Financial Accounting - Class L02

Topic 1 - Introduction to Financial Accounting

Overview
[ See handouts Slides 1-4 to 1-8 ]
i) ___________
ii) ___________ Types
Formation
BUSINESS
iii) Manufacturing
Purpose of a business:

i) ________________________
ii) Partnership
iii) _______________________

Measurement:

i) make _____________

______________________ ________________

ii) continue to ___________________

______________________ ________________
Where can we get this information?
ANSWER : _____________________
_________________ of business
informa)on system that _________ & _________
effects of business transactions
basis of recording & repor)ng is
The ___________________________

The Acounting Equation [ See handouts Slides 1-9 to 1-36 ]

Every business has the following:
ASSETS
(resources owned)

LIABILITIES
(amts owing to outside parties)

OWNER'S EQUITY
(amt owing to owner)

[ CAPITAL - DRAWINGS + REVENUES - EXPENSES ]

(1) Record business transactions using the Accounting Equation
- ensure equation is always balanced
- get balances at the end of period; ending balances
[ See Pg 2 of Notes ]
(2) Reporting effects of the business transactions in Financial Statements [See Pg 3 of Notes]
- Income Statement
- Statement of Owner's Equity
- Balance Sheet
Revenues - Expenses
= Net Profit

Opening Capital + Profit - Drawings

= Ending Capital

Assets = Liabilities + OE

End. Capital

(3) Accounting Principles are adopted/used in the recording & reporting process
to give assurance to the reliability and comparability of the accounting information
to the users. [ See handouts Slides 1-15 to 1-19 & additional explanation uploaded to D2L]

Pg 1

Prepared by Yvonne Chan

Record business transactions using the Accounting Equation

Lecture Illustration - Effects of business transactions on the accounting equation.

Date

Transactions

1-Jan

Nancy deposited $50,000 in a bank account in the name of Nancy Services

8-Jan

Nancy Services bought furniture worth $12,500 paying by cheque.

10-Jan Supplies of $6,300 was bought on credit.

16-Jan Nancy Services received $12,800 for rental from tenants through GIRO.
20-Jan The following expenses were paid by cheques: wages $1,500, utilities $350 and repairs $550.
24-Jan Nancy Services paid creditors $3,400 with a cheque.
31-Jan Nancy determined that the unused supplies was $1,900. (i.e. supplies used was $4,400)
31-Jan Nancy withdrew $ 2,100 from Nancy Servcies for her personal use.

Date

Assets
Bank

1-Jan

50,000

8-Jan

(12,500)

+ Furniture +

Supplies

12,500

Capital,
Nancy

Drawings,
Nancy

Owner's Equity

Rental
Income

Wages
Exp

Utilities
Exp

Repairs
Exp

6,300

12,800

20-Jan

(2,400)

24-Jan

(3,400)

31-Jan

Supplies
Exp

50,000

6,300
12,800
(1,500)

(350)

(550)

(3,400)

(4,400)
(2,100)
42,400 +

16-Jan

End.Bal.

Accounts
Payable

10-Jan

31-Jan

Accounting Equation of Nancy Services

Liabilities +

(4,400)
=

12,500

Assets

56,800

1,900

Liabilities
2,900

(2,000)
2,900

50,000

(2,000)

(1,500)

(350)

(550)

(4,400)

Owner's Equity

+
[ Capital

12,800

54,000

- Drawings
Pg 2

+ ( Revenue

-Expenses )
Net Profit

]
Prepared by Yvonne Chan

Reporting effects of the business transactions in Financial Statements

Lecture Illustration - Financial Statements prepared from endng bal. in the Accounting Equation.
Nancy Services
Income Statement (for Service Business) for the month ended 31 Jan 2014
$
$
Revenues:
Rental Income
12,800
Less Expenses:Wages Expense
Utilities Expense
Repairs Exense
Supplies Expense

*Format for trading

business is different
and will be covered in
Topic 3

1,500
350
550
4,400
6,800
6,000

Net profit
Nancy Services
Statement of Owner's Equity as at 31 January 2014
Opening Capital
Add: New capital
50,000
Add: Net profit
6,000
Less: Drawings
(2,100)
Ending Capital
Nancy Services
Statement of Financial Position as at 31 January 2014
$
Fixed assets
Furniture
Current assets
Bank
Supplies

53,900

$
12,500

42,400
1,900
44,300
56,800

Total Assets
Current liabilities
Account payable

2,900

Owner's equity
Ending Capital
Total Liabilities & Owner;s Equity

53,900
56,800

Note: Fixed assets : used for more than 1 year; long-term or non-current assets
Current assets : cash or used/converted to cash within 1 year; short-term
Current liabilities : amts repayable within the coming 1 year
Long-term liabilities : amts repayable more than 1 year later

Pg 3

Prepared by Yvonne Chan

Financial Accounting - Class L01

Additional Practice

Topic 1 - Analyse effects of business transactions on Accounting Equation

Accounting Equation : A = L +

OE

Accounting Equation : A = L + [ C - D + R - E ]
Indicate the effects of the following on the business Accounting Equation
Ensure that the Accounting Equation remains balanced
1) Invested cash $20,000 in the busines' bank account

A ; Bank by $20,000

C; Capital by $20,000

2) Withdrew $1,000 by cheque for personal use

D; Drawings by $1K
A; Bank by $1K
3) Purchased office equipment $8,000 by cheque

A; Equipment by $8K
A; Bank by $8K
4) Purchased furniture $7,000 on credit from AB Ltd

A; Furniture by $7K

L; Accounts Payable by $7K

5) Paid partial amount of $2,000 owing to AB Ltd by cheque

A; Bank by $2K

L; Accounts Payable by $2K

6) Received $18,000 for commission income by GIRO

A ; Bank by $18K

R; Commission income (R) by $18K

7) Paid various expenses; wages $9,000, rent $6,000 & utilities $3,000 by cheques

E; Wages Exp by $9K

E; Rent Exp by $6K
E; U0li0es Exp by $3K
A; Bank by $18K
8) Took up a 3-yr bank loan of $10,000

A ; Bank by $10K

L; Bank Loan by $10K

Pg 4

Prepared by Yvonne Chan