Glossary of Charter Accounts

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Mrs.ET Sopheak
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Glossary of Charter Accounts

• Accounts payable: Amounts owed to suppliers for purchases made on credit (on account). 
• Accounts receivable Amounts owed by customers who purchased products or services on credit (on account).
• Bank indebtedness: A short-term loan up to a maximum amount prearranged with a bank to cover cash shortfalls.
• Comparability An enhancing qualitative characteristic of useful information that enables users to identify and understand similarities in, and differences among, items
• Conceptual framework: A coherent system of interrelated elements that guides decisions about what to present in financial statements, alternative ways of reporting economic events, and appropriate ways of communicating this information.
• Contra- asset account: An account that is off set against (reduces) an asset account on the statement of financial position.
• Cost basis of accounting: A basis of measurement that states that assets and liabilities should be recorded and reported at their cost at the time of acquisition, as well as during the time the asset is held.
• Cost constraint: The constraint that the costs of obtaining and providing information should not be higher than the benefits that are gained by providing it.
• Current assets: Cash and other resources that it is reasonable to expect will be converted into cash, or will be sold or used up within one year of the company’s financial statement date or its operating cycle, whichever is longer.
• Current liabilities: Obligations that will be paid or settled within one year of the company’s financial statement date or its operating cycle, whichever is longer.
• Current maturities of long-term debt: The portion of a non-current or long-term loan that is repayable in the current year.
• Current ratio: A measure of liquidity used to evaluate a company’s short-term debt-paying ability. It is calculated by dividing current assets by current liabilities.
• Debt to total assets ratio: A measure of solvency showing the percentage of total financing that is provided by lenders and other creditors. It is calculated by dividing total liabilities by total assets. 
• Earnings per share (EPS): A measure of profitability showing the profit earned by each common share. It is calculated by dividing profit available to common shareholders by the weighted average number of common shares.
• Elements of financial statements: A set of definitions of basic terms in accounting, such as assets, liabilities, equity, revenues, and expenses.
• Fair value basis of accounting: A basis of measurement that states that assets should be reported at their fair value (price to sell).
• Intangible assets: Assets of a long-lived nature that do not have physical substance but represent a privilege or a right granted to, or held by, a company.
• Liquidity ratios: Measures of a company’s short-term ability to pay its maturing obligations (usually current liabilities) and to meet unexpected needs for cash.
• Long-term investments (also known as investments): Investments in debt securities intended to be held for many years to earn interest, and (2) equity securities of other companies held to generate investment revenue or held for strategic reasons.
• Merchandise inventory (also known as inventory): Goods held for sale to customers.
• Non-current assets (also known as long-term assets): Assets that are not expected to be converted into cash, sold, or used up by the business within one year of the statement date or its operating cycle.
• Non-current liabilities (also known as long-term liabilities): Obligations that are not expected to be paid or settled within one year or the company’s operating cycle.
• Notes payable (also known as loans payable): Amounts owed to suppliers, banks, or others that are supported by a written promise to repay.
• Notes receivable (also known as loans receivable): Amounts owed by customers or others that are supported by a written promise to repay.
• Objective of financial reporting: The provision of information about a company’s financial position, performance, and changes in financial position that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company.
• Operating cycle: Average period of time it takes for a business to pay cash to obtain products or services and then receive cash from customers for these products or services. Th is can be one year or longer, depending on the type of business.
• Prepaid expenses: Costs paid in advance of use (such as rent and insurance).
• Price-earnings (P-E) ratio: A profitability measure of the ratio of the market price of each common share to the earnings per share. It reflects investors’ beliefs about a company’s future profit potential.
• Profitability ratios: Measures of a company’s operating success for a specific period of time.
• Property, plant, and equipment: Tangible assets of a long-lived nature that are being used to operate the business.
• Relevance: A fundamental qualitative characteristic describing information that makes a difference in a decision. It should have predictive value, confirmatory value, or both, and be material.
• Solvency ratios: Measures of a company’s ability to survive over a long period of time by having enough assets to settle its liabilities as they fall due.
• Supplies Consumable items used in running a business, such as office and cleaning supplies.
• Timeliness: An enhancing qualitative characteristic of useful information that means that information is available to decision makers in time to be capable of influencing their decisions.
• Trading investments Investments in debt securities or equity securities of other companies that are bought with the intention of selling them aft er a short period of time in order to earn a profit from their price fluctuations.
• Understandability: An enhancing qualitative characteristic of useful information that means that information is clearly and concisely classified, characterized, and presented.
• Unearned revenue Cash received when a customer pays in advance of being provided with a service or product.
• Verifiability: An enhancing qualitative characteristic of useful information that means that different knowledgeable and independent users could reach consensus, although not necessarily complete agreement, that the information is a faithful representation.
• Working capital: A measure of liquidity used to evaluate a company’s short-term debt-paying ability. It is calculated by subtracting current liabilities from current assets.

