We take references from The book of Accounting Principals which is written by (Weygandt Kimmel Kieso)

1. Accounting in Action

2. PREVIEW OF THIS CHAPTER:

3. WHAT IS ACCOUNTING?
ACCOUNTING IS AN INFORMATION SYSTEM THAT IDENTIFIES,
RECORDS AND COMMUNICATES THE ECONOMIC EVENT OF AN
ORGANIZATION TO INTERESTED USERS.

4. THREE ACTIVITIES OF ACCOUNTING
Three Activities

5. Management
There are two broad
groups of users of
financial information:
internal users and
external users.
Human
Resources
Tax Authority
Marketing
Finance
Creditors
Who Uses Accounting Data
Customers
Investors
Labor
Unions
INTERNAL USERS
EXTERNAL USERS

6. ETHICS IN FINANCIAL REPORTING
Ethics: Standards of conduct by which one’s
actions are judged as right or wrong, honest or
dishonest, fair or not fair, are

7. Various users
need financial
information
The accounting profession
has attempted to develop a
set of standards that are
generally accepted and
universally practiced.
Financial Statements
Balance Sheet
Income Statement
Statement of Owner’s Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting
Principles (GAAP)
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

8. Monetary Unit – include in the accounting records only
transaction data that can be expressed in terms of money.
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.
 Corporation.
Forms of Business
Ownership
ASSUMPTIONS

9. Assets Liabilities
Owner’s
Equity= +
The Basic Accounting Equation

10. Assets Liabilities
Owner’s
Equity= +
 Resources a business owns.
 Provide future services or benefits.
 Cash, Supplies, Equipment, etc.
Assets

11. Assets Liabilities
Owner’s
Equity= +
 Claims against assets (debts and obligations).
 Creditors - party to whom money is owed.
 Accounts payable, Notes payable, etc.
Liabilities

12. Assets Liabilities
Owner’s
Equity= +
 Ownership claim on total assets.
 Referred to as residual equity.
 Investment by owners and revenues (+)
 Drawings and expenses (-).
Owner’s Equity

13. 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.
Owner’s Equity

14. 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.
Owner’s Equity

15. Illustration: Are the following events recorded in the accounting
records?
Event
Supplies are
purchased on
account.
Criterion Is the financial position (assets, liabilities, or
owner’s equity) of the company changed?
An employee
is hired.
Owner
withdraws cash
for personal
use.
Record/
Don’t Record
Using the Accounting Equation

16. EXAMPLE OF AN
ACCOUNTING
Barone’s Repair Shop was started on May 1 by Nancy Barone. A summary of May
transactions is presented below.
1. Invested $10,000 cash to start the repair shop.
2. Purchased equipment for $5,000 cash.
3. Paid $400 cash for May office rent.
4. Paid $500 cash for supplies.
5. Incurred $250 of advertising costs in the Beacon News on account.
6. Received $5,100 in cash from customers for repair service.
7. Withdrew $1,000 cash for personal use.
8. Paid part-time employee salaries $2,000.
9. Paid utility bills $140.
10. Provided repair service on account to customers $750.
11. Collected cash of $120 for services billed in transaction (10).

17. EXAMPLE OF AN
ACCOUNTING
Sl Asset = Liabilities + Owner’ Equity
Cash
Equipm
ent
Supplies
Account’s
Receivable
=
Account’
s
Payable
+Capital
-
Drawing
+Revenu
e
-Expense
1 +10000 = +10000
2 =
3
4 =
5 =
6 =
7 =
8 =
9 =
10 =
11 =
=
=
1. Invested
$10,000 cash to
start the repair
shop.
Increasing of
Cash, which is a
asset.
Increasing of
Capital, which is
owner's equity.

18. EXAMPLE OF AN
ACCOUNTING
Sl Asset =
Liabilitie
s
+ Owner’ Equity
Cash
Equipme
nt
Supplies
Account’s
Receivable
=
Account’s
Payable
+Capital -Drawing +Revenue -Expense
1 +10000 = +10000
2 -5000 +5000 =
3
4
5
6
7
8
9
10
11
2. Purchased
equipment for
$5,000 cash.
Decreasing of
Cash, which is a
asset.
Increasing of
Equipment, which
is also a asset.

19. EXAMPLE OF AN
ACCOUNTING
Sl Asset = Liabilities + Owner’ Equity
Cash
Equipme
nt
Supplies
Account’s
Receivable
=
Account’s
Payable
+Capital -Drawing +Revenue -Expense
1 +10000 = +10000
2 -5000 +5000 =
3 -400 -400
4
5
6
7
8
9
10
11
3. Paid $400
cash for May
office rent.
Decreasing of Cash,
which is a asset.
Increasing of
Expense, but of the
base symbol of it,
we give it minus.

20. EXAMPLE OF AN
ACCOUNTING
Sl Asset = Liabilities + Owner’ Equity
Cash Equipment Supplies
Account’s
Receivable
=
Account’s
Payable
+Capital -Drawing +Revenue -Expense
1 +10000 = +10000
2 -5000 +5000 =
3 -400 -400
4 -500 +500 =
5
6
7
8
9
10
11
4. Paid $500
cash for
supplies.
Decreasing of
Cash, which is
a asset.
Increasing of
Supplies, which
is also capital.

21. EXAMPLE OF AN
ACCOUNTING
Sl Asset = Liabilities + Owner’ Equity
Cash
Equipme
nt
Supplies
Account’s
Receivable
=
Account’s
Payable
+Capital -Drawing +Revenue -Expense
1 +10000 = +10000
2 -5000 +5000 =
3 -400 -400
4 -500 +500 =
5 = +250 -250
6
7
8
9
10
11
5. Incurred $250 of
advertising costs in
the Beacon News on
account.
Increasing of
Expense, but of the
base symbol of it,
we give it minus.
Increasing of
Account’s Payable,
because it incurred
on account.

