ACFI1001 Lecture Notes - Lecture 6: General Journal, Uptodate, Accounting Equation

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mauveeel452

2 Jun 2018

School

University of Newcastle

Department

Accounting

Course

ACFI1001

Professor

Marcus

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An accounting information system is about recording information to produce financial statements

that are used as a basis for decisions; it is like an athlete recording their performance so they can try

ways to improve it.

A opays aoutig information system identifies, records, summarises and communicates the

various transactions of a company.

Accounting transactions: economic events that affect a opays assets, liabilities or equity.

an account or an accounting record that accumulates the activity of a specific item and yields the

ites alae

Chart of accounts: the various accounts that a company uses to capture its business.

A transaction is oey ito or out of the business entity; it always has a source and it always has a

use. Moey oes fro soewhere ad oey goes soewhere, at least two aouts are always

affected.

Assets = Liabilities + Equity

Every accounting transaction must affect at least two accounts. This requirement is known as the

dual nature of accounting.

The double-entry nature of recording transactions is coded into debits which are the uses of

resources, and credits which are the source of resources.

Debits on the left, credits on the right

A T-account is a convention for organising and accumulating the accounting entries of transactions

that affect an individual account, such as cash, accounts receivable, bonds payable or contributed

capital.

The left side of the account is the debit side and the right side of the account is the credit side.

A debit indicates:

• an increase in an asset

• a decrease in a liability

• a decrease in a shaeholdes’ euity item

A credit indicates:

• a decrease in an asset

• an increase in a liability

• an increase in a shaeholdes’ euity item

T-account normal balances:

• Increases in assets appear on the left side of T-accounts

• Decreases in assets appear on the right side of T-accounts

• Decreases in liabilities appear on the left side of T-accounts

• Increases in liabilities appear on the right side of T-accounts

• Decreases in equity appear on the left side of T-accounts

• Increases in equity appear on the right side of T-accounts.

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Document Summary

An accounting information system is about recording information to produce financial statements that are used as a basis for decisions; it is like an athlete recording their performance so they can try ways to improve it. A (cid:272)o(cid:373)pa(cid:374)y(cid:859)s a(cid:272)(cid:272)ou(cid:374)ti(cid:374)g information system identifies, records, summarises and communicates the various transactions of a company. Accounting transactions: economic events that affect a (cid:272)o(cid:373)pa(cid:374)y(cid:859)s assets, liabilities or equity. an account or an accounting record that accumulates the activity of a specific item and yields the ite(cid:373)(cid:859)s (cid:271)ala(cid:374)(cid:272)e. Chart of accounts: the various accounts that a company uses to capture its business. A transaction is (cid:858)(cid:373)o(cid:374)ey(cid:859) i(cid:374)to or out of the business entity; it always has a source and it always has a use. Mo(cid:374)ey (cid:272)o(cid:373)es fro(cid:373) so(cid:373)ewhere a(cid:374)d (cid:373)o(cid:374)ey goes so(cid:373)ewhere, at least two (cid:858)a(cid:272)(cid:272)ou(cid:374)ts(cid:859) are always affected. Every accounting transaction must affect at least two accounts. This requirement is known as the dual nature of accounting.

Related Questions

Assets	=	Liabilities + Equity
The left side of the accounting equation shows the economic resources of the company (what the company has).	=	The right side of the accounting equation summarizes who provided those assets: Creditors or the owners.

When a business is first formed, both sides of the equation are equal to zero. As transactions occur, they affect the accounting equation, but the accounting equation must always stay in balance. A transaction can increase both sides or decrease both sides. A transaction could also affect only one side by increasing and decreasing one side at the same time.

APPLYING THE CONCEPTS: Analyzing Changes to Assets, Liabilities and Equity

Thomas Company: The table below demonstrates the effect of the first three transactions for Thomas Company. Review the details of each transaction and determine the effect on the accounting equation. Then, enter the updated amounts for the assets, liabilities, and equity accounts (do not record the the transaction). Enter all amounts as positive numbers. If an updated balance is zero, enter "0".

Transaction	Assets	=	Liabilities	+	Equity
Beginning	$0	=	$0	+	$0
Investment in the Business The owner of the company has invested $26,000 cash into the business. This increases the assets of the business from its zero balance. The owner has a claim on the assets, so equity also increases from its zero balance. Make sure the equation stays in balance.	$	=	$	+	$
Borrow Cash The company borrows $13,000 cash from the local bank. This increases the assets from its balance after the first transaction. The company now owes the bank; therefore, the bank also has a claim on the assets. Thus, liabilities increase from their zero balance. Notice this transaction did not affect equity. The equation still needs to balance.	$	=	$	+	$
Purchase equipment The company pays cash for a piece of equipment costing $10,000. Make sure that the equation stays in balance. Remember, the left side of the equation summarizes the total assets. The company has merely exchanged one asset (cash) for another asset (equipment); the value of each asset is the same.	$	=	$	+	$

Jones Company: Analyze the accounting equation for another business, Jones Company. Assume that the assets are $66,000 and the liabilities are $26,400. By rearranging the accounting equation, you determine that equity is $.

