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[Point=100]CHAPTER 1

Assets: things owned by a business which carried a value,they can be considered as economic resources, providing benefits to the business.
Liabilities: amount owed by a business to various parties, they can be considered as debts or obligations owned by the business to outside bodies.
Posting: recording trasactions and entering accounts are often called “posting”.
A trail balance: is therefore defined as a list of balances of ledger accounts worked out periodically to test the calculation accuracy of account.
---------every account in the ledger is labelled (with debit or credit )
---------the items can come in any order
---------when the debit balance agree with the credit balances, it confirm
that there has been a debit entry for every credit entry in the
posting of the account
---------it is an interim summary of the information shown by the
account,it should carry date.
---------the main difference between trial balance statements and balance
sheets is that in the trial balance, all accounts in the ledger are
shown as simple balances (debit or credit )whereas in the balance
sheet, they are shown not as debit or credit balances but as assets
and liabilities respectively.
---------trial balance is unable to detect the following type of errors:
1) omission in the recording of the accounting data
2) an entry is made into the wrong account of the same group
3) an entry is entered into the wrong group of the account
4) there are mistakes in the book of original entry in amount
5) mistake is made on the wrong side in the book of original entry
6) mistake is covered up by a same mistake
Nominal account: do not represent an asset or a liability. They simply store up information needed to work out a profit or loss for the business at the year end. Nominal account includes: purchases ,sale, rent, wages, lights and other such expenses. The nominal accounts will give us the information needed to calculate the profit or loss periodically. At the end of a financial year,the nominal accounts are written off by transferring the amounts to the trading and profit and loss account, leaving he nominal accounts empty.
Journal: the journal,or the book of original entry , is a chronological record,showing for each transaction the debit and credit changes in specific ledger accounts. The debit and credit entries recorded in the journal are transferred to the accounts in the ledger at appropriate intervals. Structure of journal: date , accounting titles and explanation, ledger page , debit , credit.[/Point]

[此贴子已经被作者于2006-6-25 12:51:35编辑过]

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CHAPTER 2

Purchases in accounting means the purchase of those goods which the firm buys,and the main objective is to sell them.
Sales in accounting means the sale of those goods which the firm normally deals with and which were acquired with resale being the main objective.
Creditor and debtor
A person to whom money is owed for goods is known as creditor, while a person who owes the firm money is known as a debtor.
Balancing off accounts
It is the process of calculating how much the balance of an account should be carried forward to the nest period. If the debit total is greater, the difference should be entered into the debit side of the account.
Correction of Errors
Errors of commission (not affecting the trial balance agreement)
i.e. in the wrong person’s account
Errors of principle (not affecting the trial balance agreement)
i.e. entered in the wrong type of account: motor or motor expense
Errors of original entry (not affecting the trial balance agreement)
Such errors are made where the original amount is incorrect.
Errors of omission (not affecting the trial balance agreement)
Such errors are made where transactions are not entered into the books at all.
Compensating errors (not affecting the trial balance agreement)
Such errors are made where mistakes cancel each other out
Complete reversal of entries (not affecting the trial balance agreement)
Such mistakes are made where the correct amount are entered in the correct accounts, but each item is shown on the wrong side of each account. We have to make the amount twice the amount of the error.

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Chapter 3 accounting and accounting cycles

