Online Tutorial Class

What Is Taxation?

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What is Taxation?
A means by which governments finance their expenditure by imposing charges on citizens and corporate entities. Governments use taxation to encourage or discourage certain economic decisions. For example, reduction in taxable personal (or household) income by the amount paid as interest on home mortgage loans results in greater construction activity, and generates more jobs. see also taxation principles.

What is Taxable year?
Twelve-month period used as the basis for computing tax on income received during that period. Also called tax year.

What is Tax Year?
Standard 12 month period (such as a calendar year or a fiscal year) used for computing a tax payer's tax liability.

What is Taxable Income?
Gross income from which standard deductions and other allowances have been subtracted.

What is Taxable Value?
Percentage of property value used to determine how much the property owner pays in taxes.

What is Taxable Estate?
An amount calculated as the adjusted gross estate minus any marital deduction property and any charitable deductions.

What is Taxable Equivalent Yield?
Restatement of total income earned from an investment portfolio (including income from tax exempt securities such as municipal bonds) in terms of taxable, for comparing its yield with those of the other investment portfolios.

What is Tax Write off?
Offsetting depreciation, expenses, and losses against tax payer's income.

What is Tax Waiver?
A state issued document that specifies the tax department will transfer stock as indicated. Tax waivers are often used to transfer ownership of property.

What is Tax Sink?
Jurisdiction in which no income tax is imposed.

What is Tax Sheltered Income?
Tax-deferred or tax-exempt earnings.

What is Tax Supplement?
Local tax imposed be a lower government unit (such as a municipality) on the same tax base over which a higher governmental unit (state or federal government) has already imposed a similar tax.

See: Taxation Explanation

Accounting Problem

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The Key to learning accounting problems is practice!

First understand the topic and try to solve with out reading the correct answer.
Act as you are the teacher, explaining the process of solving the problems as you work.
Try working with other students on this task
Be sure to always double-check the problems for accuracy and completeness.
Time management is very important in accounting courses. Be sure to keep up wit the work, completing assignments as soon after they are assigned as possible. Set aside time each night to practice the problems.
If certain problems require that information be entered into specific forms or ledgers. be sure to practice the problems using those forms. Learn what the columns and rows in the forms represent. Learn where specific types of information are to be entered on the form. Learn what types of information are given and what must be calculated. Becoming very familiar with forms is particularly important in income tax accounting courses.

Accounting Theory

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Accounting Theory is to provide a logical framework for accounting practice. The basic assumptions, definitions, principles and concepts and how we derive them. It is concerned with improving financial accounting and reporting broad perspective, it includes a conceptual framework, accounting legislation, concepts, valuation models, and hypotheses and theories that allow researchers to analyze accounting in order to explain or predict phenomena related to accounting, such as how users employ accounting data or how preparers choose accounting methods.

The Early History of Accounting

Accounting records dating back several thousand years have been found in various parts of the world. These records indicate that all levels of development people desire information about their efforts and accomplishments.

According to Hain, "The Zenon papyri give evidence of a surprisingly elaborate accounting system which had been used in Greece since the fifth century B.C. and which, in the wake of Greek trade or conquest, gradually spread throughout the Eastern Mediterranean and Middle East." Zenon's accounting system contained provisions for responsibility accounting, a written record of all transactions, a personal account for wages paid to employees, inventory records, and all records of asset acquisitions and disposals. In addition, there is evidence that all the accounts were audited.

There were no organized professions or standards of qualifications, and accountant were trained through an apprenticeship system. Later, private commercial colleges began to emerge as the training grounds for accountants.

These institutions emphasized the quality of value, and discussions of the nature of value in accounting education. Subsequently, widespread speculation in the securities markets, watered stocks, and large monopolies that controlled segments of the U.S. economy resulted in the establishment of the progressive movement at the end on the nineteenth century.

Although most accountants did not necessarily subscribe to the desirability of the progressive reforms, the progressive movement conferred specific social obligations on accountants.

