ACC

Accounting consists of three basic activities

- Identifies
- Record
- Communicate

• The accounting process includes the bookkeeping function.

Who uses accounting data?

(INTERNAL USERS)
-marketing - management - finance -HR

(EXTERNAL USERS)
- investors - creditors

• Managerial accounting activities focus on reports for internal users.

• Ethics in Financial Reporting is standards of conduct by which one’s actions are judged as right or
wrong, honest or dishonest, fair or not fair, are ethics.

Effective financial reporting depends on sound ethical behavior. TRUE

Accounting Standards
International Accounting
Standards Board
(IASB)
The IASB is an independent group of experts with an appropriate mix of recent practical experience
in setting accounting standards (UK Based)
More than 130 countries follow IFRS
15 board members drawn from around the world
Mostly used in the world
SOCPA requires the application of 'IFRS Accounting Standards that are endorsed in Saudi
Arabia

Financial Accounting
Standards Board (FASB)
TheComparability: in recent
Financial Accounting yearsBoard
Standards the two
is a private
standard-setting body (US Based)

Most companies in the United States follow standards

issued by the FASB
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standard-setting bodies made efforts to reduce the differences between IFRS and U.S. GAAP. This
process is referred to as convergence

IFRS generally uses one of two measurement principles, the historical cost principle or the
fair value principle. Explain each one:

1. Historical cost principle: companies record assets at their costs.

2. Fair value principle: assets & liabilities should be reported at fair value.

LEC2

Monetary unit assumption:

Companies included in accounting records transaction data in terms of money

Economic entity assumption:

activities of the entity be kept separate and distinct from the
activities of its owner and all other economic entities.

What are the 3 forms of business ownership?

Proprietorship, partnership, corporation

Proprietorship: owned by one person, often manager-operator, owner receives profit-suffer losses
-liable for debts

Partnership: owned by 2 or more, retail-service type businesses, unlimited personal liability,

partnership agreement

Corporation: ownership divided into shares, separate legal entity organized under corporation law,
limited liability

Explain relevance:
It is when companies' financial statements provide relevant info. To bank to make the decision of
granting a loan.

The basic accounting equation:

is the relationship of assets, liability, and equity

Assets = liability + equity

*provides the underlying framework for recording & summarizing economic events
*Assets should equal the sum of L+E

What are assets?

Are resources a business owns that provide future services or benefits ex: cash, inventory,
equipment.
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What are liabilities?
Obligations or debts against assets or creditors ex: accounts payable, notes payable, salaries.

What is equity? (residual equity)

Ownership claims on total assets ex: share capital and retained earnings.

LEC3
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A business economic events recorded by accountants (external or internal)

What are the 5 nancial statements companies prepare?

- Income statement
- Retained earnings statement
- Statement of nancial posi on
- Statement of cash ows
- Comprehensive income statement

Income statement:
reports pro tability of the company’s opera on over a period of me.
Lists revenues then expenses
shows net income/loss
Does not include investment and dividend transac ons between the shareholders and the
business.

Retained earnings statement: (part of equity)

Change in retained earnings for a speci c period of me
me period same as that covered by the income statement
Informa on indicates reasons why earnings increased or decreased.

Statement of nancial posi on:

Reports the assets, liabili es, and equity at a speci c date.
Lists assets at top then liabili es and equity

Statement of cash ows:

Informa on on the cash receipts and payments for a speci c period of me.
Answers:
► Where did cash come from?
► What was cash used for?
► What was the change in the cash balance?

Comprehensive income statement:

Other income items not part of net income
Reported by combining with income statement or separate statement

DEBIT AND CREDIT PROCEDURES

- Each transac on must a ect two or more

accounts to keep the basic accoun ng equa on
in balance.
- Recording done by debi ng at least one
account and credi ng at least one other
account.
- DEBITS must equal CREDITS
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If the sum of Debit entries are greater than the sum of Credit entries, the account will have a
debit balance.

If the sum of Credit entries are greater than the sum of Debit entries, the account will have a
credit balance.

- Assets - Debits should exceed credits.

- Liabili es – Credits should exceed debits.
- Normal balance is on the increase side.

Debits:
a. increase both assets and liabili es.
b. decrease both assets and liabili es.
c. increase assets and decrease liabili es.
d. decrease assets and increase liabili es.
Answer : C

LEC 2

Explain what a journal is and how it helps in the recording process.

JOURNALIZING - Entering transac on data in the journal.

1. Discloses the complete e ects of a transac on. helps in the recording process by
2. Provides a chronological record of transac ons.
3. Helps to prevent or locate errors because the debit and credit amounts can be easily compared.

Explain what a ledger is and how it helps in the recording process.

General Ledger contains all the asset, liability, and equity accounts. The ledger provides the
balance in each of the accounts as well as keeps track of changes in these balances.
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Pos ng : Transferring journal entries to the ledger accounts.

The Recording Process:

1. Determine what type of account is involved.

2. Determine what items increased or decreased and by how much.
3. Translate the increases and decreases into debits and credits.

Trial balance :
is a list of accounts and their balances at a given me. It proves the mathema cal equality of
debits and credits a er pos ng.

The steps for preparing a trial balance are:

1. List the account tles and their balances.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.

CH3

Time Period Assump on or Periodicity Assump on is when accountants divide the economic life
of a business into ar cial me periods

Monthly and quarterly me periods are called interim periods.

Most large companies must prepare both quarterly and annual nancial statements.
Fiscal Year = Accoun ng me period that is one year in length. = July 1, 2020 to June 30, 2021
Calendar Year = January 1 to December 31.

Q. Why companies use scal year?

They do so based on
- Business seasonality
- Timing and taxes
- The nature of business

Accrual- versus Cash-Basis Accoun ng *IMP

Accrual-Basis Accounting Cash-Basis Accounting

 Transactions recorded in the periods in  Revenues are recorded when cash is

which the events occur. received.

 Companies recognize revenues when they  Expenses are recorded when cash is
perform services (rather than when they receive paid.
cash).
 Cash-basis accounting is not in
 Expenses are recognized when incurred
accordance with International Financial
(rather than when paid
Reporting Standards (IFRS).
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Question

Adjusting entries are made to ensure that:

A. expenses are recognized in the period in which they are incurred.

B. revenues are recorded in the period in which services are performed.

C. statement of financial position and income statement accounts have correct

balances at the end of an accounting period.

D. All the responses above are correct.

Answer D
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Types of Adjusting Entries

Deferrals Accruals

1. Prepaid Expenses. Expenses paid in cash 1. Accrued Revenues. Revenues for services
before they are used or consumed. performed but not yet received in cash or
recorded.
2. Unearned Revenues. Cash received
before services are performed 2. Accrued Expenses. Expenses incurred but
not yet paid in cash or recorded.

Action is pending