introduction to accounting 22.5.2013

7/29/2019 Introduction to Accounting 22.5.2013

1/62

ACCOUNTING

THE LANGUAGE OF

BUSINESS


2/62

2

OBJECTIVES

1. Define accounting, identify business goals and activities, anddescribe the role of accounting in making informed decisions.

2. Identify the many users of accounting information in society.

3. Explain the importance of business transactions, money

measure, and separate entity to accounting measurement.

4. Describe the corporate form of business organization.

5. Define financial position, state the accounting equation, andshow how they are affected by simple transactions.

6. Identify the four financial statements.

7. State the relationship of generally accepted accounting principles(GAAP) to financial statements and the independent CPAs

report.

8. Define ethics and describe the ethical responsibilities ofaccountants.


3/62

3

ACCOUNTING AS ANINFORMATION SYSTEM

OBJECTIVE 1

Define accounting, identify businessgoals and activities, and describe therole of accounting in making informeddecisions.


4/62

Accounting Defined

Accountingprovides a vital service bysupplying the information decision makersneed to make reasoned choices amongalternative uses of scarce resources in the

conduct of business and economic activities.

Accounting - a process of identifying,

recording, summarizing, and reportingeconomic information to decision makers inthe form offinancial statements to permit

informed decisions and judgments.

4


5/62

Accounting and Decisions

Accounting is a link betweenbusiness activities and decision

makers.Accounting measures businessactivities by recording data aboutthem for future use.

The data are stored until needed

and then processed to become

5


6/62

Business Goals

1. Profitability.-

A business must take in enough moneyto pay all the costs of doing business,with enough left over as profit for theowners to want to stay in business.

2. Liquidity.-

A business must have enough cashavailable to pay debts when they aredue.

6


7/62

7

Business Goals and Activities


8/62

8

1. Financing Activities.

Obtaining capital from owners andcreditors.

Repaying creditors and a return to owners.

2. Investing Activities.

Spending the capital it receives in waysthat are productive and will help thebusiness achieve its objectives.

Buying and selling assets to be used in thebusiness.

Three Business Activities


9/62

9

Business Activities (continued)

3. Operating Activities.

Selling of goods and services tocustomers.

Employing managers and workers,buying and producing goods andservices, and paying taxes.


10/62

10

Specializations- Financial andManagement Accounting

Accountings role of assisting decision makers by

measuring, processing, and communicating

information is usually divided into two categories:1. Management accounting.2. Financial accounting.

The two may be distinguished by the principalusers of their information.


11/62

11

Is oriented toward the needs of internaldecision makers.

Provides managers and employees withinformation regarding how they have done inthe past and what they can expect in the

future.

Management Accounting


12/62

12

Is oriented toward the needs of external decisionmakers.

Provides information in the form of financial

statements so that external decision makers canevaluate how well the business has achieved itsgoals.

Financial statements report directly on the goals ofprofitability and liquidity.

Financial statements are used extensively both insideand outside a business to evaluate the businesss

success.

Financial Accounting


13/62

13

Processing AccountingInformation

Bookkeepingis the mechanical and repetitiveprocess of recording financial transactions and

keeping financial records.

Bookkeepingis a small part of accounting.

Accountingincludes the design of an information

system that meets users needs.Accountinggoals are the analysis, interpretation,

and use of information.

Accounting versus bookkeeping


14/62

Accounting versus bookkeepingcont

Computers are used extensively in accountingas a tool for the accountant.

A businesss many information needs are

organized into a Management InformationSystem (MIS).

An MIS consists of various interconnected

subsystems.The Accounting Information System (AIS) is

the most important subsystem.

14


15/62

15

DECISION MAKERS: THE

USERS OF ACCOUNTINGINFORMATION

OBJECTIVE 2Identify the users of accounting informationin society.


16/62

16

The Users of Accounting Information


17/62

17

Requires financial information to carry outits basic functions.

1. Financing the business.

2. Investing the resources of the business.

3. Producing goods and services.

4. Marketing goods and services.

5. Managing employees.

6. Providing information to decisionmakers.

Management


18/62

18

Investors

Creditors

Outside Users with a Direct FinancialInterest


19/62

19

Tax Authorities.

Regulatory

Agencies.

Labor Unions.

Customers.Economic Planners.

People, Organizations, and Agencies with anIndirect Financial Interest


20/62

20ACCOUNTINGMEASUREMENT

OBJECTIVE 3

Explain the importance of business transactions,money measure, and separate entity to accountingmeasurement.


21/62

21

Business transactions as the object ofmeasurement.

Business transactions are economic events thateffect the financial position of a business entity.

Transactions are the raw material of accounting

reports.

Transactions must relate directly to a business entity.

What Is Measured?


22/62

Accounting Measurementcont

Money Measure.

Money is the only factor common to all businesstransactions.

The monetary unit a business uses depends onthe country in which the business resides.

Exchange rates translate one currency to another.

The Concept of Separate Entity.

A business is a separate entity, distinct from itscreditors and customers and from its owner orowners.