Thanks,

Mrs.ET Sopheak

Lecturer in Economics

Glossary of Accounting

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Mrs.ET Sopheak
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Glossary of Accounting

Accounts

• Assets: The resources owned or controlled by a business that provide future economic benefits.
• Liabilities: The debts and obligations of a business. Liabilities are claims of lenders and other creditors on the assets of a business.
• Shareholders’ equity: The shareholders’ claim on total assets, represented by the investments of the shareholders (share capital) and undistributed earnings (retained earnings) generated by the represented by the investments of the shareholders (share capital) and undistributed earnings (retained earnings) generated by the company.
• Retained earnings: The amount of accumulated profit (less losses, if any), from the prior and current periods, that has been kept in the corporation for future use and not distributed to shareholders as dividends.
• Revenue (also known as income): The increase in economic benefits that result from the operating activities of a business, such as the sale of a product or provision of a service.
• Expenses: The decrease in economic benefits that result from the costs of assets consumed or services used in ongoing operations to generate revenue
• Share capital: Shares representing the ownership interest in a corporation. If only one class of shares exists, it is known as common shares.
• Dividends: The distribution of retained earnings from a corporation to its shareholders, oft en in the form of cash.
• Loss (also known as net loss): The amount by which expenses are more than revenues. Th e opposite of profit.
• Profit (also known as net income or net earnings): The amount by which revenues are more than expenses.
• Generally accepted accounting principles (GAAP): A general guide, having substantial authoritative support, that describes how economic events should be recorded and reported for financial reporting purposes.
• Fiscal year: An accounting period that is one year long.

Accounting Cycle

• Accounting cycle: A series of nine steps followed by accountants to record transactions and prepare financial statements. Th e first four steps were introduced in this chapter: analyzing transactions (step 1), journalizing transactions (step 2), posting transactions (step 3), and preparing a trial balance (step 4).
• Accounting information system: The system of collecting and processing transaction data and communicating financial information to interested parties.
• Accounting transaction An economic event that is recorded in the financial statements because it involves an exchange that affects assets, liabilities, or shareholders’ equity.
• Chart of accounts: A list of a company’s accounts and account numbers that identify where the accounts are in the general  ledger. 
• Credit Th e right side of an account.
• Debit Th e left  side of an account.
• Double-entry accounting system: A system that records the dual effect of each transaction in appropriate accounts.
• General journal: The book of original entry in which transactions are recorded in chronological order. 
• General ledger: The book of accounts that contains a company’s asset, liability, and shareholders’ equity, revenue, and expense accounts.
• Posting: The procedure of transferring journal entries to the general ledger accounts.
• T- account (also known as a general ledger account): The basic form of an account, with a debit (left ) side and a credit (right) side showing the effect of transactions on the account.
• Trial balance: A list of general ledger accounts and their balances at a specific time, usually at the end of the accounting period.

Closing Account

• Accrual basis accounting: An accounting basis in which transactions that change a company’s financial statements are recorded in the periods in which the events occur, rather than in the periods in which the company receives or pays cash.
• Accrued expenses: Expenses incurred but not yet paid in cash that are recorded at the end of the period by an adjusting entry.
• Accrued revenues: Revenues earned but not yet received in cash that are recorded at the end of an accounting period by an adjusting entry.
• Adjusted trial balance: A list of accounts and their balances after all adjustments have been made. 
• Adjusting entries: Journal entries made at the end of an accounting period to update the accounts to ensure the proper recognition of revenues and expenses.
• Carrying amount (also known as book value): The difference between the cost of a depreciable asset and its accumulated depreciation. 
• Cash basis accounting: An accounting basis in which revenue is recorded only when cash is received, and an expense is recorded only when cash is paid.
• Closing entries: Entries at the end of an accounting period to transfer the balances of temporary accounts (revenues, expenses, and dividends) to the permanent shareholders’ equity account Retained Earnings.
• Depreciation (also known as amortization): The process of allocating the cost of a depreciable asset (for example, buildings and equipment) over its useful life.
• Expense recognition Th e process of recording an expense when there is a decrease in future economic benefits related to a decrease in an asset or an increase in a liability in the course of ordinary activities that can be measured reliably. When there is a direct association between the expenses incurred and the generation of revenue, expenses (effort) are matched with revenues (results).
• Income summary A temporary account used in closing revenue and expense accounts.

