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The Accounting Equation and Double-entry Bookkeeping

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The Accounting Equation and Double-entry Bookkeeping
Chapter One The Accounting Equation and Double-entry Bookkeeping

I. Learning objectives

After completing this session, students should be able to (1) Define assets, liabilities, owner’s equity, revenue and expenses; (2) Understand the functions of the fundamental accounting equation; (3) Record business transactions and illustrate their effects on the fundamental accounting equation; (4) Understand the accounts payable, accounts receivable, prepaid insurance, and drawing accounts; (5) Understand the basic principle of double-entry bookkeeping and the use of T- account form; (6) Understand the rules of debits and credits; (7) Prepare a trial balance.

II. Lecture notes

1. Some important definitions as per the International Accounting Standards (IAS)

(1) Assets: economic resources controlled by the business enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Need to emphasize three elements in this definition: control (as compared with ownership), past event, and future economic benefits.

Recognition of the elements of financial statements: * An item that meets the definition of asset should be recognized if: (a) it is possible that any future economic benefit associated with the item will flow to the enterprise; and (b) the item has a cost or value that can be measured with reliability. * Example: Human resources are the most important assets of a company, but why can’t we find them on the financial statement? * Some professional football club is an exception to these recognition criteria.

(2) Liabilities: the existing obligations of the enterprise arising from past events, the settlement of which is expected to result in a sacrifice of economic benefits of the enterprise.

Need to emphasize three elements in this definition: existing obligations, past events, and sacrifice of economic benefits

(3)

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