22


23/62

23

THE CORPORATION AS A

SEPARATE ENTITY

OBJECTIVE 4

Describe the corporate form ofbusiness organization.

T f B i


24/62

24

Types of BusinessOrganization

SoleProprietorship.

Partnership.

Corporation.

e orpora e orm o


25/62

25

e orpora e orm oBusiness

Formation of a Corporation.

Organization of a Corporation.

Stockholders.Board of Directors.

Management.

THE


26/62

26THEACCOUNTING EQUATION

OBJECTIVE 5Define financial position,

state the accounting equation, andshow how they are affected by

simple transactions.


27/62

27

Assets are economic resourcesowned by a business that areexpected to benefit future operations.

Monetary items.

Nonmonetary physical things.

Assets


28/62

28

Liabilities

Liabilities are the presentobligations of a business to pay

cash, transfer assets, or provideservices to other entities in thefuture.

O ners Eq it


29/62

29

Owners equity represents the claims by the

owners of a business to the assets of thebusiness.

Owners equity is the residual equity that

remains after deducting liabilities from assets.

OE = Assets - Liabilities.

Assets = Liabilities + SE.

SE = Contributed Capital + Retained Earnings.

- Accumulated losses

Owners Equity

(OE)

Three Types of Transactions That


30/62

30

Three Types of Transactions ThatAffect Retained Earnings


31/62

31

Some IllustrativeTransactions


32/62

32

T1. Owners Investments of$50,000

ASSETS SE

Cash C/S

Assets = $50,000; L+SE = $50,000

Beg. Bal.T1.

End. Bal.

$ 050,000

$50,000

$ 050,000

$50,000


33/62

33

. , 10,000 and Bldg, $ 25,000) withCash.

Assets = $50,000; L+SE = $50,000

ASSETS

Cash Land Bldg.

Beg. Bal. $50,000 $ 0 $ 0T2. -35,000 +10,000 +25,000

End. Bal. $15,000 $10,000 $25,000


34/62

34

.(supplies) by Incurring aLiability of $ 500

Assets = $50,500; L+SE= $50,500

ASSETS LIABILITIES

Supplies Acc/Payable

Beg. Bal. $ 0 $ 0

T3. +500 +500

End. Bal. $500 $500

T4 Payment of a Liability of $ 200


35/62

35

T4. Payment of a Liability of$ 200with Cash

Assets = $50,300; L+SE = $50,300

ASSETS LIABILITIES

Cash Acc/Payable

$15,000

- 200

$14,800

Beg. Bal.

T4.

End. Bal.

$500

-200

$300

omm ss on evenues


36/62

36

. omm ss on evenuesEarned That Was Paid in Cash

worth $ 1,500

Assets = $51,800; L+SE = $51,800

ASSETS SE

Cash R/E

Beg. Bal $14,800 $ 0T5. + 1,500 +1,500

End. Bal. $16,300 $1,500

v u


37/62

37

. v uCommission with Deferred

Receipt of$ 2,000

Assets = $53,800; L+SE = $53,800

ASSETS SE

Acc/Receivable R/E

Beg. Bal $ 0 $1,500T6. +2,000 +2,000

End. Bal. $2,000 $3,500

T7 C ll t d A t


38/62

38

T7. Collected an AccountsReceivable of$ 1,000

Assets = $53,800; L+SE = $53,800

ASSETS

Cash A/R

Beg. Bal. $16,300 $2,000T7. + 1,000 - 1,000

End. Bal. $17,300 $1,000


39/62

39

T8. Paid Equipment Rental Expense $1000T9. Paid Wages Expense $ 400 with Cash

Assets = $52,400; L+SE = $52,400

ASSETS SE

Cash R/E

Beg. Bal $ 17,300 $3,500T8. - 1,000 -1,000

T9. - 400 - 400

End. Bal. $15,900 $2,100

T10 R i d tilit bill (E ) f $


40/62

40

T10. Received a utility bill (Expense) of$300 thus Incurring a Liability

Assets = $52,400; L+SE = $52,400

SE

A/P R/EBeg. Bal. $300 $2,100

T10. +300 - 300

End. Bal. $600 $1,800

T11 Paid Dividends of $ 600 with


41/62

41

T11. Paid Dividends of$ 600 withCash

Assets = $51,800; L+SE = $51,800

ASSETS SE

Cash R/EBeg. Bal $15,900 $1,800

T11. - 600 - 600

End. Bal. $15,300 $1,200


42/62

42

COMMUNICATION THROUGHFINANCIAL STATEMENTS

OBJECTIVE 6Identify the four financial statements.

The Importance of Financial


43/62

43

The Importance of FinancialStatements

Financial statements are the primary means ofcommunicating important accounting informationto users.

Financial statements represent models of thebusiness enterprise because they show thebusiness in financial terms.

Financial statements are not perfect pictures ofthe real thing.

The Statement of Income


44/62

44

The Statement of Income

Summarizes revenues earned andexpenses incurred over a period of time.

