Accounting Cha-1

SEEK WISDOM, ELEVATE YOUR EXCELLENCE & SERVE HUMANITY
AcFn 3142
Chapter One
Introduction to Accounting & Business
Fundamentals of Accounting I-AAUSC, AAUSC, 3142

Ch1: Introduction to Accounting and
Business
Outline
– The nature of a business
– Types of business organizations
– The role of accounting in business
– The profession of Accounting
– Overview of International Financial Reporting
Standards (IFRS)
– The accounting equation and elements of the equation
– Business transactions and financial statements
Fundamentals of Accounting I-AAUSC,

AAUSC, 3142
Ch1: Introduction to Accounting and
Business
The Nature of Business
 A business is an organization in which basic
resources (inputs), such as materials and labor, are
assembled and processed to provide goods or
services (outputs) to customers.
 Businesses come in several types and sizes, (Small
shops, Supermarkets, Laundry, Hotels, Garage,
educational institutions, banks, insurance and so on)

AAUSC, 3142
…Ch1: Introduction to Accounting and
Business
…The Nature of Business
Organizations can be classified in various forms:
 Based on objective:
 Profit making/ Not for Profit organizations
 Based on Function:
 Service giving, Merchandising, Manufacturing, Farming ..
 Based on Ownership, there are three common forms of
businesses:
1.Sole Proprietorship,
2.Partnership
3.Corporation (Share Company)
AAUSC, 3142
…Ch1: Introduction to Accounting
 Ownership
and Business
divided into
Forms of Business Ownership
shares
 Separate legal
Proprietorship Partnership Corporation
entity organized
under corporation
 Generally owned law
 Owned by two or
by one person  Limited liability
more persons
 Often small
service-type  Often retail and
businesses service-type
businesses
 Owner receives
any profits,  Generally
suffers any unlimited
losses, and is personal liability
personally liable  Partnership
for all debts agreement
LO 5I-AAUSC,
Fundamentals of Accounting Explain the monetary unit assumption
AAUSC, 3142 and the economic entity assumption.
Business
…The Nature of Business
Regardless of the objective, size, function and
form of ownership, all organizations are
required to keep records showing their
financial activities. This implies the fact that
accounting is needed in all types of
organizations.
 So what is Accounting? Why it is needed in all
organizations?

AAUSC, 3142
…Ch1: Introduction to Accounting and Business
What is Accounting?
Accounting is the process of identifying, measuring, recording,
classifying, communicating and interpreting the reports.
Accounting consists of three basic activities - it

 identifies,
 records, and
 communicates
the economic events of an organization to interested users.

AAUSC, 3142 LO 1 Explain what accounting is.
What is Accounting? Illustration 1-1
Three Activities The activities of the

accounting process
The accounting process includes the bookkeeping function.

Book keeping is only the recording part of accounting.
Accounting is wider than bookkeeping.

AAUSC, 3142 LO 1 Explain what accounting is.
Business
……What is Accounting?
Accounting is the language of business – it
can be viewed as an information system that
identifies, measures, and communicates
financial information about economic entities
to interested persons.
Accounting mainly deals with information
that is quantitative in nature.

AAUSC, 3142
……Ch1: Introduction to Accounting and
Business
What is the Role of Accounting in

Business?
The Role of Accounting in business is to

provide financial information to
managers for use in operating the
business. In addition, accounting provides
information to other users in assessing the
economic performance and condition of
the business.

AAUSC, 3142
Business
Who are users of Accounting Information?
Users of accounting information are parties
that are interested to know about the financial
activities of the organization to make various
decisions
Users of accounting information can be
broadly classified into two categories;
Internal Users
External users
AAUSC, 3142
Who Uses Accounting Data

External
Users
Internal
Users Human Taxing
Resources Authorities
Labor
Unions
Finance
Management Customers
Creditors
Marketing Regulatory
Agencies
Investors

LO 23142
AAUSC, Identify the users and uses of accounting.
Business
…….Internal users:
- Include Top executives, management, and
administrators within organizations. ( Managers at
different levels)
– Purpose: They need financial information to plan and
control operations
– Type of report & frequency- They need detailed and
frequent information
– These group of users have access to company
information

