Alexandria University English Section

Faculty of Business
Accounting Department

Accounting Principles
(1)

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 CHAPTER 1

ACCOUNTING IN ACTION

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 What is Accounting?
Accounting is an Information System,
which concerns with
Identifying , Measuring (Knowing how much value), and Recording
the economic events of an organization and then
Communicating (Let the others know)

the results to interested users to help them in

making decision(s)
The accounting process includes the
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bookkeeping function.
Three Activities

As a starting point to the accounting process, a company identifies the economic

events relevant to its business. Examples of economic events are the sale of snack
chips by Chipsy, and the payment of wages by Orange

Once a company like Chipsy identifies economic events, it records those events in
order to provide a history of its financial activities. Recording consists of keeping a
systematic, chronological diary of events, measured in dollars and cents. In recording,
.Chipsy also classifies and summarizes economic events

Finally, Chipsy communicates the collected information to interested users by means

.of accounting reports

.We refer to the communication process as financial reporting •

.The most common accounting reports are called financial statements •
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 ?What is the main objective of Accounting

To provide useful information to the

interested users, for making decisions

Who are
the Information
?users about How to
?what deliver this
?information

4 -1
 Who are the
?users

Internal Users External Users

,Management, Marketing Owners., Investors,

, Finance, employees Creditors,, Suppliers,
Human Resources tax authority
.Government …etc
Managerial Accounting Financial Accounting

In the next term Our Concern in this

course

5 -1
 Who Uses Accounting Data

EXTERNAL
USERS

Illustration 1-3
Questions that external
users ask
LO 1
 Who Uses Accounting Data

INTERNAL
USERS

Illustration 1-2
Questions that internal
users ask

LO 1
 Information About What ?
About the results of measuring (knowing the value) of the

1 Results of Operations (Profit or Loss)

Change in Owners’ Equities (wealth)

2

Financial Position
3 Ability to stay in the market for the long run (all assets)

4 Cash Position (Cash Flows From Activities)

Ability to pay liabilities in the short run (cash balance only)
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 ?How To communicate (Deliver) this information
By preparing the basic set of financial statements

Income
-1 Results of Operations (Profit or Loss) Statement
Owners’
-2 Change in Owners’ Equities Equities
Statement

Financial Position Balance

-3
Sheet

Statement of
-4 Cash Flows From different Activities Cash Flows
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?When and how are financial statements prepared
When: To measure the result of any activity that must be
completed first, such as a football match, the result of the
match cannot be confirmed until it is completed. By this
logic, it is necessary to wait until the life of the company is
completely over to measure its results. But no one knows
when the company will end, on the contrary, it is natural
that any company’s owner dreams that his company will be
.going on and expanding in the future
In order to monitor a company’s results, we divide its life
into regular periodic periods (usually a year), so that at the
end of each year, financial statements are prepared to
.measure the company's results during that year
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How: To illustrate this point, let’s take the following case:
Assume that on 1/1/2021 kamal owned 80,000 EGP and
decided to start a small tourism business called Speed
company. This company should start with a limousine, but
unfortunately the price of the car was 90,000 EGP, in
addition to the need to keep at least 10,000 EGP of cash
money to meet any potential expenses (such as secretary
salary and car petrol). Therefore, Speed company decided
to borrow 20,000 EGP from a bank to provide the
.necessary resources to start the business

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At this moment on 1/1/2021, Speed company owns two resources: a car
for 90,000 EGP and cash money for 10,000 EGP, their total is 100,000 EGP,
and this 100,000 EGP was provided from two sources: 80,000 EGP from
kamal as the owner, (The first amount owner started the business with
will be called “capital”) and 20,000 EGP from others (bank)

on 1/1/2021
Resources owned by the business sources to finance these resources
cash 10,0000 others :20,000
car 90,0000 owner 80,000
100,000 100,0000

ASSETS = EQUITIES
ASSETS = LIABILITIES + OWNER’S EQUITIES
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 The Basic Accounting (Balance Sheet) Equation

+
Owner’s
=
Assets Liabilities Equity

• Provides the underlying framework for recording and

summarizing economic events.

