2/8/2018
Principle of Accounting I Cont’d …
1 By Animaw Yayeh (BSc, BA & MBA)
Principle of Accounting I
 Chapter 1 – Introduction
 Evolution, Definition & Importance of Accounting
 Ch/cs Of AIS and its Users
 The profession of Accountancy
 The Distinction b/n Bookkeeping and Accounting
 Accounting Principles and Concepts
 Business Transactions and the Accounting Equation
 Financial statements
2 By Animaw Yayeh (BSc, BA & MBA)
Principle of Accounting I Cont’d …
 Chapter 2 – The Accounting Cycle in its simplest Form
 Starting an Accounting System
 Recording the Operating Entry
 Posting the Opening Entry
 Debit and Credit of the Transaction Affecting Balance Sheet
 Debit and Credit of Revenue and Expense Transaction
 Journalizing, Posting Business Transactions
3 By Animaw Yayeh (BSc, BA & MBA)
By - Animaw Yayeh (MBA)
 Chapter 3 - Accounting Cycle for Service Enterprise
 The Use of Accounts for Recording Transactions
 Classification of Accounts
 Sequence & Numbering of Ledger Accounts
 Rule of Debits and Credits
 Recording Transactions in a Journal
 Posting the Journal
 The Trial Balance: Uses and Limitations
 Adjustments
 Deferrals (As an Asset and Expense)
 Accruals (As a Liability and a Revenue)
 Worksheet for Financial Statements
 Preparation of Financial Statements
 Journalizing and Posting Adjusting
11/17/2017 4 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
Principle of Accounting I Cont’d …
 Chapter 4- Accounting for Merchandising Enterprise
 Purchasing and Selling Procedures
 Accounting for Purchases
 Accounting for Sales
 Trade Discounts, Transaction Costs and Sales Taxes
 Inventory Systems
 Merchandising inventory Adjustments on the Worksheet
 Preparation of Financial Statements
 Completion of the Accounting Cycle
 Journalizing and Posting Reversing Entries
11/17/2017 5 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
Principle of Accounting I Cont’d …
 Chapter 5 – Accounting for a Manufacturing Enterprise
 Difference B/n Merchandiser and Manufacturer
 Cost Classifications
 Inventories for Manufacturing Enterprise
 Computation for the Cost of Finished Goods Manufactured
 The Worksheet for a Manufacturing Company
 The Closing Entries
 Financial Reporting by Manufacturing Company
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Principle of Accounting I Cont’d … Principle of Accounting I Cont’d …

 Chapter 6 – Accounting System Design  Teaching and Learning Methods
 Principle of Accounting Systems  Lecture Method
 Accounting System Installation and Revision  Case Studies
 Internal Control  Group Discussion
 Guidelines to Strong Internal Control  ASSESSMENT METHOD
 Special Journals and Subsidiary Ledgers  Assignment Quiz ………….. 35%
 Mid Exam …………………... 25%
 Final Exam ………………….. 40%
Total ……...…….. 100%

7 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017 10 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017

Principle of Accounting I Cont’d …

 Chapter 7 – Accounting Principles and Concepts
 The need for Concepts and Principles Chapter Outline
 Generally Accepted Accounting Principles 1. Evolution, Definition & Importance of Accounting
 Business Entity Concept 2. Ch/cs Of AIS and its Users
 Going Concern Concept 3. The profession of Accountancy
 Stable Monetary Unit
4. The Distinction b/n Bookkeeping and Accounting
 Periodicity Concept
5. Accounting Principles and Concepts
 Objectivity Principle
 Cost Principle
6. Business Transactions and the Accounting Equation
 Matching Principle 7. Financial statements
 Conservatism Principle

8 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017 11 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017

Principle of Accounting I Cont’d …

 Text  The scope and definition of accounting changes throughout time.
 Fees & Warren, Accounting Principles, 16th Edition, South  People in all civilizations have maintained various types of records
Western Publishing Company of business activities. The oldest known are Clay Tablet Records of
 Other Related Texts the payment of Wages in Babylonia around 3600 B.C.
 Warren Reeve Duchac, ACCOUNTING, 23e, South-Western  In 11th Century William the Conqueror compiled English records
 NEEDLES, POWERS, CROSSON, Principles of that ascertained the financial resources of the Kingdom.
Accounting, 11e, South-Western  Complete accounting for an an enterprise developed in later
years.
 Luca Pacioli in 1494 published the system of recording – double
entry which establish a manner of equilibrum.