AAUSC, 3142
2. External Users
• Include Shareholders, Banks, Creditors, Investors,
suppliers, government
• Purpose: They need financial information about
entire company’s financial performance (Profit/loss),
financial position (resources and sources) and cash
flow
• Type of report: periodic report showing
aggregate/company wide information in the form of
general purpose financial statements
• They do not have access to company information
AAUSC, 3142
Business
• Fundamental relationships in the decision-
making process:
Accountant’s
analysis & Financial
Event Users
recording Statements

AAUSC, 3142
The ACCOUNTING Profession/CAREER OPPORTUNITIES
Public Accounting Private Accounting

Careers in auditing, taxation, Careers in industry working in
and management consulting cost accounting, budgeting,
serving the general public. accounting information
systems, and taxation.
Government Forensic Accounting

Careers with the tax Uses accounting, auditing, and
authorities, law enforcement investigative skills to conduct
agencies, and corporate investigations into theft and
regulators. fraud.

LOAAUSC,
9 Explain3142 the career opportunities in accounting.
STUDY OBJECTIVES 3, 4 & 5
The Building Blocks of Accounting
The following are considered to be the building

blocks of accounting
1. Ethics
2. Accounting Standards (IFRS)
3. Measurement Principles & Assumptions

AAUSC, 3142
• ..The Building Blocks of Accounting
Measurement Principles:
• IFRS generally uses one of two measurement principles,

the historical cost principle and Fair Value principle
• Cost Principle – or historical 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).
AAUSC, 3142
….The Building Blocks of Accounting
Assumptions
Monetary Unit – include in the accounting records only
transaction data that can be expressed in money terms.
Economic Entity – requires that activities of the entity be

kept separate and distinct from the activities of its owner and
all other economic entities.
 Proprietorship.
 Partnership. Forms of Business
Ownership
 Corporation.
LO 5I-AAUSC,
Fundamentals of Accounting Explain the monetary unit assumption
AAUSC, 3142 and the economic entity assumption.
Business
….The Building Blocks of Accounting
• Application of business entity concept enables users to
have accurate information about how well the entity is
doing.
The following are not violations of this assumption:
1. Withdrawal of assets by owners for personal use
recorded as owners withdrawals, not as a business
expense
2. Combining the financial statements of different
businesses to have an overall view/aggregate figure
AAUSC, 3142
..The Building Blocks of Accounting

• Frequency of reporting
An entity is required to present a complete
set of financial statements at least
annually.
• Accrual method of accounting
It is a method of accounting in which transactions
are recorded in the periods in which the events
occur.

AAUSC, 3142
Accrual Vs Cash Basis of Accounting
Companies prepare financial statements based on Accrual Basis
Accrual Basis of Accounting Cash Basis of Accounting
Revenue is recorded in the Revenue is recorded in the

period it is earned regardless period of cash collection.
of collection  In December 2019 ABC Co.
In December 2019 ABC Co. rendered Service :
 on cash: Br 100,000
rendered Service :
 on account/on credit: Br
 on cash: Br 100,000
200,000 (it was collected in
 on account/on credit: Br Feb. 2020)
200,000 (it was collected in Only Revenue of Br 100,000 is
Feb. 2020) reported in December 2019 and
Total Revenue of Br 300,000 is Br 200,000 is reported in 2020
reported in December 2019 AAUSC, 3142
Accrual Vs Cash Basis of Accounting
Accrual Basis of Accounting Cash Basis of Accounting
Expense is recorded in the Expense is recorded in the

period it is incurred period of cash payment.
regardless of payment  In December2019 ABC Co.
 In December2019 ABC Co. incurred Expenses as follows:
incurred Expenses as  paid in cash: Br 50,000
follows:  incurred but not paid Br 80,000
 paid in cash: Br 50,000 (it was paid in Jan. 2020)
 incurred but not paid Br Only Expense of Br 50,000 is
80,000 (it was paid in Jan. reported in December 2019 and
2020) Br 80,000 is reported in 2020
Total expense of Br 130,000 is of Accounting I-AAUSC,
Fundamentals
reported in December 2019 AAUSC, 3142
..Ch1: Introduction to Accounting and Business
Activity:
Records for the year ending December 31,2020 shows:
-Cash sales for the year ……$150,000
-Credit sales for the year …. 400,000
-Cash collected from credit sales…..100,000
Determine total sales for the year ending December 31,2020

under:
A. Accrual basis
B. Cash basis
AAUSC, 3142
..Ch1: Introduction to Accounting and Business
Which one is realistic, Accrual or Cash Basis? Which
method do companies use?
 Accrual method is considered to be realistic in
measuring the operation results of the business in terms
of net income and net loss since it matches efforts with
accomplishments (revenues are reported in the period
efforts to generate revenues are exerted).
 IFRS requires companies to prepare financial
statements based on Accrual Basis

