5. Course Objectives
basic knowledge of business records
trained in basic accounting principles
accounting cycle for a proprietorship, partnership, and
merchandising businesses.
Practical application and implication of accounting
Accounting and finance
6. Study Objective
Explain what accounting is
Identify users and uses of accounting
GAAP and IAS
Accounting cycle
Types of businesses
Basic accounting statements
Accounting equation
10. Users of Accounting
Information
External Users
•Lenders
•Shareholders
•Governments
•Consumer Groups
•External Auditors
•Customers
Internal Users
•Managers
•Officers
•Internal Auditors
•Sales Staff
•Budget Officers
•Controllers
C 2
1-10
11. Users of Accounting
Information
External Users
Financial accounting provides
external users with financial
statements (shareholders,
lenders, etc.).
Internal Users
Managerial accounting provides
information needs for internal
decision makers (officers,
managers, etc.).
C 2
1-11
12. Introduction
Accounting - a process of identifying, recording,
summarizing, and reporting economic information to
decision makers in the form of financial statements
Financial accounting - focuses on the specific needs of
decision makers external to the organization, such as
stockholders, suppliers, banks, and government
agencies
13. The Nature of Accounting
The accounting system is a series of steps performed to
analyze, record, quantify, accumulate, summarize,
classify, report, and interpret economic events and their
effects on an organization and to prepare the financial
statements.
14. The Nature of Accounting
Accounting systems are designed to meet the needs of
the decisions makers who use the financial
information.
Every business has some sort of accounting system.
These accounting systems may be very complex or very
simple, but the real value of any accounting system lies
in the information that the system provides.
15. Accounting as an Aid to
Decision Making
Accounting information is useful to anyone
who makes decisions that have economic
results.
• Managers want to know if a new product will be profitable.
• Owners want to know which employees are productive.
• Investors want to know if a company is a good investment.
• Creditors want to know if they should extend credit, how
much to extend, and for how long.
• Government regulators want to know if financial statements
conform to requirements.
16. Accounting as an Aid to
Decision Making
Fundamental relationships in the decision-making
process:
Event
Accountant’s
analysis &
recording
Financial
Statements
Users
19. 19
Service Business Service
The Walt Disney Company Entertainment
Atlas Air Transportation
Marriott International Hotels Hospitality and
lodging
Bank of America Corporation Financial services
XM Satellite Radio Satellite radio
1-1
Types of Businesses
Objective #1 - Describe the nature of a business and
the role of accounting in business.
20. 20
Merchandising Business Product
Wal-Mart General merchandise
GameStop Corporation Video games and accessories
Best Buy Consumer electronics
Gap Inc. Apparel
Amazon.com Internet books, music, video
Types of Businesses 1-1
21. 21
Manufacturing Business Product
General Motors Corp. Cars, trucks, vans
Samsung Cell phones
Dell Inc. Personal computers
Nike Athletic shoes and apparel
Pepsico Beverages and Snacks
Sony Corporation Stereos and televisions
Types of Businesses 1-1
22. 1. Describe the nature of a business.
2. Describe the role of accounting in business.
3. Describe the profession of accounting.
4. Summarize the development of accounting
principles
5. State the accounting equation and define each
element of the equation.
Objectives
23. 6. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
7. Describe the financial statements of a
proprietorship and explain how they interrelate.
Objectives
25. Product
Toyota Motors Cars, vans
Intel Computer chips
Nishat Textile
Nike Athletic shoes
Coca-Cola Beverages
Sony Stereos and television
Types of Businesses
Manufacturing Business
26. Metro Cash & Carry General merchandise
D.Watson Medicine
United Mobiles Mobile Phones
Amazon.com Internet books, music,
Types of Businesses
Merchandizing Business
Product
27. PIA Transportation
Marriott Hotels Hospitality and lodging
HBL Financial Services
PTCL Telecommunication
Types of Businesses
Product
Services Business
28. There are three types of business
organizations
Proprietorship
Partnership
Corporation
29. A proprietorship
is owned by one
individual.
Advantages
• Ease in organizing
• Low cost of organizing
Disadvantage
• Limited source of
financial resources
• Unlimited liability
30. A partnership is owned by two or more
individuals.
Advantages
• More financial resources than a proprietorship.
• Additional management skills.
Disadvantage
• Unlimited liability.
31. A corporation is organized under state or federal
statutes as a separate legal entity.
Advantage
• The ability to obtain large amounts of
resources by issuing stocks.
• Limited liability
Disadvantage
• Double taxation.
