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1、Unit 1 Basic Knowledge of AccountingObjectives In Dialogue,students should understand the meaning of each accounting principle.In Section 2,students should understand the meaning of the accounting elements andthe accounting equation.In Section 3,T account and double-entry system are demonstrated.Stu
2、dents shouldknow the structure of T account and understand how to make correct entries based ondouble-entry system.In Section 4 and Section 5,students should learn to make entries in the ledger accounts,journalize transactions and post them to the ledgers.Dialogue1.GAAPJohn:Have you seen or heard of
3、 the abbreviation GAAP?Mary:Ive seen it before,but I only know that GAAP is the initial of Generally AcceptedAccounting Principles.I dont know what principles are included in it.John:GAAP consists of a series of concepts,assumptions and principles.Mary:GAAP could include concepts and assumptions?Joh
4、n:Yes.The major concept is the concept of accounting entity;of course,it can also becalled an assumption.The other assumptions are the going concern assumption,theaccounting period assumption,and the stable money unit assumption.Mary:Does the accounting entity refer to an organization accounting ser
5、ves?John:Yes.An accounting entity is any economic organization which controls resourcesand engages in economic activities.Accounting for every entity should beindependent.Mary:I guess the accounting period refers to a time period like a year or a month,right?John:Right.The account entity is assumed
6、to continue in operation for a period of timesufficient to carry out its commitments and realize its objectives.Its what we call thegoing concern assumption.But in order to make it more convenient to measure,wedivide the life of a business into time periods of equal length,like a year,a quarter,ora
7、month.The time periods are what we call accounting periods.Mary:Then what does the stable money unit assumption refer to?John:It requires that money be used as the basic measuring unit for financial reporting.According to this assumption,accounting recording generally doesnt consider theeffect of in
8、flation,that is,the purchasing power remains unchanged.Mary:I think its a shortcoming,for it cant reflect true values of the product or service atdifferent time.John:Its true.However,in periods of low inflation,this assumption doesnt cause seriousproblems.If the effects of inflation are too great,yo
9、u can explain it by preparingsupplementary information upon financial statements.Mary:Thats a good idea.2.Major PrinciplesMary:Besides the four assumptions you mentioned,what principles does the GAAPinclude?John:Major principles include the objective principle,the materiality principle,theconsistenc
10、y principle,the conservatism principle,the accrual basis accountingprinciple,the adequate disclosure,the matching principle,the realization principle,and the cost principle.Mary:Oh,so many.But for some principles,I can tell the meaning from its name.Forexample,the objective principle may mean that a
11、ccounting should reflect thetransactions truly and objectively,right?John:Quite right.Then,please guess the meaning of the consistency principle and theconservatism principle.Mary:I guess the consistency principle means that accounting data cant be changed andthe conservatism principle requires that
12、 accountants not be too optimistic oftransactions,right?John:The consistency principle means that accounting methods should be consistent fromone period to the other and shouldnt be arbitrarily changed.The conservatismprinciple does require accountants not be too optimistic,but its fundamentalmeanin
13、g is like this:Accountants should be conservative in choosing the one thathas the least favorable impact on net income when there are two or more alternativeaccounting methods.Mary:Thank you for your instruction.Does the adequate disclosure principle require thataccountants report as much accounting
14、 information as possible when they preparefinancial statements?John:Youre quite right there.But when they disclose the information,they should obeythe regulations of the law,the industry,and the company,and the informationshould be focused on certain aspects.Yes,the materiality requires accountants
15、paymore attention to the important items of the financial statements.Of course,thereare no definite criteria by which to judge whether an item is important.It is subjectto the judgment of the account in practice.Besides,the matching principle is tocompare the revenue with the expenses of the same pe
16、riod and work out the netincome or net loss of that period.In most cases,the realization principle indicatesthat the revenue should be recognized at the time goods are sold or services arerendered.At this point,the business has essentially completed the earning processand the sales value of the good
17、s or services can be measured objectively.At anytime prior to sale,the ultimate sales values of the goods or services sold can only beestimated.As for the cost principle,both the balance sheet and the income statementare affected by it.Assets are initially recorded in the accounts at cost,and noadju