Income Statement

• Income statement (also known as statement of earnings or statement of profit and loss): A financial statement that presents the revenues and expenses and resulting profit or loss of a company for a specific period of time.
• Statement of changes in equity: A financial statement that summarizes the changes in total shareholders’ equity, as well as each component of shareholders’ equity, for a specific period of time.
• Statement of financial position (also known as balance sheet): A financial statement that reports the assets, liabilities, and shareholders’ equity at a specific date.
• Statement of cash flows: A financial statement that provides information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time.

Statement of Cash Flow

• Financing activities: Activities that include (1) borrowing (or repaying) cash to lenders, and (2) issuing (or reacquiring) shares or paying dividends to investors.
• Investing activities: Activities that include purchasing and disposing of long-lived assets such as property, plant, and equipment and long-term investments.
• Operating activities: Activities that result from day-to-day operations and include revenues and expenses and related accounts such as receivables, supplies, inventory, and payable.

Forms of Business Organization

• Proprietorship: A business owned by one person.
• Partnership: A business owned by more than one person.
• Corporation: A business organized as a separate legal entity having ownership divided into transferable shares held by shareholders.

Thanks,

Mrs.ET Sopheak

Lecturer in Economics

Explanation of Accrual & Cash Accounting

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ESP Educational Class
Mrs.ET Sopheak
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Accrual Accounting vs . Cash Accounting

An important consideration in measuring and recording revenues and expenses, as well as assets and liabilities, is when to record a transaction. Transactions need not involve cash. In those circumstances, the accounting question is when to record the event in the books of the organization (and thereby in the financial reports).

•Accrual accounting basic: Accrual accounting records transactions when they occur, regardless of when money actually changes hands between the organization and third parties. Examples are fee-for- service delivered and invoiced but payment has not yet been received by the organization (this would be included in revenues and accounts receivable) or a purchase of office supplies using a credit card where payment has not yet been made (this would appear as an expenditure and account payable).
•Cash accounting basic: Cash accounting records transactions only when there is an exchange of cash. Under this system, the sample transactions above would not be recorded until the fee-for-service was received (an increase in revenues) and until the organization paid its credit card bill (an increase in expenditures).

Accrual accounting provides a more accurate record of financial activities because it records the economic substance of transactions, whether or not cash has been received or paid. Under GAAP(Generally Accepted Accounting Principles), CICA (Canadian Institute Of Chartered Accountants) recommends that organizations use the accrual method.

Thanks,

Mrs.ET Sopheak

Lecturer in Economics

Explanation of Accounts

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ESP Educational Class
Mrs.ET Sopheak
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Explanation of  Account

Assets, Liabilities and Net Assets

There are various categories within assets and liabilities and also certain financial figures derived from them that are of interest:

• Current assets are those assets that are in the form of cash, or expected to become cash (or be used in operations) within the coming year. Examples are bank balances, short-term guaranteed investments, accounts receivable and prepaid expenses.

• Long-term assets (perhaps described as “capital assets” or “other assets”) are not expected to be converted to cash within a year. Examples are buildings, furniture, equipment and vehicles, all of which are expected to serve the needs of the organization over a number of years. Also included in this category are long-term financial assets that are being held to generate a return on investment over time.

• Current liabilities are those that have to be paid within the coming year. The items cited above — payable due to suppliers and mandated amounts withheld from employees’ salaries — are current liabilities as they are typically due to be paid within a year.

• Long-term liabilities are obligations to make payments in the future, beyond one year. Examples are loans outstanding and mortgage balances. However, mortgage or loan obligations that are to be paid within the coming year are shown as a current liability.

• Working capital is the difference between current assets and current liabilities. In equation form: Working Capital = Current Assets – Current Liabilities. Working capital is usually a positive number. On that basis, it can be thought of as a short-term “cushion” available to the organization in the coming year, reflecting the excess of current assets over what is required to meet current liabilities. Put another way, a positive working capital balance is evidence of the organization’s ability to pay its bills as they come due.

• The working capital ratio is another way of assessing the organization’s ability to pay its bills as they come due. Rather than calculating the dollar value of working capital, the ratio describes how many dollars of current assets are on hand for each dollar of current liabilities. In equation form: Working Capital Ratio = Current Assets / Current Liabilities. A ratio value greater than 1 signals the capacity in the short run to pay all current liabilities from current asset sources.

Revenues and expenditures

Revenues and expenditures are “cumulative sums over time”. They reflect the aggregation of many transactions that have occurred during the specified period.

