1、Lesson 2 Business Transactions and Accounting EquationTask Team ofFUNDAMENTAL ACCOUNTINGSchool of Business, Sun Yat-sen UniversityOutline Enterprises Accounting Transactions, Accounting Events, and Accounting Circumstances Economic Activities and Accounting Elements Accounting Equation2Opening Story

2、 Funding and Spending at College Assets of a college student Cash CD player Computer Funding these assets Sponsored by parents Sponsored by relatives Borrowed from relatives and acquaintance3Opening Story (continued） We could deal with the above-mentioned financial issues from the following perspect

3、ives： 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？4Enterprises Concept of EnterpriseDefinition of “enterprise”Functions of an

4、 enterpriseCharacteristics of an enterprise 5Forms of Enterprise There are three major forms of enterprise:Sole-proprietorshipPartnershipCorporations 6Sole proprietorships Single person owns the business Not separate from its owner in terms of responsibility and liability The business is the owner a

5、nd the owner is the business 7Partnership Owned by two or more people Similar to a sole proprietorship Not separate from the owners in terms of responsibility and liability 8Corporations 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 9Characteristics of Enterprise10Four Types of Enterprise Service organization provides services (does something for you) rather than selling something Merchandising business buys goods, a

7、dds 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 11Resources in an Enterprise Major resources： Human resources Propert

8、ies,plant and equipment,supplies, raw materials, finished products or inventories Financing In cash or bank deposits In material forms12Movements of Material Resources in an Enterprise An example-Beauty Photo Store13Movements of Material Resources in an EnterpriseMovements in a manufacturing enterpr

9、ise cash/bank depositraw materials work-in-processfinished productsfincash/bank depositMovements in a merchandising enterprise cash/bank depositinventory cash/bank deposit14Activities of Enterprise Three major phases of business activities:InceptionOperatingLiquidation15Inception of Enterprise Incep

10、tion and investment of funds External fundingState, legal persons, privates or foreign investors；Financing from banking institutions, other legal persons or privates Ownersequity and liabilities 16Inception of EnterpriseForms of Investment Monetary(cash/bank deposits) Property, plants and equipment

11、Raw materials and goods,etc.Sources and changes of funds Increase of ownersequity or liabilities Increase of assets17Operating Activities Operating activities and changes of asset Changes of assets in Beauty Photo Store Connections between Beauty Photo Store and Suppliers, clients, etc.18Liquidation

12、 of Enterprise Liquidation of enterprise and payoff of funds Payment of taxes Distribution of profits Declaration of dividends Payoff of borrowings Withdrawals and changes of funds Decrease of assets Decrease of liabilities or ownersequity19Accounting Transactions A business transaction is an event

13、that affects the financial position of a business and may be reliably recorded 20Economic Activities and Accounting Elements Accounting element：Uses of funds and assets cash equipment,etc.Resources of funds and equity Borrowings and equity of creditors-liabilities Investments and ownersequity21Uses

14、of Funds Uses and changes of fundsBeauty Photo Store From cash to equipment Using equipment to produce photos From photos to cash22Circulation of Funds Circulation of funds:Uses of funds Beauty Photo StoreCost of equipmentCost of suppliesHuman costs？Uses and payoff of funds What are the operating pu

15、rposes for Beauty Photo Store？23Payoff of FundsPayoff of Funds and Revenues Cash receptions and revenues by Beauty Photo StoreNet increase of funds and profit Difference between uses and payoff of cash？ Nature of profit?24Accounting Transactions Accounting transactions-Economic exchange between two

16、different accounting entities Mutual exchange A purchases an asset,paying cash or bearing the responsibility of paying cash in future B sells the asset, earning the rights of receiving or collecting cash One-way transaction Investments or donations to another accounting entity 25Accounting Events Ac

17、counting events-internal transferring of resources among departments of a same entity allotments of raw materials for plants Damages caused by earthquakes External versus internal events Between different entities Within a same entity26Accounting Circumstances Accounting circumstances-usually an out

18、come of collaboration of multiple events Circumstances and their impacts Changes in prices,exchange rates How to determine these changes？ E.g. uncollectability of receivables due to the liquidation of the debtor Unpredictability 27Accounting Elements Assets Liabilities Ownersequity Revenues Expenses

19、 Profits28Assets Assets are economic resources owned by a business that are expected to be of benefit in the future. 29Further 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?30Liabilities

20、Liabilities are creditors claims to the assets. Liabilities are obligations to outsiders 31OwnersEquity Owners Equity is the owners claim to the assets. It is the amount of assets that remains after subtracting the liabilities. 32Changes in OwnersEquity Investments by owners and revenues, amounts ea

21、rned by delivering 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.33Revenue Revenues (sales) are increases in ow

22、ners equity arising 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 34Revenue Recognition Revenue should be recognized in the financial stat

23、ement when: the performance has been achieved there is reasonable assurance regarding the measurement and collectability of the consideration35Expense Expenses are decreases in owners equity that arise because goods or services are delivered to customers. Expenses are decreases in economic resources

24、, either through 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 business36Expense Recognition Cost, expenditure, and expense General recognition criteria Appro

25、aches to expense recognition 37Cost, 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 expenditure When the benefits of the cost have been used and we put that cost (or a portion

26、thereof) on the income statement, we have recognized an expense38General Recognition Criteria Recognized items must: meet the definition of a financial statement element have a valid measurement basis and amount Financial statement elements are based on future economic benefits or sacrifices; these

27、must be probable for recognition to be appropriate39General 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

28、CICA 1000.38 Asset or expense? if the asset recognition criteria are met, an asset is recorded. If not, an expense is recorded40Approaches toExpense Recognition Definitional approach: expenses are created either through the reduction of an asset or the increase in a liability Matching approach: once

29、 revenues are determined in conformity with the revenue principle for any reporting period, the expenses incurred in generating the revenue should be recognized in that period41Profit / Loss Income (profit or earnings) is the excess of revenues over expenses 42Accounting Equation Assets Liabilities

30、= Owners Equity Net Assets = Owners Equity Every 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 increas

31、e liabilities by $20,000. 43Dual 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

32、by creditors + financed by owners.44Beauty Photo Store- An Illustration Changes to the accounting equation of Beauty Photo Store： 45Summary Economic resources in the enterprise-human,financial and material resources Economic transactions derive from the operating activities of an enterprise Accounti

33、ng elements are basic components of economic transactions Accounting elements comprise of assets,liabilities, ownersequity, revenues, expenses and profit Economic transactions are viewed in the forms of increase or decrease in accounting elements Accounting equation：ALOE46Case for DiscussionMarks an

34、d Spencer In 1882, 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. 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 fo