Is considered by many to be the mostimportant financial report because it showswhether or not a business achieved itsprofitability goal of earning an acceptable

income.

n y , .I St t t


45/62

45

y ,[Title] Income Statement[Period] For the Month Ended December 31,2012

Trace to Statement of

Retained Earnings

Revenues

Commissions Earned $3,500

Expenses

Equipment Rental $1,000Wages 400

Utilities 300

Total Expenses $1,700

Net Income $1,800


46/62

46

The Statement of RetainedEarnings

Shows the changes in retained

earnings over a period of time.

Shannon Realty Company


47/62

47

Shannon Realty, Company.Statement of Retained EarningsFor the Month Ended December 31, 2012

Retained Earnings, 12/1/2012 $ 0

Net Income for the Month 1,800

Subtotal $ 1,800Less Dividends 600Retained Earnings,12/31/2012 $ 1,200

Trace to Owners Equity

Section of Statement of

Financial Position

The Statement of Financial


48/62

48

The Statement of FinancialPosition (Balance Sheet)

Shows financial position at a pointin time.

Presents a view of the business asthe holder of resources, or assets,that are equal to the claims against

those assets.

Shannon Realty, Company.


49/62

49

Shannon Realty, Company.Statement of Financial Position

As of December 31, 2012

ASSETS

Cash $15,300

Accounts Receivable 1,000

Supplies 500

Land 10,000

Building 25,000

Total Assets $51,800

St t t f Fi i l P iti


50/62

50

Statement of Financial Positioncont

LIABILITIES

Accounts Payable $600

STOCKHOLDERS EQUITY

Common Stock$50,000

Retained Earnings $1,200

Total SE $51,200Total Liabilities and SE $51,800

The Statement of Cash


51/62

51

The Statement of CashFlows

Focuses on a companys liquidity goal.

Shows cash produced by operating abusiness as well as important financing

and investing transactions that take placeduring an accounting period.

Is derived from the income statement and

statement of financial position. Is directly related to the other three

statements.



52/62

52

y, p yStatement of Cash FlowsFor the Month Ended December 31, 2012

Cash Flows from Operating Activities

Net Income $1,800

Noncash Expenses and RevenuesIncluded in Income

Increase in A/R $(1,000)

Increase in Supplies (500)

Increase in A/P 600

(900)

Net Cash Flows from

Operating Activities $900

Shannon Realty Company


53/62

53

Shannon Realty, Company.Statement of Cash FlowsFor the Month Ended December 31, 2012

Purchase of Land ($10,000)

Purchase of Building (25,000)

Net Cash Flows from InvestinActivities 35 000

Cash Flows from Investing Activities



54/62

54

y, p yStatement of Cash FlowsFor the Month Ended December 31, 2012

Investments by Stockholders $50,000

Dividends (600)

Net Cash Flows from

Financing Activities 49,400

Net Increase Decrease in Cash $15,300

Cash at Beginning of Month 0Cash at End of Month $15,300

Cash Flows from Financing Activities

Traced to the statement of financial position

55

GENERALLY ACCEPTED


55/62

55

GENERALLY ACCEPTEDACCOUNTING PRINCIPLES

OBJECTIVE 7

State the relationship of generallyaccepted accounting principles(GAAP) to financial statements andthe independent CPAs report

Generally Accepted


56/62

56

Focus on understandability of financialstatements.

Encompass the conventions, rules, andprocedures necessary to define acceptedaccounting practice at a particular time.

They include assumptions (Separate entity,Going concern, Periodicity & Stable

monetary unit), Principles (Historical cost,Revenue recognition, Matching & Fulldisclosure) as well as constraints (Materiality,cost benefit, Prudence & Industrial

peculiarity)

Generally AcceptedAccounting Principles (GAAP)

Financial Statements GAAP and


57/62

57

Financial statements are prepared bymanagement and may be biased.

Financial statements are auditedby independent

CPAs.

An audit ascertains that the financial statementshave been prepared in accordance with GAAP.

GAAP ensure that the financial statements willbe relevant, reliable, comparable andunderstandable to their users.

Financial Statements, GAAP, andthe Independent CPAs Report

58


58/62

58

AND THE ACCOUNTING

PROFESSION

OBJECTIVE 8Define ethics and describe the ethical

responsibilities of accountants.

What Are Professional


59/62

59

What Are ProfessionalEthics?A code of conduct that applies to the

practice of a profession.

Code of conduct adopted by the CPA

and each country. They includeResponsibility to the public.

Integrity.

Objectivity. Independence.

Due care.


60/62

60

Code of Professional Conduct

Competency.

Confidentiality.

Integrity.

Avoidance of conflicts ofinterest.

Communication ofinformationobjectivelyand without bias.

Role Professional Ethics


61/62

61

Professional ethics forms a code ofconduct that applies to the practice of a

profession.As members of a profession, accountants

have a responsibility, not only to their

employers and clients but also to societyas a whole, to uphold the highest ethicalstandards.

Role Professional Ethics


62/62

The End Thank You

Questions? Comments

introduction to accounting 22.5.2013

Documents