CH 2 Note - CHAPTER 2 P R I N C I P L E S O F A C C O U N T...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
23 CHAPTER 2 P R I N C I P L E S O F A C C O U N T I N G 1 FINANCIAL STATEMENTS Definition Accounting is the art of recording business transactions systematically for the purpose of keeping historical records for future reference and generating financial statements. Basic Accounting Equivalences BALANCE SHEET equivalence: SHAREHOLDERS' EQUITY = ASSETS - LIABILITIES ASSETS represent the value of goods owned by a business or owed to that business by third parties; e.g., cash, inventory, accounts receivable, investments in other businesses (shares and securities), equipment (net of depreciation, i.e. cost of usage), property. LIABILITIES represent the value of goods or services owed by a business to third parties; e.g., accounts payable, income taxes payable, outstanding loans. SHAREHOLDERS' EQUITY represents the net worth of a business, i.e., the value that re- mains to the shareholders after all debts have been paid. This net worth consists of: Value of shares issued to shareholders (private or public) by the business, i.e. the par value Retained earnings – past profits reinvested in the business From the business' point of view, equity is a liability as well because: The capital obtained by issuing shares belong to the shareholders Retained earnings, representing profits reinvested in the business, belong to the share- holders as well INCOME STATEMENT equivalence: PROFITS = REVENUES - OPERATING EXPENSES 1 The shaded areas in this chapter contain material that is not part of the course syllabus.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
CHAPTER 2 24 REVENUES represent the funds generated from the sale of products or the rendering of ser- vices. OPERATING EXPENSES represent the expenses incurred in fabricating products or provid- ing services to appropriate markets. PROFITS (or NET INCOME) represent the net amount available for distribution to share- holders (dividends) or for reinvestment in the business (retained earnings). Recording Business Transactions All transactions are recorded chronologically in a journal . In addition, each transaction is recorded in an account that relates to that specific item; e.g. sales, accounts payable, cash, equipment. The double entry system is a fundamental practice in accounting, whereby each transaction involves at least 2 accounts: at least one account that gives value at least one account that receives value For example, a business buys raw materials required in its production process. The material is paid cash and stocked in inventory. The following accounts are affected: Withdraw money from petty cash; this is the giver account Stock material in inventory; this is the receiver account Each account consists of 3 columns: Details of Transaction Debit Credit Date Transaction 50 Date Transaction 100 Date Transaction 300 Date Transaction 500 These are called T accounts . According to a convention , the Giver Account is credited (give credit) with the value of the transaction, and the Receiver Account is debited (receive value)
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/14/2011 for the course MIME 310 taught by Professor Bilido during the Spring '08 term at McGill.

Page1 / 26

CH 2 Note - CHAPTER 2 P R I N C I P L E S O F A C C O U N T...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online