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LECTURE 1, 2 & 3
Power of Accounting 1
Enron Enron's share price, which hit a high of US 90 per share in mid-2000, dropped to less than a 1 by the end of November 2001. It was the largest corporate bankruptcy in U.S. history until WorldCom's 2002 bankruptcy.
Issue: Enron's non-transparent financial statements did not clearly detail its operations and finances with shareholders and analysts, earnings and the balance sheet were drawn up to show a favourable picture of its performance.
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Power of Accounting 2
WorldCom
Telecoms company filed the largest ever US bankruptcy in July 2002. Scott Sullivan, former chief financial officer, and David Myers, its former chief controller were arrested August 1, 2002 on criminal charges of conspiracy to commit securities fraud.
Issue: Accountancy fraud. The company inflated earnings by transferring $3.9bn out of the company's normal operating expenses and classifying it instead as capital investment. That trick kept the expenses off the profit and loss account.
What is accounting?
Identifying, measuring and recording Processing AND Communicating economic information to the users. (AAA, 1966)
Employee
Shareholders
Company
Public
Customers
Government
FA V. MA
POINTS Nature FA External Backward Whole entity Strict MA Internal Forward Segments Flexible
Scope
Regulation
Reporting frequency
Annual
Any
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Balance Sheet
Balance Sheet as at 30th June 2003 xx | Fixed Assets xx | Current Assets xx | ---===
xx xx ---===
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Progress Check 1
Which one of the following statement is incorrect:
a. Balance Sheet as at 31st October, 2007 b. Profit and Loss Statement as at 31st October, 2007 c. Cash flow statement for the year ended 31st October, 2007 d. Profit and Loss Statement for the year ended 31st October, 2007
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(b) Partnership
(c) Listed Companies (d) Non-profit making organisations (e) Public sector
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Accounting Equation A company has 100,000 of assets and 60,000 in owners equity. What amount of liabilities does the company have? a. 40,000 b. 60,000 c. 100,000 d. 160,000
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18 2008 Pearson Prentice Hall. All rights reserved.
Net income occurs when: a. expenses exceed revenues. b. revenues exceed expenses. c. assets exceed liabilities. d. revenues exceed liabilities.
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19 2008 Pearson Prentice Hall. All rights reserved.
Lecture 2
Accounting Cycle
It refers to a process through which financial statements are produced. It involves the following steps:
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Accounting Cycle
Recording (Journal entry)
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DOUBLE ENTRY BOOKKEEPING Accountants record transactions by using accounts which look like a large T and therefore, they are usually called Taccounts.
---------------------------------------------| | | | |
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Book-keeping Rules 1
Each account is split into two halves:
the LEFT hand side is called debit the RIGHT hand side is called credit
For any transaction debit must equal credit. For the whole set of accounts total debits must equal total credits.
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Book-keeping Rules 2
Increases in asset and expense accounts are debits Increases in capital, liability and income accounts are credits
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Progress Check 1
What are the two aspects of each of the following transactions?
owner withdraws 2,000 in cash sale of goods for 2,000 cash
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Day 3
Day 7
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Day 1 Debit: Bank A/C ------------------------------------------ 1000 Credit: Johns Capital A/C--------------------------------1000 Day 2 Purchases --------------------------------------------------------- 500 Bank --------------------------------------------------------------Day 3 Rent ---------------------------------------------------------50 Bank ---------------------------------------------------------------Day 7 Cash ---------------------------------------------------------700 Sales ------------------------------------------------------------Bank ----------------------------------------------------------700 Cash --------------------------------------------------------------
500
50
700
700
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Ledger Entries 1
Bank A/C Cash A/C _______________________________________________________________________________ | | | | Johns Capital 1000 | Purchases 500 Sales 700 | Bank 700 Cash 700 | Rent 50 === | === | Balance 1150 -----| ----Johns Capital A/C 1700 | 1700 -------------==== | ===
| Bank 1000
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Ledger Entries 2
Purchases A/C _______________________________ | Bank 500 | | Rent A/c Bank 50
| | |
________________ | | |
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Johns shop: Trial balance at day 7 Dr 1150 500 700 50 ______ 1700 _____ 1700
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Cr 1000
___50__ 150
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Capital and Liabilities Capital introduced Profit for the period Total capital and liabilities
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Lecture 3
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These are more commonly termed as Generally Accepted Accounting Principles (GAAP). Accountants follow these principles while preparing the financial statements.
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Example:
The capital provided by the owner/shareholder to the business.
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6. Consistency concept
Consistency of accounting treatment of similar items for each accounting period and from one period to the next Example: Depreciation method Purpose:
limit the possibility of manipulations meaningful comparison - users confidence is increased
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7. Accrual/matching concept
revenue and expenses are recognised in the period they are incurred this may not coincide with the date of cash receipt or payment Examples:
stock sales costs (accruals, prepayments)
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Arguments against:
-- Conflict with other accounting concepts:
with the consistency with the matching
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9. Periodicity Concept
Business will run for an indefinite period Divide the life of a business into smaller periods
These are called accounting period.
It could vary from one month to one year depending on the information requirements of the business.
Usually, in most of the cases it is one year,
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Progress Check 2
Which one of the following is not an accounting concept?
a. Business Entity
b. Consistency c. Matching
d. Conservatory
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