• Difficult process to establish
32. Business Strategies
A business strategy is an integrated
set of plans and actions designed to
enable the business to gain an
advantage over its competitors, and
in doing so, to maximize its profits.
33. Business Strategies
Under a low-cost strategy, a business
designs and produces products or
services of acceptable quality at a cost
lower than that of its competitors.
34. Business Strategies
Under a differential strategy, a business
designs and produces products or services
that possess unique attributes or
characteristics which customers are willing
to pay a premium price.
35. A business stakeholder is a
person or entity having an
interest in the economic
performance of the business.
Business Stakeholders
42. Purpose of Information
• Investors want to know if a company is a good investment.
• Creditors want to know if they should extend credit, how much to
extend, and for how long.
• Managers want to know if a new product will be profitable.
• Owners want to know which employees are productive.
• Government regulators want to know if financial statements
conform to requirements.
43. The basic purpose of Accounting is to provide
information to decision makers that is useful in
making economic decisions.
44. Accounting System
The accounting system is a series of steps performed to
Analyze,
Record,
Quantify,
Accumulate,
Summarize,
Classify,
Interpret
Report economic events and their effects on an organization
and to prepare the financial statements.
45. Accounting System
Accumulates data for use in both financial and managerial accounting
Accounting System
Accumulates cost information
Managerial Accounting
Financial Accounting
46. Financial Accounting
Financial accounting - focuses on the
specific needs of decision makers external
to the organization, such as stockholders,
suppliers, banks, and government
agencies i.e. annual reports, quarterly
reports, semi annual reports.
47. Financial Statements
Balance Sheet
Income Statement
Cash Flow Statement
Statement of Changes in Owner’s Equity
Notes
48. Financial Statements
Balance Sheet
◦ Shows financial position of the company for a specific point in
time/date i.e. 31st December 2010, 30th June 2010 etc.
Income Statement
◦ Shows net results of business operations for a specific period of time
i.e. a week, month, semi-annual, Annual
Cash Flow Statement
◦ Shows inflow-outflow of funds for a specific period of time.
Statement of Changes in Owner’s Equity
◦ Shows changes incurred in the total equity for a specific period of
time
49. The Balance Sheet
Sections of the balance sheet:
Assets - resources of the firm that are expected to increase
or cause future cash flows (everything the firm owns)
Liabilities - obligations of the firm to outsiders or claims
against its assets by outsiders (debts of the firm)
Owners’ Equity - the residual interest in, or remaining
claims against, the firm’s assets after deducting liabilities
(rights of the owners)
50. Income Statement
Sales Revenue xxxx
- Less Expenses xxxx
= Gross profit xxxx
- Operating Cost:
Selling General Administration Expenses xxxx
= Net Income xxxx
51. Managerial Accounting
It is a science of Identify information,
Measure information, Analyze information,
Interpret information, and Communicate
information
Focus of managerial accounting is on the
needs of managers within the organization
rather than interested parties outside the
organization.
52. Costing Accounting
• Accumulate cost data for use in both
managerial and financial accounting
i.e. production cost data (MA), value
inventory for balance sheet (FA)
53. Accounting System
Accumulates data for use in both financial and managerial accounting
Accounting System
Managerial
Accounting
Information for decision
making, planning, directing,
and controlling an
organization's operations
and assessing its
competitive position
Financial
Accounting
Published financial
statements and other
financial reports
54. Managerial
Accounting
Financial
Accounting
Users of information Managers within
organizations
Interested parties
outside organizations
Regulations Not required and
unregulated
Must confirm to
GAAP/IFRS/IAS/SECP
Source of Data Organizations basic
accounting system plus
other sources
Almost exclusive drawn
from the org`s basic
accounting system
which accumulate
financial info
Nature of Reports
and procedures
Focus on subunits within
org (Dept, divisions,
region etc), historical as
well as projection of future
events
Focus on entire
enterprise based on
Historical Data
55. Profession of Accounting
Accountants employed by a business firm or
a not-for-profit organization are said to be
engaged in private accounting.
Accountants and their staff who provide
services on a fee basis are said to be
employed in public accounting.
57. Financial accounting practice is governed by
concepts and rules known as generally accepted
accounting principles (GAAP).
Generally Accepted Accounting
Principles
Relevant
Information
Affects the decision of
its users.
Reliable Information Is trusted by
users.
C 4
Comparable
Information
Used in comparisons
across years & companies.
1-57
58. Principles and Assumptions of
Accounting
C 4
Measurement principle (also called
cost principle) means that accounting
information is based on actual cost.
