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1、Lesson 2 Business Transactions and Accounting EquationTask Team ofTask Team ofFUNDAMENTAL ACCOUNTINGFUNDAMENTAL ACCOUNTINGSchool of Business, Sun School of Business, Sun Yat-senYat-sen University UniversityOutlinetEnterprisestAccounting Transactions, Accounting Events, and Accounting CircumstancestE
2、conomic Activities and Accounting ElementstAccounting EquationAccounting Equation22Opening StorytFunding and Spending at CollegeAssets of a college studentAssets of a college studentCashCashCD playerCD playerComputerComputerFunding these assetsFunding these assetsSponsored by parentsSponsored by par
3、entsSponsored by relativesSponsored by relativesBorrowed from relatives and acquaintanceBorrowed from relatives and acquaintance33Opening Story (continued）tWe could deal with the above-mentioned financial We could deal with the above-mentioned financial issues from the following perspectivesissues f
4、rom the following perspectives： How do we fund our daily expenditures and possessionsHow do we fund our daily expenditures and possessions？ How do we spend the “funds” which we have sourcedHow do we spend the “funds” which we have sourced？ What about the relationship between the “funds”which What ab
5、out the relationship between the “funds”which we have sourced and our daily expenditures and we have sourced and our daily expenditures and possessionspossessions？44EnterprisestConcept of EnterpriseDefinition of “enterprise”Functions of an enterpriseCharacteristics of an enterprise 55Forms of Enterp
6、risetThere are three major forms of enterprise:Sole-proprietorshipPartnershipCorporations 66Sole proprietorships tSingle person owns the business tNot separate from its owner in terms of responsibility and liability tThe business is the owner and the owner is the business 77PartnershiptOwned by two
7、or more people tSimilar to a sole proprietorship tNot separate from the owners in terms of responsibility and liability 88CorporationstLegally separate and financially separate from the owners tOwnership in a corporation is divided into units called shares of capital stock tOwners are called shareho
8、lders or stockholders tCorporations are separate legal entities 99Characteristics of Enterprise1010Four Types of Enterprise tService organization provides services (does Service organization provides services (does something for you) rather than selling somethingsomething for you) rather than sellin
9、g something tMerchandising business buys goods, adds value Merchandising business buys goods, adds value to them, then sells them to customersto them, then sells them to customers tManufacturer makes the products it sellsManufacturer makes the products it sells tFinancial services company doesnt mak
10、e Financial services company doesnt make tangible products and doesnt sell products made tangible products and doesnt sell products made by other companies; deals in services related to by other companies; deals in services related to moneymoney 1111Resources in an EnterprisetMajor resourcesMajor re
11、sources：Human resourcesHuman resourcesProperties,plant and equipment,supplies, raw Properties,plant and equipment,supplies, raw materials, finished products or inventoriesmaterials, finished products or inventoriesFinancingFinancingIn cash or bank depositsIn cash or bank depositsIn material formsIn
12、material forms1212tAn example-Beauty Photo StoreMovements of Material Resources in an Enterprise1313Movements of Material Resources in an EnterpriseMovements in a manufacturing enterprisecash/bank depositraw materials work-in-cash/bank depositraw materials work-in-processfinished productsfincash/ban
13、k processfinished productsfincash/bank depositdepositMovements in a merchandising enterprisecash/bank depositinventory cash/bank cash/bank depositinventory cash/bank depositdeposit1414Activities of EnterprisetThree major phases of business activities:InceptionOperatingLiquidation1515 Inception and i
14、nvestment of fundsInception and investment of fundsExternal fundingExternal fundingState, legal persons, privates or foreign investorsState, legal persons, privates or foreign investors；Financing from banking institutions, other legal Financing from banking institutions, other legal persons or priva
15、tespersons or privatesOwnersequity and liabilitiesOwnersequity and liabilities Inception of EnterpriseInvestmentInvestmentof ownersof ownersFinancing ofFinancing ofcreditorscreditorsTotal funds of a firmTotal funds of a firm1616Inception of EnterpriseForms of InvestmentMonetary(cash/bank deposits)Pr
