Principle of Accounting (Keiso)

1. Accounting in Action
CHAPTER 1

2. Why Do we need accounting
To make resource allocation decisions investors and
creditors need comparable, relevant and reliable
information about financial position, profitability and risk.
Financial accounting and reporting is concerned with the
form and content of the information that is disclosed by a
firm to external parties, including shareholders, lenders,
customers, suppliers, employees, etc.

3. Who uses Accounting Data
 Internal Users
• Management-Finance, Marketing, Human Resource, Production
• Managerial accounting provides internal reports to help users
make decision about their companies

4. Who uses Accounting Data
 External Users
• Investors
• Creditors
• Customers
• Regulatory agencies
• Taxing Authority

5. Accounting
 Identifies
 Records
 Communicates

6. Accounting Standards
 GAAP
• USA, France, India
• Standard setting body: FASB, SEC (oversees)
 IFRS
• UK, Bangladesh, Australia
• Standard Setting body: IASB

7. Measurement Principles
 Historical Cost Principle
• Records assets at their cost
 Fair value Principle
• Records assets and liabilities at their fair value (the price received
to sell an asset or settle a liability)
 Depends on Relevance and Faithful representation

8. Assumptions
 Provides foundation for accounting process
 Monetary Unit Assumption
• Records transaction data that can be expressed in money terms
 Economic Entity Assumption
• Activities of the entity must be kept separate and distinct from the
activities of its owner and all other economic entities
• Ownership: Proprietorship, Partnership, Corporation

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

10. The Basic Accounting Equation
 Asset
• Resources owns by business
 Liabilities
• Claims against assets-that is existing debt and obligation
 Owner’s Equity
• Ownership claim on total assets
• Increase in ownership equity: Investment, Revenue
• Decrease in Ownership equity: Drawings, Expenses

11. The Basic Accounting Equation
Assets = Liabilities + Shareholders’ Equity
Asset= Liabilities + Owner’s Capital - Owner’s
drawings + Revenues - Expenses

12. Dual Effect
 Each transaction have dual effect on the accounting equation
 Increase in asset – decrease in another asset or increase in liability
or increase in owner’s equity

13. Transactions
 Transaction 1 to 10
 Page: 10 - 15

14. Transactions

15. Transactions

16. Transactions

17. Principal Financial Statements
 Balance Sheet
• reports assets, liabilities ad owner’s equity for a specific period of time
 Income Statement
• present revenue and expenses and resulting net income or net loss for
a specific time period
 Statement of Cash flows
• Summarizes information about the cash inflows (receipts) and outflows
(payments) for a specific period of time
 Statement of Shareholder’s Equity
• Summarizes the changes in owner’s equity for a specific time period
- EXAMPLE: Illustration 1-9, Page 16

18. Income Statement

19. Statement of Owner’s Equity

20. Balance Sheet

21. Statement of Cash flows

22. Career opportunities in Accounting
 Public Accounting
 Private Accounting
 Governmental Accounting
 Forensic Accounting

23. End of chapter problems
 In class:
•Practice Exercises
•E1-7, E1-10, E1-11, E1-15, P1-3A, P1-4A

24. Next Class
The Recording Process