• Revenues are the amounts recorded by the organization associated with increases in economic resources related to its operating activities. Examples are grants from governments (or foundations) and contributions (donations).

• Expenditures (or expenses) are the amounts spent by the organization in its operating activities. Examples are salaries, rent and office supplies. Also included in expenditures is “depreciation” of capital assets (usually called “amortization of capital assets”) as the cost of capital assets is usually spread over a number of periods, based on the useful life of each asset.

• Net Revenues (or “Excess of Revenues over Expenditures”) is the difference between total revenues and total expenditures. In equation form: Net Revenues = Total Revenues – Total Expenditures. A positive number reflects an operating surplus, whereas a negative number means an operating deficit, described as a “Deficiency of Revenues over Expenditures”.

Thanks,

Mrs. ET Sopheak

Lecturer in Economics

Financial Statements

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Mrs.ET Sopheak

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Introduction of Accounting

• Accounting: The process of identifying, recording and communicating the economic events of a business to interested users of the information.
• Accounting equation: The equation that states that Assets= Liabilities+ Shareholder's Equity.
• Assets: The resources owned or controlled by a business that provide future economic benefits.
• Liabilities: The debts and obligations of a business. Liabilities are claims of lenders and other creditors on the assets of a business.
• Shareholders’ equity: The shareholders’ claim on total assets, represented by the investments of the shareholders (share capital) and undistributed earnings (retained earnings) generated by the represented by the investments of the shareholders (share capital) and undistributed earnings (retained earnings) generated by the company.
• Retained earnings: The amount of accumulated profit (less losses, if any), from the prior and current periods, that has been kept in the corporation for future use and not distributed to shareholders as dividends.
• Revenue (also known as income): The increase in economic benefits that result from the operating activities of a business, such as the sale of a product or provision of a service.
• Expenses: The decrease in economic benefits that result from the costs of assets consumed or services used in ongoing operations to generate revenue
• Share capital: Shares representing the ownership interest in a corporation. If only one class of shares exists, it is known as common shares.
• Dividends: The distribution of retained earnings from a corporation to its shareholders, oft en in the form of cash.

The purpose of accounting is to provide useful information for decision making. Th ere are two types of groups who use accounting information: internal users and external users. Internal users work for the business and need accounting information to plan, organize, and run operations. Th e primary external users are investors and lenders and other creditors. Investors (existing and potential shareholders) use accounting information to help decide whether to buy, hold, or sell shares. Lenders (such as bankers) and other creditors (such as suppliers) use accounting information to evaluate the risk of loaning money or granting credit to a business.

Essential Keys of Financial statements

Financial statements are classified in 4 kinds:

• The Income Statement: The Income Statement (Profit and Loss) records all income and expenses of the business during a specified time period, and is the accepted method of determining profits and losses.

Total Incomes- Total Expenses=Net Income/Loss

• A Statement of Owner's Equity: A Statement of Owner's Equity  shows the changes in the capital account due to contributions (Investment/ Capital- in), withdrawals, and net income or net loss. Capital is increased by owner contributions and income, and decreased by withdrawals and expenses.

Beginning Equity+Additional Investment +Net Income-Net Loss-Withdraws-Dividend =Ending Equity

• Balance Sheet: Balance Sheet shows, at a given date, the company’s financial position: – the economic resources (assets) it controls and – where its finance comes from (liabilities and equity). From an economic point of view: Represents financial resources received either from shareholders (equity) or from external agents (liabilities) that allow the firm to make the necessary investments (assets) in order to be able to develop its business.

Total Assets=Total Liabilities+Total Equity 

• Statement of Cash Flow: Statement of Cash Flow may be defined as a summary of receipts and disbursements of cash for a particular period of time. It also explains reasons for the changes in cash position of the firm. Cash flows are cash inflows and outflows. Transactions which increase the cash position of the entity are called as inflows of cash and those which decrease the cash position as outflows of cash. Cash flow Statement traces the various sources which bring in cash such as cash from operating activities, sale of current and fixed assets, issue of share capital and debentures etc. and applications which cause outflow of cash such as loss from operations, purchase of current and fixed assets, redemption of debentures, preference shares and other long-term debt for cash. In short, a cash flow statement shows the cash receipts and disbursements during a certain period.

Beginning Cash Flow+Cash Flow from Operating Activities+Cash Flow from Investing Activities +Cash Flow of Financing Activities =Ending Cash (Actual Cash)

Please click to download file PDF below:

• Financial Statement Analysis PDF

Thanks 

Mrs.ET Sopheak 

Lecturer in Economics