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Chapter1-Introduction To Acc

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13 views29 pages

Chapter1-Introduction To Acc

Uploaded by

minhkurt
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ACCOUNTING

AND FINANCIAL
STATEMENT ANALYSIS

Introduction to accounting
Learning Objectives

 In this chapter you will be introduced to

 Accounting definition
 financial accounting and management
accounting
 Major financial statements
 The Basic Accounting Equation
Accounting defined

“the process of identifying, measuring and


communicating economic information to
permit informed judgments and decisions by
users of the information”
Two major forms of
accounting
F ig u re 2 .1 F orm s of ac c ou n tin g

A c c ou n tin g

F in an c ial ac c ou n tin g M an ag em en t A c c ou n tin g

G en eral p u rp os e S p ec ial p u rp os e
fin an c ial rep orts fin an c ial rep orts
Financial Accounting
 Oriented towards users of financial reports
who are external to an organisation
 Users
 investors, employees, lenders, suppliers,
customers, governments, community groups…
Management Accounting
 Prepared internally for insiders
 management (including directors)
 Specific purpose
 organising, planning, control and performance
evaluation
 Detailed information
 Flexible format
Internal vs. External
reporting
 Two major differences
 External users may be many and varied
 variety of needs
 highly standardised, summarised reports
 satisfy multiplicity of users
 internal can be specific

 Legal obligations on external reporting


Major Financial Statements
 Three questions
 How well has the entity performed?
Income statement
 What is the financial position of the entity?
Balance Sheet
 What is the ability of the entity to generate
cash to pay its debts?
Statement of cash flows
Income Statement (Profit and
Loss Statement)

 Income statement reports profit (or


loss) as the difference between the
revenue earned and the expenses
incurred during a given period.
 Revenue
 Type: sales of goods, fees earned...
 Cash or/and credit (amount paid at a later
date)
Income Statement
 Expenses
 incurred in earning revenue
 types: cost of goods sold, rent, electricity,
salary, interest, …
 cash or/and credit
 Net Profit = Revenue - Expenses
 increases the net assets of the entity
Balance Sheet
Balance sheet (statement of financial
position) reports the resources of value
controlled by the entity and claims of
owners and non-owners to those resources
at a given date.
Balance Sheet components
 Assets:
resources which provide benefits to the entity.
Eg: Cash, Supplies, Equipment, Building, Land,
etc.
 Liabilities:
are financial claims on the entity by non-owners.
Eg:Loan, Accounts payable, etc
 Owner’s Equity represents the excess of assets
over liabilities
 Investment by owners and revenues (+)
 Dividend (or drawings) and expenses (-).
Statement of Cash flow
 Reports the effects of all transactions
involving a flow of cash into or out of
the entity
 These transactions are classified into
 Operating
 investing
 financing
The Basic Accounting Equation

Owner’s
Assets = Liabilities + Equity
Using the Accounting Equation

Transactions are a business’s economic events


recorded by accountants.
 Each transaction has a dual effect on the accounting
equation.
Using the Accounting Equation
Illustration: Are the following events recorded in the accounting
records?
Owner
Supplies are An employee withdraws cash
Event purchased on is hired. for personal
account. use.

Criterion Is the financial position (assets, liabilities, or


owner’s equity) of the company changed?

Record/
Don’t Record
Transactions
Transactions Analysis
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:
Transactions
Transactions Analysis
Analysis
Transaction (2). Purchase of Equipment for Cash. Softbyte
purchases computer equipment for $7,000 cash.
Transactions
Transactions Analysis
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.
Transactions
Transactions Analysis
Analysis
Transaction (4). Services Provided for Cash. Softbyte
receives $1,200 cash from customers for programming services
it has provided.
Transactions
Transactions Analysis
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.
Transactions
Transactions Analysis
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.
Transactions
Transactions Analysis
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.
Transactions
Transactions Analysis
Analysis
Transaction (8). Payment of Accounts Payable. Softbyte
pays its $250 Daily News bill in cash.
Transactions
Transactions Analysis
Analysis
Transaction (9). Receipt of Cash on Account. Softbyte
receives $600 in cash from customers who had been billed for
services [in Transaction (6)].
Transactions
Transactions Analysis
Analysis
Transaction (10). Dividends. The corporation pays a dividend
of $1,300 in cash.
Transactions
Transactions Analysis
Analysis
Illustration 1-10
Summary of Transactions Tabular summary of
Softbyte transactions
General accepted
accounting principles

 The accounting entity assumption


 The accounting period
 The original cost assumption
General accepted
accounting principles

 The monetary unit assumption


 The matching concept
 Realisation assumption

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