AAUSC, 3142
The accounting equation and elements of the equation

The Accounting Equation: The foundation of accounting system.
The accounting (balance sheet) equation is an equation that expresses the
following relationships:
Assets = Liabilities + Owner’s Equity
=
Resources Sources of the resources
Equity = Creditors equity + Owners equity

AAUSC, 3142
The Basic Accounting Equation
Assets = Liabilities + Equity
Provides the underlying framework for recording and summarizing

economic events.
Applies to all economic entities regardless of size.

LO 6 State the accounting
AAUSC, 3142 equation, and define its components.

economic events.
Assets
 Resources a business owns.
 Provide future services or benefits.
 Cash, Inventory, Equipment, etc.


economic events.
Liabilities
 Claims against assets (debts and obligations).
 Creditors - party to whom money is owed.
 Accounts payable, Notes payable, etc.


economic events.
Equity
Ownership claim on total assets.
Referred to as residual equity.
Share capital-ordinary and retained earnings.

Illustration 1-7
Revenues result from business activities entered into for the purpose
of earning income.
Generally results from selling merchandise, performing services,
renting property, and lending money.

Illustration 1-7
Expenses are the cost of assets consumed or services used in the

process of earning revenue.
Common expenses are salaries expense, rent expense, interest
expense, property tax expense, etc.

Illustration 1-7
Dividends are the distribution of cash or other assets to shareholders.

 Reduce retained earnings
 Not an expense

Classify the following items as issuance of shares, dividends,
revenues, or expenses. Then indicate whether each item
increases or decreases equity.
Classification Effect on Equity
1. Rent expense Expense Decrease
2. Service revenue Revenue Increase
3. Dividends Equity Decrease

4. Salaries expense Expense Decrease
LO 6 State the accounting equation, and define its components.

Using the 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.

LO 7 Analyze the effects of business
AAUSC, 3142transactions on the accounting equation.
Illustration: Are the following events recorded in the

accounting records?
Illustration 1-8
Discuss
Purchase product
Event Pay rent.
computer. design with
customer.
Criterion Is the financial position (assets, liabilities, or equity)

of the company changed?
Record/ Don’t
Record

Transaction Analysis
Illustration 1-9
Expanded accounting equation

Transaction (1). Investment by Shareholders. Ray and Barbara Neal
decides to open a computer programming service which he names
Softbyte. On September 1, 2014, they invest €15,000 cash in exchange for
€15,000 of ordinary shares. Illustration 1-10

AAUSC, 3142 LO 7
Transaction (2). Purchase of Equipment for Cash. Softbyte purchases
computer equipment for €7,000 cash.
Illustration 1-10

AAUSC, 3142 LO 7
Transaction (3). Purchase of Supplies on Credit. Softbyte purchases for
€1,600 from Acme Supply Company computer paper and other supplies
expected to last several months. The purchase is on account.
Illustration 1-10

AAUSC, 3142 LO 7
Transaction (4). Services Provided for Cash. Softbyte receives €1,200
cash from customers for programming services it has provided.
Illustration 1-10

AAUSC, 3142 LO 7
Transaction (5). Purchase of Advertising on Credit. Softbyte receives a
bill for €250 from the Daily News for advertising but postpones payment
until a later date.
Illustration 1-10

AAUSC, 3142 LO 7
Transaction (6). Services Provided for Cash and Credit. Softbyte
provides €3,500 of programming services for customers. The company
receives cash of €1,500 from customers, and it bills the balance of €2,000
on account.
Illustration 1-10

AAUSC, 3142 LO 7
Transaction (7). Payment of Expenses. Softbyte pays the following
expenses in cash for September: store rent €600, salaries and wages of
employees €900, and utilities €200.
Illustration 1-10