• Assets are claimed by either creditors (Liabilities), or

owners (Owner’s Equity).

• If a business is liquidated, claims of creditors must be paid

before ownership claims.
 Speed company had performed services for its customers of
65,000 EGP during the year ended on 12/31/2021 (For simplicity,
suppose that they are all made in cash) , while the expenses
required to operate the company during the same period was
.15,000 EGP (For simplicity, suppose that they are all made in cash)

Now, can you tell us the following: 1- The result of operations

.during the year ended on 12/31/2021
The change in Kamal wealth during the year ended on -2
.12/31/2021
.The financial position of the business on 12/31/2021 -3
.The cash position during the year ended on 12/31/2021 -4

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The company provided services of 65,000 EGP ( REVENUES ) and it was
fully collected in cash, while it spent 15,000 EGP during the same period
.( EXPENSES ) and paid in cash also

You know that Speed had a beginning cash balance of 10,000 EGP . But
the company Collected 65,000 & Paid 15,000 during the year. So, the
ending balance of cash on 12/31/2021 = 10,000 + 65,000 – 15,000 =
60,000
As you see, we have 5 categories, types, or classes (Assets, Liabilities, O.E,
Revenues & Expenses), and each category has several accounts. At the
end of the accounting period, you should prepare 4 financial statements
from these 5 categories. Each financial statement is a table, but before
:preparing any of them, you must write three lines
:Company’s name: 2- Financial statement’s name:. 3- Date -1
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 Speed company
Income statement
For the year ended December 31,2021
Revenues 65,000

Expenses)-( ) 15,000(

NET INCOME 50,000

 From
Speed company
Statement of Owner Equity income
For the year ended December 2021 statement

kamal capital at the beginning 80,000

ADD
Additional investment by the owner(kamal) xx
Net income 50,000
Subtract
Drawings from the owner xx
Kamal capital at the end of 2021 130,000
 Speed company From O,E
Balance sheet statement
Assets On 31/12/2021 L& OE
Cash 60,000 Equity
Car 90,000 Kamal Capital at the end of 130,000
2021

Liabilities
Loan from bank 90,000

Total Assets 150,0000 Total Liabilities & Equity 150,000

Example •
Owner’s capital, January 1, 2022 $42,000 •
Advertising expense $1,800
Owner’s drawings during 2022 6,000 •
Rent expense 10,400 •
Service revenue 63,600 •
Utilities expense 3,100 •
Salaries and wages expense 30,200 •
Instructions •
After analyzing the data, prepare an income statement •
and an owner’s equity statement for the year ending
.December 31, 2022
 Use the accounting equation to answer the following questions.
1. Force Sails Co. has total assets of $120,000 and total liabilities of
$35,000. What is owner’s equity?
2. Marcy Fun Center has total assets of $225,000 and owner’s equity
of $105,000. What are total liabilities?
3. Franco’s Restaurant has total liabilities of $40,000 and owner’s
equity of $95,000. What are total assets?
 At the beginning of the year, Hafez Company had total assets
of $800,000 and total liabilities of $500,000. Answer the
following questions viewing each situation as being
independent of the others.
(a) If total assets increased $150,000 during the year and total
liabilities decreased $80,000, What is the amount of owner’s
equity at the end of the year?
(b) During the year, total liabilities increased $100,000 and
owner’s equity decreased $70,000. What is the amount of
total assets at the end of the year?
(c) If total assets decreased $80,000 and owner’s equity
increased $120,000 during the year, What is the amount of
total liabilities at the end of the year?
 MCQ
 1-During the year 2021, Hana Company earned revenues of $25,000, had
expenses of $15,000. Net income (Loss) for the year is:
a. $40,000. b. $10,000. c. ($10,000). d. All answers are wrong.

