Session 1

Introduction to Accounting
Balance Sheet
 Introduction to Accounting Principle

❖ This course is designed to provide a basic understanding

of financial and managerial accounting and covers various
accounting topics, including accounting principles,
procedures to record business transactions, managerial
cost concepts, cost-volume profit, budgetary planning.
 Lesson Plan
Week / Contents
Session
Introduction to Accounting Fundamentals
Session 1
Balance Sheet
Session 2 Income Statement & Recording Process
Session 3 The recording process (con’t) & Adjusting the Accounts
Session 4 Review and Midterm Exam
Session 5 Completing Accounting Cycle
Session 6 Completing Accounting Cycle (con’t)
Session 7 Review Financial Accounting
Managerial Accounting:
Session 8 - Managerial cost concepts
- Manufacturing costs in Financial Statements
Session 9 Cost – Volume – Profit
Session 10 Budgetary Planning

Session 11 Review of the course

 Course Assessment

Assessment Weight
Contents
methods (%)

[1] [2] [6]

Progress
Individual exercises 10
Assessment

Quizzes Individual activity 10

Mid-term examination 20
Examination
Final examination 50

Classes
Attendance 10
Participation
What is Accounting?

Three Activities Accounting process

The accounting process includes

the bookkeeping function.
 Who Uses Accounting Data

Internal Users
Management IRS
Human Investors
Resources There are two broad
groups of users of Labor
financial information: Unions
Finance
internal users and
external users.
Creditors
Marketing
SEC
Customers External
Users
 Who Uses Accounting Data
Common Questions Asked User

1. Can we afford to give our

employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income? Investors
3. Do we need to borrow in the
near future? Management
4. Is cash sufficient to pay
dividends to the stockholders? Finance
5. What price for our product will
maximize net income? Marketing
6. Will the company be able to
pay its short-term debts? Creditors
Managerial and Financial Accounting
Part I: Financial Accounting
 Generally Accepted Accounting Principles

Financial Statements
Various users Balance Sheet/ Statement of financial
need financial position
Income Statement
information Retained Earnings Statement
Statement of Cash Flows
Note Disclosure

The accounting profession

has attempted to develop a
Generally Accepted
set of standards that are
Accounting
generally accepted and Principles (GAAP)
universally practiced.
Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP) - A set of

rules and practices, having substantial authoritative support, that
the accounting profession recognizes as a general guide for
financial reporting purposes.

Standard-setting bodies determine these guidelines:

► Securities and Exchange Commission (SEC)

► Financial Accounting Standards Board (FASB)

► International Accounting Standards Board (IASB)

Generally Accepted Accounting Principles

Measurement Principles
Cost Principle – Or historical cost principle, dictates that
companies record assets at their cost.

Fair Value Principle – Indicates that assets and liabilities

should be reported at fair value (the price received to sell an
asset or settle a liability).
Generally Accepted Accounting Principles

Assumptions
Monetary Unit – include in the accounting records only
transaction data that can be expressed in terms of money.

Economic Entity – 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.

.
Forms of Business Ownership

Proprietorship Partnership Corporation

◆ Generally owned ◆ Owned by two or ◆ Ownership

by one person. more persons. divided into
◆ Often small shares of stock
◆ Often retail and
service-type service-type ◆ Separate legal
businesses businesses entity organized
◆ Owner receives under state
◆ Generally
any profits, corporation law
unlimited
suffers any personal liability ◆ Limited liability
losses, and is
◆ Partnership
personally liable
agreement
for all debts.
.
An illustration

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
Financial Statements
Companies prepare four financial statements from the
summarized accounting data:

Owner’s Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows
 Key financial statements
• Income statement
• Revenue
• Expenses
• Net Income
• Owner’s Equity statement
• Balance sheet (statement of financial position)
• Assets
• Liabilities
• Owner’s Equity
• Statement of cash flows
• Cash inflows
• Cash outflows
17
Balance Sheet
 Key financial statements
Balance sheet
This lists the following at a specific point in time:
 Assets (resources)
 Liabilities (external claims on resources)
 Owner’s Equity (owners’ claims on resources)
This indicates the finanical position of an
organization
This is reflected in the following Accounting
equation:

Assets = Liabilities + Owner’s Equity

The Basic Accounting Equation

Owner’s
Assets = Liabilities + Equity

Provides the underlying framework for recording and

summarizing economic events.

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership claims.

The Basic Accounting Equation

Assets
◆ Resources a business owns.
◆ Provide future services or benefits.
◆ Cash, Accounts Receivable, Supplies, Equipment, etc.

Owner’s
Assets = Liabilities + Equity
The Basic Accounting Equation

Liabilities
◆ Claims against assets (debts and obligations).
◆ Creditors - party to whom money is owed.
◆ Accounts payable, Notes payable, etc.

Owner’s
Assets = Liabilities + Equity
The Basic Accounting Equation

Owner’s Equity
◆ Ownership claim on total assets.
◆ Referred to as residual equity.
◆ Investment by owners and revenues (+)
◆ Drawings and expenses (-).

Owner’s
Assets = Liabilities + Equity
Owner’s Equity
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 (At least 2 items are affected in every transaction).
 Transaction analysis
• The first step is to determine the items affected

• Once this is known we may classify them as the

appropriate accounting element
 Asset, Liability or Owner’s Equity (A, L or OE)
 Note: OE includes revenue, expenses, Owner’s capital and
Owner’s drawings

• The final step is determine the increase/decrease

in the item

26
Transaction Analysis
Transaction (1): Ray Neal decides to open a computer programming
service which he names Softbyte. On September 1, 2012, Ray Neal
invests $15,000 cash in the business.
Transaction (2): Purchase of Equipment for Cash. Softbyte purchases
computer equipment for $7,000 cash.
Transaction (3): Softbyte purchases for $1,600 from Acme Supply
Company computer paper and other supplies expected to last several
months. The purchase is made on account.
Transaction (4): Softbyte receives $1,200 cash from customers for
programming services it has provided.
Transaction (5): Softbyte receives a bill for $250 from the Daily News
for advertising but postpones payment until a later date.
 Transaction Analysis

Transaction (6): 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.
Transaction (7): Softbyte pays the following expenses in cash for
September: store rent $600, salaries of employees $900, and utilities
$200.
Transaction (8): Softbyte pays its $250 Daily News bill in cash.
Transaction (9): Softbyte receives $600 in cash from customers who
had been billed for services [in Transaction (6)].
Transaction (10): Ray Neal withdraws $1,300 in cash from the
business for his personal use.
Transactions Analysis
Summary of Transactions
Financial Statements
Companies prepare four financial statements from the
summarized accounting data:

Owner’s Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows
 Net income is needed to determine the
Financial Statements ending balance in owner’s equity.
 The ending balance in owner’s equity is
Financial Statements needed in preparing the balance sheet