ACCOUNTING IN ACTION

Chapter 1
“
PLEASE CHANGE YOUR NAME TO
STUDENT NAME _ STUDENT ID

INSTRUCTOR
PHAM PHUONG KHA
• Bachelor in Accounting and Finance (Monash University –
Australia)
• Master in Business (Accounting) – (Monash University –
Australia)
• Master in Applied Finance (Monash University – Australia)
• kha.pham@isb.edu.vn

 ASSESSMENTS
• Weekly Pre-class Online Quiz (Individual) 5%
– Due each session, from W2 - Best 8
– Available 2 days before class, 8 - 10pm
• Weekly Post-class Online Quiz (Individual) 10 %
– Due each session - Best 8
– Available 2 days after class, 8 - 10pm
• Tutorial Tests (Group) 20 %
– Due each session in class (by 8pm) - Best 8
• Group Assignment (Group) 10 %
– Due session 12
• Mid-term exam 20 %
– Due session 6 (TBC)
• Final Exam (Individual) 35 %

 TUTORIAL TESTS
• Work in group

• Students select their own groups from the beginning of the

course. And there will be no changes after the group has been
made.

• Tutorial test due: 8 pm (online, after each session)

• Submit on CANVAS:
– ONLY ONE MEMBER in group will submit the final file. You have 2 attempts
– File name: PA11_TT01_Group 1
– NO LATE SUBMISSION accepted

LEARNING OBJECTIVES

1 Identify the activities and users associated with accounting.

2 Explain the building blocks of accounting: ethics, principles, and assumptions.

3 State the accounting equation, and define its components.

4 Analyze the effects of business transactions on the accounting equation.

Describe the four financial statements and how they are

5 prepared.

 LEARNING OBJECTIVE 1:
IDENTIFY THE ACTIVITIES AND USERS ASSOCIATED WITH ACCOUNTING.

ACCOUNTING ACTIVITIES

Accounting consists of three basic

activities - it:
➤ identi es,
➤ records, and
➤ communicates
the economic events of an organization
to interested users.

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ACCOUNTING ACTIVITIES
Illustration 1-1
The activities of the accounting process

The accounting process includes

the bookkeeping function.

LO 1

ACCOUNTING INFORMATION USERS

INTERNAL
USERS

Illustration 1-2
Questions that internal
users ask

LO 1 10

ACCOUNTING INFORMATION USERS

EXTERNAL
USERS

Illustration 1-3
Questions that external
users ask
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 LEARNING OBJECTIVE 2:
EXPLAIN THE BUILDING BLOCKS OF ACCOUNTING:
ETHICS, PRINCIPLES, AND ASSUMPTIONS.

12

 ETHICS IN FINANCIAL REPORTING

◆ Recent nancial scandals include: Enron,
WorldCom, HealthSouth, AIG, and other
companies.
◆ Regulators and lawmakers concerned that
economy would su er if investors lost
con dence in corporate accounting. In
response,
► Congress passed Sarbanes-Oxley Act
(SOX).
◆ E ective nancial reporting depends on sound
ethical behavior.
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ETHICS IN FINANCIAL REPORTING

Illustration 1-4
Steps in analyzing ethics cases
and situations
14 LO 2

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Financial Statements
Various users
need nancial ◆ Balance Sheet
information ◆ Income Statement
◆ Statement of Owner's Equity
◆ Statement of Cash Flows
◆ Note Disclosure

The accounting profession

Generally Accepted
has developed standards that
Accounting
are generally accepted and
Principles (GAAP)
universally practiced. 16
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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Generally Accepted Accounting Principles (GAAP) – Standards that are generally
accepted and universally practiced. These standards indicate how to report economic events.

Standard-setting bodies:

► Financial Accounting Standards

Board (FASB)

► Securities and Exchange

Commission (SEC)

► International Accounting
Standards Board (IASB)

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MEASUREMENT PRINCIPLES
HISTORICAL COST PRINCIPLE (or cost principle) dictates that companies
record assets at their cost.

FAIR VALUE PRINCIPLE states that assets and liabilities should be reported at
fair value (the price received to sell an asset or settle a liability).

Selection of which principle to

follow generally relates to trade-offs
between relevance and faithful
representation.

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ASSUMPTIONS
MONETARY UNIT ASSUMPTION requires that companies
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 Business
◆ Partnership
Ownership
◆ Corporation
19 LO 2

FORMS OF BUSINESS OWNERSHIP

Proprietorship Partnership Corporation

◆ Owned by one ◆ Owned by two or ◆ Ownership

person more persons divided into
shares of stock
◆ Owner is often ◆ Often retail and
manager/operator service-type ◆ Separate legal
businesses entity organized
◆ Owner receives
under state
any profits, ◆ Generally
corporation law
suffers any losses, unlimited
and is personally personal liability ◆ Limited liability
liable for all debts ◆ Partnership
agreement 20

 LEARNING OBJECTIVE 3:
STATE THE ACCOUNTING EQUATION, AND DEFINE ITS COMPONENTS.

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BASIC ACCOUNTING EQUATION

◆ Provides the underlying framework for recording and summarizing economic events.

◆ Assets are claimed by either creditors or owners.

◆ If a business is liquidated, claims of creditors must be paid before ownership claims.

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BASIC ACCOUNTING EQUATION

Assets

◆ Resources a business
owns.

◆ Provide future services or

benefits.

◆ Cash, Supplies,
Equipment, etc.

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BASIC ACCOUNTING EQUATION

Liabilities
◆ Claims against assets (debts
and obligations).

