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Summary Accounting (MAN-BCU168) book & lectures
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Summary of the book for the Accounting course, which also includes lecture notes.
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Samenvatting accountingHoofdstuk 1 – Accounting and the Business Environment
Accounting is the information system that measures business activities, processes the information into reports and
communicates the results to decision makers.
• Financial accounting: provides information for external decision makers (investors, lenders, customers etc.)
• Managerial accounting: focuses on information for internal decision makers (company’s managers etc.)
Generally Accepted Accounting Principles (GAAP); shows the guidelines (objectives, characteristics, elements and
implementations of financial statements) for accounting information.
- Primary objective; provide information useful (relevant and faithful representation, so complete, neutral
and no error) for making investments and lending decisions.
- Economic entity Assumption; requires an organization to be a separate economic unit (entity).
- The cost principle; states that acquired assets and services should be recorded at their actual cost.
- Going Concern Assumption; assumes that the entity will remain in operation for the foreseeable future.
- Monetary Unit Assumption; requires items on the financial statements to be recorded in a monetary unit.
Types of businesses (entity)
• Sole proprietorship; a small business with a single owner
- one owner, called the proprietor who is personally liable
- life of organization ends at owner’s choice or death
- the owner pays tax on the proprietorship’s earnings
• Partnership; a business (professional organizations) with two or more owners
- two or more owners, called partners who are personally liable
- life of organization ends at partner’s choice or death
- partners pay tax on their share of the earnings, partnership is not taxed.
• Corporation; a separate legal entity (large multinational businesses)
- one or more owners, called stockholders who are not personally liable.
- life of organization is indefinite
- there are separate taxable entities (each stockholder) and the corporation pays tax
• Limited-liability company (LLC); a company in which each member is only liable for his own actions
- one or more owners, called members or partners, wo are not personally liable
- life of organization is indefinite
- LLC is not taxed. Instead, members pay tax on their share of earnings.
An audit is an examination of a company’s financial statements, to determine if financial statements give a fair
picture of the company’s financial situation.
The accounting equation → assets = liabilities + equity
• Asset = something the business owns (Cash, merchandise, inventory, furniture, land, building etc.)
• Liability = debts that are owed to creditors (... Payable, so accounts payable, notes payable, salaries payable)
• Equity = the owner’s claim to the assets of the business (what is left after company has paid his liabilities)
|→ increases with owners contribution and revenues, decreases with expenses and owner withdrawals
! Assets = Liabilities + owner’s capital – owner’s withdrawal + revenues – expenses
Transaction = any event that affects the financial position of the business and it can be measured reliably.
|→ analyse transactions: 1. Identify the accounts and the account type (at least two accounts).
2. Decide if each account increases or decreases.
3. Determine if the accounting equation is in balance.
Financial statements: business documents used to communicate information needed to make business decisions.
Properly-formatted heading; 1. Who = name of the business
2. What = name of the financial statement
3. When = date or period
, Income statement; answers the question of whether the business is profitable.
- Revenue and expenses
- Revenue listed first, then each expense account is listed separately (largest to smallest)
! it summarizes an entity’s revenues and expenses and reports the net income or loss for a
specific period.
Statement of owner’s equity; how the business uses its earnings.
- Begins with capital balance at the beginning of the period.
- Ends with capital balance at the end of the period.
- Increases with net income and owners contribution
- Decreases with net loss and owners withdrawal.
! it shows the changes in the owner’s capital account for a specific period.
Balance sheet; the amount of assets a business has and who can claim those
assets (creditors or owners).
- On a specific date, so not a period of time
- Each asset account is listed separately and then totalled (cash first)
- Liabilities are listed separately and then totalled (fist to be paid first)
- Owner’s equity is taken directly from the statement of owner’s equity
Statement of cash flows; whether the business generates enough cash to pay its bills
- Operating activities: involve cash receipts for services provided and cash payments for expenses paid.
- Investing activities: include the purchase and sale of land and equipment for cash.
- Financial activities: includes cash contribution and withdrawal by the owner
- (3000) means -3000
! reports on a business’s cash receipts and cash payments for a specific period.
Return on Assets (ROA): measures how profitable a company uses its assets.
➢ Return on Assets = net income / average total assets
➢ Return on Assets = net income / ((beginning total assets + ending total assets)/2)
Hoofdstuk 2 – Recording business transactions
An account is a detailed record of all increases and decreases on assets, liabilities or equity.
Chart of Accounts; a list of all of a company’s accounts with their account numbers. Assets are often numbered
beginning with 1, liabilities with 2, owner’s equity with 3, revenues with 4 and expenses with 5.
Asset accounts:
• Cash; a business’s money
• Accounts receivable; a customer’s promise to pay in the future for services or goods sold
• Notes receivable; a written promise that a customer will pay a fixed amount of money and interest
• Prepaid expenses; a payment of an expense in advance
- prepaid rent, prepaid insurance, office supplies
• Equipment, furniture, fixtures; the cost of equipment, furniture and fixtures (each type; separate account)
• Building; the cost of an office building, store, warehouse
• Land; the cost of land a business uses in operations
Liability accounts:
• Accounts payable; a promise made by the business to pay a deb tin the future
• Notes payable; a written promise made by the business to pay a debt (and interest) in the future
• Accrued liability; an amount owned but not paid
- taxes payable, rent payable, salaries payable
• Unearned revenue; the promise to provide services or deliver goods in the future
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