18、stment is made to the evaluation in later periods.Mary:What does the accrual basis accounting principle mean then?John:The accrual basis and the cash basis are two different accounting principles.According to the accrual basis principle,whenever a transaction happens,theaccountant should enter it in
19、to the journal,whether or not cash has been received orpaid.But under the cash basis accounting,the entry is done only when cash isreceived or paid.In comparison,the accrual basis accounting is more justifiable,forit provides more complete information.Mary:It is very practical.Section 1 What is acco
20、untingAccounting contains elements both of science and art.The important thing is that it is notmerely a collection of arithmetical techniques but a set of complex processes depending on andprepared for people.The human aspect,which many people,especially accountants,forget,arisesbecause:1.Most acco
21、unting reports of any significance depend,to a greater or lesser extent,onpeoples opinions and estimates.2.Accounting reports are prepared in order to help people make decisions.3.Accounting reports are based on activities which have been carried out by people.But what specifically is accounting?It
22、is very difficult to find a pithy definition that isall-inclusive but we can say that accounting is concerned with:The provision of information in financial terms that will help in decisions concerningresource allocation,and the preparation of reports in financial terms describing the effects of pas
23、tresource allocation decisions.Examples of resource allocation decisions are:Should an investor buy or sell shares?Should a bank manager lend money to a firm?How much tax should a company pay?Which collective farm should get the extra tractor?As you can see,accounting is needed in any society requir
24、ing resource allocation and itsusefulness is not confined to“capitalize or mixed“economies.An accountant is concerned with the provision and interpretation of financial information.He does not,as an accountant,make decisions.Many accountants do of course get directlyinvolved in decision making but w
25、hen they do they are performing a different function.Accounting is also concerned with reporting on the effects of past decisions.But one shouldconsider whether this is done for its own sake or whether it is done in order to provideinformation which it is hoped will prove helpful in current and futu
26、re decision.We contend thatknowledge of the past is relevant only if it can be used to help in making current and futuredecisions,for we can hope that we shall be able to influence the future by making appropriatedecisions but we cannot redo the past.Thus the measurement of past results is a subsidi
27、ary role,but because of the historical development of accounting and,perhaps,because of the limitationsof the present state of the art,“backward looking accounting sometimes appears to be an end initself and not as a means that will help in achieving a more fundamental objective.Section 2 Accounting
28、 Elements&Accounting EquationFinancial accounting is intended to provide information both for managers and for theoutsiders such as shareholders,banks,government agencies,the general public,etc.Accountingelements include assets,liabilities,owners equity,revenue,expenses,and profits of a businessduri
29、ng a certain accounting period.Assets are,in general,the properties or economic resources that are owned by the business.Assets include such things as cash,accounts receivable,inventory,supplies,equipment,buildings,land,etc.Liabilities are debts of a business,including such obligations as notes paya
30、ble,accountspayable,tax payable,salaries payable,etc.Owners equity means the net assets of a business.It is the owners interest in the business.When a business is owned by one person,the owners equity is shown as“capital”.But when it isowned by shareholders,it is shown as shareholders9 equity”.Reven
31、ue is the increase in owners equity resulting from the sales of goods or services bythe business.In amount,the revenue is equal to the cash,bank deposit and receivables gained incompensation for the goods or services rendered.Please note that a cash receipt qualifies asrevenue only when it helps to
32、increase owners equity.Thus,borrowing cash from a bank doesnot belong to revenue;it simply belongs to liability.Expenses are the decrease in owners equity caused by the businesss revenue-producingoperations.In amount,the expense is equal to the value of goods and services used up in gainingrevenue.P
33、lease also note that a cash payment can be regarded as an expense only if it decreasesowners equity.Profit is also the increase in owners equity resulting from profitable operation of a business.It is the excess of revenue over expenses fbr the accounting period.The accounting equation shows the bas
