Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Accounting and
2 Business
12/08/09 1
Learning Outcomes:
At the end of this topic, students
should be able to:
1. Explain the nature and types of business.
2. Defined assets, liabilities, owner’s equity,
revenue and expenses.
3. Discuss on the differentiation of cash and
accrual accounting.
4. Explain accounting assumptions, principles
and constraints.
12/08/09 2
Business Entity Forms
Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation
12/08/09 3
Exh.
1.8
Characteristics of Businesses
**Proprietorships
Proprietorshipsandand partnerships
partnerships that
thatare
are set
set up
up as
asLLC’s
LLC’s
provide
providelimited
limitedliability.
liability.
12/08/09 4
Corporation
Governed by: Companies Act 1965,
Memorandum of Association & Article of
Association
12/08/09 5
DEFINITIONS
Definitions of Income ,Expenses Assets,
Liabilities and Equity, based on MASB
Framework for the Preparation Presentation of
Financial Statement.
12/08/09 6
INCOME
Income is increases in economic benefits
during the period in the form of inflows or
enhancements of assets or decreases of
liabilities that result in increases in equity,
other than those relating to contributions from
equity participants.
12/08/09 7
INCOME…
REVENUE - the gross inflow of economic benefits
during the period arising in the course of the
ordinary activities of an enterprise when those
inflows result in increases in equity, other than
increases relating to contributions from equity
participants.
increases assets results from the sales of
goods and services, fees, interest, dividends,
royalties, grants and rent.
12/08/09 9
ASSETS
Probable future economic benefit obtained or controlled
by a particular entity as a result of past transactions or
events
E.g.:
1. Cash,
2. Accounts and notes receivable
3. Inventories
4. Prepaid items
5. Property, plant, and equipment
12/08/09 10
Assets
Cash
Cash
Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
Resources
Resources
owned
owned oror
Vehicles controlled
controlled
Vehicles Land
by
by aa Land
company
company
Store
Store Buildings
Buildings
Supplies
Supplies
12/08/09 Equipment
Equipment 11
LIABILITY
Probable future sacrifice of economical benefit
arising from a present obligation of a particular
entity to transfer assets or provide services to
other entities in the future as a result of past
transactions or events.
12/08/09 12
Liabilities
Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable
Creditors’
Creditors’
claims
claims on
on
assets
assets
Taxes
Taxes Wages
Wages
Payable
Payable Payable
Payable
12/08/09 13
OWNER’S EQUITY
Residual interest in the assets of an entity that remains after deducting its liabilities.
E.g.: (corporation)
Share capital – ordinary and preferred shares
12/08/09 14
Equity
Owner
Owner Owner
Owner
Investments
Investments Withdrawals
Withdrawals
Owner’s
Owner’s
claims
claims
on
on
assets
assets
Revenues
Revenues Expenses
Expenses
12/08/09 15
Classification of
Assets and Liabilities
How to Classify Items on the Balance Sheet
12/08/09 16
CURRENT ASSETS
those assets that;
Are either expected to be realised in, or intended for
sale or consumption in, the normal course of entity’s
operating cycle;
Held primarily for trading purposes;
Expected to be realised within 12 months after the
balance sheet date;
E.g.:
1. Accounts and notes receivable
2. Inventories
3. Prepaid items
4. Cash
12/08/09 17
Operating Cycle
the time between the acquisition of assets for processing and
their realisation in cash or cash equivalents.
12/08/09 18
Operating Cycle
Cash
Collect Purch
ions ases
Receivables Inventories
12/08/09
Sale 19
s
NON-CURRENT ASSETS
All other assets that do not meet the current
assets’ criteria.
E.g.:
Investments
Property, plant, and equipment (PPE)
Deferred income taxes
PPE - properties of a tangible and relatively permanent
nature that are used in the normal business operations.
Intangible assets - long-term rights and privileges of a
nonphysical nature acquired for use in business
operations. E.g.: goodwill, patent, copyright, etc.
12/08/09 20
CURRENT LIABILITIES
Liabilities are classified as CURRENT if they are:
Expected to be settled in the entity’s normal
operating cycle or less than 12 months.
Held for trading.
it is due to be settled within twelve months after
the balance sheet date
E.g.:
1. accounts payable,
2. notes payable,
3. accrued expenses
12/08/09 21
NON-CURRENT LIABILITIES
All other liabilities that do not meet the current
liabilities’ criteria.
E.g.:
Long-term debt
Long-term lease obligations
Deferred income tax liability
Pension obligations
12/08/09 22
Timing Issue:
Cash-Basis Accounting
Vs
Accrual-Basis Accounting
12/08/09 23
Cash-Basis Accounting
Revenues are recognized when cash is
received.
Expenses are recognized when cash is paid.
Cash-basis accounting is not in accordance
with generally accepted accounting principles
(GAAP).
Use by public sector (government). But most of
the public sector is moving towards the
application of accrual basis.
12/08/09 24
Accrual-Basis Accounting
Transactions recorded in the periods in which
the events occur
Revenues are recognized when earned,
rather than when cash is received.
Expenses are recognized when incurred,
rather than when paid.
Accrual-basis accounting is applied
accordance with generally accepted
accounting principles (GAAP).
Use by private entities
12/08/09 25
The Operating Guidelines of
Accounting
ASSUMPTIONS PRINCIPLES CONSTRAINTS
Economic entity Historical costs Conservatism
12/08/09 26
Accounting Assumptions
Now Future
Economic Entity Going-Concern Principle
The business is accounted for Reflects assumption that the
separately from other business business will continue operating
entities, including its owner instead of being closed or sold
Going Concern
Allow to record assets at historical cost
Monetary Unit:
Provides a common unit of measure
Permit to add & subtract items on FS
12/08/09 28
Time Period Assumption
•Fiscal year:1/7/2006-30/6/2007
12/08/09 29
Accounting Principles
Revenue Recognition
1. Recognize revenue when it is
Historical Cost
earned.
Accounting information is based
2. Proceeds need not be in cash.
on actual cost.
3. Measure revenue by cash
received plus cash value of items
received.
Full Disclosure
Matching
Report enough information for
Expenses are matched against
users to make knowledgeable
revenues, and recorded in the
decisions about the company
same period in which the related
12/08/09 revenues are earned 30
Accounting Principles
Conservatism
Income and assets be reported at
their lowest reasonable amounts (i.e.
minimizing the assets and
understating the income) Materiality
Accountants are required to
accurately account for significant
items and transactions
12/08/09 32
Accounting Constraints
(FRS101)
12/08/09 34