Principles Accounting

Lecturer of Accounting and Finance
Chapter
1-1
Accounting in
Business
Chapter
1-2
Study Objectives
1. Explain what accounting is.

2. Identify the users and uses of accounting.
3. Understand why ethics is a fundamental business concept.
4. Explain generally accepted accounting principles and the cost
principle.
5. Explain the monetary unit assumption and the economic entity
assumption.
6. State the accounting equation, and define its components.
7. Analyze the effects of business transactions on the accounting
equation.
8. Understand the four financial statements and how they are
prepared.
Chapter
1-3
Accounting in Action
The Building The Basic Using the

What is Basic Financial
Blocks of Accounting
Accounting? Accounting Statements
Accounting Equation Equation
Three Ethics in Assets Transaction Income

activities financial Liabilities analysis statement
Who uses reporting Summary of Owner’s
Owner’s
accounting Generally equity transactions equity
data accepted statement
accounting Balance
principles sheet
Assumptions Statement of
cash flows
Chapter
1-4
What is Accounting?
The purpose of accounting is to:

(1) identify, record, and communicate the
economic events of an
(2) organization to
(3) interested users.
Chapter
1-5 SO 1 Explain what accounting is.
What is Accounting?
Three Activities
Illustration 1-1
Accounting process
The accounting process includes

the bookkeeping function.
Chapter
1-6 SO 1 Explain what accounting is.
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
Chapter
1-7 SO 2 Identify the users and uses of accounting.
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
Chapter
1-8 SO 2 Identify the users and uses of accounting.
Discussion Question
Q1. “Accounting is ingrained in our society and it is
vital to our economic system.” Do you agree? Explain.
See notes page for discussion

SO 3 Understand why ethics is a fundamental business concept.
Chapter
1-9
The Building Blocks of Accounting
Ethics In Financial Reporting

Standards of conduct by which one’s actions are
judged as right or wrong, honest or dishonest, fair or
not fair, are Ethics.
Recent financial scandals include: Enron,

WorldCom, HealthSouth, AIG, and others.
Congress passed Sarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound

ethical behavior.

Chapter
1-10
Ethics
Review Question
Ethics are the standards of conduct by which one's
actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.

Chapter
1-11
Financial Statements
Various users Balance Sheet
need financial Income Statement
Statement of Owner’s Equity
information Statement of Cash Flows
Note Disclosure
The accounting profession

has attempted to develop Generally Accepted
a set of standards that
Accounting
are generally accepted
and universally practiced.
Principles (GAAP)
Chapter
1-12 SO 4 Explain generally accepted accounting principles and the cost principle.
Organizations Involved in Standard Setting:
Securities and Exchange Commission (SEC)

http://www.sec.gov/
Financial Accounting Standards Board (FASB)

http://www.fasb.org/
International Accounting Standards Board

(IASB) http://www.iasb.org/
Chapter
Cost Principle (Historical) – dictates that companies

record assets at their cost.
Issues:
Reported at cost when purchased and also over the
time the asset is held.
Cost easily verified, whereas market value is often
subjective.
Fair value information may be more useful.
Chapter
Assumptions
Monetary Unit Assumption – include in the

accounting records only transaction data that can be
expressed in terms of money.
Economic Entity Assumption – 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
Partnership. Business Ownership
Corporation.
Chapter SO 5 Explain the monetary unit assumption
1-15
and the economic entity assumption.
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.
1-16
Chapter
1-17 SO 5 Explain the monetary unit assumption and the economic entity assumption.
Assumptions
Review Question
Combining the activities of Kellogg and General
Mills would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.

1-18
Forms of Business Ownership
Review Question
A business organized as a separate legal entity
under state law having ownership divided into
shares of stock is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.

1-19
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.
Chapter SO 6 State the accounting equation, and define

1-20
its components.
Owner’s
Equity

Assets
Resources a business owns.

Provide future services or benefits.
Cash, Supplies, Equipment, etc.
1-21
its components.
Owner’s
Equity

Liabilities
Claims against assets (debts and obligations).

Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
1-22
its components.
Owner’s
Equity

Owner’s Equity
Ownership claim on total assets.

Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or
Partnership).
1-23
its components.
Owner’s Equity
Illustration 1-6
Revenues result from business activities entered into for

the purpose of earning income.
Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.

1-24
its components.
Owner’s Equity
Illustration 1-6
Expenses are the cost of assets consumed or services used

in the process of earning revenue.
Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.

1-25
its components.
Using The Basic 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.
Chapter SO 7 Analyze the effects of business transactions

1-26
on the accounting equation.
Transactions (Question?)
Q1-15: Are the following events recorded in the

accounting records? Owner
Supplies are An employee withdraws
Event purchased is hired. cash for
on account. personal use.
Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?
Record/
Don’t Record

1-27
Transactions
Discussion Question
Q1-18. In February 2010, Paula King invested
an additional $10,000 in her business, King’s
Pharmacy, which is organized as a proprietorship.
King’s accountant, Lance Jones, recorded this
receipt as an increase in cash and revenues. Is
this treatment appropriate? Why or why not?

1-28
Transactions (Problem)
P1-1A: Barone’s Repair Shop was started on May 1 by Nancy

Barone. Prepare a tabular analysis of the following
transactions for the month of May.
1. Invested $10,000 cash to start the repair shop.

Assets = Liabilities + Owners’ Equity
Accounts Accounts Barone, Barone,
Cash + Receivable + Equipment = Payable + Capital - Drawing + Revenues - Expenses
1. +10,000 +10,000

1-29
2. Purchased equipment for $5,000 cash.


1. +10,000 +10,000
2. -5,000 +5,000
3.
4.
5.
6.
7.
8.
9.
10.

1-30
3. Paid $400 cash for May office rent.


1. +10,000 +10,000
2. -5,000 +5,000
3. -400 -400
4.
5.
6.
7.
8.
9.
10.

1-31
4. Incurred $250 of advertising costs, on account.


1. +10,000 +10,000
2. -5,000 +5,000
3. -400 -400
4. +250 -250
5.
6.
7.
8.
9.
10.

1-32
5. Received $5,100 from customers for repair service.


1. +10,000 +10,000
2. -5,000 +5,000
3. -400 -400
4. +250 -250
5. +5,100 +5,100
6.
7.
8.
9.
10.

1-33
6. Withdrew $1,000 cash for personal use.


1. +10,000 +10,000
2. -5,000 +5,000
3. -400 -400
4. +250 -250
5. +5,100 +5,100
6. -1,000 -1,000
7.
8.
9.
10.

1-34
7. Paid part-time employee salaries of $2,000.


1. +10,000 +10,000
2. -5,000 +5,000
3. -400 -400
4. +250 -250
5. +5,100 +5,100
6. -1,000 -1,000
7. -2,000 -2,000
8.
9.
10.

1-35
8. Paid utility bills $140.


1. +10,000 +10,000
2. -5,000 +5,000
3. -400 -400
4. +250 -250
5. +5,100 +5,100
6. -1,000 -1,000
7. -2,000 -2,000
8. -140 -140
9.
10.

1-36
9. Provided $750 of repair services on account.


1. +10,000 +10,000
2. -5,000 +5,000
3. -400 -400
4. +250 -250
5. +5,100 +5,100
6. -1,000 -1,000
7. -2,000 -2,000
8. -140 -140
9. +750 +750
10.

1-37
10. Collected $120 cash for services previously billed.


1. +10,000 +10,000
2. -5,000 +5,000
3. -400 -400
4. +250 -250
5. +5,100 +5,100
6. -1,000 -1,000
7. -2,000 -2,000
8. -140 -140
9. +750 +750
10. +120 -120
Chapter
1-38
10. Collected $120 cash for services previously billed.