Accountants generally came to accept three general levels of progressiveness:

A fundamental faith in democracy, a concern for morality and justice, and a broad acceptance of the democracy, a concern for morality and justice, and a broad acceptance of the efficiency of education as a major tool in social amelioration;
An increased awareness of the idea of the social obligation of all segments of society and introduction of the idea of the public accountability of business and political leaders; and
An acceptance of pragmatism as the most relevant operative philosophy of the day.

During the period 1900-1915, the concept of income determination was not well developed. There was, however, a debate over which financial statement should be viewed as more important, the balance sheet or the income statement.

The 1904 International Congress of Accountants marked the initial development of the organized accounting profession in the United States, although there had been earlier attempts to organize and several states had state societies. At this meeting, the American Association of Public Accountants was formed as the professional organization of accountants in the United States.

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Ownership

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Ownership and Equity

Ownership = Is the exclusive tight to posses, use, enjoy, and dispose of property.

Equity = Is the owners' contributions to the business.

Equity represents the noncurrent obligations of the entity to the owners. Because equity equals the amount of assets remaining after subtracting liabilities, equity is sometimes called net assets. (The term "net" indicates that at least one amount has been subtracted from another to reach this final amount)

Equity comes from two primary sources: investments by owners and earnings.
An unincorporated business (sole proprietorship or partnership) will be illustrated first.

Equity is equal to the owners' investments plus net income, less any withdrawals and losses.

Capital = The owner's current investment, or equity, in the assets of a business.

Drawing Account = A temporary capital account, set up in the name of the sole proprietorship or a partner, form which he or she can withdraw money or other assets in anticipation of profit.

Liabilities

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LIABILITIES

Liabilities - Debts, amounts owed to creditors
1. Current Liabilities - Liabilities that will be paid with current assets within one year or one operating cycle, whichever is longer.
Accounts Payable - Amounts owed creditors that result from the purchased of goods or services on account.
Notes Payable - Written promises in the hands of the makers, that serve as evidence of debts. If due within one year or one operating cycle, whichever is longer.
Interest Rate Payable - A percentage of the principal that is paid for the use of money borrowed.
Interest - Money paid for the use or borrowing of money.
Unearned Revenue - Advance payment for services that still must be performed. Unearned revenue represents a liability or obligation of the company receiving the payment for a service not yet rendered.
2. Non Current Liabilities - In general liabilities that have a due date more than a year beyond the balance sheet date or beyond one operating cycle, whichever is longer, are classified as non current source is considered non current, whatever the due date. There are several accounts that are classified as noncurrent liabilities, such as mortgages payable, Bonds Payable, Long-term Notes Payable.

EXPANDED ACCOUNTING EQUATION:

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ASSETS = LIABILITIES + (CAPITAL - WITHDRAWAL) + REVENUE - EXPENSES)

Analyzing Business Transactions: Revenue and Expense accounts

Revenue and Expenses = directly affect owner's equity. If a business earns revenue, there is an increase in owner's equity. If a business incurs or pays expenses, there is a decrease in owner's equity.

For the present, think of it this way: if the company makes money, the owner's equity is increased. On the other hand, if the company has to pay out money for the costs of doing business, then the owner's equity is decreased.

Revenues and expenses fall under the umbrella of owner's equity: revenue increase owner's equity; expenses decrease owner's equity.

What are Revenue, Expenses, and Profit?

Every business exists primarily to earn a profit. This profit is realized through revenue earned by an organization as a result of the sale of a service or product by that business.

Revenues - Are the amounts earned by a business. Examples of revenues are fees earned for performing services, income from selling merchandise, rent income for providing the use of property, and interest income for lending money.

Revenues - May be in the form of Cash and Credit Card Receipts like those from VISA and MASTER CARD.

Revenue - May also result from credit sales to charge customers, in which case cash will be received at a later time.

