1.Understanding the Business

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1.Understanding the Business
Potential Owner or Investors
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1.Understanding the Business
Owner
The owner is the person who owns shares in a
enterprise. Sometimes the owner creates the
enterprise
Investors
Investors buy ownership in the company in the
form of stock. Investor are also owners
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1.Understanding the Business
Management are the people who make operating
decisions for the business, and conduct and
control the daily business activities of the
business.
Management
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1.Understanding the Business
Creditors
Creditors lend money for a specific period of
time and gain by charging interest on the money
they lend.
Suppliers
Suppliers offer raw materials, spare parts, other
things that your company needs in operating
activities
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1.Understanding the Business
Manufacturers either make the parts needed to
produce its products or buy the parts from
suppliers.
Manufacturer
Suppliers
Final Product
Customer
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2. Accounting system
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2. Accounting system
Our courses Task
Accounting System
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2. Accounting system
Financial statements are the tools which supply
information to outsiders
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3. Double-entry accounting system
3.1 Accounting equation and B/S
Assets Liabilities Owners Equity
Assets
Liabilities
Owners Equity
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3. Double-entry accounting system
3.1 Accounting equation and B/S
Assets are the economic resources of a business
that are expected to produce a benefit in the
future.
Liabilities are outsider claims, or economic
obligations payable to outsiders.
Owners equity represents the insider
claims of a business.
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3. Double-entry accounting system
3.1 Accounting equation and B/S
Asset examples
Cash, Cash in bank, Account receivable, Raw
Material, work in process, finished product,
Plant, Machinery, office equipment, etc.
Liability examples
Loan from bank (Long-term or short-term), loan
from subsidiary, account payable, tax payable,
salary payable, bund, etc.
Shareholders Equity examples
Contributed Capital, Retained earnings.
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3. Double-entry accounting system
3.1 Accounting equation and B/S

• Please every group sets up a small business
• Hint
• Which assets do you need in your company and How
  much?
• how to get your assets? From Owners or Banks?
  How much?
• EIC-1

Lets have a balance sheet preparing
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3. Double-entry accounting system
3.2 Business Profit and I/S
In Business transactions Revenues will make and
Expenses will occur profit (loss) will be earned
(happen)
Profit (Loss) Revenues - Expenses
Revenues are increases in retained earnings from
delivering goods or services to customers.
Expenses are decreases in retained earnings that
result from operations.
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3. Double-entry accounting system
3.2 Business Profit and I/S
XXX Company Income statement For the year of
Items Amount
Revenues 100,000
Expenses 800,000
Profit 200,000
I/S can tell you how and how much your company
makes profit
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3. Double-entry accounting system
3.3 How does Business affect the Equation?
Revenues for the period
Expenses for the period

End of the period
Start of the period

Net income (or Net loss) for the period
Dividends for the period
Ending balance of SE (RE)
Beginning balance of SE (RE)
or


