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how to anaylize accounting effects of busines transactions.
publicly owned companies abide by a different set of standards than privately owned companies.
Principles and Assumptions of Accounting
Revenue Recognition Principle
When the product or service has been delivered to customer.
3 situations
- product/service is delivered and cash changes hands at the same time. (Revenue is earned) cash goes up, revenue goes up.
- Product/service is delivered, but payment is delayed. (Revenue is earned) Revenue goes up, account receivable goes up.
- Product/service is going to be delivered the next few days, but payment is done in advance (Renuve is not earned) cash goes up, unearned revenue, which is a liability goes up.
Cost Principle
Accounting information is based on actual cost. The actual cost is considered objective.
Matching Principle
Full Disclosure Principle
going-concern assumption
monetary unit assumption
Business Entity assumption
Keep your personal finance separate from the business finance, and if there are multiple companies, then each company should have it’s own accounting system separated from each other.
Time period assumption
Create the chart of Accounts
common assets accounts
- cash
- office supplies
- equipment
- accounts receivable
- notes receivable
- land
- building
- prepaid accounts
Common liabilities accounts:
- accounts payable
- notes payable
- unearned revenue
- accrued liabilities
Common equity accounts
- revenue
- expense
- owner’s equity
- owner capital
- owner withdrawal
sub-accounts
- salary expense
- telephone expense
When you record a transaction in the journal, the accounting equation must remain in balance after each transaction. Every business transaction affects at least two accounts.
There are only 7 possible outcomes of business transactions.
- one asset goes up, one liability goes up. e.g bank loan cash goes up, liabilities (notes payable) goes up
- one asset goes up, one equity goes up. owner capital contribution cash goes up, owner capital (equity) goes up
- one asset goes up, another asset goes down. e.g. using cash to buy a photocopy machine cash goes down, equipment (assets) goes up
- one liability goes up, one equity goes up
- one liability goes down, one equity goes down
- one liability goes up, one liability go down
Transaction Analysis
The business purchased an equipment of $1000 on account. (On account/on credit means pay later).
equipment goes up. Accounts payable goes up by $1000.
Provice consulting service receiving $3000 cash
cash goes up, revenue goes up
Paid salary of $8000 to employee
cash goes down, salaries expense went up equity goes down,
Owner withdrawal of $5000
cash goes down, withdrawals goes up, equity goes down
A business transaction can affect more than two accounts, but not less than two. For example, a company bought office supplies of $1,500, paid cash in $1,000 and the remaining $500 is on account, so
office supplies (asset) goes up by $1,500. Cash (asset) goes down by $1000, and accounts payable (liability) goes up by $500.
Common accounts in income statement
- revenue
- mis revenue
- salary expense
- rent expense
- advertising expense
- telephone expense
- mis expense
- total expenses
- net income
