Lecture Presentation

Introduction to Accounting
Denitions of Accounting
Denitions of Accounting
What is Accounting? Denition 1 (Inst. Certied Pub. Accountants ): Accounting is the art of recording, classifying, and summarizing in a signicant manner and in terms of money, transactions and events which are, in part at least, of a nancial character, and interpreting the results thereof. Denition 2 (A broader perspective): Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information. Denition 3: wrt. Quantitative information Accounting is a service activity. Its function is to provide quantitative information, primarily nancial in nature about economic entities that is intended to be useful in making economic decisions, in making resolved choices among Dr.Serhan Duran (METU) EM 501 Week 1 Industrial Engineering Dept. alternative courses of action.
Business Activities
Therefore, accounting is a link between business activities and decision makers.

Action
Decision Makers
Information Needs
Information
Data
Measurement Recording data
Processing Storing data
Communication Reporting
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Dr.Serhan Duran (METU)
EM 501 Week 1
Industrial Engineering Dept.
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Distinctions from Bookkeeping
Users of Accounting
What is the Difference between Accounting and Bookkeeping? Bookkeeping Mundane function of
Collecting Recording Reporting operating & nancial info of rm
The Parties that Use the Accounting? 1-Internal usage: Management Accounting Creating reports for
controlling costs measuring performance planning the future
Vital but Clerical of accounting Accounting Includes design of information systems that meets users needs Its main goals are:
Analysis of data Interpretation of data Using these for problem solving
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The data and reports must be

accurate timely objective and exible
Cost controlling function is known as Cost Accounting.
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Users of Accounting
Users of Accounting
Accounting Function 2-External usage: Stewardship Accounting Measure and report information about how the business performed
regular accurate veriable standardized
Income Tax Accounting -special income reports -tax forms
Stewardship Accounting - external usage -report for public usage
Financial Accounting -reports that meets standards
Accounting for Regulatory Agecies
Users of these reports are

investors creditors shareholders government regulatory agencies
ex: selection of depreciation rule ex: inventory value
Cost Accounting
Management Accounting internal usage coordination planning and control
Major accounting system in a manufacturing firm
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Types of Business Organization
Financial Position and the Accounting Equation
Three types of business

1
Financial Position - What the company owns and owes Economic resources that belong to a company and the claims against those resources at a point in time A company can be viewed as Economic resources = Claims Two types of Claims, creditors and owners claims Economic resources = creditors claims + owners claims In accounting terminology, economic resources are called Assets, creditors claims is called Liabilities and owners claims is called as Equity. Accounting Equation Assets = Liabilities + Equity
Proprietorship
owned by a single person Legally, the proprietorship is the same as the individual individual receives all prot or losses
Partnership
owned by more than one person Legally, the Partnership is again the same as the individuals receive all prot or losses
Corporation
separate from its owners (stockholders) ownership divided into transferable shares of stock owners do not control the operations directly the stockholders enjoy limited liability
From Accounting Perspective - Economic Entity Assumption Activities of organization kept separate from the activities of owners
This equation tells us that the assets owned by the company are subject to the rights of debt holders and owners.
Assets Economic resources owned by a business that are expected to benet future operations. converted to cash within one year are current
Cash Accounts Receivable (money owed to the business) Supplies Inventory
Liabilities Obligations in form of money to be paid or services to be rendered by the company to the outsiders payable within one year are current
Notes Payable Account Payable and Taxes payable
having a life exceeding one year are noncurrent.

Land Equipment Buildings Machinery
payable in more than a year are noncurrent.

Bonds Payable
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Owners/Stockholders Equity The residual interest in the assets of an entity that remains after deducting its liabilities or the equity interest of the owner(s). In a Proprietorship, Owners Equity has only one Capital Account (owners). In a Partnership, Owners Equity is composed of Capital Accounts for each owner. In a Corporation, equity represents the Stockholders Equity
Share capital - ordinary Retained Earnings-Accumulated earnings minus dividends
Shares of Stock Authorized Shares 1 Issued Shares

Treasury Stock owned by company Outstanding Shares
Dividends based on them Common Stock has voting rights Preferred Stock has priority in dividend distribution
2
Five types of transactions affect owners equity

1 2 3 4 5
Unissued Shares
Owners investments increases owners/Stockholders equity Owners withdrawals decreases owners equity Revenues increases owners/Stockholders equity Expenses decreases owners/Stockholders equity Dividends decreases Stockholders equity
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Effects of Business Transactions on Accounting Equation
Business Transactions are economic events that affect the nancial position of a business entity. These transactions are the raw material of accounting reports. It can be: 1 An Exchange of Value between two or more parties
A purchase A sale A collection A loan
2
Double-Entry Accounting It maintains the equivalence of assets and claims on it Every business transaction has dual effect
Debit Credit
A business transaction affects either:

Both sides of the equation by the same amount One side of the equation only, by both increasing and decreasing it by identical amounts, netting to zero
A Nonexchange Transaction
Accumulation of Interest Physical wear and tear on machinery and equipment Losses from ood, re, theft
Now Lets Analyze the Effects of some Business Transactions on Accounting Equation
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Transaction 1: Aras starts a business by depositing $50,000 in a bank in the name of Luxury Homes Realty. Owners Investments Assets Cash $50,000 = Owners Equity Aras, Capital $50,000 Type of OE Transaction Owners investment Transaction 2: After starting his business, Aras nds a good location for his ofce,and purchases with cash a lot for $10,000 and a small building on the that lot for $25,000. Purchase of Assets with Cash
Assets Cash bal. $50,000 -$35,000 Land Building = Owners Equity Aras, Capital $50,000 +$10,000 $10,000 +$25,000 $25,000 $50,000 Type of OE Transaction Owners investment
Accounts The labels Cash, Aras, Capital are accounts Accounts are used by accountants to accumulate amounts produced from like transactions
bal. $15,000
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Transaction 3: Aras buys ofce supplies for $500 on credit. This transaction will increase both sides of the accounting equation. Buying on Credit On agreement to pay for the asset or service later. Purchase of Assets by Incurring a Liability
Transaction 4: Let us see how the balance equation changes when Aras pays $200 of the $500 owned for the supplies he has purchased before. Payment of a Liability
Assets Cash Supplies $500 $500 Land $10,000 $10,000 Building $25,000 $25,000 = Liabilities Accounts Payable $500 $-200 $300 + Owners Equity Aras, Capital $50,000 $50,000 Type of OE Transaction
Assets Cash bal. $15,000 +$500 bal. $15,000 $500 $10,000 $25,000 Supplies Land $10,000 Building $25,000
Liabilities Accounts Payable +$500 $500
Owners Equity Aras, Capital $50,000 $50,000 Type of OE Transaction bal. $15,000 $-200 bal. $14,800
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Transaction 5: Lets assume that Luxury Homes Realty sells a house and gets $1,500 commissions in cash. Cash Revenue
Assets Cash bal. $14,800 $+1,500 bal. $16,300 Supplies $500 $500 Land $10,000 $10,000 Building $25,000 $25,000 = Liabilities Accounts Payable $300 $300 + Owners Equity Aras, Capital $50,000 +1,500 $51,500 bal. $16,300 +2,000 bal. $16,300 $2,000 $500 $10,000 $25,000 $300
Transaction 6: Now, let see how the transaction of $2,000 of an earned commission that will be paid later will affect the equation. Revenue to be Collected
Transaction Assets Commission Cash Accounts Receivable Supplies $500 Land $10,000 Building $25,000 = Liabilities + Accounts Payable $300 Owners Equity Aras, Capital $51,500 +$2,000 $53,500
Timing of Recording the Revenues Revenues can be received immediately as cash, and sometimes the clients/customers agree to pay the revenue at a later time. In either case, the revenue is recorded when it is earned.
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Transaction 7: A few days later, Luxury Homes Realty receives $1,000 of $2,000 from his client Collection of Accounts Receivable
Transaction 8: Assume that Aras paid in cash $400 for wages of his aid and $1,000 for rent of some equipments. Expenses in Cash
Assets Cash = Land $10,000 Building $25,000 Liabilities + Accounts Payable $300 Owners Equity Aras, Capital $53,500 $-400 $-1,000 $52,100 Accounts Receivable $1,000 Supplies $500
Assets Cash bal. $16,300 $+1,000 bal. $17,300 Accounts Receivable $2,000 $-1,000 $1,000 Supplies $500 $500 Land $10,000 $10,000 Building $25,000 $25,000
Liabilities + Accounts Payable $300 $300
Owners Equity Aras, Capital $53,500 $53,500 bal. $17,300 -$400 -$1,000 bal. $15,900
$1,000
$500
$10,000
$25,000
$300
Timing of Recording the Expenses Expenses are recorded when they are incurred.
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Transaction 9: Lets assume that a bill of $300 for utilities incurred but not paid yet. Expenses to be paid
Transaction 10: At the end of the month, Aras withdraws $600 in cash from Luxury Homes Realty and deposits it into his personal account. Owners Withdrawal
Assets Cash Accounts Receivable $1,000 $1,000 Supplies $500 $500 Land $10,000 $10,000 Building $25,000 $25,000 = Liabilities + Accounts Payable $600 $600 Owners Equity Aras, Capital $51,800 -600 $51,200
Assets Cash bal. $15,900 bal. $15,900 Accounts Receivable $1,000 $1,000 Supplies $500 $500 Land $10,000 $10,000 Building $25,000 $25,000
Liabilities + Accounts Payable $300 +$300 $600
Owners Equity Aras, Capital $52,100 -$300 $51,800 bal. $15,900 $-600 bal. $15,300
CAUTION! Withdrawals are NOT expenses.
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Financial Statements
Accounting Standards
Accounting Standards
Financial statements In order to ensure high-quality nancial reporting, accountants present nancial statements in conformity with accounting standards that are issued by standard-setting bodies. 1 International Accounting Standards Board
Standards are called International Financial Reporting Standards (IFRS) More than 130 countries follow them Less detailed Principle-based
2
Financial statements
1
Reect the activities of the company over a period or time