A1 L1 SE1 time point 1
A2 L2 SE2 time point 2
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3. Double-entry accounting system
3.3 How does Business affect the Equation?
Asset , Liability, Equity, Revenue, Expense,
Profit are called Financial statement elements
A L SE
P R - Exp
SE2 SE1 P
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3. Double-entry accounting system
3.3 How does Business affect the Equation?
EIC-2
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3. Double-entry accounting system
3.4 T-account
A T-account is a tool for recording the changes
of Financial statement elements
The left side of the T-account is always the
debit side.
The right side of the T-account is always
the credit side.
which side is record increase?
which side is record decrease?
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3. Double-entry accounting system
3.4 T-account
For Asset and expense account
Total Amount on Dr.
Total Amount on Cr.
Dr. Balance
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3. Double-entry accounting system
3.4 T-account
For Liability, Equity, Revenue, Profit account
Total Amount on Dr.
Total Amount on Cr.
Cr. Balance
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3. Double-entry accounting system
3.5 Double-Entry Accounting Method
A1 L1 SE1
Accounting equation, which includes all
accounting elements
A2 L2 SE1 P1-2
A2 L2 SE1 R1-2 - E1-2
How to keep the balance of above equations ?
Only double entry can keep the balance
Each transaction affects at least two accounts !
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3. Double-entry accounting system
3.5 Double-Entry Accounting Method
For example
1.The business received 50,000 cash that Lyon
invested to begin his practice.
A1 L1 SE1 50,000 0 50,000
50000
50000
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3. Double-entry accounting system
3.5 Double-Entry Accounting Method
For example
2.The business purchased 10,000 Merchandise P on
Cash.
A L
SE 50,000
0 50,000 10,000 - 10,000
0 50,000
0 50,000
10000
10000
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3. Double-entry accounting system
3.5 Double-Entry Accounting Method
For example
3.The business sells the merchandise P at price
of 20000 on Cash.
A L SE 50,000
0 50,000
Transaction from the selling activity
A L SE
R 20000 (Cash)
20000
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3. Double-entry accounting system
3.5 Double-Entry Accounting Method
For example
4.The cost of merchandise is RMB10,000.
A L SE
R 20000 (Cash)
20000
Transaction from the cost due to the decrease
of the Merchandise P
A Exp. L SE
R -10000 (M.P) 10000 (Cost of goods
sold)
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3. Double-entry accounting system
3.5 Double-Entry Accounting Method
Example 3
Revenue 20,000
20000
20000
Example 4
Expenses 10,000
10000
10000
Profit will be 10,000
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3. Double-entry accounting system
3.5 Double-Entry Accounting Method
Recording rules in DEAM
Existing Debit, Credit exists And both sides
always are equal
?????,?????!
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3. Double-entry accounting system
3.5 Double-Entry Accounting Method
(1) 50000
(2) 10000
(3) 20000
(3) 20000
20000
60000
(2) 10000
(1) 50000
(4) 10000
50000
0
A L SE time1 50000
50000 A Exp L SER time2 6000010000
5000020000
(4) 10000
10000
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3. Double-entry accounting system
3.5 Double-Entry Accounting Method
EIC-3
30
3. Double-entry accounting system
3.6 The processes of accounting
Invoice
Source Documents Is the evidences that prove
the transactions happens
Bank sheet
Receipt
Some Photos
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3. Double-entry accounting system
3. Double-entry accounting system
3.6 The processes of accounting
3.6 The processes of accounting
A typical journal looks like this
Jan. 1 Cash 20,000
Contributed Capital 20,000
Accounting entry or Journal entry
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3. Double-entry accounting system
3.6 The processes of accounting
Source Documents
Journalizing
Posting
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3. Double-entry accounting system
3.6 The processes of accounting
Preparing Financial statements
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3. Double-entry accounting system
3.7 Accounting cycle
During the period Analyze transactions. Record
journal entries. Post amounts to general ledger.

• Close revenues, gains, expenses, and losses to
  Retained Earnings.

• Prepare financial statements.
• Disseminate statements to users.

• At the end of the period
• Adjust revenues and expenses.

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• 4. Important Accounting assumptions
• and accounting principles

Economic Entity
Going concern
Accounting assumptions
Time period
Monetary Unit
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• 4. Important Accounting assumptions
• and accounting principles

Accounting information Quality
Management is responsible for preparing . . .
Financial Statements
High Quality Relevance Reliability
. . . Are useful to investors and creditors.
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• 4. Important Accounting assumptions
• and accounting principles

Historical Cost
Revenue Recognition
Matching Principle
Accounting principles
Substance over Form
Accrual Basis
.
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• 4. Important Accounting assumptions
• and accounting principles

Revenue is recorded when cash is received.
Cash Basis Accounting
Expenses are recorded when cash is paid.
Revenue Principle
Accrual Basis Accounting
Marching Principle
All accounting elements should be recognized when
the transaction that causes them occurs
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• 4. Important Accounting principles

Revenue Principle

• Recognize revenues when . . .
• (1)Delivery has occurred or services have been
  rendered.
• (2)There is persuasive evidence of an arrangement
  for customer payment.
• (3)The price is fixed or determinable.
• (4)Collection is reasonably assured.

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• 4. Important Accounting principles

Marching Principle
Resources consumed to earn revenues in an
accounting period should be recorded in that
period, regardless of when cash is paid.
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• 4. Important Accounting principles

EIC-4