Accounting System

WEEK 6
Accounting Definition
= “Accounting is the art of recording, classifying,
and summarizing in a significant manner and in
terms of money, transactions and events
which are, in parts at least, of a financial
character, and interpreting the results
thereof.”

- American Institute
of Certified Public Accounting
 Elements of Accounting
& The assets of the business organization
& The liabilities of the business organization
& The capital of the business organization

ASSETS = EQUITIES

Assets = Liabilities + Capital (Net Worth)

= The financial statement called the balance

_ sheet is based on the "accounting equation.” _
Assets

& economic resources owned and used by a

business in conducting its operations
= consist of money, land, buildings, machineries,
and other property
= include items like raw materials, merchandise
inventory, accounts receivable, prepaid
expenses, and investments
Types of Assets
= Two types:
Q Current assets — include money and other
assets that are easily converted into cash during
the normal operating cycle of the business or
within one year
Q Fixed assets — tangible assets owned and used
by a company for its operations, and are not
intended for sale (e.g. land, buildings,
equipment, furniture and fixtures)
Liabilities

= debts and obligations of a business to other

entities other than its owner
= require settlement at a future date
& represent an existing obligation for the
business to part with resources in the future
Types of Liabilities
= Two types:
Q Current liabilities — obligations that must be
paid within one year or within one operating
cycle
0 Long-term liabilities — debts or obligations that
will be due and payable after one year (e.g. long
term notes payable, bonds payable, and
mortgage payable)
Capital / Owner’s Equity
& represents the investment or equity of a
business’ owners
& the net worth of a company
& comes from investment in the business by the
owners, plus accumulated net profits of the
business that have not been paid out to the
owners
& represents amounts owed to the owner(s)
& equity accounts are balance sheet accounts

= Example of typical capital/equity:

Q John Adams, capital: Designation of the interest
_ in a business of an owner named John Adams. _
 Double Entry Accounting
& recognized that no asset could exist without
someone having claim or a right to it
& both the specific assets and the equities are
accounted for at the time transactions are
recorded
& assets obtained through loans or credits result
in an increase in liabilities
) & assets of a business can be decreased by:
= assets can be increased by: b Losses
0 Donations Withdrawal of assets by owners
0 Investment by the owners Use of assets

iy Wy
Q Services performed by the business Donations to others
Q Loans or credit furnishing by outsiders Settlement of the claims (liabilities) of outsiders
[
 Accounting Cycle
. . = This includes the following steps:
& The sequence of accounting procedures is
Q Transaction
used to record, classify, and summarize
Analyze and classify
accounting information.

Y
Journalize
& This starts with the initial recording of busine Post and balance

[
transactions and completes with the

5
Trial balance

5y
preparation of formal financial statements. Adjustments
Adjusted trial balance
Closing
Post-closing trial balance
Prepare financial statement
Transaction
& event or condition that requires an entry in the
accounting records

& for accounting purposes, it is expressed in

terms of their effect on the accounting
equation

= effect of changes on the three basic elements

is illustrated by examining the accounting
equation and some typical transactions
Transaction Example:
& Juan Cruz begins business on October 1 by
investing £75,000 in cash. After this
transaction, the business has cash as an asset
in the amount of £75,000; and the owner’s
equity, that is waiver’s claim on the assets, is
£75,000.
& Cruz pays £900 for the rental of the store for
three months. The assets cash is traded for the
asset prepaid rent, representing the right to
occupy the store for the three months.
Transaction Example:

= New equipment costing £30,000 is purchased

for the store on account. An asset is increased
in exchange for an increase in a liability.
& Payment of 28,000 was made to the creditors
from whom equipment was purchased. The
asset cash is reduced by 228,000, and the
liability, accounts payable, is reduced by
£28.000.
Transaction Example:

Assets = Liabilities + Capital

Prepaid Accounts Cruz,
Cash + Rent + Equipment = Payable + Capital
(1) 75,000.00 75,000.00
(2) -900.00 900.00
(3) 30,000.00 30,000.00
(4) -28,000.00 -28,000.00
Analyze and Classify
& involve quantifying the transaction in
monetary terms
= identifying the accounts that are affected and
whether those accounts are to be debited or
credited
Analyze and Classify
= Accounting Equation and Revenue and
Expense
0 Assets are increased by revenue received for
services performed by a business.
Q Revenue - consideration received by the
business for rendering goods and services to its
customers.
Sales indicate how the revenue was earned.
[

Q Revenue is treated as an increase in capital.

 Analyze and Classify
= Source Documents
QO A business transaction is supported by some
form or source document, which serves as
evidence or proof of the transaction and gives
information about what has happened.

0 Such document is either received from an

outsider or is originated within the business.

a Abill orinvoice received from a supplier of

materials supports an entry to record an
increase in the materials inventory assets and
_ the account payable liability. _
Analyze and Classify
= Accounts
Q Pages or cards divided into two halves by a
vertical line and may appear somewhat as
follows:

Debit Credit
Side Side

0 Increases in accounts are recorded in one side

of the account, and decreases are recorded on
the other side.
0 Balance of the account = the difference
between the sums of the items on each side of
the account.
Analyze and Classify

0 A debit balance exists if the amounts on the left

sides are greater; a credit balance occurs if the
amounts on the right side are greater.
0O Debit means increase in any asset, but a debit
will also decrease any liability owner’s equity
account.
 Analyze and Classify
= Use of Accounts
0 The transaction previously given for Cruz are
now expanded and are listed and numbered as
follows:
e Juan Cruz invested £75,000 in cash to begin
* Merchandised was sold to customers on account
business operations.
for R48,000.
* AP900 prepayment was made for rent of a store
¢ Wages of R800 were paid.
for three months.
* A promissory note of £8,000 was received from
¢ Equipment was purchased on account of a cost
customer on account.
$£30,000.
e Cash of £28,000 was paid to the creditors from * Cash of 200 was paid for heat and light for one
whom equipment was purchased.
¢ Merchandised costing 50,000 was purchased on
credit terms.
 Assets = Liabilities + Capital
Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - +

Cash Accounts payable Cruz, Capital

(1) 7s000((2) 900 (4) 28000((3) 30000 (1) 75000
(4) 28000 (5) 50000
(7) 800
(9) 200

Accounts Receivable Plus

(6) m(s) 8000 Revenue

Analyze and Classify

!

(8)
s sood
]
Dr.
s
Cr.

Sales
Prepaid Rent (6) 48000
2) fi
Minus
Equipment Expenses
(3) 3&& Dr. Cr.
R
Purchases
(5) s
Wage Expenses
(7 8
Heat & Liiht Expenses