Recording Revenue
If revenue of $550 is received by the business, this revenue should be recorded as an increase Cash of $550 and resulting increase in proprietor's capital of $550. Revenue may be received in forms other than cash. An organization may receive payment for services rendered in the form of other assets such as supplies, equipment, and even someone's promise to pay at a future time (accounts receivable). The effects of the accounting equation will still be an increase in the specific asset received and a corresponding increase in capital.

Expenses - Are the costs that relate to the earning of revenue (or the costs of doing business). Examples of expenses are wages expenses for labor performed, rent expense for the use of various media (for example, newspaper, radio, and direct mail).

Expenses - Maybe paid in cash when incurred (that is, immediately) or at a later time.

Expenses - To be paid at a later time involve.

Recording Expenses
Every business, regardless of its nature, must incur certain costs in order to operate. These costs are known as expenses. Expenses are generally referred to as the "costs of doing business." Examples of business expenses are rent expense, insurance expense, salary expense, and supplies expense.

Profit - An excess of revenue over expenses.

ACCOUNTING CYCLE

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STEPS IN ANALYZING TRANSACTION

Read the transaction to understand what is happening and how it affects the business. Example, the business has more Revenue, or has more Expenses, or has more Cash, or Owes less to Creditors.
Identify the accounts involved, and decide whether the accounts are increased or decrease. Look for Cash first; you will quickly recognize if Cash is coming in or going out.
Decide on the Classifications of the accounts involved. (for Example, Equipment is something the business owes, and it's a liability; Rent is an Expense.
After recording the transaction, make sure the accounting equation is in balance.

THE FIVE CLASSIFICATIONS:
Accounts Category Normal Balance Increase Decrease
1. ASSETS DEBIT DEBIT CREDIT
2. LIABILITIES CREDIT CREDIT DEBIT
3. OWNER'S EQUITY
CAPITAL CREDIT CREDIT DEBIT
WITHDRAWALS DEBIT DEBIT CREDIT
4. REVENUE CREDIT CREDIT DEBIT
5. EXPENSES DEBIT DEBIT CREDIT

STEPS IN THE ACCOUNTING PROCESS
1. Record the transactions of a business in a JOURNAL book of original entry - the day - by day record of the transactions of a firm). Entry should be based on some source document or evidence that a transaction has occurred, such as an invoice, a receipt, or a check.
2. Post entries to the accounts in the LEDGER. Transfer the amounts from the JOURNAL to the Debit or Credit column of the specified accounts in the LEDGER. Use a cross reference system. Accounts are placed in the LEDGER according to the account numbers assigned to them in the CHART OF ACCOUNT.
3. Prepare a TRIAL BALANCE. Record the balances of the LEDGER accounts in the appropriate Debit or Credit column of the Trial balances form. Prove that the total of the debit balances equals the total of the credit balances.
RECORDING BUSINESS TRANSACTION
To repeat Business transactions are events that have a direct effect on the operations of an economic unit or enterprise and are expressed in terms of money. Each business transaction must be recorded in the accounting records. As one records business transactions, one has to change the amounts listed under the headings Assets, Liabilities, and Owners Equity. However, the total of one side of the fundamental accounting equation should always equal the total of the other side.
SUMMARY OF TRANSACTIONS
Summarizing each individual ledger account and listing these accounts and their balances to test for accuracy in recording the transactions.
1. Name of the company
2. Title
3. Date
4. Account Name (In order - Chart of Account)
5. Two Column Debit - Credit
CHART OF ACCOUNTS
A numbering system of accounts that list account titles and accounts numbers to be used by a company.
Before recording transactions for new business, the accountant must first think of all the possible types of transactions that the company will carry out. Based on this variety of possible transactions, the company's accountant makes a list of account titles to be use to record the company's transactions.
Chart of Account - Is the official list of the ledger accounts in which transactions of a business are to be recorded. Assets are listed, Liabilities, Owners Equity, Revenue, and Expenses.
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Owners Equity

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Owners Equity - represents the amount owed to the owners by the company. It is calculated by subtracting Liabilities from each side of the accounting operation. Owners Equity also represents the net asset of the company.