34、ic financial position of a business.It is representedby the relationship of assets to liabilities and owners equity.Thus the accounting equation is:Assets=Liabilities+Owners equityAssume that a business owns assets of SI,000,000,borrows from creditor$200,000,and theowner invests$800,000.The entries
35、made in the accounting equation would be:Assets=Liabilities+Owners equity$1,000,000=$200,000+$800,000Suppose that$5,000 in cash has been used to pay fbr a debt,the changed equation wouldthen be:Assets=Liabilities+Owners equity$995,000=$195,000+$800,000Suppose again that the business has received$6,0
36、00 as an income;the accounting equationis as follows:Assets=Liabilities+Owners equity$1,001,000=$195,000+$806,000Any business event that alters the amount of the accounting elements is called atransaction.Section 3 T account&Double-entry SystemT account is the simplest form of the account.It is so c
37、alled because it resembles the letter“T.On top of the T account there is the account title and the account number.Below on eachside of the vertical line are the debit which is on the left side and the credit which is on the rightside.Often the debit and credit are abbreviated as Dr.and Cr.When an am
38、ount is placed on theleft side of the account,the account is said to be debited.If the amount is entered on the right side,the account is credited.The difference between the debit and the credit side is called the balanceof the account.Table 1-1 T accountAccount TitleDebit CreditWhether an account i
39、s to be debited or credited depends on the accounting elements.Byconvention,increases in assets and expenses are recorded as debits,whereas increases in liability,owners equity,revenue and profit are recorded as credits.Asset and expense decreases arerecorded as credits,whereas liability,owners equi
40、ty,revenue and profit decreases are recordedas debits.Assets and Expenses_ Liability,Owners Equity,Revenue and ProfitTable 1-2 Entries in the T accountD匚aDr.Cr.+-+(Increases)(Decreases)(Decreases)(Increases)In double-entry system,there are equal debit and credit entries for every transaction.Whereth
41、ere only two accounts affected,the debit and credit amounts are equal.If more than twoaccounts are affected,the total of the debit entries must equal the total of the credit entries.Thisrule helps when we need to find a mistake in our records.If the total debits do not equal totalcredits,there must
42、be a mistake.Section 4 The Ledger and Chart of AccountsThe actual accounts can differ depending on different accounting systems.In an accountingsystem,a separate account is designated fbr each asset,each liability,and each component ofowners equity,including revenues and expenses.Thafs to say,accoun
43、ts are grouped accordingto accounting elements.These groups of accounts are called the ledger.As most businesses today,even the smallest,use computerized accounting systems,the accountants must establish theledger accounts that can be easily and quickly referred to.The emplacement of accounts and th
44、e number of accounts depend on the size and operationsof a business.A small business may get by with as few as 20 or 30 accounts,while a largecompany may need several thousand.Therefore,it is desirable to establish a systematic methodof identifying and locating each account in the ledger by means of
45、 chart of accounts.The chart of accounts is a listing of the accounts by title and number.Businesses assign thenumbers to different accounts for identification in an orderly manner.Usually they would use athree or four digital code that is useful in tracking down the accounts and adequately flexible
46、 forfuture expansion without revising the basic system.The following are the numerical designationsfor the ledger accounts under two three-digital code systems.Table 1 -3 Two Kinds of Three-digital Code Systems of Chart of AccountsAccount GroupAccount NameAccount NumberAccount Number1 .AssetsCash101
47、111Notes Receivable105113Accounts Receivable106114Supplies125116Prepaid Insurance128118Furniture130120Equipment1671462.LiabiliticsNotes Payable201211Accounts Payable202212Salaries Payable205213Unearned Revenue2362143.Owner?s equityT.Lott,Capital301311T.Lott,Withdrawals3023124.RevenueService Fees Ear
48、ned401411Rent Expenses5015115.ExpensesSalaries Expenses502512Supplies Expenses504513Utilities Expenses506518Asset and liability accounts are arranged according to their liquidity.While income,expenseand owners equity accounts are listed according to their importance.Let us show you how the accountan
49、t makes a meaningful record of a series of transactionsstep by step with the double entry system in the ledger accounts.Example 1.1During the month of January,Ted Lott,a lawyer(1)invested$8,000 to open his practice.(2)bought office supplies(stationery,forms,pencils,and so on)fbr cash,$700.(3)bought
50、several pieces of office furniture from Ferraro Furniture Company on account,$2,000.(4)received$3,500 in service fees earned during the month.(5)paid office rent for January,$600.(6)paid salary for part-time help,$800.(7)paid$1,600 to Ferraro Furniture Company on account.(8)after taking inventory at