AAUSC, 3142 LO 7
Transaction (8). Payment of Accounts Payable. Softbyte pays its €250
Daily News bill in cash.
Illustration 1-10

AAUSC, 3142 LO 7
Transaction (9). Receipt of Cash on Account. Softbyte receives €600 in
cash from customers who had been billed for services [in Transaction (6)].
Illustration 1-10

AAUSC, 3142 LO 7
Transaction (10). Dividends. The corporation pays a dividend of €1,300 in
cash.
Illustration 1-10

AAUSC, 3142 LO 7
Financial Statements
Companies prepare four financial statements :
Retained Statement of
Income Statement of
Earnings Financial
Statement Cash Flows
Statement Position

LO 8 Understand the four financial
AAUSC, 3142 statements and how they are prepared.
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.

Net income is needed to determine the
Financial Statements ending balance in retained earnings.
Illustration 1-11
Financial statements and
their interrelationships

AAUSC, 3142 LO 8
The ending balance in retained earnings is
Financial Statements needed in preparing the balance sheet
Illustration 1-11

AAUSC, 3142 LO 8
The balance sheet and income statement are
Financial Statements needed to prepare statement of cash flows.
Illustration 1-11

AAUSC, 3142 LO 8
Question
Which of the following financial statements is prepared as
of a specific date?
a. Statement of financial position.
b. Income statement.
c. Retained earnings statement.
d. Statement of cash flows.

Chapter 1
The End
Any

AAUSC, 3142

Accounting Cha-1

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SEEK WISDOM, ELEVATE YOUR EXCELLENCE & SERVE HUMANITY

Fundamentals of Accounting I-AAUSC, AAUSC, 3142

Fundamentals of Accounting I-AAUSC,

Fundamentals of Accounting I-AAUSC,

Fundamentals of Accounting I-AAUSC,

Accounting consists of three basic activities - it

the economic events of an organization to interested users.

Fundamentals of Accounting I-AAUSC,

Three Activities The activities of the

The accounting process includes the bookkeeping function.

Fundamentals of Accounting I-AAUSC,

Fundamentals of Accounting I-AAUSC,

What is the Role of Accounting in

The Role of Accounting in business is to

Fundamentals of Accounting I-AAUSC,

Who Uses Accounting Data

Fundamentals of Accounting I-AAUSC,

Fundamentals of Accounting I-AAUSC,

Fundamentals of Accounting I-AAUSC,

Public Accounting Private Accounting

Government Forensic Accounting

Fundamentals of Accounting I-AAUSC,

The Building Blocks of Accounting

The following are considered to be the building

Fundamentals of Accounting I-AAUSC,

• IFRS generally uses one of two measurement principles,

• Fair Value Principle – states that assets and liabilities should

Economic Entity – requires that activities of the entity be

..The Building Blocks of Accounting

Fundamentals of Accounting I-AAUSC,

Accrual Basis of Accounting Cash Basis of Accounting

Revenue is recorded in the Revenue is recorded in the

Accrual Basis of Accounting Cash Basis of Accounting

Expense is recorded in the Expense is recorded in the

Determine total sales for the year ending December 31,2020

Fundamentals of Accounting I-AAUSC,

The accounting equation and elements of the equation

Assets = Liabilities + Owner’s Equity

Equity = Creditors equity + Owners equity

Assets = Liabilities + Equity

Provides the underlying framework for recording and summarizing

Fundamentals of Accounting I-AAUSC,

Assets = Liabilities + Equity

Provides the underlying framework for recording and summarizing

Fundamentals of Accounting I-AAUSC,

Assets = Liabilities + Equity

Provides the underlying framework for recording and summarizing

Fundamentals of Accounting I-AAUSC,

Assets = Liabilities + Equity

Provides the underlying framework for recording and summarizing

Fundamentals of Accounting I-AAUSC,

Fundamentals of Accounting I-AAUSC,

Expenses are the cost of assets consumed or services used in the

Fundamentals of Accounting I-AAUSC,

Dividends are the distribution of cash or other assets to shareholders.

Fundamentals of Accounting I-AAUSC,

Classification Effect on Equity

1. Rent expense Expense Decrease