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Generally Accepted Accounting Principles
ACB10103/MAS 3013
Chapter 2
Financial accounting practice is governed by concepts and
rules known as generally accepted accounting principles
(GAAP).
BASIC CONCEPTS OF ACCOUNTING
Relevant Information
Affects the decision of its users.
Reliable Information
Is trusted by users.
Comparable
Information
Is helpful in contrasting
organizations.
UJH SEM 1 2016/2017
UJH SEM 1 2016/2017
Principles and Assumptions of
Accounting
Principles and Assumptions of
Accounting
Now
1. Recognize revenue when it is earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash received plus
cash value of items received.
Matching Principle
A company must record its expenses
incurred to generate the revenue reported.
Future
Going-Concern Assumption
Revenue Recognition Principle
Cost Principle
Accounting information is based on
actual cost. Actual cost is considered
objective.
Reflects assumption that the business will
continue operating instead of being
closed or sold.
Monetary Unit Assumption
Express transactions and events in
monetary, or money, units.
Full Disclosure Principle
A company is required to report the
details behind financial statements
that would impact users decisions.
Business Entity Assumption
Time Period Assumption
A business is accounted for separately
from other business entities, including
its owner.
Presumes that the life of a company can be
divided into time periods, such as months
and years.
Principles and Assumptions of
Accounting
CONSERVATISM
Transaction Analysis and the
Accounting Equation
Accounting Equation
MATERIALITY
Assets
= Liabilities +
Equity
CONSISTENCY
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Assets
Liabilities
Cash
Accounts
Receivable
Accounts
Payable
Notes
Receivable
Resources
owned or
controlled by a
company
Vehicles
Store
Supplies
Notes
Payable
Creditors
claims on
assets
Land
Taxes
Payable
Buildings
Wages
Payable
Equipment
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Expanded Accounting Equation
Equity
Owners
Claims on
Assets
Assets
Owner Capital
Equal to
Assets Minus
Liabilities
(Net Assets)
=
_
Liabilities
Owner
Withdrawals
+
Revenues
Equity
Expenses
Owner's Equity
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Transaction Analysis Equation
The Account and its Analysis
The accounting equation MUST remain in
balance after each transaction.
Assets
Liabilities
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Equity
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An account is a
record of increases
and decreases in a
specific asset,
liability, equity,
revenue, or expense
item.
The general ledger
is a record
containing all
accounts used by
the company.
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The Account and its Analysis
Assets
Assets
Asset
Accounts
Accounts
Accounts
Liability
Liability
Liability
Accounts
Accounts
Accounts
Asset Accounts
Equity
Equity
Equity
Accounts
Accounts
Accounts
Cash
Accounts
Receivable
Land
Buildings
Owner, Capital
Owner, Withdrawals
Asset
Accounts
Notes
Receivable
Prepaid
Accounts
Equipment
Supplies
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Liability Accounts
Accounts
Payable
Equity Accounts
Owners
Withdrawals
Owners
Equity
Notes
Payable
Equity
Accounts
Liability
Accounts
Accrued
Liabilities
Unearned
Revenue
Revenues
Expenses
Owners
Capital
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The Account and its Analysis
Assets
+
Owners
Capital
Liabilities
Owner's
Withdrawals
Revenues
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Ledger and Chart of Accounts
The ledger is a collection of all accounts for an
information system. A companys size and diversity
of operations affect the number of accounts needed.
Equity
The chart of accounts is a list of all accounts and includes an
identifying number for each account.
Expenses
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Account Number
101
106
126
128
167
201
236
301
Account Name
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accounting payable
Unearned revenue
C. Taylor, Capital
Accounting Number
302
403
406
622
637
640
652
690
Accounting Name
C. Taylor, Withdrawals
Revenues
Rental revenue
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
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Debits and Credits
Double-Entry Accounting
A T-account represents a ledger account and is a
tool used to understand the effects of one or
more transactions.
Assets
ASSETS
Account Title
(Left side)
(Right side)
Debit
Credit
Debit
Liabilities
Debit
Equity
EQUITIES
LIABILITIES
Credit
Credit
Debit
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Credit
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Double-Entry Accounting
Double-Entry Accounting
Equity
An account balance is the difference between the increases
and decreases in an account.
Notice the T-Account.
Owners
Capital
Owner's
Withdrawals
Revenues
_ Expenses
Cash
Owners
Capital
Owner's
Withdrawals
Debit Credit
Debit Credit
Revenues
Expenses
Debit Credit
Investment by owner
Consulting services revenues earned
Collection of accounts receivable
Debit Credit
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Total increases
Balance
30,000 Purchase of supplies
4,200 Purchase of equipment
1,900 Payment of rent
Payment of salary
Payment of account payable
Withdrawal by owner
36,100 Total decreases
4,800
2,500
26,000
1,000
700
900
200
31,300
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END OF CHAPTER 2
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