9 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017 12 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017

By - Animaw Yayeh (MBA) 2


 Accounting originally served a stewardship function, as a result of
the separation of ownership and control of resources.
 First wealthy landowners, and later company shareholders, hired
managers or ‘stewards’ to run their properties and businesses.
 The landowners and shareholders owned the resources, but the
stewards and managers controlled them. As the business owners
could not always be on hand to watch their stewards or managers
perform their duties, they required the stewards to make regular
reports on their activities, using accounting to prepare the figures.
 This is what we call financial reporting.
13 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
 In general, it is argued that accounting is concerned with the
provision of information about the position and
performance of an enterprise that is useful to a wide
range of potential users in making decisions.
 Around 1900’s finance emerged as a separate and distinct
from Economics.
 Being the major focus how to raise capital in big companies.
14 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
 Accounting provides information for managers to use in operating
the business.
 In addition, accounting provides information to other users in
assessing the economic performance and condition of the business.
Thus, accounting can be defined as an information system that
provides reports to users about the economic activities and
condition of a business.
 You may think of accounting as the “language of business.” This is
because accounting is the means by which businesses’ financial
information is communicated to users for making an informed
judgments and decisions.
 Accounting data composed of financial information expressed in
terms of money.
15 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
By - Animaw Yayeh (MBA)
2/8/2018
 The process by which accounting provides information to
users is as follows:
1. Identify users.
2. Assess users’ information needs.
3. Design the accounting information system to meet users’
needs.
4. Record economic data about business activities and events.
5. Prepare accounting reports for users.
16 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
Usefulness of the Information refers to the ability of users to effectively
use important information in decision-making; that is, it is presented in a
timely manner. Usefulness is the quality of adapting the accounting
information to the user’s purpose. The usefulness of this information is
presented in terms of its informative content and timeliness.
 Comprehensibility - To fulfill this quality the user must have
sufficient knowledge to understand the information; since information
is vitally important for decision-making, some information cannot be
biased by its complex level of comprehensibility.
17 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
 Relevance - The more relevant the information is – that is, the more it can
influence the economic decisions of those using it – the more useful the
information will be.
 Truthfulness - This allows for including in accounting information
events that really happened with their proper measurement,
according to rules accepted as valid by the system.
 Comparability - Users for whom this characteristic is met should
be able to compare information with: – Other periods – Other,
different companies (link to monografias.com).
 Meaningfulness - This measures the ability of the accounting
information to symbolically represent the company and its
performance, its situation at different points in time and the results of
its operation with words and amounts.
18 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
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 Accounting profession has a rapid development in the current

 Reliability - The information may be relevant but not very reliable; thus
the information should be free of material error, bias or prejudice, represent
transactions and other events faithfully, be neutral, and, lastly, be prudent.
 Objectivity - This implies that the rules under which the accounting
information was generated have not been deliberately distorted and that the
information represents the reality according to those rules.
 Verifiability - This means that tests can be applied to the system that
generated the accounting information and the same result will be obtained.
 Stability - Stability of the system indicates that its operation does not
change over time and the information it produces can be obtained applying
the same rule for capturing, quantifying and presenting the data. This
characteristic is also known as consistency.
 Timelines – Reports should be presented timely.
century accompanied by expansion of career opportunities and
increasing number of professionally trained professionals.
 During 1960 – 1988 the profession doubled in size due to the
increase in number, size and complexity of business
organizations, the frequent change in tax laws and other
government restrictions on business organizations.
 Which profession do you think demanding high careers?
 Health related?
 Accounting?
 Management?

19 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017 22 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017

 Accountants are engaged as either

 Private Accounting – accountants employed by a particular business
 The information that the accounting provides allows users to firm or not for profit organizations to serve the community at large.
make informed decisions (reasonable choices) among alternative  Accountants can perform in private as
uses of scarce resources in conducting the business.  Cost Accountant – determine the cost of producing a specific product.
 The people who use the accounting information basically fall in  Budgeting – assisting management in quantifying goals concerning revenue,
to two categories. cost of goods sold, and operating expense.
 External Users – are not directly involved in running the business  General Accounting – recording daily transactions and preparing financial
statements.
enterprise.
 Tax Accounting – preparing tax returns and engaging in tax planning for the
 The information help users make better decisions in trying to achieve their
company.
objectives. The area of accounting aimed at  Internal Auditing – determines compliance with the management policies
 These include serving the external users is called and evaluating efficiency of operation.
 Lenders Financial Accounting
 Shareholders (Stock holders)  Public Accounting – accountants who render accounting services on a
 Suppliers fee basis and staff accountants employed by them.
 Employees and Labour Unions  Not - for - Profit Accounting – donors need information how well
 Government (Regulatory Parties) objectives are being met.

