AC120 l ecture  2 <ul><li>Role of financial accounting </li></ul><ul><li>Accounting equation development </li></ul><ul><li...
Account ants are associated with ... <ul><li>… bookkeeping </li></ul><ul><li>… financial statements preparation </li></ul>...
Accounting is concerned with... <ul><li>information gathering, measuring and recording of data  </li></ul><ul><ul><li>book...
Financial /Management Accounting <ul><li>Financial accounting information  is addressed to users external to the organisat...
Business start up scenario <ul><li>Scenario: </li></ul><ul><ul><li>B Smith  decides to  set up  his own business.  He lodg...
T ransactions affecting the  business <ul><li>What is the impact of the following on the resources and obligations of  Acc...
Accounting Solutions business <ul><li>Assets € </li></ul><ul><ul><li>Bank 8,500 </li></ul></ul><ul><ul><li>Stock/Inventory...
Double entry bookkeeping <ul><li>Large numbers of transactions require an system of record keeping that reveals the ongoin...
Double entry rules <ul><li>Assets </li></ul><ul><ul><li>Increase => debit the account </li></ul></ul><ul><ul><li>Decrease ...
The asset of stock /inventory <ul><li>Most businesses want to make a profit and therefore wish to sell stock for more than...
Accounts and entries <ul><li>Stock goes out  =>  sales account </li></ul><ul><li>returns outwards account </li></ul><ul><l...
Lecture references <ul><li>Thomas  4 th  ed ,  c hapter s 1,2, 3,  4 </li></ul><ul><li>Britton and Waterston 3 rd  ed, cha...
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AC120 lecture 2 Role of financial accounting

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AC120 lecture 2 Role of financial accounting

  1. 1. AC120 l ecture 2 <ul><li>Role of financial accounting </li></ul><ul><li>Accounting equation development </li></ul><ul><li>Principles of double entry bookkeeping </li></ul>
  2. 2. Account ants are associated with ... <ul><li>… bookkeeping </li></ul><ul><li>… financial statements preparation </li></ul><ul><li>...costing products and services </li></ul><ul><li>… advice on saving money </li></ul><ul><li>… helping to run a business or personal finance </li></ul><ul><li>… financial budgeting </li></ul><ul><li>… tax planning and calculations </li></ul><ul><li>… consultancy </li></ul><ul><li>… auditing </li></ul>
  3. 3. Accounting is concerned with... <ul><li>information gathering, measuring and recording of data </li></ul><ul><ul><li>bookkeeping </li></ul></ul><ul><li>classifying and summarising the data </li></ul><ul><ul><li>financial statements preparation </li></ul></ul><ul><li>communicating what has been learned to interested users to allow them make economic decisions </li></ul><ul><li>U seful for those who need to make economic decisions and plans . Accounting information serves no purpose unless it is needed and wanted by someone, somewhere for something . </li></ul>
  4. 4. Financial /Management Accounting <ul><li>Financial accounting information is addressed to users external to the organisation . Information is conventionally produced in the form of financial statements – highly aggregated and structured, and comparable between organisations. Subject to the regulatory framework </li></ul><ul><li>Management accounting focuses on the information needs of those inside the organisation . Greater volumes of information available to management than to parties external to the business. Variety of formats and contents possible depending on particular needs of management of each organisation – no regulation. </li></ul>
  5. 5. Business start up scenario <ul><li>Scenario: </li></ul><ul><ul><li>B Smith decides to set up his own business. He lodges his savings of € 5,000 in to a bank account in the name of the business (Accounting Solutions buys and sells accounting textbooks) </li></ul></ul><ul><ul><li>In addition, t he business receives a € 2,500 loan from the bank as new business start up assistance </li></ul></ul><ul><ul><li>Using accounting language, what is the economic status of this business? What are the resources and obligations of the business ? </li></ul></ul>
  6. 6. T ransactions affecting the business <ul><li>What is the impact of the following on the resources and obligations of Accounting Solutions (AS) : </li></ul><ul><li>AS buys books on credit for € 500 </li></ul><ul><li>A S sells books on credit for € 100 </li></ul><ul><li>A S sells books for cash € 200 </li></ul><ul><li>A S pays € 200 to the creditor </li></ul><ul><li>B Smith contributes additional savings of € 1,000 to the business </li></ul>
  7. 7. Accounting Solutions business <ul><li>Assets € </li></ul><ul><ul><li>Bank 8,500 </li></ul></ul><ul><ul><li>Stock/Inventory 200 </li></ul></ul><ul><ul><li>Debtor 100 </li></ul></ul><ul><li>Total assets 8,800 </li></ul><ul><li>Capital 6,000 </li></ul><ul><li>Liabilities </li></ul><ul><ul><li>Bank loan 2,500 </li></ul></ul><ul><ul><li>Creditor 300 </li></ul></ul><ul><li>Total capital plus liabilities 8,800 </li></ul>
  8. 8. Double entry bookkeeping <ul><li>Large numbers of transactions require an system of record keeping that reveals the ongoing activities in an efficient way </li></ul><ul><li>This is the double entry system of bookkeeping </li></ul><ul><ul><li>Individual accounts for each asset, liability and capital </li></ul></ul><ul><ul><li>For each account, left hand side is the debit side and right hand side is the credit side </li></ul></ul>
  9. 9. Double entry rules <ul><li>Assets </li></ul><ul><ul><li>Increase => debit the account </li></ul></ul><ul><ul><li>Decrease => credit the account </li></ul></ul><ul><li>Liabilities and capital </li></ul><ul><ul><li>Increase => credit the account </li></ul></ul><ul><ul><li>Decrease => debit the account </li></ul></ul>
  10. 10. The asset of stock /inventory <ul><li>Most businesses want to make a profit and therefore wish to sell stock for more than cost </li></ul><ul><li>Stock account records cost of goods purchased </li></ul><ul><li>We require the accounting system to be more sophisticated if it to reflect profit making activities in a useful way </li></ul><ul><li>Therefore, transactions involving stock are recorded in the following way </li></ul><ul><ul><li>Stock goes out => we sold it or we returned it to the organisation from which we bought it </li></ul></ul><ul><ul><li>Stock comes in => we bought it or it was returned by customers to whom we sold it </li></ul></ul>
  11. 11. Accounts and entries <ul><li>Stock goes out => sales account </li></ul><ul><li>returns outwards account </li></ul><ul><li>Stock comes in => purchases account </li></ul><ul><li>returns inwards account </li></ul><ul><li>Debit and credit rules that apply to stock apply to the sales, purchases and returns accounts </li></ul>
  12. 12. Lecture references <ul><li>Thomas 4 th ed , c hapter s 1,2, 3, 4 </li></ul><ul><li>Britton and Waterston 3 rd ed, chapters 1, 5 </li></ul><ul><li>Wood 2 nd ed, chapters 2, 3, 4 </li></ul>

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