Week 2 Notes: Financial Accounting for Business

Introduction to the accounting cycle.
Introduction to common accounts used in recording transactions and events related to Assets, Liabilities, Owner's Equity, Income, and Expenses (ALOIE).
Introduction to transaction analysis and the accounting equation.
Introduction to double-entry accounting.
Accounting concepts and principles.
Qualitative Characteristics of Accounting Information.

A transaction is an external exchange of value between two or more entities.
Accounting transactions and events are recorded if they affect the assets, liabilities, or equity of a business.
Evidence of a transaction comes from a source document.
Not all transactions are recorded (e.g., hiring a new employee).

Assets: Present economic resource controlled by the entity as a result of past events.
- Examples: Cash at bank, inventory, plant and equipment, buildings, accounts receivable, prepaid expenses.
Liabilities: Present obligation of the entity to transfer an economic resource as a result of past events.
- Examples: Accounts payable, loan payable, interest payable, revenue received in advance (unearned revenue).
Equity: Residual interest in the assets of the entity after deducting all its liabilities.
- Increases with owner’s contribution (capital) and income.
- Decreases with expenses and drawings/dividends.
- Capital: Owner’s share of the business.
- Income: Amounts received/receivable from selling goods or services.
- Expenses: Costs incurred to generate income.
- Drawings/Withdrawals: Owners take out of the business for personal use.
- Dividends: Distribution of profits to shareholders.
Income: Increases in assets or decreases in liabilities that result in increases in equity, excluding contributions from equity holders.
- Examples: Sales revenue, service revenue, interest income.
Expenses: Decreases in assets or increases in liabilities that result in decreases in equity, excluding distributions to equity holders.
- Examples: Wages expense, rent expense.
- Profit: Total income exceeds total expenses.
- Loss: Total expenses exceed total income.

The accounting equation measures the resources of a business and the claims to those resources.
Basic equation: $Assets = Liabilities + Owner’s Equity$
Expanded equation: $Assets = Liabilities + Owner’s Capital + Income – Expenses – Drawings$

Accounting is based on a "Double-Entry" system, recording the dual effect of a business transaction.
Each transaction affects TWO or more accounts.
For every transaction, the amount on the left side of the equation must EQUAL the amount on the right side.

The account category determines how increases and decreases are recorded as debits and credits.
Assets: Increase (Debit), Decrease (Credit)
Liabilities: Increase (Credit), Decrease (Debit)
Owner’s Equity: Increase (Credit), Decrease (Debit)
Income: Increase (Credit), Decrease (Debit)
Expenses: Increase (Debit), Decrease (Credit)
Drawings: Increase (Debit), Decrease (Credit)
Dividends: Increase (Debit), Decrease (Credit)

Going Concern Principle: The business will remain in operation for the foreseeable future.
Accounting Period Concept: The life of a business is divided into artificial periods for comparability.
Accounting Entity Concept: Personal transactions of the owner must be separate from the entity's transactions.
Accrual Basis Accounting: Effects of transactions are recognized when they occur, NOT when cash is received/paid.
Cash-Basis Accounting: Records transactions only at the time of cash receipt/payment.
Cost Principle: Assets are initially recorded at their purchase price or cost.

Fundamental Qualitative Characteristics:
- Relevance: Information capable of making a difference to users' decisions.
- Faithful Representation: Information is complete, neutral, and free from material error.
Enhancing Qualitative Characteristics:
- Comparability: Users can identify similarities and differences between two sets of economic data.
- Verifiability: Information represents the economic phenomena without bias or material error.
- Timeliness: Information is available to users before it ceases to be relevant.
- Understandability: Users with reasonable knowledge can comprehend its meaning.