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INTRODUCTION

What Is Accounting?
Accounting is the language of business. It is a standard set of rules for measuring a firms financial performance. Assessing a companys financial performance is important for many groups, including: The firms officers (managers and employees) Investors (current and potential shareholders) Lenders (banks) General public Standard financial statements serve as a yardstick of communicating financial performance to the general public. For example, monthly sales volumes released by McDonalds Corp. provide both its managers and the general public with an opportunity to assess the companys financial performance across major geographic segments.

Why Is Accounting Important? Making Corporate Decisions


Suppose a telecom company is looking to acquire a regional company to boost its presence in that region. There are several potential targets that fit the bill. How does this company determine which of these targets, if any, would make a good acquisition candidate?

Making Investment Decisions


A mutual fund is looking to invest in several diverse technology companies Microsoft, Oracle, and Intel. How does this mutual fund determine in which of these targets it should make an investment?

Accounting Facilitates Corporate and Investment Decisions


A major part of corporate and investment decisions relies on analyzing all of the companies financial information in the above-mentioned cases. Accounting, the standard language by which such financial information can be assessed and compared, is fundamental to making these decisions.

Who Uses Accounting?


Accounting is used by a variety of organizations, from the federal government to nonprofit organizations to small businesses to corporations (Exhibit 1.1). We will be discussing accounting rules as they pertain to publicly traded companies.

U.S. Accounting Regulations


Accounting attempts to standardize financial information, and like any language, follows rules and regulations. What are these accounting rules, how are they established, and by whom?

Generally Accepted Accounting Principles


In the United States, a governmental agency called the Securities and Exchange Commission (SEC) authorizes the Financial Accounting Standards Board (FASB) to determine U.S. accounting rules. FASB communicates these rules through the issuance of Statements of Financial Accounting Standards (SFAS). These statements make up the body of U.S. accounting

PART A

INCOME STATEMENT Income statement (also referred as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations)[1] is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including writeoffs (e.g., depreciation and amortization of various assets) and taxes.[1] The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. (Williams. 2008) The income statement can be prepared in one of two methods.[2] The Single Step income statement takes a simpler approach, totaling revenues and subtracting expenses to find the bottom line. The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line, starting with the gross profit. It then calculates operating expenses and, when deducted from the gross profit, yields income from operations. Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured. ( Williams 2008)

Usefulness and limitations of income statement


Income statements should help investors and creditors determine the past financial performance of the enterprise, predict future performance, and assess the capability of generating future cash flows through report of the income and expenses. However, information of an income statement has several limitations:

Items that might be relevant but cannot be reliably measured are not reported (e.g. brand recognition and loyalty). Some numbers depend on accounting methods used (e.g. using FIFO or LIFO accounting to measure inventory level). Some numbers depend on judgments and estimates (e.g. depreciation expense depends on estimated useful life and salvage value).(Barry J 2007)

BALANCE SHEET In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition".[1]

Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year. (Barry J 2007) A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity.[2] Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities. [(Epstein 2007)3] Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing."( Epstein 2007) THE INCOME STATEMENT AND BALANCE SHEET Income Statement
The income statement communicates the inflows and outflows of assets, where inflows are the revenues generated and outflows are the expenses. An excess of inflows over outflows is called net income, and an excess of outflows over inflows is called a net loss. The income statement can be expressed as an equation: Revenue Expenses = Net Income (Loss) The income statement is a summary of the sources of revenues and expenses that result in a profit or a loss for a specified accounting period. Typically that period is one year but it can be a month or a quarter as well. Income statements are always prepared for a period of time and the term for the period ended is included in the title. Revenue: The sources of revenue for any business depend on the type of business being operated. A company that manufactures or resells a product would generate sales revenue. A service company on the other hand might generate fees revenue or service revenue. Expense: Examples of typical expenses encountered are salaries, utilities, rent, insurance, and office supplies. Here again, each entity will have its own unique set of expenses depending on the type of business being operated. Net Income (Loss): The difference between revenues and expenses is expressed as a positive or negative depending on whether revenues were greater or less than expenses.