1. +10,000 +10,000
2. -5,000 +5,000
3. -400 -400
4. +250 -250
5. +5,100 +5,100
6. -1,000 -1,000
7. -2,000 -2,000
8. -140 -140
9. +750 +750
10. +120 -120
+6,680 +630 +5,000 = +250 +10,000 -1,000 +5,850 -2,790
Chapter $12,310 $12,310

1-39
Companies prepare four financial statements from

the summarized accounting data:
Owner’s Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows
Chapter
1-40 SO 8 Understand the four financial statements and how they are prepared.
Review Question
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
Chapter
Income Statement
Barone’s Repair Shop Reports the revenues

Income Statement
For the Month Ended May 31, 2010
and expenses for a
Revenues:
specific period of time.
Service revenue $ 5,850
Expenses: Net income – revenues
Salary expense 2,000 exceed expenses.
Rent expense 400
Utility expense 140
Advertising expense 250
Net loss – expenses
Total expenses 2,790 exceed revenues.
Net income $ 3,060
Chapter
Income Statement Owner’s Equity Statement
Barone’s Repair Shop Barone’s Repair Shop

Income Statement Owner's Equity Statement
For the Month Ended May 31, 2010 For the Month Ended May 31, 2010
Revenues: Barone's, Capital May 1 $ -

Service revenue $ 5,850 Add: Investment 10,000
Expenses: Net income 3,060
Salary expense 2,000 13,060
Rent expense 400 Less: Drawings 0
Utility expense 140 Barone's, Capital May 31 $13,060
Advertising expense 250
Total expenses 2,790
Net income $ 3,060
Net income is needed to determine
the ending balance in owner’s equity.
Chapter
Owner’s Equity Statement
Statement indicates the Barone’s Repair Shop

reasons why owner’s Owner's Equity Statement
equity has increased or For the Month Ended May 31, 2010
decreased during the Barone's, Capital May 1

Add: Investment
$ -
10,000
period. Net income 3,060
13,060
Less: Drawings 1,000
Barone's, Capital May 31 $12,060
Chapter
Balance Sheet Owner’s Equity Statement

Barone’s Repair Shop
Balance Sheet Barone’s Repair Shop
May 31, 2010 Owner's Equity Statement
Assets For the Month Ended May 31, 2010
Cash $ 7,680 Barone's, Capital May 1 $ -

Accounts receivable 630 Add: Investment 10,000
Equipment 5,000 Net income 3,060
Total assets $ 13,310 13,060
Liabilities Less: Drawings 0
Accounts payable $ 250 Barone's, Capital May 31 $ 13,060
Owner's Equity
Barone's, capital 13,060
Total liab. & equity $ 13,310 The ending balance in owner’s equity is
needed in preparing the balance sheet
Chapter
Balance Sheet
Barone’s Repair Shop Reports the assets,
Balance Sheet liabilities, and owner’s
May 31, 2010
Assets
equity at a specific date.
Cash $ 7,680
Accounts receivable 630 Assets listed at the top,
Equipment 5,000 followed by liabilities
Total assets $ 13,310
Liabilities
and owner’s equity.
Accounts payable $ 250
Owner's Equity Total assets must equal
Barone's, capital 13,060 total liabilities and
Total liab. & equity $ 13,310
owner’s equity.
Chapter
Balance Sheet Statement of Cash Flows

Barone’s Repair Shop Barone’s Repair Shop
Balance Sheet Statement of Cash Flows
May 31, 2010 For the Month Ended May 31, 2010
Assets Cash flow from operating activities
Cash $ 7,680 Cash receipts from revenues $ 5,220
Accounts receivable 630 Cash paid for expenses (2,540)
Equipment 5,000 Cash provided by operations 2,680
Total assets $ 13,310 Cash flow from investing activitites
Liabilities Purchase of equipment (5,000)
Accounts payable $ 250 Cash flow from financing activities
Owner's Equity Investment by owners 10,000
Barone's, capital 13,060 Cash provided by financing 10,000
Total liab. & equity $ 13,310 Net increase in cash 7,680
Cash balance, May 1 -
Cash balance, May 31 $ 7,680
Chapter
1-47
Information for a Statement of Cash Flows