22. EXAMPLE OF AN
ACCOUNTING
Sl Asset = Liabilities + Owner’ Equity
Cash
Equipme
nt
Supplies
Account’s
Receivable
=
Account’s
Payable
+Capital -Drawing +Revenue -Expense
1 +10000 = +10000
2 -5000 +5000 =
3 -400 -400
4 -500 +500 =
5 = +250 -250
6 +5100 = +5100
7
8
9
10
11
6. Received
$5,100 in cash
from customers
for repair service.
Increasing of
Cash, which is a
asset.
Increasing of
Revenue, because
earned it from
service.

23. EXAMPLE OF AN
ACCOUNTING
Sl Asset = Liabilities + Owner’ Equity
Cash Equipment Supplies
Account’s
Receivable
=
Account’s
Payable
+Capital -Drawing +Revenue -Expense
1 +10000 = +10000
2 -5000 +5000 =
3 -400 -400
4 -500 +500 =
5 = +250 -250
6 +5100 = +5100
7 -1000 = -1000
8
9
10
11
7. Withdrew
$1,000 cash for
personal use.
Decreasing of Cash,
which is a asset.
Increasing of
Drawing, but of the
base symbol of it,
we give it minus.

24. EXAMPLE OF AN
ACCOUNTING
Sl Asset = Liabilities + Owner’ Equity
Cash
Equipme
nt
Supplies
Account’s
Receivable
=
Account’s
Payable
+Capital -Drawing +Revenue -Expense
1 +10000 = +10000
2 -5000 +5000 =
3 -400 -400
4 -500 +500 =
5 = +250 -250
6 +5100 = +5100
7 -1000 = -1000
8 -2000 = -2000
9
10
11
8. Paid part-
time employee
salaries $2,000.
Decreasing of Cash,
which is a asset.
Increasing of
Expense, but of the
base symbol of it,
we give it minus.

25. EXAMPLE OF AN
ACCOUNTING
Sl Asset = Liabilities + Owner’ Equity
Cash Equipment Supplies
Account’s
Receivable
=
Account’s
Payable
+Capital -Drawing +Revenue -Expense
1 +10000 = +10000
2 -5000 +5000 =
3 -400 -400
4 -500 +500 =
5 = +250 -250
6 +5100 = +5100
7 -1000 = -1000
8 -2000 = -2000
9 -140 = -140
10
11
9. Paid utility
bills $140.
Decreasing of Cash,
which is a asset.
Increasing of
Expense, but of the
base symbol of it,
we give it minus.

26. EXAMPLE OF AN
ACCOUNTING
Sl Asset = Liabilities + Owner’ Equity
Cash Equipment Supplies
Account’s
Receivable
=
Account’s
Payable
+Capital -Drawing +Revenue -Expense
1 +10000 = +10000
2 -5000 +5000 =
3 -400 -400
4 -500 +500 =
5 = +250 -250
6 +5100 = +5100
7 -1000 = -1000
8 -2000 = -2000
9 -140 = -140
1
0
+750 = +750
11
10. Provided
repair service on
account to
customers $750.
Increasing of
Account’s
Receivable, which
is a asset.
Increasing of
Revenue, because
earned it from
service.

27. EXAMPLE OF AN
ACCOUNTING
Sl Asset = Liabilities + Owner’ Equity
Cash Equipment Supplies
Account’s
Receivable
=
Account’s
Payable
+Capital -Drawing +Revenue -Expense
1 +10000 = +10000
2 -5000 +5000 =
3 -400 -400
4 -500 +500 =
5 = +250 -250
6 +5100 = +5100
7 -1000 = -1000
8 -2000 = -2000
9 -140 = -140
10 +750 = +750
1
1
+120 -120 =
11. Collected
cash of $120 for
services billed in
transaction (10).
Increasing of Cash,
which is a asset.
Decreasing of
Account’s
Receivable, because
cash received.

28. EXAMPLE OF AN
ACCOUNTING
Sl Asset = Liabilities + Owner’ Equity
Cash Equipment Supplies
Account’s
Receivable
=
Account’s
Payable
+Capital -Drawing +Revenue -Expense
1 +10000 = +10000
2 -5000 +5000 =
3 -400 -400
4 -500 +500 =
5 = +250 -250
6 +5100 = +5100
7 -1000 = -1000
8 -2000 = -2000
9 -140 = -140
10 +750 = +750
1
1
+120 -120 =
+6180 +5000 +500 +630 = +250 +10000 -1000 +5850 -2790
12310 = 12310
Total

29. FINANCIAL STATEMENTS
BARONE’S REPAIR SHOP
Income Statement
For the month ended May 31,2011
Revenues:
Service Revenue
Less: Expense:
Office Rent
Advertising Expense
Salaries Expense
Utility Expense
Total Expense
Net Income
400
250
2000
750
5450
3400
2050

30. FINANCIAL STATEMENTS
BARONE’S REPAIR SHOP
Owner’s Equity Statement
For the month ended May 31,2011
Capital
Add: Net Income
Less: Drawing
Capital at May 31, 2011
10000
2050
12050
1000
11050

31. FINANCIAL STATEMENTS
BARONE’S REPAIR SHOP
Balance Sheet
For the month ended May 31,2011
Asset:
Cash
Equipment
Supplies
Account Receivable
Total Asset:
Liabilities + Owner’s Equity:
Liabilities:
Account Payable
Owner’s Equity:
Capital at May 31, 2011
Total Liabilities & Owner’s Equity:
6180
5000
500
630
12310
250
11050
12310