Accounting is the process of providing quantitative information about business entities to help users in making decisions regarding the allocation of economic resources.
The process of accounting consists of :
1. Identification----the observation of activity and the selection of particular events that are evidence of economic activities to an entity.
2. Measurement ----the quantification fo the events in monetary terms
3. Recording ----the keeping of a chronological diary of the measured events.
4. Communication ----the preparation and distribution of financial statements to users.
Financial accounting : involves the recording and presentation of factual transactions.
Managerial accounting :involves the use of financial information to interpret its implications for decision-making purposes.
Forms of business organizations:
Sole proprietorship: is owned and usually managed by one individual , partnership has more than one owner; limited company is a separate legal entity that is owned by many individuals, called shareholders, who are issued shares of capital as evidence of their ownership.
Account
An account is a business document used to record ad retain monetary information about a company’s transaction. The company’s full set of accounts are kept in a general ledger and accounts are sometimes called general ledger accounts.
Posting
It is the process of transferring the debit and credit information record in each journal entry to the proper accounts in the general ledger.
Accounting period
It is the period of time for which the net profit of a company is computed. An accounting period of less than one year is called interim period.
Revenue
It is derived from the charge to customers for goods or services provided, resulting in increase in assets or decrease in liabilities.
Expense
They are the cost of purchasing goods or services used in running the business , resulting in decrease in assets or increase in liabilities.
Accrual accounting and cash base accounting
1. In accrual accounting ,revenues are recorded in the period in which goods or services are provided, regardless of when cash is received. The revenues and expenses of the same period are matched so that the company’s profit can be determined.
2. Under the cash basis accounting system, net profit is the difference between cash receipt from operations and cash payments made during the accounting period. It may distort the net profit.
Depreciation
1. Provision for depreciation is the process of allocation of the cost of a
physical asset to each accounting period in which the asset is used.
2. Depreciation represents the portion consumed during the accounting
period.
3. When depreciation expense is debited, the provision for depreciation is credited.
4. Provision for depreciation represents the total depreciation expenses recorded since the asset was purchased.

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Chapter 4 accounting principles

Business entity assumption
1. economic events can be identified with a particular unit of accountability.
2. Accounting is mainly concerned with the business organization as a separate entity.
3. The revenues and expenses of a business are regarded as affecting its assets and liabilities but not the individual investor’s assets and liabilities.
Monetary unit assumption
1. only transaction data capable of being expressed in terms of money should be included in the accounting records and the unit of measurement remains constant over a specific period of time.
2. The use of the monetary nit assumption has two major limitations. First , it limits the scope of accounting reports, i.e. goodwill. Second, the purchasing power of money continually changes.
Periodic assumption
1. the economic life of a business can be divided into artificial time periods.
2. We must therefore prepare periodic reports on operations and financial position for decision-makers such as management and other parties.
3. The accounting period concept creates many difficulties . i.e. adjusted entries are needed to report net income for a period of time. The inventory costing, estimating bad debt provisions, and selecting depreciation methods are also directly related to measuring periodic profit.
Going concern assumption
1. The business will continue in operation long enough to carry out its
existing objectives and commitments.
2. The going concern assumption also supports the recording of prepaid expenses as assets although in most cases the prepayments cannot be sold.
3. The assumption justifies our recording fixed assets at cost and depreciating them without reference to their current replacement costs.
4. When the ability of a business to continue as a going concern is doubtful, this fact should be disclosed in a note to the financial statement.
5. The financial statement s should be prepared from the quitting concern or even liquidation point of view instead of a going concern point of view.
Contingent liabilities
Contingent liabilities are potential obligations that will become liabilities only if certain events happen in the future. If the liabilities are probable and the amount of the liabilities can be reasonably estimated, it should be recorded in the accounts.
Capital expenditure and revenue expenditure
Capita expenditure is the amount of investment by a business in its assets retained for the purpose of earning profits, which are termed fixed assets.
Revenue expenditure are those costs incurred in running a business on a current or daily basis.

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Chapter 5 accounting for trading companies

Credit memo (credit note)---------sales return
Debit memo--------purchase return
Perpetual inventory system and periodic inventory system
*In a perpetual inventory system, a continuous record is kept for the cost of goods sold and the cost of stock on hand. It is usually employed for items that have high selling prices and costs that are easily determined. When a sale occurs and a perpetual inventory system is used, two journal entries must be made at the same time, namely one journal entry to record sales and another entry to record cost of sales.
**A periodic inventory system is used when items are sold at a very low rice, when the cost of the individual items is not easily determined, or when high volumes of items are sold. Cost of goods sold can only be determined by counting the unsold items in the warehouse at the end of the accounting period. Under the periodic inventory system, the amount in the stock account remains unchanged during the accounting period.
Special journals
Special journals are used to record transactions efficiently and to summarize many similar transactions.
Subsidiary ledger
A subsidiary ledger is a group of similar accounts that are taken out of the general ledger and show details of every customer and supplier.
It should be noted that if subsidiary ledgers are used, an entry that affects a subsidiary ledger account must be posted twice---once to the subsidiary ledger account and once to the control account in the general ledger. DR. Debtor subsidiary ledger (named debtor) and debtors account (as control account) CR. Sales account.