16、operty, plants and equipmentRaw materials and goods,etc.Sources and changes of fundsIncrease of ownersequity or liabilitiesIncrease of assets1717tOperating activities and changes of assetOperating activities and changes of assetOperating activities and changes of assetOperating activities and change
17、s of asset Changes of assets in Beauty Photo StoreChanges of assets in Beauty Photo StoreChanges of assets in Beauty Photo StoreChanges of assets in Beauty Photo Store Connections between Beauty Photo Store and Connections between Beauty Photo Store and Connections between Beauty Photo Store and Con
18、nections between Beauty Photo Store and Suppliers, clients, etc.Suppliers, clients, etc.Suppliers, clients, etc.Suppliers, clients, etc.Operating Activitiescashcash2 cameras2 cameraslenslensproducing producing equipmentequipmentsuppliessuppliesphotosphotoscashcash1818Liquidation of EnterprisetLiquid
19、ation of enterprise and payoff of fundsPayment of taxesPayment of taxesDistribution of profitsDistribution of profitsDeclaration of dividendsDeclaration of dividendsPayoff of borrowingsPayoff of borrowingstWithdrawals and changes of fundsDecrease of assetsDecrease of assetsDecrease of liabilities or
20、 ownersequityDecrease of liabilities or ownersequity1919Accounting TransactionstA business transaction is an event that affects the financial position of a business and may be reliably recorded 2020Economic Activities and Accounting ElementstAccounting element：Uses of funds and assetscashequipment,e
21、tc.Resources of funds and equityBorrowings and equity of creditors-Borrowings and equity of creditors-liabilitiesliabilitiesInvestments and ownersequityInvestments and ownersequity2121Uses of FundstUses and changes of fundsBeauty Photo StoreFrom cash to equipmentFrom cash to equipmentUsing equipment
22、 to produce photosUsing equipment to produce photosFrom photos to cashFrom photos to cash2222Circulation of FundstCirculation of funds:Uses of fundsBeauty Photo StoreBeauty Photo StoreCost of equipmentCost of equipmentCost of suppliesCost of suppliesHuman costsHuman costs？Uses and payoff of fundsWha
23、t are the operating purposes for Beauty What are the operating purposes for Beauty Photo StorePhoto Store？2323Payoff of FundsPayoff of Funds and RevenuesCash receptions and revenues by Beauty Cash receptions and revenues by Beauty Photo StorePhoto StoreNet increase of funds and profitDifference betw
24、een uses and payoff of cashDifference between uses and payoff of cash？Nature of profit?Nature of profit?2424Accounting TransactionstAccounting transactions-Economic exchange between two different accounting entitiesMutual exchangeMutual exchangeA purchases an asset,paying cash or bearing the A purch
25、ases an asset,paying cash or bearing the responsibility of paying cash in futureresponsibility of paying cash in futureB sells the asset, earning the rights of receiving or B sells the asset, earning the rights of receiving or collecting cashcollecting cashOne-way transactionOne-way transactionInves
26、tments or donations to another accounting Investments or donations to another accounting entity entity 2525Accounting EventstAccounting events-internal transferring of resources among departments of a same entityallotments of raw materials for plantsallotments of raw materials for plantsDamages caus
27、ed by earthquakesDamages caused by earthquakestExternal versus internal eventsBetween different entitiesBetween different entitiesWithin a same entityWithin a same entity2626Accounting CircumstancestAccounting circumstances-usually an outcome of Accounting circumstances-usually an outcome of collabo
28、ration of multiple eventscollaboration of multiple eventsCircumstances and their impactsCircumstances and their impactsChanges in prices,exchange ratesChanges in prices,exchange ratestHow to determine these changesHow to determine these changes？E.g. E.g. uncollectabilityuncollectability of receivabl
29、es due to the of receivables due to the liquidation of the debtorliquidation of the debtorUnpredictability Unpredictability 2727Accounting ElementstAssetstLiabilitiestOwnersequitytRevenuestExpensestProfits2828tAssets are economic resources owned by a business that are expected to be of benefit in th
30、e future. Assets2929Further Thoughts on AssetstHuman resources as an asset？Value and labor of Manager of Beauty Photo Value and labor of Manager of Beauty Photo StoreStore？Cameramen and shop Cameramen and shop assistants assistants？tNatural resources as an asset?3030LiabilitiestLiabilities are credi
31、tors claims to the assets. Liabilities are obligations to outsiders 3131OwnersEquitytOwners Equity is the owners claim to the assets. It is the amount of assets that remains after subtracting the liabilities. 3232Changes in OwnersEquitytInvestments by owners and revenues, amounts earned by deliverin
