Week 1

  • When assets increase, you debit, when assets decrease you credit. This fundamental principle helps maintain the balance in accounting records.

The Journal

Initial entry into the accounting system of transaction information :

  • Listed in date order (chronological), called general journal

  • Contains information for each transaction and effect on asset, liability, and owner’s equity accounts

  • Standard format includes a description of the transaction (called narration)

  • Remember that in the equation owners equity is revenue - expenses. If revenue increases, OE will increase, if expenses increases, OE will decreases.

QUESTIONS

1. Explain the business context and the need for decision making.    

  • Helps you make informed business decisions. This could be lending money, deciding whether to supply goods on credit, investing etc.

2. Define accounting and describe the accounting process. 

  • Accounting is the process of identifying, measuring, recording and communicating the economic transactions and events of a business operation.

3. Understand the Conceptual Framework and the process of financial reporting.

  • The conceptual framework defines the nature, purpose and content of general purpose financial reporting. Its purpose is to assist developing accounting standards/policies and assist all financial statement preparers and users interpret, understand, and apply these standards.

  • 8 Chapters: objective of general purpose financial reporting, qualitative characteristics of useful financial information, financial statements and the reporting entity, elements of financial statements, recognition and derecognition, measurement, presentation and disclosure, concepts of capital and capital maintenance.

4. Explain the objective of general purpose financial reporting. 

  • First objective: information usefulness.

  • Second: Stewardship

5. Explain the nature of a reporting entity.

  • An entity that is required or chooses to prepare financial statements. It can be a single entity or a portion of an entity or can comprimise more than one entity. It is not necessarily a legal entity.

6. Define assets, liabilities, equity, income and expenses and apply recognition criteria.

  • Asset: economic resource controlled by the entity, exists as a result of past events, the right has the potential to produce economic benefits.

  • Liability: present obligation of the entity, obligation exists as a result of a past event, obligation is to transfer an economic resource.

  • Revenue: increases economic benefits arising in the course of ordinary activities. Salees, revenue, rent dividends.

  • Gains: other increases in economic benefits that do not arise from ordinary course of business. Gains from the sale of non-current assets.

  • Expenses: decreases economic benefits that arise in the activities of an entity. Cost of sales and salaries.

  • Losses: expenses that do not necessarily arise in the ordinary course of business like loss from natural disasters.

  • Recognition criteria: meets the definition AND satisfies the conceptual framework recognition criteria of relevant information AND faithful representation

7. Explain what an account is and how it helps in the recording process.    

8. Define debits and credits and explain how it helps in the recording process. 

9. Identify the basic steps in the recording process. 

10. Explain what a journal is and how it helps in the recording process.  

LECTURE NOTES