Chapter 3 for course website

Chapter 3 for course website - Introduction To Financial...

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Introduction To Financial Accounting HKUST Chapter 3 Operating Decisions and the Income Statement Slide 1 of 74 Chapter Three ACCT 101 Fall 2010 Allen Huang Introduction To Financial Accounting HKUST Transaction Analysis Process Accounts and effects 1 Identify the accounts affected and classify 1. Identify the accounts affected and classify them by type of account (A, L, SE). 2. Determine the direction of the effect (increase or decrease) on each account. Balancing Slide 2 of 74 Chapter Three 3. Verify that the accounting equation ( A = L + SE) remains in balance.
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Introduction To Financial Accounting HKUST Direction of Transaction Effects For Assets: DR = Left = Increase; Slide 3 of 74 Chapter Three CR = Right = Decrease For Liab and SE: CR = Right = Increase; DR = Left = Decrease Introduction To Financial Accounting HKUST Assets + DR CR Norma Liabilities DR + CR Norma Shareholders’ Double-Entry Bookkeeping Normal Balance Normal Balance Equity DR + CR Normal Balance Retained Earnings DR + CR Normal Contributed Capital DR + CR Slide 4 of 74 Chapter Three Balance Normal Balance Revenues DR + CR Normal Balance Expenses + DR CR Normal Balance
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Introduction To Financial Accounting HKUST Why Debit Expenses? A = L + SE = L + Cont. Capital + RE End RE =Beg RE+NI Dividend End. RE = Beg. RE + NI – Dividend. = Beg. RE + Rev – Exp – Dividend. $1 in Rev Æ End. RE by $1 (recall increase of RE is Cr) Æ Cr increase in Rev; Slide 5 of 74 Chapter Three $1 in Exp Æ End. RE by $1 (recall decrease of RE is Dr) Æ Dr increase in Exp. Introduction To Financial Accounting HKUST Transaction Analysis Balance check: A = L + SE remains balance for each transaction. (I.e. A = L + SE ) Equality check: Total Debits = Total Credits for each transaction. +A L SE = +SE A +L Slide 6 of 74 Chapter Three +A L SE A +L +Exp Rev Exp +Rev
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Introduction To Financial Accounting HKUST Contract Exchange (Not Transaction) Most transactions with external parties involve an exchange where the business entity both gives up something and recei es something in ret rn something and receives something in return. Signing a contract is just an exchange of promises but not assets, service, which will change the financial position of the firm. Slide 7 of 74 Chapter Three Introduction To Financial Accounting HKUST Learning Objectives for Ch 3 1. Learn a typical business operating cycle and the necessity for the time period assumption. 2. How business activities affect the elements of the income statement . 3. Learn the accrual basis of accounting and apply the revenue and matching principles . 4. Apply transaction analysis to examine and record the effects of operating activities. Slide 8 of 74 Chapter Three 5. Prepare unadjusted financial statements .
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Introduction To Financial Accounting HKUST Business Background How do business activities affect the income affect the income statement?
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Chapter 3 for course website - Introduction To Financial...

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