Going-concern assumption means
that accounting information reflects a
presumption the business will
continue operating.
Monetary unit assumption means we
can express transactions in money.
Revenue recognition principle
provides guidance on when a
company must recognize revenue.
Business entity assumption means
that a business is accounted for
separately from its owner or other
business entities.
Matching principle (expense
recognition) prescribes that a
company must record its expenses
incurred to generate the revenue.
Full disclosure principle requires a
company to report the details behind
financial statements that would impact
users’ decisions.
1-58
Time period assumption presumes
that the life of a company can be
divided into time periods, such as
months and years.
59. The business entity concept limits the
economic data in the accounting
system to data related directly to the
activities of the business.
The cost concept is the basis for
entering the exchange price, or cost
of an acquisition in the accounting
records.
60. The objectivity concept requires
that the accounting records and
reports be based upon objective
evidence.
The unit-of-measure concept
requires that economic data be
recorded in dollars.
64. What is a business
transaction?
A business transaction is an economic event or
condition that directly changes an entity’s financial
condition or directly affects its results of operations.
65. On November 1, 2010, Javid Iqbal begins
a business that will be known as
Opportunities Incorporation.
66. a. Javid Iqbal deposits Rs. 25,000 in a bank
account in the name of Opportunities.
Javid , Capital
25,000 Investment by
Javid Iqbal
Cash
25,000
a.
Assets Owner’s Equity
=
=
67. b. Opportunities exchanged Rs. 20,000 for
land.
Javid Iqbal, Capital
25,000
Cash + Land
25,000
Bal.
Assets Owner’s Equity
=
=
b. –20,000 +20,000
Bal. 5,000 20,000 25,000
68. Accounts Javid Iqbal,
Cash + Supplies + Land Payable Capital
Assets
c. During the month, Opportunities purchased
supplies for Rs.1,350 and agreed to pay the
supplier in the near future (on account).
Owner’s
Liabilities + Equity
=
Bal. 5,000 20,000 25,000
c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
=
69. d. Opportunities Inc. provided services to customers,
earning fees of Rs.7,500 and received the amount in
cash.
Bal. 12,500 1,350 20,000 1,350 32,500
d. + 7,500 + 7,500
Accounts Javid Iqbal,
Cash + Supplies + Land Payable Capital
Assets
Owner’s
Liabilities + Equity
Bal. 5,000 1,350 20,000 1,350 25,000
Fees
earned
=
=
70. e. – 3,650 –2,125
– 800
– 450
– 275
Wages
Rent
Util.
Misc.
Accounts Javid Iqbal,
Cash + Supplies + Land Payable Capital
Assets
e. Opportunities Inc. paid the following expenses:
wages, Rs.2,125; rent, 800; utilities, Rs.450; and
misc,Rs.275.
Owner’s
Liabilities + Equity
=
Bal. 12,500 1,350 20,000 1,350 32,500
=
Bal.8,850 1,350 20,000 1,350 28,850
71. Accounts Javid Iqbal,
Cash + Supplies + Land Payable Capital
Assets
f. Opportunities paid Rs.950 to creditors
during the month.
Owner’s
Liabilities + Equity
=
Bal. 8,850 1,350 20,000 1,350 28,850
f. – 950 – 950
=
Bal. 7,900 1,350 20,000 400 28,850
72. Accounts Javid Iqbal,
Cash + Supplies + Land Payable Capital
Assets
g. At the end of the month, the cost of supplies on
hand is Rs.550, so Rs.800 of supplies were used.
Owner’s
Liabilities + Equity
=
Bal. 7,900 1,350 20,000 400 28,850
g. – 800 – 800
=
Bal. 7,900 550 20,000 400 28,050
Supplies
expense
73. Accounts Javid Iqbal,
Cash + Supplies + Land Payable Capital
Assets
h. At the end of the month, Javid withdrew
Rs.2,000 in cash from the business for personal
use.
Owner’s
Liabilities + Equity
Bal. 7,900 550 20,000 400 28,050
h. –2,000 –2,000
Bal. 5,900 550 20,000 400 26,050
With-
drawal
=
=
76. Financial Statements
Balance sheet—A list of the assets, liabilities, and
owner’s equity as of a specific date.
Statement of cash flows—A summary of the cash
receipts and disbursements for a specific period of
time.
77. Financial Statements
Income statement—A summary of the revenue
and expenses for a specific period of time.
Statement of owner’s equity—A summary of the
changes in the owner’s equity that have occurred
during a specific period of time.