20 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017 23 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017

 Internal Users – are users that are directly involved in managing and
operating an organization. Bookkeeping – is the process of recording business activities and
 The internal Users of Accounting Information are keeping records. It is the recording phase of Accounting. It is mechanical
and repetitive in nature.
 Managers 1. Involves only the recording of economic events
 Decision makers in the organization 2. Is just one part of accounting
3. Is the simplest and the smallest part of accounting
 Employees Accounting – include the design of the information need to the users.
 The internal role of accounting is to provide information to The major goals of accounting are the analysis, interpretation and use of
information. It
help them improve the efficiency and performance of the 1. Includes bookkeeping
organization. 2. System design
3. Budgeting
 The area of accounting aimed at serving the decision making 4. Cost analysis
needs of the internal users is called Managerial Accounting. 5. Auditing
6. Tax planning and preparation

21 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017 24 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017

By - Animaw Yayeh (MBA) 4


 If a company’s management could record and report financial
data as it saw fit, comparisons among companies would be
difficult, if not impossible.
 Thus, financial accountants follow generally accepted accounting
principles (GAAP) in preparing reports. These reports allow
investors and other users to compare one company to another.
 Accounting principles and assumptions are the essential
guidelines under which businesses prepare their financial
statements. These principles guide the methods and decisions for
a business over a short and long term.
25 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
 Business Entity Concept - the activities of a business are
recorded separately from the activities of its owners, creditors, or
other businesses.
 The business entity concept limits the economic data in an accounting
system to data related directly to the activities of the business.
 In other words, the business is viewed as an entity separate from its
owners, creditors, or other businesses. For example, the accountant
for a business with one owner would record the activities of the
business only and would not record the personal activities, property,
or debts of the owner.
26 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
 The Cost Concept - amounts are initially recorded in the
accounting records at their cost or purchase price.
 The cost concept also involves the objectivity and unit of measure
concepts.
 The objectivity concept requires that the amounts recorded in the
accounting records be based on objective evidence.
 In exchanges between a buyer and a seller, both try to get the best
price. Only the final agreed-upon amount is objective enough to be
recorded in the accounting records. If amounts in the accounting
records were constantly being revised upward or downward based on
offers, appraisals, and opinions, accounting reports could become
unstable and unreliable. The unit of measure concept requires that
economic data be recorded in dollars. Money is a common unit of
measurement for reporting financial data and reports.
27 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
By - Animaw Yayeh (MBA)
2/8/2018
 The monetary unit assumption - requires that companies
include in the accounting records only transaction data that can be
expressed in money terms.
 This assumption enables accounting to quantify (measure)
economic events.
 The monetary unit assumption is vital to applying the cost
principle. This assumption prevents the inclusion of some relevant
information in the accounting records. For example, the health of
a company’s owner, the quality of service, and the morale of
employees are not included. The reason: Companies cannot
quantify this information in money terms. Though this information
is important, companies record only events that can be measured
in money.
28 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
1. Sole proprietorship - is a business owned by one person.
The owner is often the manager/operator of the business.
Small service-type businesses (plumbing companies, beauty
salons, and auto repair shops), farms, and small retail stores
(antique shops, clothing stores, and used-book stores) are
often proprietorships.
 Usually only a relatively small amount of money (capital) is
necessary to start in business as a proprietorship. The owner
(proprietor) receives any profits, suffers any losses, and is
personally liable for all debts of the business.
 There is no legal distinction between the business as an economic
unit and the owner, but the accounting records of the business
activities are kept separate from the personal records and activities
of the owner.
29 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
2. Partnership - A business owned by two or more persons associated
as partners is a partnership.
 In most respects a partnership is like a proprietorship except that
more than one owner is involved.
 Typically a partnership agreement (written or oral) sets forth such
terms as initial investment, duties of each partner, division of net
income (or net loss), and settlement to be made upon death or
withdrawal of a partner.
 Each partner generally has unlimited personal liability for the debts of
the partnership. Like a proprietorship, for accounting purposes the
partnership transactions must be kept separate from the personal