 2-During the year 2021, Habiba Company earned revenues of $15,000, had
expenses of $25,000. Net income (Loss) for the year is:
a. $40,000. b. $10,000. c. ($10,000). d. All answers are wrong

 3-On January 1, 2021, Nesma Company reported owner’s equity of

$450,000. On December 31, 2021, the balance in owner’s equity was
$500,000. What amount of net income or (net loss) would the company
report for 2021? assume that there aren’t other factors affect Owners
Equities
 a. $30,000 b. ($50,000) c. $10,000 d. $50,000
 Answers to mcq
 1- B
 NET INCOME =REVENUES –EXPENSES
 25,000-15,000=10,000

 2- C
 LOSS (10,000)
 15,000-25,000 = -10,000

 3-D
 Owner equity at end =owner equity at the beg +net income –
drawings
 450,000 = 400,000+x -0
 x-= 50,000
 The Output of the Financial Accounting
Four Basic Financial Statements

Income Revenues – Expenses = Net Income (loss)

Statement
Capital Beginning xxx
Statement of
+ Net Income xxx
Owner equity
- Drawings (xxx)
Capital Ending xxx

Assets = Liabilities + Owners’ Equity

Balance
Resources = Sources of Financing these Resources
Sheet
Owned = Creditors + Owners

Statement Change = Cash from Operating Activities

of Cash Flows in + Cash from Investing Activities
Cash + Cash from Financing Activities
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 Accounts Categories (Types, Classes)
(Types or Classifications)

Revenues
Income statement
Expenses

Assets
Liabilities Balance Sheet

Owners’ Equity
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• Understanding the contents of the Financial Statements is
not enough

• Decision makers also needed to understand the

measurement rules and set standard applied in
computing the numbers on the statements

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The
The Building
Building Blocks
Blocks of
of Accounting
Accounting

: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/

.SO 4 Explain generally accepted accounting principles and the cost principle
 RECOGNITION,
RECOGNITION, MEASUREMENT,
MEASUREMENT, AND
AND
DISCLOSURE
DISCLOSURE CONCEPTS
CONCEPTS

These concepts explain how companies should recognize,

measure, and report financial elements and events.

Recognition, Measurement, and Disclosure Concepts

ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
3. Monetary unit 3. Expense recognition
4. Periodicity 4. Full disclosure
5. Accrual

ILLUSTRATION 2-7
Conceptual Framework for
Financial Reporting

29-2 LO 6
 ASSUMPTIONS
Monetary Unit Assumption – include in the accounting records
only transaction data that can be expressed in terms of money.

Economic (Accounting) Entity Assumption – requires that

activities of the entity must be kept separate and distinct from
the activities of its owner(s) and all other economic entities.
 Proprietorship.
 Partnership.
 Corporation. Forms of
Business Ownership

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 Prof. Ahmed Hussien & Prof. Samir Elsaban
31 With DR. Rehab Elbakry, Dr Tamer Khalil & Dr.
Mohamed Ismail - 2020/2021
• Accounting period assumption:

• The life time of an enterprise can be divided into artificial time

periods (monthly, quarterly, and yearly) for practical evaluation
instead of waiting to the end of life (liquidation).

• Going Concern (continuity) assumption :

• Most accounting methods are based on the assumption that the
business enterprise exist to stay in the long run, i.e., will have long
life (last for long time). The opposite is to assume liquidation.
• Accrual Basis of Accounting –
• transactions are recorded in the periods in which the events occur.
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 Principles
Measurement Principle –
Companies can use two measurement principles, the historical cost
.principle or the fair value principle
Historical Cost Principle
The historical cost principle (or cost principle) dictates that companies
.record assets at their cost
.Assets are resources a company owns •
Companies use the historical cost principle to value assets not only at •
the time the asset is purchased but also over the time the asset is held.
(regardless if the price changes in the future)