32、g goods or services to customers, increase owners equity.tWithdrawals 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.3333RevenuetRevenues (sales) are increases in owners equity ari
33、sing from increases in assets received in exchange for the delivery of goods or services to customers.tRevenues are increases in economic resources, either through increases to assets or reductions to liabilities 3434Revenue RecognitiontRevenue should be recognized in the financial Revenue should be
34、 recognized in the financial statement when:statement when: the performance has been achieved the performance has been achieved there is reasonable assurance regarding the there is reasonable assurance regarding the measurement and measurement and collectabilitycollectability of the of the considera
35、tionconsideration3535ExpensetExpenses are decreases in owners equity that Expenses are decreases in owners equity that arise because goods or services are delivered to arise because goods or services are delivered to customers. customers. tExpenses are decreases in economic resources, Expenses are d
36、ecreases in economic resources, either through outflows or the using-up of assets either through outflows or the using-up of assets or incurrence of liabilities from delivering or or incurrence of liabilities from delivering or producing goods, rendering services, or carrying producing goods, render
37、ing services, or carrying out other activities that constitute the entitys out other activities that constitute the entitys normal businessnormal business3636Expense RecognitiontCost, expenditure, and expense tGeneral recognition criteria tApproaches to expense recognition 3737Cost, Expenditure, and
38、 ExpensetWhen we agree to pay out cash (or other assets) When we agree to pay out cash (or other assets) for goods or services received, we have incurred a for goods or services received, we have incurred a cost cost tWhen we actually pay the cash, we have an When we actually pay the cash, we have a
39、n expenditureexpendituretWhen the benefits of the cost have been used and When the benefits of the cost have been used and we put that cost (or a portion thereof) on the we put that cost (or a portion thereof) on the income statement, we have recognized an expenseincome statement, we have recognized
40、 an expense3838General Recognition CriteriatRecognized items must:meet the definition of a financial statement meet the definition of a financial statement elementelementhave a valid measurement basis and amounthave a valid measurement basis and amounttFinancial statement elements are based on futur
41、e economic benefits or sacrifices; these must be probable for recognition to be appropriate3939General Recognition Criteria (cont) tExpenses are decreases in economic resources, either by way of outflows or reductions of assets or incurrences of liabilities, resulting from an entitys ordinary revenu
42、e generating or service delivery activities CICA 1000.38tAsset or expense? if the asset recognition criteria are met, an asset is recorded. If not, an expense is recorded4040Approaches toExpense RecognitiontDefinitional approach: expenses are created either through the reduction of an asset or the i
43、ncrease in a liabilitytMatching approach: once 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 period4141Profit / LosstIncome (profit or earnings) is the excess of revenues over ex
44、penses 4242Accounting EquationtAssets Assets Liabilities Liabilities = = Owners Equity Owners EquitytNet Assets Net Assets = = Owners Equity Owners EquitytEvery accounting transaction has an equal affect Every accounting transaction has an equal affect on both sides of the equation.on both sides of
45、the equation.tPurchase a $20,000 car for cash.Purchase a $20,000 car for cash.Increase asset car and decrease asset cash by Increase asset car and decrease asset cash by $20,000. No net change to assets.$20,000. No net change to assets.tPurchase a $20,000 car on credit.Purchase a $20,000 car on cred
46、it.Increase asset car and increase liabilities by Increase asset car and increase liabilities by $20,000$20,000. . 4343Dual Aspect ofAccounting EquationtAssets = Liabilities + Owners equity.Assets = Liabilities + Owners equity. LHS = RHS.LHS = RHS. First view:First view:Resources = Obligations to cr
47、editors or claims on Resources = Obligations to creditors or claims on resources + Residual claim.resources + Residual claim. Second view:Second view:Amounts invested in resources = how these amounts Amounts invested in resources = how these amounts were financed.were financed.Resources = financed b