activities of the partners. Partnerships are often used to organize retail
and service-type businesses, including professional practices (lawyers,
doctors, architects, and certified public accountants).
30 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
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3.Corporation - A business organized as a separate legal entity under
state corporation law and having ownership divided into transferable
shares of stock is a corporation.
 The holders of the shares (stockholders) enjoy limited liability; that is,
they are not personally liable for the debts of the corporate entity.
 Stockholders may transfer all or part of their ownership shares to
other investors at any time (i.e., sell their shares). The ease with which
ownership can change adds to the attractiveness of investing in a
corporation. Because ownership can be transferred without dissolving
the corporation, the corporation enjoys an unlimited life.
 Although the combined number of proprietorships and partnerships in
the United States is more than five times the number of corporations,
the revenue produced by corporations is eight times greater.
31 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
 Business transactions are economic events that should be recorded
because they affect the financial position of the business enterprise. This
business transactions are raw materials of accounting reports.
 The transaction can be an exchange b/n two or more parties.
 For a given transaction to qualify to be recorded, it has:
 To be related to the business enterprise
 To be measured in terms of money
 To be completed (happened) action
 It should not be a mere promise or intention; it must be at least
partially completed to be recorded.
Ex.The purchase of the land and building for $250,000
32 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
 Financial position refers to a company's economic resources, such as
cash, inventory, and buildings, and the- claims against resources at a
particular time.Another term for claims is equities.
 The two basic elements of a business are what it owns and what it
owes.
 Assets are the resources a business owns. For example, Google has
total assets of approximately $40.5 billion.
 Liabilities and owner’s equity are the rights or claims against these
resources. Thus, Google has $40.5 billion of claims against its $40.5
billion of assets.
 Claims of those to whom the company owes money (creditors) are
called liabilities. Claims of owners are called owner’s equity. Google
has liabilities of $4.5 billion and owners’ equity of $36 billion.
Assets = Liabilities + Owner’s Equity
This relationship is the basic accounting equation.
33 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
By - Animaw Yayeh (MBA)
2/8/2018
 Assets must equal the sum of liabilities and owner’s equity.
 Liabilities appear before owner’s equity in the basic accounting
equation because they are paid first if a business is liquidated.
 The accounting equation applies to all economic entities
regardless of size, nature of business, or form of business
organization. It applies to a small proprietorship such as a corner
grocery store as well as to a giant corporation such as PepsiCo.
 The equation provides the underlying framework for recording
and summarizing economic events.
34 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
 For example,
 If the asset owned by the business amount birr 100,000 and
 if the equity is birr 80,000, then the remaining is the claim of
creditors which is equal to 20,000
 Thus, Asset = Liability + owners equity (capital)
 Liability = Assets – owners equity
 Liability, 20,000 = 100,000 – 80,000
 It is customary to place liabilities before owners’
equity in the accounting equation.
 Because, creditors have preferential right (priority) to the asset.
 This implies owners are residual Clements.
35 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
 Assets - are resources a business owns. The business uses its
assets in carrying out such activities as production and sales. The
common characteristic possessed by all assets is the capacity to
provide future services or benefits. In a business, that service
potential or future economic benefit eventually results in cash
inflows (receipts).
 Liabilities - are claims against assets - that is, existing debts and
obligations. Businesses of all sizes usually borrow money and
purchase merchandise on credit. Creditors may legally force the
liquidation of a business that does not pay its debts. In that case,
the law requires that creditor claims be paid before ownership
claims.
36 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017
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 The ownership claim on total assets is owner’s equity. It is equal

to total assets minus total liabilities.
 Here is why: The assets of a business are claimed by either
creditors or owners.
 To find out what belongs to owners, we subtract the creditors’
claims (the liabilities) from assets.
 he remainder is the owner’s claim on the assets—the owner’s
equity. Since the claims of creditors must be paid before
ownership claims, owner’s equity is often referred to as residual
equity.

37 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017

 Each transaction during NetSolutions’ first month of

operations is described in the following paragraphs. The
effect of each transaction on the accounting equation is then
shown.
1. Nov. 1, 2009 Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions.

38 By Animaw Yayeh (BSc, BA & MBA) 11/17/2017

By - Animaw Yayeh (MBA) 7