BSB110 - Mid-Semester Exam Notes (Summary of Topics 1 - 5)

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Department
Management and Human Resources
Course
BSB110
Professor
All Professors
Semester
Spring

Description
BASIC CONCEPTS AND PRINCIPLES Accounting entity – entity separate from owner (business separate from personal assets) Cost principle– assets recorded at acquisition price – “historical cost” Going concern – financial reports prepared on assumption that entity will continue to operate Accounting period – profit determined for arbitrary period e.g financial year, calendar year, quarter Matching principle – profit can be seen as a process of matching revenues recognised for the period with expenses incurred in earning that revenue Reliability – accounting data is objective and verifiable – “historical cost” AASB – Australian Accounting Standards Board relevant companies legally binding Corporations Act CPAA – Certified Practicing Accountants Australia – joint code of conduct ICAA – Institute of Chartered Accountants Australia – independent professional accountants CIMA – Chartered Institute of Management Accountants – accountants working in businesses Accounting data flow: Income Statement  Statement of Changes in Equity  Trial Balance  Adjusted Trial Balance Business Entities - Sole proprietorship – separate accounting entity, not separate legal/taxable entity, unlimited liability (personally liable for debts of business) - Partnership – same as sole proprietorship except partners - Company – owners are shareholders, separate accounting, legal and taxable entity, limited liability (shareholders personally liable up to value of their shares) Assets - Cash at Bank - Accounts Receivable - Bills Receivable - Inventories - Prepaid Expenses - Land - Buildings - Plant and Equipment Liabilities - Accounts payable - Bills payable - Accrued liabilities – expenses/revenue Christina Meyers BSB110 Accounting 1 ALL RECEIBABLES ARE ASSETS, ALL PAYABLES ARE LIABILITIES Owners’ Equity - Capital - Drawings - Revenues - Expenses Balance Sheet – Financial position of an entity at specific point in time shows A, L & OE Income Statement – earning activities for a specific period of time shows Revenue and Expenses -  Revenue =  OE - Expense =  OE Statement of Changes in Equity – shows the changes that took place in OE for the period -  Capital Contributions =  OE -  Drawings =  OE Double entry accounting – every transaction has at least two effects on the accounting equation - A , A  - A , L  - A , OE  Accounting Cycle 1. Transaction occurs 2. Source Documentation prepared 3. Information entered into Journal 4. Post to ledger 5. Trial balance prepared 6. Journalise and Post Adjusting Entries 7. Prepare Adjusted Trial Balance 8. Journalise and Post Closing Entries 9. Prepare and Post closing Trial Balance 10. Prepare Financial Statements Double entry accounting Dr = Cr A = L + OE - Revenue  OE, Cr in nature - Expenses  OE, Dr in nature Christina Meyers BSB110 Accounting 2 DEBIT CREDIT ASSETS LIABILITIIES + OWNERS EQUITY EXPENSES REVENUES  to accounts are recorded on the same side as the nature of the account  to accounts are recorded on the opposite side to the nature of the account Journal – records Dr & Cr, book of original entry, complete record transactions chronological order Ledger – contains all the accounts of the business, T account format Debit Credit Dr Cr Debit = Left Credit = Right Chart of Accounts - list of all accounts and their numbers Accrual accounting v Cash-basis accounting - Accrual accounting records all transactions - Cash-basis accounting records only cash receipts and cash payments - Accrual accounting is superior because it provides more information Accrual Basis Accounting Cash Basis Accounting Revenue principle record revenue when earned not when recorded when cash received received Expense principle record when incurred not when paid recorded when expenses paid Adjusted trial balance – shows the amounts ready from the financial statements Adjusting the accounts: process of updating the accounts on the last day of the accounting period Prepayments and accruals are natural opposites - Prepaid is an expense upfront early - Accrual is an expense not yet paid, owed Adjusting entries - Prepaid Expense – paid before consumed e.g Prepaid Insurance/Rent, Office Supplies - Depreciation – cost over useful life e.g Vehicle, Furniture, Office Equipment Christina Meyers BSB110 Accounting 3 - Accrued Expense – payables - incurred but not yet recorded e.g Wages, Rent, Interest - Accrued Revenue – receivables - earned but not yet recorded e.g Interest, Rent, Accounts - Unearned revenue – received before service performed e.g Deliveries Straight line depreciation – depreciates the same amount every year over the whole life of the asset Deprecation is a contra-asset, it can only exist with a linked asset account, contra (negative) asset account is deducted from asset cost, balance sheet account, ALWAYS has a credit balance As asset gets older, Accumulated Depreciation  in value and written value  until = residual value Business will pay accrued expense on first pay day in the next accounting period Effects of Adjusting Entries - Prepaid Expenses -  Expense,  Asset =  Profit - Depreciation Adjustment -  Expense,  Asset =  Profit - Accrued Expenses -  Expense,  Liabilities =  Profit - Accrued Revenues -  Revenue,  asset =  Profit - Unearned Revenue Adjustment - Revenue,  Liabilities =  Profit ADJUSTING ENTRIES SIGNIFICANTLY AFFECT THE PROFIT AND BALANCE SHEET Worksheet - summary of working payments, not part of financial statements, internal document needed to adjust and close accounts and prepare financial statements Major columns 1. Unadjusted Trial Balance 2. Adjustments 3. Adjusted trial balance 4. Income Statement 5. Balance Sheet Unadjusted Adjustment AdjustedTrial Income Balance Sheet TrialBalance Balance Statement AccountTitle DR CR DR CR DR CR DR CR DR CR IMPORTANT NOTE: - Add together like figures (e.g both Cr or both Dr) - Subtract if different figures - Profit figure is in credit column of Income Statement in Worksheet - Net profit is in the credit column of the Balance sheet in Worksheet Christina Meyers BSB110 Accounting 4 Temporary and Permanent Accounts Temporary (Nominal) Accounts Permanent (Real) Accounts - Used to Determine profit & finalise capital - Balance Sheet Accounts - Revenue, Expense & Drawings - Assets, Liabilities and Capital - Closed at end of each accounting period - Carried forward to next period Closing Procedure - Brings account balance to zero - En
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