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1、Lesson 2 Business Transactions and Accounting Equation,Task Team ofFUNDAMENTAL ACCOUNTINGSchool of Business, Sun Yat-sen University,2,Outline,EnterprisesAccounting Transactions, Accounting Events, and Accounting CircumstancesEconomic Activities and Accounting ElementsAccounting Equation,3,Opening St
2、ory,Funding and Spending at CollegeAssets of a college studentCashCD playerComputerFunding these assetsSponsored by parentsSponsored by relativesBorrowed from relatives and acquaintance,4,Opening Story (continued）,We could deal with the above-mentioned financial issues from the following perspective
3、s：How do we fund our daily expenditures and possessions？How do we spend the “funds” which we have sourced？What about the relationship between the “funds”which we have sourced and our daily expenditures and possessions？,5,Enterprises,Concept of EnterpriseDefinition of “enterprise”Functions of an ente
4、rpriseCharacteristics of an enterprise,6,Forms of Enterprise,There are three major forms of enterprise:Sole-proprietorshipPartnershipCorporations,7,Sole proprietorships,Single person owns the business Not separate from its owner in terms of responsibility and liability The business is the owner and
5、the owner is the business,8,Partnership,Owned by two or more people Similar to a sole proprietorship Not separate from the owners in terms of responsibility and liability,9,Corporations,Legally separate and financially separate from the owners Ownership in a corporation is divided into units called
6、shares of capital stock Owners are called shareholders or stockholders Corporations are separate legal entities,10,Characteristics of Enterprise,11,Four Types of Enterprise,Service organization provides services (does something for you) rather than selling something Merchandising business buys goods
7、, adds value to them, then sells them to customers Manufacturer makes the products it sells Financial services company doesnt make tangible products and doesnt sell products made by other companies; deals in services related to money,12,Resources in an Enterprise,Major resources：Human resourcesPrope
8、rties,plant and equipment,supplies, raw materials, finished products or inventoriesFinancingIn cash or bank depositsIn material forms,13,An example-Beauty Photo Store,Movements of Material Resources in an Enterprise,14,Movements of Material Resources in an Enterprise,Movements in a manufacturing ent
9、erprisecash/bank depositraw materials work-in-processfinished productsfincash/bank depositMovements in a merchandising enterprisecash/bank depositinventory cash/bank deposit,15,Activities of Enterprise,Three major phases of business activities:InceptionOperatingLiquidation,16,Inception and investmen
10、t of fundsExternal fundingState, legal persons, privates or foreign investors；Financing from banking institutions, other legal persons or privatesOwnersequity and liabilities,Inception of Enterprise,17,Inception of Enterprise,Forms of InvestmentMonetary(cash/bank deposits)Property, plants and equipm
11、entRaw materials and goods,etc.Sources and changes of fundsIncrease of ownersequity or liabilitiesIncrease of assets,18,Operating activities and changes of assetChanges of assets in Beauty Photo StoreConnections between Beauty Photo Store and Suppliers, clients, etc.,Operating Activities,19,Liquidat
12、ion of Enterprise,Liquidation of enterprise and payoff of fundsPayment of taxesDistribution of profitsDeclaration of dividendsPayoff of borrowingsWithdrawals and changes of fundsDecrease of assetsDecrease of liabilities or ownersequity,20,Accounting Transactions,A business transaction is an event th
13、at affects the financial position of a business and may be reliably recorded,21,Economic Activities and Accounting Elements,Accounting element：Uses of funds and assetscashequipment,etc.Resources of funds and equityBorrowings and equity of creditors-liabilitiesInvestments and ownersequity,22,Uses of
14、Funds,Uses and changes of fundsBeauty Photo StoreFrom cash to equipmentUsing equipment to produce photosFrom photos to cash,23,Circulation of Funds,Circulation of funds:Uses of fundsBeauty Photo StoreCost of equipmentCost of suppliesHuman costs？Uses and payoff of fundsWhat are the operating purposes
15、 for Beauty Photo Store？,24,Payoff of Funds,Payoff of Funds and RevenuesCash receptions and revenues by Beauty Photo StoreNet increase of funds and profitDifference between uses and payoff of cash？Nature of profit?,25,Accounting Transactions,Accounting transactions-Economic exchange between two diff
16、erent accounting entitiesMutual exchangeA purchases an asset,paying cash or bearing the responsibility of paying cash in futureB sells the asset, earning the rights of receiving or collecting cashOne-way transactionInvestments or donations to another accounting entity,26,Accounting Events,Accounting
17、 events-internal transferring of resources among departments of a same entityallotments of raw materials for plantsDamages caused by earthquakesExternal versus internal eventsBetween different entitiesWithin a same entity,27,Accounting Circumstances,Accounting circumstances-usually an outcome of col
18、laboration of multiple eventsCircumstances and their impactsChanges in prices,exchange ratesHow to determine these changes？E.g. uncollectability of receivables due to the liquidation of the debtorUnpredictability,28,Accounting Elements,AssetsLiabilitiesOwnersequityRevenuesExpensesProfits,29,Assets a
19、re economic resources owned by a business that are expected to be of benefit in the future.,Assets,30,Further Thoughts on Assets,Human resources as an asset？Value and labor of Manager of Beauty Photo Store？Cameramen and shop assistants？Natural resources as an asset?,31,Liabilities,Liabilities are cr
