4. 1-4
Purpose of accounting is to:
1. identify, record, and communicate the economic
events of an
2. organization to
3. interested users.
What is Accounting?
6. 1-6
Users of Financial Information
๏ถ Users of financial information can be classified by
various distinctions:
๏ถ Users of financial information may be classified as Direct
or Indirect and as Internal or External
๏ผ Internal users are inside the organization -
management
๏ผ External users are outside the organization- creditors,
government and Auditors
6
7. 1-7
Management
There are two broad
groups of users of
financial information:
internal users and
external users.
Human
Resources
Tax&Zak
at
Labor
Unions
Regulators
Marketing
Finance
Investors
Creditors
Customers
Internal Users
External
Users
Who Uses Accounting Data
8. 1-8
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 Ownerโs Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting
Principles (GAAP)
Generally Accepted Accounting Principles
9. 1-9
Generally Accepted Accounting Principles (GAAP) - A set of
rules and practices, having substantial authoritative support, that
the accounting profession recognizes as a general guide for
financial reporting purposes.
Generally Accepted Accounting Principles
10. 1-10
Provides the underlying framework for recording and
summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership claims.
Assets Liabilities
Ownerโs
Equity
= +
The Basic Accounting Equation
11. 1-11
Assets Liabilities
Ownerโs
Equity
= +
๏ต Resources a business owns.
๏ต Provide future services or benefits.
๏ต E.g. Cash, Supplies, Equipment, etc.
Assets
The Basic Accounting Equation
12. 1-12
Assets Liabilities
Ownerโs
Equity
= +
๏ต Claims against assets (debts and obligations).
๏ต Creditors - party to whom money is owed.
๏ต E.g. Accounts payable, Notes payable, etc.
Liabilities
The Basic Accounting Equation
13. 1-13
Assets Liabilities
Ownerโs
Equity
= +
๏ต Ownership claim on total assets.
๏ต Referred to as residual equity.
๏ต Investment by owners and revenues (+)
๏ต Drawings and expenses (-).
Ownerโs Equity
The Basic Accounting Equation
14. 1-14
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.
Illustration 1-6
Ownerโs Equity
15. 1-15
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.
Illustration 1-6
Ownerโs Equity
16. 1-16
Account Name
Debit / Dr. Credit / Cr.
๏ต Record of increases and decreases
in a specific asset, liability, equity,
revenue, or expense item.
๏ต Debit(โซ)ู ุฏููโฌ = โLeftโ
๏ต Credit(โซุฏุงุฆูโฌ ) = โRightโ
Account
(โซ)ุญุณุงุจโฌ
An Account can
be illustrated in a
T-Account form.
The Account
17. 1-17
Double-entry system (โซุงูู ุฒุฏูุฌโฌ โซุงูููุฏโฌ โซ)ูุธุงู โฌ
โบ Each transaction(โซู ุงููุฉโฌ โซ)ุนู ููุฉโฌ must affect two or more
accounts to keep the basic accounting equation in
balance.
โบ Recording done by debiting at least one account and
crediting another.
โบ DEBITS must equal CREDITS.
Debit and Credit Procedures
The Account
18. 1-18
Account Name
Debit / Dr. Credit / Cr.
If Debits are greater than Credits, the account will have
a debit balance.
$10,000 Transaction #2
$3,000
$15,000
8,000
Transaction #3
Balance
Transaction #1
Debits and Credits
19. 1-19
Account Name
Debit / Dr. Credit / Cr.
$10,000 Transaction #2
$3,000
Balance
Transaction #1
$1,000
8,000 Transaction #3
If Debits are less than Credits, the account will have a
credit balance.
Debits and Credits
20. 1-20
๏ต Assets(โซ)ุฃุตููโฌ - Debits should
exceed credits.
๏ต Liabilities (โซ)ุฎุตูู โฌโ Credits
should exceed debits.
๏ต Normal balance is on the
increase side.
Chapter
3-23
Assets
Assets
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-24
Liabilities
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Debits and Credits
21. 1-21
๏ต Ownerโs investments and
revenues increase ownerโs equity
(credit).
๏ต Ownerโs drawings and expenses
decrease ownerโs equity (debit).
Chapter
3-25
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Owner
Ownerโ
โs Capital
s Capital
Chapter
3-23
Owner
Ownerโ
โs Drawing
s Drawing
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-25
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Owner
Ownerโ
โs Equity
s Equity
Debits and Credits
22. 1-22
๏ต Purpose of earning revenues is to
benefit the owner(s).
๏ต Effect of debits and credits on
revenue accounts is the same as
their effect on Ownerโs Capital.
๏ต Expenses have the opposite effect:
expenses decrease ownerโs equity.
Chapter
3-27
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Expense
Expense
Chapter
3-26
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Revenue
Revenue
Debits and Credits
23. 1-23
Chapter
3-23
Assets
Assets
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-27
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Expense
Expense
Normal
Balance
Credit
Normal
Balance
Debit
Debits/Credits Rules
Chapter
3-24
Liabilities
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-25
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Owners
Ownersโ
โ Equity
Equity
Chapter
3-26
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Revenue
Revenue
25. 1-25
Debits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.
Debits/Credits Rules
Question
26. 1-26
Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and ownerโs capital.
c. assets, liabilities, and ownerโs drawings.
d. assets, ownerโs drawings, and expenses.
Debits/Credits Rules
Question
27. 1-27
Relationship among the assets, liabilities and ownerโs
equity of a business:
The equation must be in balance after every transaction.
For every Debit there must be a Credit.
Assets Liabilities
= Ownerโs Equity
Basic
Equation
Expanded
Basic
Equation
+
Illustration 2-11
Summary of Debits/Credits Rules
28. 1-28
Source documents, such as a sales slip, a check, a bill, or a
cash register tape, provide evidence of the transaction.
Illustration 2-12
Analyze each transaction Enter transaction in a journal
Transfer journal information to
ledger accounts
Steps in the Recording Process
29. 1-29
๏ต Book of original entry.
๏ต Transactions recorded in chronological order.
๏ต Contributions to the recording process:
1. Discloses the complete effects of a transaction.
2. Provides a chronological record of transactions.
3. Helps to prevent or locate errors because the debit
and credit amounts can be easily compared.
The Journal (โซููู ูุฉโฌ โซ)ุฏูุชุฑโฌ
Steps in the Recording Process
30. 1-30
Journalizing - Entering transaction data in the journal.
Illustration: On September 1, Ray Neal invested $15,000 cash in
the business, and Softbyte purchased computer equipment for
$7,000 cash.
Account Title Ref. Debit Credit
Date
Cash
Ownerโs, Capital
Sept. 1 15,000
15,000
General Journal
Equipment
Cash
7,000
7,000
Illustration 2-13
Steps in the Recording Process
31. 1-31
Simple and Compound Entries
Illustration: On July 1, Butler Company purchases a delivery truck
costing $14,000. It pays $8,000 cash now and agrees to pay the
remaining $6,000 on account.
Account Title Ref. Debit Credit
Date
Equipment
Cash
July 1 14,000
8,000
General Journal
6,000
Accounts payable
Illustration 2-14
Steps in the Recording Process