specific period of time.
Barone’s Repair Shop
Statement of Cash Flows
Answers the following: For the Month Ended May 31, 2010
Cash flow from operating activities
1. Where did cash come
Cash receipts from revenues $ 5,220
from? Cash paid for expenses (2,540)
Cash provided by operations 2,680
2. What was cash used Cash flow from investing activitites
for? Purchase of equipment (5,000)
Cash flow from financing activities
3. What was the change Investment by owners 10,000
Cash provided by financing 10,000
in the cash balance?
Net increase in cash 7,680
Cash balance, May 1 -
Cash balance, May 31 $ 7,680
Chapter
Chapter
Review Question
Which of the following financial statements is
prepared as of a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.
Chapter
Discussion Question
Q1-19. “A company’s net income appears
directly on the income statement and the
owner’s equity statement, and it is included
indirectly in the company’s balance sheet.” Do
you agree? Explain.
Chapter
Accounting Career Opportunities
Public Accounting
Careers in auditing and taxation serving the general public.
Private Accounting
Careers in industry working in cost accounting, budgeting,
accounting information systems, and taxation.
Opportunities in Government
Careers with the IRS, the FBI, the SEC, and in public
colleges and universities.
Forensic Accounting
Careers with insurance companies and law offices to conduct
investigations into theft and fraud.
Chapter
1-52 SO 9 Explain the career opportunities in accounting.

Principles Accounting

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Principles Accounting

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Lecturer of Accounting and Finance

1. Explain what accounting is.

The Building The Basic Using the

Three Ethics in Assets Transaction Income

The purpose of accounting is to:

The accounting process includes

See notes page for discussion

Ethics In Financial Reporting

Recent financial scandals include: Enron,

Congress passed Sarbanes-Oxley Act of 2002.

Effective financial reporting depends on sound

SO 3 Understand why ethics is a fundamental business concept.

SO 3 Understand why ethics is a fundamental business concept.

The accounting profession

Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB)

International Accounting Standards Board

Cost Principle (Historical) – dictates that companies

Monetary Unit Assumption – include in the

Proprietorship Partnership Corporation

Generally owned Owned by two or Ownership

Chapter SO 5 Explain the monetary unit assumption

Chapter SO 5 Explain the monetary unit assumption

Provides the underlying framework for recording and

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership

Chapter SO 6 State the accounting equation, and define

Provides the underlying framework for recording and

Resources a business owns.

Provides the underlying framework for recording and

Claims against assets (debts and obligations).

Provides the underlying framework for recording and

Ownership claim on total assets.

Revenues result from business activities entered into for

Chapter SO 6 State the accounting equation, and define

Expenses are the cost of assets consumed or services used

Chapter SO 6 State the accounting equation, and define

Transactions are a business’s economic events

Not all activities represent transactions.

Each transaction has a dual effect on the

Chapter SO 7 Analyze the effects of business transactions

Q1-15: Are the following events recorded in the

Criterion Is the financial position (assets, liabilities, or

Chapter SO 7 Analyze the effects of business transactions

See notes page for discussion

P1-1A: Barone’s Repair Shop was started on May 1 by Nancy

1. Invested $10,000 cash to start the repair shop.

Chapter SO 7 Analyze the effects of business transactions

2. Purchased equipment for $5,000 cash.

Accounts Accounts Barone, Barone,

Chapter SO 7 Analyze the effects of business transactions

3. Paid $400 cash for May office rent.

Accounts Accounts Barone, Barone,

Chapter SO 7 Analyze the effects of business transactions

4. Incurred $250 of advertising costs, on account.

Accounts Accounts Barone, Barone,

Chapter SO 7 Analyze the effects of business transactions

5. Received $5,100 from customers for repair service.

Accounts Accounts Barone, Barone,

Chapter SO 7 Analyze the effects of business transactions

6. Withdrew $1,000 cash for personal use.

Accounts Accounts Barone, Barone,