Ownership - Is the exclusive right to posses, use, enjoy, and dispose of property.

Equity - Is the owners' contribution to the business. It is represents the noncurrent obligations of the entity to the owners,. Because equity equals the amount of assets remaining after subtracting liabilities, equity is sometimes called net assets. (The term 'net' indicates that at least one amount has been subtracted from another to reach this final amount.) Equity comes from two primary sources investments by owners and earnings. An unincorporated business (sole proprietorship or partnership) will be illustrated first. Equity is equal to the owners' investments plus net income, less any withdrawals and net losses.

Capital - The owners' current investment, or equity, in the assets of a business.

Drawing Account - A temporary capital account, set in the name of the sole proprietor or a partner, from which he or she can withdraw money or other assets in anticipation of profit.

BASIC ACCOUNTING EQUATION

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ASSETS = LIABILITIES + OWNER'S EQUITY

ASSETS - Properties (Resources) of value owned by a business.

It must be owned by the organization, and
It must have money value.

Money Value - Exist if a buyer is willing to pay money to a seller for the property.

TYPES OF ASSETS

ASSETS

1. Current Assets: Are cash and non cash assets that are readily converted to cash and are available to pay current liabilities, or non cash assets that are consumed in operations within one year or the operating cycle, whichever is longer. There are several traditional accounts that are classified as current assets on the balance sheet.
CASH - An asset consisting of coins, bills, money orders, Checks, Certificates of deposit, or treasury bills
Fixed deposits receipts - For certain periods - 1 year.
Treasury bills - Issued by the government.
Notes Receivable - Written promises in the hands of the creditors, that serve as evidence of debts
Accounts Receivable - A current asset for which an oral promise to pay, made by the customer, serve as evidence. Accounts used to record the amounts owed by charge customers (legal claims against charge customer).
Note: performed services or sales item.
Merchandise Inventory - Represents the value of goods on hand, either at the beginning or end of the accounting period.
Accounting Period - The period of time, no more than 1 year, covered by the three financial statements.
Supplies - One type of asset acquired by a firm; has much shorter life than equipment. Such as pencil, stationery, etc.
Prepaid Expense - An asset account an item that normally is considered to be an expense but, because it is paid in advance, is classified as an asset. When the value of the asset has been used up, an adjusting entry will convert this prepaid expense (asset) to an actual expense. Such as insurance policies and rent paid in advance.
2. Fixed Assets: An asset that has an expected useful life of 1 year or more. Fixed assets are also referred to as "plant assets" or "property, plant and equipment."
Property, Plant, and Equipment Assets - That have a useful life of more than 1 year and are used in the continuing operations of the organization.
Property - Which a person owns; possession; such as Land, or Land and Building.
Plant - The machinery, etc., used in an industrial process, etc.: The farm has its own lighting. (ex. generator)
Equipment (Office) - Such as typewriter, computer, fax machine, Xerox. etc.
Furniture and Fixtures - Such as desk, chair, cabinet, chair, etc.
Automobile Equipment - Such car, truck, for transportation.

LIABILITIES

What is Accounting, Accountant, Bookkeeper, and Computer?

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ACCOUNTING

Accounting - Is the process of Analyzing, Classifying, Recording, Summarizing and Interpreting business transaction in financial or monetary terms.

ACCOUNTANT

Accountant - Takes that information and prepares the financial reports that are used to analyze the company's financial position.

BOOKKEEPER

Bookkeeper - An individual who earns a living by recording the financial activities of a business and who is concerned with the techniques involving the recording of the transactions.

COMPUTER

Computer - Is taking over the acccounting's job of completing financial reports. It is important to understand that the computer is only a tool that is doing the routine bookkeeping operations that previously took days or months to complete.