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 Fair value principle
The 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)
.Liabilities are creditor claims against assets •
Fair value information may be more useful than historical cost for •
certain types of assets
.and liabilities
For example, certain investment securities are reported at fair value •
because market price information is usually readily available for these
.types of assets

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 Exercise
The following situations involve accounting principles and assumptions.
1. El Nasr Company owns buildings that are worth substantially more than they
originally cost. In an effort to provide more relevant information, El Nasr
reports the buildings at market value in its accounting reports.
2. Farah Company includes in its accounting records only transaction data that
can be expressed in terms of money.
3. Sroor, owner of Sroor’s Company, records his personal living costs as
expenses of the Company.
Instructions
For each of the three situations, say if the accounting method used is correct or
incorrect. If correct, identify which principle or assumption supports the
method used. If incorrect identify which principle or assumption has been
violated.

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 The Accounting Cycle: Steps

Begin
During The period
1. Analyze the transaction

New Accounting Period

2. Journalize the transaction in Journal (s)
3. Post the transaction to accounts in ledger(s)

End of Period:
4. Prepare the (unadjusted) trial balance
5. Prepare necessary adjusting journal entries
6. Prepare the adjusted trial balance
7. Prepare financial statements
8. Prepare closing journal entries for the year
9. Prepare the post-closing trial balance
Start over
 TRUE-FALSE STATEMENTS
1. Owners of business firms are the only people who need accounting
information.
2. Transactions that can be measured in dollars and cents are recorded in the
financial information system.
3. The hiring of a new company president is an economic event recorded by
the financial information system.
4. Management of a business enterprise is the major external user of
information.
5. Accounting communicates financial information about a business
enterprise to both internal and external users.
6. Accounting information is used only by external users with a financial
interest in a business enterprise.
7. Financial statements are the major means of communicating accounting
information to interested parties.
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8. The study of accounting will be useful only if a student is interested in
working for a profit-oriented business firm.
9. The cost and fair market value of an asset are the same at the time of
acquisition and in all subsequent periods.

10. The economic entity assumption requires that the activities of an entity be
kept separate and distinct from the activities of its owner and all other
economic entities.

11. The monetary unit assumption states that transactions that can be
measured in terms of money should be recorded in the accounting records.
12. The three steps in the accounting process are identification, recording, and
communication.
13. Accountants prepare, but do not interpret, financial reports.

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14. The two most common types of external users are investors and company
officers.
15. Managerial accounting activities focus on reports for internal users.
16. Combining the activities of Kellogg and General Mills would violate the
economic entity assumption.
17. The historical cost principle dictates that companies record assets at their
cost. In later periods, however, the fair value of the asset must be used if
fair value is higher than its cost.
18. A business owner’s personal expenses must be separated from expenses
of the business to comply with accounting’s economic entity assumption.
19. The accounting cycle begins at the start of a new accounting period.

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 Use the following information for questions 1-3.
Carla’s Computer Repair Shop started the year with total assets of
$270,000 and total liabilities of $180,000. During the year, the business
recorded $450,000 in computer repair revenues, $255,000 in
expenses, and Carla withdrew $45,000.

1. Carla's Capital balance at the end of the year was

.

2-The net income reported by Carla's Repair Shop for the year was
.

3. Carla's Capital balance changed by what amount from the beginning

of the year to the end of the year?
Two items are omitted from each of the following summaries of balance sheet
and income statement data for two proprietorships for the year 2010, Farahy
and Sroor Enterprises
. Farah Sroor Enterprises
Beginning of year:
Total assets $ 95,000 $129,000
Total liabilities 85,000 (c)
Total owner’s equity (a) 80,000
End of year:
Total assets 160,000 180,000
Total liabilities 120,000 50,000
Total owner’s equity 40,000 130,000
Changes during year in owner’s equity:
Additional investment (b) 25,000
Drawings 24,000 (d)
Total revenues 215,000 100,000
Total expenses 175,000 55,000
Instructions: Determine the missing amounts