Acc - Module 6 | Mindmap

Accounting - Module 6

Process of Identifying, measuring, recording, communicating financial info.
1. For a company's business activities
  1. Decision makers can make informed decisions
    1. Decision Makers - Creditors & Investors
2. "Communication" refers to a company's financial statements
  1. Good decisions - assumes agreement about the content in F.S & how the amounts are measured
    1. GAAP - Rules business must follow with F.S
Basic Concepts
1. Entity Concept - separate from its owners & from any other business
2. Transactions - Exhange of property or service with another entity
  1. "Another Entity" Owners
  2. Economic Events not transactions
    1. Depreciation - Use of an asset (NCA)
      1. Decrease in value
    2. Revaluation of Buildings
      1. Only if Fair Value Measurement has been chosen
        Increase in Value
3. Source Documents - Provide Objective Support for recording of transactions
  1. E.g. Sales Receipts, cheque butt, invoice, payroll timesheet, log book, print out from ATM
4. Monetary Unit Concept
  1. Recordable Economic Events
    1. Incl. Transactions, F.S that summarize such events recorded in "money"
      1. Monetary Unit -National Currency of Country the company operates in
5. Historical Cost Concept - Record's its transactions based on amount exchanged at time it occurred
  1. Values shown on F.S based on Original Cost
Balance Sheet (Statement of Financial Information)
1. Info for Internal & External Users
  1. Evaluate business's ability (Profit & remaining Solvent)
2. Reports Financial Position of Company incl. assets, liabilities, & shareholders' equity at specific point in time
3. Balance Sheet Equation (AKA, Acc Eq): A = L + OE
  1. Relationship between assets of business & how they are financed
    1. Assets Financed - Borrowing from Creditors (Debts AKA. Liabilities) or issuing shares to owners (Equity)
    2. Both owners & creditors have claims against assets, in company - owner's claims = Shareholder's Equity
  2. Assets = Economic Resources & Liabilities & Owner's Equity = Claims on Economic Resources
    1. Owner's Equity - Represent Owner's Current Investment in Assets of Business
      1. Equity represents share of assets claimed by owners
        2 Primary Sources of Equity - Contributed Capital & Retained Earnings
        Sole Trades, these 2 sources are in one account called "capital" but companies kept separate
        Often called Residual - what's left over
        A - L = OE
        Creditors have priority (legally) over owners
        If Assets & liabilities are measured according to GAAP, than dollar value of Equity must be measured properly
  3. Assets - Resources of company
    1. Requirements to appear on BS: Past Event, Resource controlled by company, provide future economic benefits, reliably measured - Verifiable (E.g. Source Doc)
      1. Not all resources are shown in BS
    2. CA - Cash &other assets that business expects to convert into cash, sell, or use up within 1 year of balance sheet date.
      1. Helps asses liquidity also listed in in order of liquidity
        On BS date, asset may not be shown greater than exp eco benefit measured of date
        Acc rec.Debtors - Shown at recoverable amount
        Inventory (Stock) - good held or resale, shown at lower of cost or net realisable value (whichever is lower)
        Prepayment - Expense prepaid (CL)
    3. NCA - Use it longer than 12 months
      1. PP&E (Fixed Assets) - tangible productive assets used in operations e.g.. land, buildings, equipment
      2. Intangible Assets - lack physical Substance e.g.. patents, trademarks, copy rights
      3. Long - Term Investments - Not used in operations, expected benefits usually from rent or sale. E.g. Land, Buildings, & shares in other companies
    4. Assets can have a Negative Balance
      1. BankOverdrafts (Liability) - Negative cash balance
      2. Asset Contra Accounts - e.g. accumulated depreciation & Allowance for Doubtful Debts
        ACA means creating a "negative' asset account instead of reducing a particular asset directly
        BS and footnote disclosures
  4. Liabilities - Obligations of Company
    1. Requirements: Past Event, Cause an outflow of Resources, Reliably Measured
    2. Current Liabilities - Obligations company expects to pay within on year
      1. E.g. Accounts Payable, Short - term borrowings
    3. Non - Current Liabilities (Long - Term Liabilities) Present Obligations that require payment beyond one year of the BS date
      1. e.g. Notes Payable. Mortgage payable, Loan or Bonds payable
        If due date is within on year of the BS date, the debt becomes current.

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Acc - Module 6

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