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Chapter 6 accounting procedures for asset and liabilities

Imprest system
It implies a fixed amount of cash, a float is supplied. From the float, expenses are paid, which are reimbursed at the end of the period bringing the amount in hand up to the original amount.
Bank reconciliation statement
A bank reconciliation statement is normally prepared each month to analyze the differences between the ending cash balance on the bank statement and the ending cash balance in the firm’s accounting records.
Its begin is ‘balance per bank statement’ ends at ‘balance per cash book’ (correct version or adjusted one).
First-in-first-out assumption
FIFO cost flow assumption assumes that the first item purchased is the item sold.
Weighted average cost assumption
The average cost flow assumption allocates all costs to cost of goods sold and ending stock on an average basis. The total cost of gods available for sale is divided by the total number of units on hand.
Disposal of fixed assets
*A fully depreciated asset with no scrap value is removed from the accounts by debiting provision for depreciation and crediting the asset account.
**An asset that is sold for an amount equal to its carrying value is removed from the accounts by debiting cash for the proceeds, debiting provision for depreciation, and crediting the asset account. If there is loss or gain, it will be shown in the profit and loss account. ( disposal of fixed assets account may be used, DR. Fixed asset CR. trade-in allowance , accumulate depreciation , profit and loss.)
Preference share
*They carry a fixed rate of dividend.
**cumulative preference shares have the right to accumulate dividends in a given year if they are in arrears.
***Participating preference shareholders share extra dividends with ordinary shareholders in excess of their normal preference dividends.
Provisions and reserves
A provision is an amount written off or retained by ways of providing for depreciation or renewals.
A reserve is where an amount has been voluntarily transferred from the profit and loss appropriation account. It may be for some specific purpose or it would be a general reserve account.
Indirect cost
Cost that cannot be identified with or traced to a given cot object in a cost effective way.
Variable cost
A variable cost is unchanged per unit of cost driver but changes I total in direct proportion to changes in the cost driver. Such like direct materials, direct labor costs; sales commissions and some factory supplies.
Fixed cost
A fixed cost is unchanged in total over a wide range of the cost drivers during a given time span but becomes progressively smaller on a per unit basis as the cost driver increases. Such like rental ; fixed asset depreciation, and supervisor’s salary.
Relevant range
It is the band of the cost driver in which a specific relationship between cost and the cost driver is valid. The basic assumption of a relevant range also applies to variable costs.
Prime costs are all direct manufacturing costs (direct materials and labor costs).
Conversion costs are all manufacturing costs other than direct materials costs. (direct labor cost and factory overhead).
Breakeven analysis
It is an overview of decision models by examining the interrelationships of changes in costs, volume, and profits. The breakeven point is that point of sales volume where total revenue equals total expenses and costs, there is neither profit nor loss.
1. Equation method:
sales -variable costs - fixed costs =net income
2. Contribution margin method
Contribution margin is equal to sales minus all variable costs.
Unit contribution margin is the unit selling price less unit variable cost.
Breakeven point in units = fixed costs / unit contribution
Margin
3. graphic method
we can also graph the CVP relationships and find the breakeven point where the total revenue line and total cot line intersect.
Sensitivity analysis and margin of safety
A tool of sensitivity analysis is the margin of safety, which is the excess of budgeted sales over the breakeven volume. Products with lower fixed costs will always enjoy a higher Margin of Safety.
Products with lower fixed costs will always enjoy a higher Margin of Safety.