48、y creditors + financed by Resources = financed by creditors + financed by owners.owners.4444tChanges to the accounting equation of Beauty Photo Store： Beauty Photo Store- An IllustrationAsset:130000Asset:130000Liability:30000Liability:30000Equity:100000Equity:100000Liabilities30000Liabilities30000Ow
49、ners equityOwners equity10000010000060006000AssetsAssets130000130000150001500090009000Profit:6000Profit:6000Revenue:15000Revenue:15000Expense:9000Expense:90004545SummarytEconomic resources in the enterprise-Economic resources in the enterprise-human,financial and material resources human,financial a
50、nd material resources tEconomic transactions derive from the operating Economic transactions derive from the operating activities of an enterpriseactivities of an enterprisetAccounting elements are basic components of Accounting elements are basic components of economic transactionseconomic transact
51、ionstAccounting elements comprise of assets,liabilities, Accounting elements comprise of assets,liabilities, ownersequity, revenues, expenses and profitownersequity, revenues, expenses and profittEconomic transactions are viewed in the forms of Economic transactions are viewed in the forms of increa
52、se or decrease in accounting elementsincrease or decrease in accounting elementstAccounting equationAccounting equation：A AL LOEOE4646Case for DiscussionMarks and SpencerMarks and Spencert tIn 1882, a Russian refugee named Michael Marks came to In 1882, a Russian refugee named Michael Marks came to
53、the North East of England. Needing work, he put a tray the North East of England. Needing work, he put a tray round his neck and started selling haberdashery in the round his neck and started selling haberdashery in the villages around Leeds. Two years later he borrowed villages around Leeds. Two ye
54、ars later he borrowed 5 5 from his friend Isaac from his friend Isaac DewhirstDewhirst to buy stock, and was able to buy stock, and was able to open a stall in Leeds market. to open a stall in Leeds market. t tWithin ten years Markss success as a trader had enabled Within ten years Markss success as
55、 a trader had enabled him to establish a chain of stalls in markets throughout him to establish a chain of stalls in markets throughout North East England. In 1894, Marks realized that his North East England. In 1894, Marks realized that his business was getting too large for him to manage business
56、was getting too large for him to manage effectively on his own. He decidedeffectively on his own. He decidedto form a partnership withto form a partnership withTom Spencer and MarksTom Spencer and Marks& Spencer was born. & Spencer was born. 4747Case for Discussion (cont)t tThe business continued to
57、 thrive and grow, so in 1903 Marks The business continued to thrive and grow, so in 1903 Marks and Spencer registered their partnership as a private limited and Spencer registered their partnership as a private limited company. This allowed more people to become involved with company. This allowed m
58、ore people to become involved with managing the growing company and increase its finances by managing the growing company and increase its finances by buying shares in the company. One shareholder was Israel buying shares in the company. One shareholder was Israel SieffSieff, , who became chairman o
59、f the company in 1917. who became chairman of the company in 1917. SieffSieff can be can be credited with shaping the future of Marks & Spencer. By 1926, credited with shaping the future of Marks & Spencer. By 1926, Marks & Spencer had opened 125 stores. In order to continue Marks & Spencer had open
60、ed 125 stores. In order to continue its successful development the company finally registered as a its successful development the company finally registered as a public limited company (plc) in order to obtain as much capital public limited company (plc) in order to obtain as much capital as possibl
61、e to finance its continued growth.as possible to finance its continued growth.t tAnd the rest, as they say, And the rest, as they say, is history. is history.4848Suggested QuestionstHow many people started the original business How many people started the original business that eventually became Mar
62、ks & Spencer?that eventually became Marks & Spencer?tWho owned the original business?Who owned the original business?tWho owns Marks & Spencer plc?Who owns Marks & Spencer plc?tWhy do you think Marks & Spencer became a Why do you think Marks & Spencer became a public limited company?public limited company?tDo you think the business would have developed Do you think the business would have developed in the way it has if it was still owned by one in the way it has if it was still owned by one person?person?4949The End of Lesson 2