20、editors claims to the assets. Liabilities are obligations to outsiders,32,OwnersEquity,Owners Equity is the owners claim to the assets. It is the amount of assets that remains after subtracting the liabilities.,33,Changes in OwnersEquity,Investments by owners and revenues, amounts earned by deliveri
21、ng goods or services to customers, increase owners equity.Withdrawals of assets from the business by owners and expenses decrease owners equity. Expenses occur when assets are used or liabilities increase as a result of earning revenues.,34,Revenue,Revenues (sales) are increases in owners equity ari
22、sing from increases in assets received in exchange for the delivery of goods or services to customers.Revenues are increases in economic resources, either through increases to assets or reductions to liabilities,35,Revenue Recognition,Revenue should be recognized in the financial statement when: the
23、 performance has been achieved there is reasonable assurance regarding the measurement and collectability of the consideration,36,Expense,Expenses are decreases in owners equity that arise because goods or services are delivered to customers. Expenses are decreases in economic resources, either thro
24、ugh outflows or the using-up of assets or incurrence of liabilities from delivering or producing goods, rendering services, or carrying out other activities that constitute the entitys normal business,37,Expense Recognition,Cost, expenditure, and expense General recognition criteria Approaches to ex
25、pense recognition,38,Cost, Expenditure, and Expense,When we agree to pay out cash (or other assets) for goods or services received, we have incurred a cost When we actually pay the cash, we have an expenditureWhen the benefits of the cost have been used and we put that cost (or a portion thereof) on
26、 the income statement, we have recognized an expense,39,General Recognition Criteria,Recognized items must:meet the definition of a financial statement elementhave a valid measurement basis and amountFinancial statement elements are based on future economic benefits or sacrifices; these must be prob
27、able for recognition to be appropriate,40,General Recognition Criteria (cont),Expenses are decreases in economic resources, either by way of outflows or reductions of assets or incurrences of liabilities, resulting from an entitys ordinary revenue generating or service delivery activities CICA 1000.
28、38Asset or expense? if the asset recognition criteria are met, an asset is recorded. If not, an expense is recorded,41,Approaches toExpense Recognition,Definitional approach: expenses are created either through the reduction of an asset or the increase in a liabilityMatching approach: once revenues
29、are determined in conformity with the revenue principle for any reporting period, the expenses incurred in generating the revenue should be recognized in that period,42,Profit / Loss,Income (profit or earnings) is the excess of revenues over expenses,43,Accounting Equation,Assets Liabilities = Owner
30、s EquityNet Assets = Owners EquityEvery accounting transaction has an equal affect on both sides of the equation.Purchase a $20,000 car for cash.Increase asset car and decrease asset cash by $20,000. No net change to assets.Purchase a $20,000 car on credit.Increase asset car and increase liabilities
31、 by $20,000.,44,Dual Aspect ofAccounting Equation,Assets = Liabilities + Owners equity.LHS = RHS.First view:Resources = Obligations to creditors or claims on resources + Residual claim.Second view:Amounts invested in resources = how these amounts were financed.Resources = financed by creditors + fin
32、anced by owners.,45,Changes to the accounting equation of Beauty Photo Store：,Beauty Photo Store- An Illustration,46,Summary,Economic resources in the enterprise-human,financial and material resources Economic transactions derive from the operating activities of an enterpriseAccounting elements are
33、basic components of economic transactionsAccounting elements comprise of assets,liabilities, ownersequity, revenues, expenses and profitEconomic transactions are viewed in the forms of increase or decrease in accounting elementsAccounting equation：ALOE,47,Case for Discussion,Marks and SpencerIn 1882
34、, a Russian refugee named Michael Marks came to the North East of England. Needing work, he put a tray round his neck and started selling haberdashery in the villages around Leeds. Two years later he borrowed 5 from his friend Isaac Dewhirst to buy stock, and was able to open a stall in Leeds market
35、. Within ten years Markss success as a trader had enabled him to establish a chain of stalls in markets throughout North East England. In 1894, Marks realized that his business was getting too large for him to manage effectively on his own. He decidedto form a partnership withTom Spencer and Marks&
36、Spencer was born.,48,Case for Discussion (cont),The business continued to thrive and grow, so in 1903 Marks and Spencer registered their partnership as a private limited company. This allowed more people to become involved with managing the growing company and increase its finances by buying shares
37、in the company. One shareholder was Israel Sieff, who became chairman of the company in 1917. Sieff can be credited with shaping the future of Marks & Spencer. By 1926, Marks & Spencer had opened 125 stores. In order to continue its successful development the company finally registered as a public l
38、imited company (plc) in order to obtain as much capital as possible to finance its continued growth.And the rest, as they say, is history.,49,Suggested Questions,How many people started the original business that eventually became Marks & Spencer?Who owned the original business?Who owns Marks & Spencer plc?Why do you think Marks & Spencer became a public limited company?Do you think the business would have developed in the way it has if it was still owned by one person?,The End of Lesson 2,