(www.entrepreneur.com/encyclopedia/term/82202.html)

Balance Sheet The balance sheet communicates what the entity owns in terms of assets, what it owes in terms of liabilities, and the difference between those two which represents what the owners of the company are entitled to. The owners portion is called equity.

The balance sheet can be expressed as the fundamental accounting equation: Assets = Liabilities + Equity The balance sheet shows a snapshot of an organizations assets, liabilities, and equity at one point in time and it demonstrates the accounting equation. Balance sheets are always prepared for a point in time and the term as at is included in the title. Assets: The assets of a company represent the resources owned by the company. These assets can be in the form of cash or things that can be converted to cash like accounts receivable and they can also be fixed assets like cars and office equipment. Liabilities: What a company owes to creditors is reported in the liabilities section of the balance sheet. Creditors are banks and other lending institutions as well as suppliers that are owed money in the form of accounts receivable as well as money that is owed but not yet paid (accruals). A common example of an accrued liability is yearly taxes. Equity: The difference between what the entity owns and what it owes represents the owners share of the company. For sole proprietorships this equity is usually called capital and for public companies it is often referred to as common stock or share capital. The equity in a company is the owners claim against the assets owned. The income statement and balance sheet of a company are linked through the net income for a period and the subsequent increase, or decrease, in equity that results. The income that an entity earns over a period of time is transcribed to the equity portion of the balance sheet. The income represents an increase in the owners claim against the assets: Income is NOT a cash asset. It is through the income and equity accounts that the balance sheet and income statement reflect the total financial picture of the entity.

(basiccollegeaccounting.com/contrast-between-capital-and-revenue-expenditure)

Part B
Expenditure is usually of two types: (a) Capital expenditure; and (b) Revenue expenditure. Capital Expenditure Capital expenditure consists of expenditure, the benefit of which is not fully enjoyed in one accounting period but spread over several accounting periods. It includes assets acquired for the purpose of earning income or increasing the earning capacity of the business or effecting economy in the operation of an asset. These are not meant for sale. Expenditure incurred for improving assets and extending an existing asset is also capital expenditure.

The sum of invoice price, freight and insurance charges, installation and erection cost and custom duty etc. will be capitalized in the books of a firm. These capital items appear on the assets side of Balance Sheet.( blog.accountingcoach.com/capital-expenditure-revenue-expenditure)

Examples: (a)Interest on capital paid during the period of construction of Company (b) Expenditure in connection with or incidental to the purchase or installation of an asset. (c) Acquisition of new assets. (d) Expenditure incurred for putting the old asset purchased, into working condition. (e) Additions and extensions to existing assets. (f) Interest and financing charges paid, brokerage and commission paid. (g) Betterment of fixed assets or improvement of an asset to produce more, to improve its earning capacity or to reduce its operating expenses or to increase the life of asset. The cost of assets will be written off by way of depreciation over a period of its life. The amount of depreciation is a revenue expenditure and is debited to profit and loss account. The reason for charging depreciation to revenue i.e. profit and loss account is that the asset is used for earning revenue. Hence the depreciation is charged to profit and loss account. Thus, the benefit of capital expenditure does not exhaust in one year but extends over a number of years of its use or life of the asset.