Income Statement
Summarizes amount of revenues earned and expenses incurred Shows whether a business earned an acceptable level of income
Statement of Owners Equity

Changes in the owners capital
Statement of Cash Flows

Changes in cash that result from operating activities, investing activities and nancing activities
2
Financial Accounting Standards Board

Standards are called Generally Accepted Accounting Principles (GAAP) Followed by US companies Rules-based
Indicate the nancial position at a point in time

Balance Sheet
Financial position of the rm on a certain date
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Examples
Examples
Luxury Homes Realty Income Statement For the Month Ended December 31,2007 Revenues Commissions Revenues Expenses Equipment Rental Expense Wages Expense Utility Expense Total Expenses Net Income $3,500 $1,000 $400 $300 $1,700 $1,800
Luxury Homes Realty Statement of Owners Equity For the Month Ended December 31,2007 Aras, Capital, December 1, 2007 Add: Investments by Aras Net Income for the Month Subtotal Less Withdrawals by Aras Aras, Capital December 31, 2007 $0 $50,000 $1,800 $51,800 $51,800 $600 $51,200
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Examples
Examples
Luxury Homes Realty Balance Sheet December 31,2007 Assets Cash Accounts Receivable Supplies Land Building Total Assets $15,300 $1,000 $500 $10,000 $25,000 $51,800 Total Equities $51,800 Liabilities Accounts Payable $600
Luxury Homes Realty Statement of Cash Flows For the Month Ended December 31,2007 Cash Flows from Operating Activities Net Income Non Cash Expenses and Revenues Included in Income Increase in Accounts Receivable Increase in Supplies Increase in Accounts Payable Net Cash Flows from Operating Activities Cash Flows from Investing Activities Purchase of Land Purchase of Building Net Cash Flows from Investing Activities Cash Flows from Financing Activities Investments by Aras Withdrawals by Aras Net Cash Flows from Financing Activities Net Increase (Decrease) in Cash Cash at Beginning of Month Cash at End of Month $1,800 $(1000) (500) 600
(900) $900
Owners Equity Aras, Capital $51,200
$(10,000) (25,000) (35,000) $50,000 (600) 49,600 $15,300 0 $15,300
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Introduction to Accounting

Therefore, accounting is a link between business activities and decision makers.

Measurement Recording data

Processing Storing data

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Distinctions from Bookkeeping

The data and reports must be

Cost controlling function is known as Cost Accounting.

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Stewardship Accounting - external usage -report for public usage

Financial Accounting -reports that meets standards

Accounting for Regulatory Agecies

Users of these reports are

Management Accounting internal usage coordination planning and control

Major accounting system in a manufacturing firm

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Types of Business Organization

Financial Position and the Accounting Equation

Three types of business

Financial Position and the Accounting Equation

Financial Position and the Accounting Equation

having a life exceeding one year are noncurrent.

payable in more than a year are noncurrent.

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Financial Position and the Accounting Equation

Financial Position and the Accounting Equation

Shares of Stock Authorized Shares 1 Issued Shares

Five types of transactions affect owners equity

Dr.Serhan Duran (METU)

Effects of Business Transactions on Accounting Equation

Effects of Business Transactions on Accounting Equation

A business transaction affects either:

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Effects of Business Transactions on Accounting Equation

Effects of Business Transactions on Accounting Equation

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Effects of Business Transactions on Accounting Equation

Effects of Business Transactions on Accounting Equation

Liabilities Accounts Payable +$500 $500

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Effects of Business Transactions on Accounting Equation

Effects of Business Transactions on Accounting Equation

Dr.Serhan Duran (METU)

Industrial Engineering Dept.

Dr.Serhan Duran (METU)

Industrial Engineering Dept.