the machine). • In the first case, assets also go down by $1,000 (cash is paid). Thus, the fundamental accounting equation holds. • In the second case, liabilities increase by $1,000. Thus, the fundamental accounting equation holds.
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(c) Mikhail B. Pevzner and George Mason University How is book-keeping done? Journal Entries
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This note was uploaded on 02/05/2011 for the course ACCT 301 taught by Professor Hasan during the Fall '09 term at George Mason.

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ch2 - Class 2 Chapter 2: Investing and Financing Decisions...

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