CHAPTER 1

• Student Should be able to:

Learning Objectives (LO)

• LO1: Recognize different principles
and standards of accounting.
• LO2: Define the differences among
accounting systems.
• LO3: Define and explain the basic
assumptions of financial Accounting.
• LO4: Explain how to convert
economic events into accounting
language.
 Accounting
• Definition
• Accounting is the “language of business”

ACCOUNTING - THE BASIS OF

• Accounting is the information system that
– Measures business activities

DECISION MAKING
– Processes that information into reports
– Communicates the results to decision makers

– It is a systematic process of identifying, recording,

measuring, classifying, verifying, summarizing,
interpreting and communicating financial
information.(Business Dictionary)

– Accounting is the systematic and comprehensive

recording of the financial transactions pertaining
to a business, it also refers to the process of
summarizing, analyzing and reporting these
transactions to oversight agencies and tax
collection entities. (Investopedia)
• Organized set of manual and
computerized accounting

Accounting system
methods, procedures and
controls, established to gather,
record, classify, analyze,
summarize, interpret and
present accurate and timely
financial data for management
decisions.
• Single Entry
– Most basic.
– Ideal for small organizations with few simple operations.
– No journal entries are made
– Chances of errors.
• Double Entry

Types
– Complicated but accurate
– Journal entries are recorded for balancing
– Errors are detectable.
• Manual
– No computers involved
– All manual recordings
– Time consuming,
– High chance of error/frauds
• Computerized
– Use of computer programs
– Less work , timely
– Requires accountant with specialization in the accounting
software.
 ACCOUNTING INFORMATION
DECISION MAKERS WHO USE
• Individuals
• Businesses
• Investors and Creditors
• Government Regulatory
Agencies
• Taxing Authorities
 FINANCIAL ACCOUNTING AND
MANAGEMENT ACCOUNTING
• Financial accounting provides
information to managers and people
outside the firm
–Financial accounting information
must meet certain standards of
relevance and reliability
• Management accounting generates
confidential information for internal
decision makers, e.g.,
–Top executives
–Department heads
• Proprietorships
– Have a single owner who is generally the manager
– Are business entities, but not legal entities

TYPES OF BUSINESS
– Have debt for which the proprietor is personally liable
• Partnerships

ORGANIZATIONS
– Join two or more persons together as co-owners
– Are business entities, but not legal entities
– Have debt for which each partner is personally liable
• Corporations
– Are owned by stockholders or shareholders
– Are business entities and legal entities
– Are liable for all debts
• Stockholders have no personal obligation for corporation debts
Cooperative
it is an autonomous association of persons united voluntarily to
meet their common economic and social needs and aspirations
through a jointly-owned and democratically controlled enterprise.
It may include Non profit organizations

– TYPES OF BUSINESS ORGANIZATIONS

TYPES OF BUSINESS ORGANIZATIONS
• Generally accepted
accounting principles (GAAP)
and IFRS (International
Financial Reporting
standards: are
– The rules that govern how
accountants operate ACCOUNTING
– GAAP are Based upon a
PRINCIPLES AND
conceptual framework
written by the Financial CONCEPTS
Accounting Standards
Board (FASB)
– IFRS are set by
International Accounting
standard board.
• The entity concept
– States that an organization is an
economic entity that keeps its affairs
separate from those of the owner(s)

• The reliability (objective)

principle
– States that accounting records and
statements are based on the most
reliable data available and
documented by objective evidence
• The cost principle
– States that acquired assets and
services should be recorded at
their actual (historical) cost and
should maintain that historical
cost for as long as they are
owned

• The going-concern concept

– States that the entity will
remain in operation for the
foreseeable future
 THE ACCOUNTING EQUATION