During the year, the owner invested an additional $4,000 in the business. The company also paid off $2,500 of its debt. What would the accounting equation look like at the end of the year for Jones Company? Enter the updated amounts for Jones' accounting equation below.

Assets	=	Liabilities	+	Equity
$	=	$	+	$

APPLYING THE CONCEPTS: Analyzing the Effect of Revenues and Expenses

The equity component of the accounting equation can be affected by more than owner contributions. In any form of business, the owners take all revenues and expenses. Therefore, equity increases for revenue earned and decreases for expenses incurred. Also in any form of business, money can be distributed from the business to the owners. Distributions (in the form of cash or other assets) to the owner decrease the equity account. Smith Company had transactions affecting equity during the past year. The table below demonstrates the effect of these transactions for Smith Company. Review the details of each transaction and determine the effect on the accounting equation. Then, enter the updated amounts for the assets, liabilities, and equity accounts (do not record the the transaction). Enter all amounts as positive numbers.

Transaction	Assets	=	Liabilities	+	Equity
Beginning of the year	$320,000	=	$96,000	+	$224,000
Revenues earned: During the year, Smith Company earned revenues totalling $192,000. The cash has been collected from the customers for all revenue earned this year.	$	=	$	+	$
Expenses incurred: Smith Company incurred expenses totalling $134,400 during that same year. All of the expenses incurred this year were paid in cash.	$	=	$	+	$
Distributions: At the end of each quarter, the owner withdraws cash from Smith Company. The sum of those quarterly distributions was $5,760.	$	=	$	+	$

APPLYING THE CONCEPTS: Putting it all together

Letâs put all the pieces together now. Suppose that you are analyzing Martin Company. You know that at the beginning of the year, the assets equaled $320,000 and the liabilities equaled $176,000. During the year, assets increased by $48,000 and equity increased by $74,400. The change in equity includes all increases and decreases. Further analysis reveals that the changes in equity were caused by revenues of $172,800 and expenses totaling $112,320 during the year, and additional ownersâ investments of $50,400 in the first half of the year. Because of your understanding of the accounting equation, you realize that distributions (withdrawals) to the owner must have also occurred during the year. However, you must determine the amountfor those distributions.

What is the amount of distributions made to the owner of Martin Company during the year? $

Complete the equation below with amounts for the end of the year.

Assets	=	Liabilities	+	Equity
$	=	$	+	$

cyanbee498

1. Creditors' claims on the assets of a company are called: (Points : 2)

2. The primary objective of financial accounting is: (Points : 2)

To serve the decision-making needs of internal users

To provide financial statements to help external users analyze and interpret an organization's activities

To monitor and control company activitiesTo provide information on both the costs and benefits of managing products and services

To know what, when and how muchto produce

3. Assets created by selling goods and services on credit are: (Points : 2)

4. The debt ratio is used: (Points : 2)

To measure the amount of equity relative to the expenses

To reflect the risk associated with a company's debts

Only by banks when a business applies for a loan

To determine how much debt a firm should pay off

5. Net Income: (Points : 2)

Decreases equity

Represents the amount of assets owners put into a business

Equals assets minus liabilities

Is the excess of revenues over expenses

Represents the owners' claims against assets

6. Internal users of accounting information include: (Points : 2)

Shareholders

Customers

Creditors

Government regulators

Line Supervisor

7. Risk is: (Points : 2)

Net income divided by average total assets

The reward for investment

The uncertainty about the expected return that will be earned from an investment

Unrelated to expected return

8. An example of an operating activity is: (Points : 2)

Paying wages

Purchasing office equipment

Borrowing money from a bank

Selling stock

Paying off a loan

9. Which accounting assumption assumes that all accounting information is reported monthly or yearly? (Points : 2)

Business entity assumption

Monetary unit assumption

Value assumption

Cost assumption

Time period assumption

10. Distributions of assets by a business to its stockholders are called: (Points : 2)

True or False:

An advantage of FIFO is that it assigns the most recent costs to cost of goods sold, and does a better job of matching current costs with revenues on the income statement.

A properly designed internal control system is a key part of systems design, analysis, and performance.

An internal control system consists of the policies and procedures companies use to protect assets, ensure reliable accounting, promote efficient operations, and uphold company policies.

Technologically advanced accounting systems rarely need monitoring for errors because computers always process transactions correctly.

Separation of duties involves dividing responsibility for a transaction or a series of related transactions between two or more individuals or departments.

The Sarbanes-Oxley Act (SOX) requires managers and auditors of companies whose stock is traded on an exchange to document and certify the system of internal controls.

A receivable is an amount due from another party.

Credit sales are recorded by crediting Accounts Receivable.

The accounts receivable turnover indicates how often accounts receivable are received and collected during the period.

A high accounts receivable turnover in comparison with competitors suggests that the firm should tighten its credit policy.

The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible.

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ACFI1001 Lecture Notes - Lecture 6: General Journal, Uptodate, Accounting Equation

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