78. Fees earned Rs. 750 000
Operating expenses:
Rent expense
Rs. 212500
Wages expense
800 00
Supplies expense
450 00
Utilities expense
275 00
Miscellaneous expense
Total operating expenses 1 135 00
Opportunities Inc.
Income Statement
For the Month Ended November 30, 2010
800 00
Net income Rs.3 050 00
To the statement
of owner’s equity
79. Javid Iqbal, capital, November 1, 2010 Rs. 0
Opportunities Inc.
Statement of Owner’s Equity
For the Month Ended November 30, 2010
Investment on November 1 Rs.25 000 00
Net income for November 3 050 00
Rs.28 050 00
Less withdrawals 2 000 00
Increase in owner’s equity 26 050 00
Javid Iqbal, capital, November 30, 2010 Rs.26 050 00
To the balance sheet
80. Javid Iqbal, capital, November 1, 2010 Rs. 0
Opportunities Inc.
Statement of Owner’s Equity
For the Month Ended November 30, 2010
Investment on November 1 Rs.25 000 00
Net income for November 3 050 00
Rs.28 050 00
Less withdrawals 2 000 00
Increase in owner’s equity 26 050 00
Javid Iqbal, capital, November 30, 2010 Rs.26 050 00
From the income
statement
81. Javid Iqbal, capital, November 1, 2010 Rs. 0
Opportunities Inc.
Statement of Owner’s Equity
For the Month Ended November 30, 2010
Investment on November 1 Rs.25 000 00
Net income for November 3 050 00
Rs.28 050 00
Less withdrawals 2 000 00
Increase in owner’s equity 26 050 00
Javid Iqbal, capital, November 30, 2010 Rs.26 050 00
From the income
statement
To the balance sheet
82. Assets Liabilities
Opportunities Inc.
Balance Sheet
November 30, 2010
Cash Rs, 5 900 00 Accounts Payable Rs. 400 00
Supplies 550 00 Owner’s Equity
Land 20 000 00 Javid Iqbal, cap. 26 050 00
Total liabilities and
Total assets Rs.26 450 00 owner’s equity Rs.26 450 00
From the
statement of
owner’s equity
This balance sheet presented
using the account form
83. Assets Liabilities
Opportunities Inc.
Balance Sheet
November 30, 2010
Cash Rs, 5 900 00 Accounts Payable Rs. 400 00
Supplies 550 00 Owner’s Equity
Land 20 000 00 Javid Iqbal, cap. 26 050 00
Total liabilities and
Total assets Rs.26 450 00 owner’s equity Rs.26 450 00
This balance sheet presented
using the account form
84. When the balance sheet displays the
liabilities and owner’s equity below the
assets, the report form is being used.
85. Cash flows from operating activities:
Cash received from customers Rs. 7 500 00
Deduct cash payments for expenses
and payments to creditors 4 600 00
Net cash flow from operating activities 2 900 00
Cash flows from investing activities:
Cash payment for acquisition of land (20 000 00
Cash flows from financing activities:
Cash received as owner’s investment Rs.25 000 00
Deduct cash withdrawal by owner 2 000 00
Net cash flow from financing activities 23 000 00
Net cash flow and Nov. 30, 2005 cash bal. Rs. 5 900 00
Opportunities Inc.
Statement of Cash Flows
For the Month Ended November 30, 2010
Should match Cash on the balance sheet
)
86. Assets Liabilities
Opportunities Inc.
Balance Sheet
November 30, 2010
Cash Rs, 5 900 00 Accounts Payable Rs. 400 00
Supplies 550 00 Owner’s Equity
Land 20 000 00 Javid Iqbal, cap. 26 050 00
Total liabilities and
Total assets Rs.26 450 00 owner’s equity Rs.26 450 00
This balance sheet presented
using the account form
match Cash
87. Statement of Cash Flows
Cash Flows from Operating Activities—This section
reports a summary of cash receipts and cash payments
from operations.
Cash Flows from Investing Activities—This section
reports the cash transactions for the acquisition and sale
of relatively permanent assets.
Cash Flows from Financing Activities—This section
reports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.
88. Ratio of liabilities
to owner’s equity
=
Total Liabilities
Total owner’s equity (or total
stockholders’ equity)
The ratio of liabilities to owner’s equity allows
owners like Javid Iqbal to analyze the firm’s
ability to withstand poor business conditions.
Tools for Financial Analysis and
Interpretation
89. Ratio of
liabilities to
owner’s equity
=
Rs.400
Rs.26,050
Tools for Financial Analysis and
Interpretation
= 0.015 / 15%
Ratio of
liabilities to
owner’s equity