Revenue Expenditure
Revenue expenditure consists of expenditure incurred in one period of the accounting, the full benefit of which is enjoyed in that period only. This does not increase the earning capacity of the business but it is incurred in order to maintain the existing earning capacity of the business. It includes all expenses which arise in normal course of business. The benefit of such expenditure is for a short period, say, one year only and it is not to be carried forward to the next year. The expenditure is of a recurring nature i.e. incurred every year. (basiccollegeaccounting.com/contrast-between-capital-and-revenue-expenditure) Examples:

(a) Purchase of raw materials for conversion into finished goods. (b) Selling and distribution expenses incurred for sale of finished goods e.g. sales office expenses, delivery expenses, advertisement charges, et(% (c) Establishment expenses like salaries, wages, rent, rates, taxes, insurance, depreciation on office equipment. (d) Depreciation of plant, machinery and equipment. (e) Expenses incurred in order to maintain the existing fixed assets in an efficient and workable state such' as repairs to building, repairs to plant, white-washing and painting of building. All these items appear on the debit side of trading and profit and loss account, in case of trading concerns or income and expenditure account, in case of non-trading concerns.

Bank Reconciliation Statement


A bank reconciliation statement is a statement prepared by organizations to reconcile the balance of cash at bank in a company's own records with the bank statement on a particular date.

This statement is the most common tool used by organizations for reconciling the balance as per books of company with the bank statement and is made at the end of every month. The main objective of reconciliation is to ascertain if the discrepancy is due to error rather than timing. The difference between the two records on a given date may arise because of the following:

Cheques drawn but not yet presented to the bank. Cheques received but not yet deposited in the bank. Interest credited and not recorded in the organization's books. Bank charges debited but not recorded in the organization's books.

Bank Reconciliation Statement process is being outsourced to professional accounting firms by large organizations. This helps them have an accurate view and also ensure that the company's bookkeeping is good. Accounting firms make monthly reconciliation statements for clients and help them determine any discrepancy. Advantages

Faster processing Requirement of less manpower Easy identification of errors

(http://www.accountingissue.info/bank-reconciliation.html)

Example

Assets and Liabilities

The Assets- the assets are generally those possessions of an individual that have a good market value or are quite valuable. Assets are mainly classified into three typesCurrent Asset- the cash is the most basic asset of any individual. The money that is being held in accounts like the checking and savings accounts is also included in the cash. Also inclusive are the marketable securities in the form of bonds, stocks, shares etc. The money lent or payments due from clients, even form a part of it. Fixed Asset- comprises of all the tangible valuable things like property, machines, equipments, land and the like that are not meant to be sold. Intangible Asset- incorporates all the untouchable things like copyrights, patents, trademarks etc. that have tremendous monetary significance. (www.helium.com/items/1739637-assetscapital-and-liabilities) The law of opposites governs the nature; where there are assets, there will be liabilities. These are the debts that you have to pay back to your creditors. This can be done through giving cash or any other asset like jewelry, some other goods etc. Liabilities again are of two kinds1. The Current Liabilities- the liabilities that are to be paid back within a certain time limit and most often through your current assets. These include the accounts payable i.e. type of bill that you have to monthly, the Notes Payable-loans taken from banks meant to be repaid within 30 days and the Accrued Expenses- the compulsory expenses like taxes, wages, interests etc. where the bills are not received but the balances of each must be repaid. 2. Long Term Liabilities- those debts that can be repaid at ease for the tenure is more then a month. ( http://www.articlealley.com/article_12205_15.html?ktrack=kcplink)

Example

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Reference
1.blog.accountingcoach.com/capital-expenditure-revenue-expenditure 2. http://www.articlealley.com/article_12205_15.html?ktrack=kcplink 3. www.helium.com/items/1739637-assetscapital-and-liabilities 4. http://www.accountingissue.info/bank-reconciliation.html 5. basic college accounting.com/contrast-between-capital-and-revenueexpenditure 6.basiccollegeaccounting.com/contrast-between-capital-and-revenue-expenditure 7. Williams, Jan R.; Susan F. Haka, Mark S. Bettner, Joseph V. Carcello (2008). Financial & Managerial Accounting. McGraw-Hill Irwin. pp. 40 8.Epstein, Barry J.; Eva K. Jermakowicz (2007). Interpretation and Application of International Financial Reporting Standards. John Wiley & Sons. pp. 931.

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