• The accounting equation presents the resources of the

business and the claims to those resources
Economic Resources = Claims to Economic Resources

or

Assets = Liabilities + Owners’ Equity

• Assets are the economic resources of a
business that are expected to be of

THE ACCOUNTING
benefit in the future

EQUATION
• Claims to assets come from
– Liabilities
• Economic obligations - debts
payable to outsiders, called creditors
– Owners’ equity (capital)
• Assets held by the owners of the
business
 THE ACCOUNTING EQUATION
• For a corporation, stockholders’ (owners’)
equity consists of two main categories
– Paid-in capital
– Retained earnings

Assets = Liabilities + Stockholders’ Equity

or

Assets = Liabilities + Paid-in Capital + Retained Earnings

• Paid-in (contributed) capital is
– The amount invested in the corporation by its owners
– Comprised basically of common stock.

THE ACCOUNTING
• Retained earnings
• Is the amount earned by income-producing activities and

EQUATION
kept for use in the business
– Is affected by
• Revenues - increases in retained earnings from
delivering goods or services
• Expenses - decreases in retained earnings that
result from operations
• Net income (net earnings)
– Total revenues exceed total expenses
• Net loss
– Total expenses exceed total revenues
• Dividends
– Distributions to stockholders (usually cash)
generated by net income
• Current assets are
– Those assets which the company expects to convert to cash,
sell, or consume during the next 12 months.
• Current assets include
– Cash
– Accounts receivable
– Merchandise inventory

ASSETS
– Prepaid expenses
• Long-term assets are
– Those assets which the company expects to hold longer then
the next 12 months or the business’s normal operating cycle.
• Long-term assets include
– Property
– Equipment
• Intangible assets are
– Those with no physical form
• Trademarks
• Patents
• Goodwill
• Other assets are
– Those with small values which do not fall within any other
standard asset category
For each of the below transactions indicate the two or more
effect on accounting equations.

1.The owner invests personal cash in

business.
2. The owner withdraws cash from
business for personal use.
3. The company receives cash from a bank

Test
loan.
4. The company purchases a significant
amount of supplies on credit.
5. The owner contributes his personal truck
to the business.

Asset Increase Decrease No effect

Liability Increase Decrease No effect
Owner Equity Increase Decrease No effect
• Current liabilities are
– Debts payable within one year or within the
business’s normal operating cycle.
• Current liabilities include
– Notes payable, short term

LIABILITIES
– Accounts payable
– Accrued expenses payable
– Income taxes payable
• Long-term liabilities are
– Debts not payable within one year or within
the business’s normal operating cycle.
• Long-term liabilities include
– Notes payable, long term
– Bonds payable
• Owners’ equity

OWNERS’ EQUITY
–Represents the shareholders’ ownership of
the assets of the business
• Owners’ equity of a corporation
consists of
–Common stock
–Retained earnings
INFORMATION REPORTED ON THE
FINANCIAL STATEMENTS
 INCOME
STATEMENT
• The income statement (statement of earnings) reports the company’s
revenues, expenses, and net income or net loss for the period
 INCOME
AIR
AIR&&SEA
Income
STATEMENT
SEATRAVEL,
TRAVEL,
IncomeStatement
Statement
INC.
INC.

Month
MonthEnded
EndedApril
April30,
30,2017
2017

Revenue:
Revenue:
Service
Servicerevenue
revenue $8,500
$8,500

Expenses:
Expenses:
Salary
Salaryexpense
expense $1,200
$1,200
Rent
Rentexpense
expense 1,100
1,100
Utilities
Utilities 400
400
Total
Totalexpenses
expenses 2,700
2,700
Net
NetIncome
Income $5,800
$5,800
 STATEMENT OF
RETAINED EARNINGS
• The statement of retained earnings reports that
portion of net income the company has
retained, or kept for use in the business
–Net income increases retained earnings
–Dividends paid to stockholders decrease retained
earnings
 COMPONENTS OF RETAINED EARNINGS

