1.
INTRODUCTION TO
ACCOUNTING
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1-1
What is Accounting?
The purpose of accounting:
(1) to identify, record, and communicate the
economic events of an
(2) organization to
(3) interested users.
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1-2
What is Accounting?
Three Activities
1. Identification- identify relevant economic events
2. Recording- Record, classify, and summarize
Record events in order to provide a history of its financial
activities.
It consists of keeping a systematic, chronological diary of
events, measured in dollars (birr) and cents.
3. Communication- Prepare Accounting Reports
Communicates the collected information to interested users
by means of Accounting Reports.
Slide Analyze and interpret for users
1-3
What is Accounting?
Who Uses Accounting Data?
B. External
A. Internal
Users
Users Human Taxing
Resources Authorities
Labor Unions
Finance
Management Customers
Creditors
Marketing Regulatory
Agencies
Investors
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1-4
What is Accounting?
Common Questions Asked User
1. Can we afford to give
our employees a pay Human Resources
raise?
2. Did the company earn a
satisfactory income? Investors
3. Should any product lines
be eliminated? Management
4. Is cash sufficient to pay
dividends to shareholders? Finance
5. What price for our product
will maximize net income? Marketing
6. Will the company be able
to pay its debts? Creditors
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1-5
The Building Blocks of Accounting
Accounting Standards- to ensure high-quality financial reports,
accountants prepare financial Statements in conformity with accounting standards
issued by standard setting bodies. Two primary accounting standard setting bodies
International Accounting Standards Board (IASB)
http://www.iasb.org/
International Financial Reporting Standards (IFRS)
Financial Accounting Standards Board (FASB)
http://www.fasb.org/
Generally Accepted Accounting Principles (GAAP)
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1-6
The Building Blocks of Accounting
Measurement Principles
Cost Principle (Historical) – dictates that companies record
assets at their cost.
Issues:
Reported at cost when purchased and also over the time
the asset is held.
Cost easily verified, market value is often subjective.
Fair value information may be more useful.
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1-7
The Building Blocks of Accounting
Measurement Principles
Fair Value Principle – indicates that assets and liabilities
should be reported at fair value.
In determining which measurement principle to use,
companies weigh the factual nature of cost figures versus
the relevance of fair value.
Only in situations where assets are actively traded, such as
investment securities, is the fair value principle applied.
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1-8
The Building Blocks of Accounting
Assumptions – provide foundation for acct process
A. Monetary Unit Assumption – include in the accounting
records only transaction data that can be expressed in terms
of money. It is vital to apply the measurement principles.
B. Economic Entity Assumption – requires that activities of the
entity be kept separate and distinct from the activities of its
owner and all other economic entities.
Proprietorship.
Forms of Business
Partnership. Ownership
Corporation.
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1-9
The Building Blocks of Accounting
Proprietorship Partnership Corporation
Generally owned Owned by two or Ownership
by one person. more persons. divided into
Owner receives shares
Generally
any profits, suffers unlimited Separate legal
any losses, and is personal liability entity
personally liable
Partnership Limited liability
for all debts.
agreement
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1-10
The Basic Accounting Equation
Assets = Liabilities + Equity
Provides the underlying framework for recording and
summarizing economic events.
Applies to all economic entities regardless of size,
nature of business, or form of business organization.
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1-11
The Basic Accounting Equation
Assets = Liabilities + Equity
Provides the underlying framework for recording and
summarizing economic events.
Assets
Resources a business owns.
Provide future services or benefits.
Cash, Inventory, Equipment, etc.
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1-12
The Basic Accounting Equation
Assets = Liabilities + Equity
Provides the underlying framework for recording and
summarizing economic events.
Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
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1-13
The Basic Accounting Equation
Assets = Liabilities + Equity
Provides the underlying framework for recording and
summarizing economic events.
Equity
Ownership claim on total assets.
Referred to as residual equity.
Share capital and retained earnings.
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1-14
The Basic Accounting Equation
Revenues result from business activities entered into for the
purpose of earning income.
Generally results from selling merchandise, performing services,
renting property, and lending money.