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Chapter 12 Absorption costing and marginal costing

Inventory costing methods
Two major methods of inventory costing are absorption costing and marginal costing. These methods differ in one conceptual aspect: whether fixed manufacturing costs are inventoriable.
Absorption costing (total cost)is a method of inventory that includes all direct or indirect manufacturing costs as inventoriable costs it is the total cost divided by the number of items produced. It includes all the costs incurred in making the product spread evenly and fairly over each item produced.
Marginal cost concerned yourself only with what extra cost has been incurred in making one more item. It is a method of inventory costing that includes only variable manufacturing costs as inventoriable costs; fixed manufacturing costs are written off in the period when they are incurred.
Marginal costing is concerned with the extra cost of producing another item on the basis that despite increased production, certain costs won’t increase at all.
Marginal cost equation:
S---sales revenue V----total variable costs
C-------contribution margin F-------total fixed costs.
P-------profit
C=S - V P=C – F S – V=P+F
If the total contribution has just covered all fixed costs, it is called breakeven situation.
If the variable costs remain in direct proportion to the sales revenue is 40%, the contribution to sales is 60%.

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Chapter 14 cost concepts relating to decision making

Relevant cost
Relevant costs are those expected future costs that differ among different alternatives. The difference in total cost between two alternatives is an incremental cost. Synonyms for incremental costs are differential costs and net relevant costs.
Limiting factors
It may not be possible to produce unlimited quantities of product B because there could be a restriction on how many units could be sold or produced. Such restrictions are known as limiting factors or key factors.
Produce the product which provides the maximum contribution per unit of limiting factor employed.
Contribution per unit = unit contribution /limiting factor per unit
Opportunity cost is defined as the maximum available contribution that is forgone by using limited resources for a specific purpose or the value of the best alternative foregone.
Sunk costs
Accountants often use the terms sunk cost to refer to costs already incurred that will not be affected by subsequent decisions. I.e. undepreciated cost of a plant asset is a sunk cost.
Sunk costs are therefore not relevant to decision making because they cannot be changed regardless of what decisions are made.

Accounting practice----ratio analysis
Return on capital employed (ROCE)
1. Profit includes: operating profit ; net profit before interest and taxation ; net profit before taxation ; net profit after taxation; net profit after taxation and preference dividends;
2. Capital employed includes: total assets; total assets less current liabilities; shareholders’ funds; shareholders’ funds less preference shares; shareholders’ funds plus long-term liabilities.
3. We ought to take the average capital figures. It is customary to take a simple average of opening and closing capital balances.
4. ROCE=(profit/capital)X100%
Gross profit ratio
(Gross profit / total sale)X100%
Net profit with the sales
(Net profit before taxation and dividends / total sales)X100%
Liquidity ratio ;quick ratio; acid test ratio
(current assets less stocks / current liabilities) X100%
quick ratio must be at least 1 to 1 , but depends on type of business
Current ratio; working ratio
(Current assets / current liabilities) X100%
A current ratio of less than 2 to 1 may indicate a serious financial position
Stock turnover ratio
Cost of sales / average stock
Average stock =(opening stock + closing stock) /2
Debtor turnover ratio
Total credit sales / average trade debtors
It is most usually shown in the form of the Debtor Collection Period. The true average of debtors time taken to settle their debts, it would necessitate taking a daily amount outstanding.
Debtor collection period
(Average trade debtors / total credit sales) X 365 days
Credit payment period
(Average trade creditors / total credit purchase) X 365days
Dividend yield
(Dividend per share / market price per share) X 100%
Dividend cover
Net profit after taxation and preference dividend / ordinary dividends
If the dividend cover is 4 ,the company would be paying out one quarter of its earnings as an ordinary share dividend.
Earnings per share (ESP)
Net profit less preference dividends / weighted number of shares outstanding

Price earnings ratio (P/E)
Market price per share / earnings per share
An investor needs X years to recover the market price paid for the shares out of the earnings.
Gearing ratio
Gearing express the relationship between the proportion of fixed interest capital, e.g. debentures, to ordinary share capital. Where a company has a large proportion of its capital in the form of debentures in relation to ordinary shares, it is said to be high geared.

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