Revenues
Revenuesfor
forthe
the
Period
Period

--

Expenses
Expensesfor
forthe
the
Period
Period

Start of the == End of the

Period Period

Beginning
BeginningBalance
Balance ++ Ending
EndingBalance
Balanceofof
Net
NetIncome
Income(Loss)
(Loss) -- Dividends
Dividendsfor
forthe
the ==
ofofRetained
Retained -- Retained
Retained
for the Period
for the Period Period
Period
Earnings
Earnings Earnings
Earnings

1-28
 AIR
AIR&&SEA
SEATRAVEL,
TRAVEL,INC.INC.
Statement
StatementofofRetained
RetainedEarnings
Earnings
Month
MonthEnded
EndedApril
April30,
30,2017
2017

Retained
Retainedearnings,
earnings,April
April1,
1,2017
2017 $$ 00 STATEMENT
Add:
Add:Net
Netincome
incomefor
forthe
themonth
month 5,800
5,800
$5,800
$5,800
OF
Less:
Less:Dividends
Dividends (2,100)
(2,100) RETAINED
Retained
RetainedEarnings,
Earnings,April
April30,
30,2017
2017 $3,700
$3,700
EARNINGS
 BALANCE
• The balance sheet (statement of SHEET
financial position) reports the
company’s assets, liabilities, and
owners’ equity
 BALANCE SHEET
AIR
AIR&&SEA
SEATRAVEL,
TRAVEL,INC.
INC.
Balance
BalanceSheet
Sheet
As
AsatatNOV
NOV30,
30,2017
2017

Assets
Assets Liabilities
Liabilities
Current
CurrentAssets
Assets
Cash
Cash $33,300
$33,300 Accounts
Accountspayable
payable $$ 100
100
Accounts
Accountsreceivable
receivable 2,000
2,000
Office
Officesupplies
supplies 500
500 Stockholders’
Stockholders’Equity
Equity
Long
Longterm
termAssets
Assets Common
Commonstock stock 50,000
50,000
Land
Land 18,000
18,000 Retained
Retainedearnings
earnings 3,700
3,700
Total
Totalstockholders’
stockholders’equity
equity53,700
53,700
Total
Totalliabilities
liabilitiesand
and
Total
Totalassets
assets $53,800
$53,800 stockholders’
stockholders’equity
equity $53,800
$53,800
 STATEMENT OF CASH FLOWS

• The statement of cash flows reports the

company’s cash inflows and outflows from
operating, investing, and financing activities
 AIR
AIR&&SEA
SEATRAVEL,
TRAVEL,INC.
INC.
Statement
StatementofofCash
CashFlows
Flows
Month
MonthEnded
EndedNov
Nov30,
30,2017
2017

Cash
Cashflows
flowsfrom
fromoperating
operatingactivities:
activities:
Collections
Collectionsfrom
fromcustomers
customers $$ 6,500
6,500
Payments
Paymentsto tosuppliers
suppliersand
andemployees
employees (3,100)
(3,100)
Net
Netcash
cashinflow
inflowfrom
fromoperating
operatingactivities
activities 3,400
3,400
Cash
Cashflows
flowsfrom
frominvesting
investingactivities:
activities:
Acquisition
Acquisitionof ofland
land $(40,000)
$(40,000)
Sale
Saleof
ofland
land 22,000
22,000
Net
Netcash
cashoutflow
outflowfromfrominvesting
investingactivities
activities (18,000)
(18,000)
Cash
Cashflows
flowsfrom
fromfinancing
financingactivities:
activities:
Issuance
Issuance(sale)
(sale)ofofstock
stock $$ 50,000
50,000
Payment
Paymentof ofdividends
dividends (2,100)
(2,100)
Net
Netcash
cashinflow
inflowfrom
fromfinancing
financingactivities
activities 47,900
47,900
Net
Netincrease
increaseinincash
cash $$33,300
33,300
Cash
Cashbalance,
balance,NovNov1,1,2017
2017 00
Cash
Cashbalance,
balance,NovNov30,30,2017
2017 $$33,300
33,300
END OF CHAPTER 1