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1-15
The Basic Accounting Equation
Illustration 1-7
Expenses are the cost of assets consumed or services used in the
process of earning revenue.
Common expenses are salaries expense, rent expense, utilities
expense, tax expense, etc.
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1-16
The Basic Accounting Equation
Illustration 1-7
Dividends are the distribution of cash or other assets to
shareholders.
Reduce retained earnings
Not an expense
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1-17
The Basic Accounting Equation
Classify the following items as issuance of shares,
dividends, revenues, or expenses.
Then indicate whether each item increases or decreases
equity.
Classification Effect on Equity
1. Rent expense Expense Decrease
2. Service revenue Revenue Increase
3. Dividends Dividends Decrease
4. Salaries expense Expense Decrease
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1-18
Using The Accounting Equation
Transactions are a business’s economic events
recorded by accountants.
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the
accounting equation.
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1-19
Using The Accounting Equation
Illustration: Are the following events recorded in the
accounting records?
Discuss
Purchase product
Event Pay rent.
computer. design with
customer.
Criterion Is the financial position (assets, liabilities, or
equity) of the company changed?
Record/
Don’t Record
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1-20
Using The Accounting Equation
Transaction Analysis
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1-21
Transactions Analysis
Transaction (1). Investment by Shareholders. Ray and
Barbara Neal decides to open a computer programming
service which he names Softbyte. On September 1, 2011,
they invest $15,000 cash in exchange for capital shares.
The effect of this transaction on the basic equation is:
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1-22
Transactions Analysis
Transaction (2). Purchase of Equipment for Cash. Softbyte
purchases computer equipment for $7,000 cash.
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1-23
Transactions Analysis
Transaction (3). Purchase of Supplies on Credit. Softbyte
purchases for $1,600 from Acme Supply Company
computer paper and other supplies expected to last
several months.
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1-24
Transactions Analysis
Transaction (4). Services Provided for Cash. Softbyte
receives $1,200 cash from customers for programming
services it has provided.
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1-25
Transactions Analysis
Transaction (5). Purchase of Advertising on Credit.
Softbyte receives a bill for $250 from the Daily News for
advertising but postpones payment until a later date.
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1-26
Transactions Analysis
Transaction (6). Services Provided for Cash and Credit.
Softbyte provides $3,500 of programming services for
customers. The company receives cash of $1,500 from
customers, and it bills the balance of $2,000 on account.
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1-27
Transactions Analysis
Transaction (7). Payment of Expenses. Softbyte pays the
following Expenses in cash for September: store rent $600,
salaries of employees $900, and utilities $200.
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Transactions Analysis
Transaction (8). Payment of Accounts Payable. Softbyte
pays its $250 Daily News bill in cash.
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Transactions Analysis
Transaction (9). Receipt of Cash on Account. Softbyte
receives $600 in cash from customers who had been billed
for services [in Transaction (6)].
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Transactions Analysis
Transaction (10). Dividends. The corporation pays a
dividend of $1,300 in cash.
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Transactions Analysis
Tabular summary of
Summary of Transactions Softbyte transactions
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Financial Statements
Companies prepare four financial statements from
the summarized accounting data:
Statement
Retained Statement
Income of
Earnings of Cash
Statement Financial
Statement Flows
Position
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1-33
Financial Statements Income Statement
Reports the revenues and expenses for a specific period of time.
Net income – revenues exceed expenses.
Net loss – expenses exceed revenues.
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Financial Statements Net income is needed to determine the
ending balance in retained earnings.
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Retained Earnings
Financial Statements Statement
Statement indicates the reasons why
retained earnings has increased or
decreased during the period.
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1-36
Financial
Statements
The ending
balance in
retained
earnings is
needed in
preparing the
statement of
financial
position/
balance sheet
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Financial Statements Balance Sheet
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Financial
Statements
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1-39
Financial Statements
Statement of Cash Flows
Information for a specific period of time.
Answers the following:
1. Where did cash come from?
2. What was cash used for?
3. What was the change in the cash balance?
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Financial Statements Statement of Cash Flows
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