◆ Creditors (party to whom

money is owed).

◆ Accounts Payable, Notes

Payable, Salaries and Wages
Payable, etc.
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BASIC ACCOUNTING EQUATION

Owner's Equity

◆ Ownership claim on total

assets.

◆ Referred to as residual equity.

◆ Investment by owners and
revenues (+)
◆ Drawings and expenses (-).

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EXPANDED ACCOUNTING EQUATION

Increases in Owner’s Equity

◆ Investments by owner: the assets the owner puts into the business.
◆ 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.
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EXPANDED ACCOUNTING EQUATION

Decreases in Owner’s Equity

◆ Drawings An owner may withdraw cash or other assets for personal use.
◆ 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.

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28
 LEARNING OBJECTIVE 4:
ANALYZE THE EFFECTS OF BUSINESS TRANSACTIONS ON THE
ACCOUNTING EQUATION.

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BUSINESS TRANSACTIONS

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.

30 LO 4

BUSINESS TRANSACTION ANALYSIS

Illustration: Are the following events recorded in the accounting records?

Discuss product
Purchase
Event design with Pay rent
computer
potential customer

Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?

Record/
Don’t Record

31 LO 4

BUSINESS TRANSACTION ANALYSIS

TRANSACTION 1. INVESTMENT BY OWNER

Ray Neal decides to start a smartphone app development company which he names Softbyte. On
September 1, 2017, he invests $15,000 cash in the business. This transaction results in an equal
increase in assets and owner’s equity.

32 LO 4

BUSINESS TRANSACTION ANALYSIS

TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH

Softbyte Inc. purchases computer equipment for $7,000 cash.

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BUSINESS TRANSACTION ANALYSIS

TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT

Softbyte Inc. purchases for $1,600 headsets and other accessories expected to last several
months. The supplier allows Softbyte to pay this bill in October.

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BUSINESS TRANSACTION ANALYSIS

TRANSACTION 4. SERVICES PERFORMED FOR CASH

Softbyte Inc. receives $1,200 cash from customers for app development services it has performed.

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BUSINESS TRANSACTION ANALYSIS

TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT

Softbyte Inc. receives a bill for $250 from the Daily News for advertising on its online website but
postpones payment until a later date.

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BUSINESS TRANSACTION ANALYSIS

TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT.

Softbyte performs $3,500 of services. The company receives cash of $1,500 from customers, and it
bills the balance of $2,000 on account.

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BUSINESS TRANSACTION ANALYSIS

TRANSACTION 7. PAYMENT OF EXPENSES

Softbyte Inc. pays the following expenses in cash for September: office rent $600, salaries and wages
of employees $900, and utilities $200.

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 BUSINESS TRANSACTION ANALYSIS

TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc. pays its $250 Daily News bill
in cash. The company previously (in Transaction 5) recorded the bill as an increase in Accounts Payable.

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TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT

Softbyte Inc. receives $600 in cash from customers who had been billed for services (in Transaction 6).

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TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER

Ray Neal withdraws $1,300 in cash from the business for his personal use.

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SUMMARY OF TRANSACTIONS
1. Each transaction is analyzed in terms of its effect on:

a. The three components of the basic accounting equation.

b. Specific of items within each component.

2. The two sides of the equation must always be equal.

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 LEARNING OBJECTIVE 5:
DESCRIBE THE FOUR FINANCIAL STATEMENTS
AND HOW THEY ARE PREPARED.

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FINANCIAL STATEMENTS

Companies prepare four financial statements :

Owner’s Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows

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 Net income is needed to determine the
FINANCIAL STATEMENTS ending balance in owner’s equity.

SOFTBYTE
Income Statement
For the Month Ended September 30, 2017

Illustration 1-
Financial statements and
their interrelationships

SOFTBYTE
Owner’s Equity Statemen
For the Month Ended September 30, 2017

45 LO 5
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 SOFTBYTE
Owner’s Equity Statemen
For the Month Ended September 30, 2017

Illustration 1-9
The ending
balance in SOFTBYTE
owner’s equity Balance Shee
September 30, 2017
is needed in
preparing the
balance sheet.

Illustration 1-
Financial statements
and their
interrelationships

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 SOFTBYTE

FINANCIAL STATEMENTS Balance Shee

September 30, 2017

Balance sheet and

income statement
are needed to
prepare statement of
cash flows.
SOFTBYTE
Statement of Cash Flow
For the Month Ended September 30, 2017

Illustration 1-
Financial statements
and their
interrelationships

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INCOME STATEMENT
◆ Reports the revenues and expenses for a specific period
of time.

◆ Lists revenues first, followed by expenses.

◆ Shows net income (or net loss).

◆ Does not include investment and withdrawal

transactions between the owner and the
business in measuring net income.

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OWNER’S EQUITY STATEMENT

◆ Reports the changes in owner’s equity for a specific period of time.

◆ The time period is the same as that covered by the income statement.

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BALANCE SHEET
◆ Reports the assets, liabilities, and owner's equity
at a specific date.

◆ Lists assets at the top, followed by liabilities and

owner’s equity.

◆ Total assets must equal total liabilities and

owner's equity.

◆ Is a snapshot of the company’s financial

condition at a specific moment in time (usually
the month-end or year-end).

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STATEMENT OF CASH FLOWS

◆ Information on the cash receipts and payments for a specific period of time.

◆ Answers the following:

► Where did cash come from?

► What was cash used for?

► What was the change in the

cash balance?

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