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- 1. Assistant Professor Department ofManagement Sciences SZABIST, Karachi
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- 4. Teacher vs Professor Journeyfrom high school to University
- 5. Course Objectives basicknowledge 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 Explainwhat accounting is Identify users and uses of accounting GAAP and IAS Accounting cycle Types of businesses Basic accounting statements Accounting equation
- 7. Accounting information The accounting process Decision makers Economic activities Actions (decisions) Accounting “links”decision makers with economic activities and with the results of their decisions.
- 8. Identifies Records Communicates Relevant Reliable Comparable Importance of Accounting Accounting isa system that information that is about an organization’s business activities. C1 1-8
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- 10. Users of Accounting Information ExternalUsers •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 ExternalUsers 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 ofAccounting 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 ofAccounting 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 anAid 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 anAid to Decision Making Fundamental relationships in the decision-making process: Event Accountant’s analysis & recording Financial Statements Users
- 17. Opportunities in Accounting Financial •Preparation •Analysis •Auditing •Regulatory •Consulting •Planning •Criminal investigation Managerial •Generalaccounting •Cost accounting •Budgeting •Internal auditing •Consulting •Controller •Treasurer •Strategy Taxation •Preparation •Planning •Regulatory •Investigations •Consulting •Enforcement •Legal services •Estate plans Accounting- related •Lenders •Consultants •Analysts •Traders •Directors •Underwriters •Planners •Appraisers •FBI investigators •Market researchers •Systems designers •Merger services •Business valuation •Forensic accountant •Litigation support •Entrepreneurs C 2 1-17
- 18. Business types Manufacturing Merchandizing Services business.
- 19. 19 Service Business Service TheWalt 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-MartGeneral 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 GeneralMotors 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 thenature 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 howbusiness 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
- 24. Types of Businesses •Manufacturing • Merchandizing • Services business.
- 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 HotelsHospitality and lodging HBL Financial Services PTCL Telecommunication Types of Businesses Product Services Business
- 28. There are threetypes of business organizations Proprietorship Partnership Corporation
- 29. A proprietorship is ownedby one individual. Advantages • Ease in organizing • Low cost of organizing Disadvantage • Limited source of financial resources • Unlimited liability
- 30. A partnership isowned by two or more individuals. Advantages • More financial resources than a proprietorship. • Additional management skills. Disadvantage • Unlimited liability.
- 31. A corporation isorganized 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 businessstrategy 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 alow-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 adifferential 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 stakeholderis a person or entity having an interest in the economic performance of the business. Business Stakeholders
- 36. Business Stakeholders • Owners •Banks • Customers • Government Agencies etc
- 37. Common Things Organizational Goals NeedInformation
- 38. Organizational Goals ProfitMaking Welfare Work
- 39. 2 Assess stakeholders’ informational needs. The Process ofProviding Information STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government 1 Identify stake- holders.
- 40. Accounting Information System Design the accounting information system tomeet stakeholders’ needs. 3 4 Record economic data about business activities and events. The Process of Providing Information
- 41. 5 Prepare accounting reports for stakeholders. Accounting Information System The Processof Providing Information STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government
- 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 purposeof Accounting is to provide information to decision makers that is useful in making economic decisions.
- 44. Accounting System Theaccounting 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 datafor 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 BalanceSheet Income Statement Cash Flow Statement Statement of Changes in Owner’s Equity Notes
- 48. Financial Statements BalanceSheet ◦ 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 Sectionsof 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 Revenuexxxx - Less Expenses xxxx = Gross profit xxxx - Operating Cost: Selling General Administration Expenses xxxx = Net Income xxxx
- 51. Managerial Accounting It isa 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 • Accumulatecost 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 datafor 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 informationManagers 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 Accountantsemployed 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.
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- 57. Financial accounting practiceis 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 Assumptionsof 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 entityconcept 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 conceptrequires that the accounting records and reports be based upon objective evidence. The unit-of-measure concept requires that economic data be recorded in dollars.
- 61. The Accounting Equation Assets= Liabilities + Owner’s Equity The resources owned by a business
- 62. The Accounting Equation Assets= Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business
- 63. The Accounting Equation Assets= Liabilities + Owner’s Equity The rights of the owners
- 64. What is abusiness 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 Iqbaldeposits 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 exchangedRs. 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 = =
- 74. Owner’s withdrawals Expenses Decreased by Owner’s Equity Effectsof Transactions on Owner’s Equity Increased by Owner’s investments Revenues Net income
- 75. Accounting reports, calledfinancial statements, provide summarized information to the owner.
- 76. Financial Statements Balancesheet—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 Incomestatement—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. BalanceSheet 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. BalanceSheet 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 balancesheet displays the liabilities and owner’s equity below the assets, the report form is being used.
- 85. Cash flows fromoperating 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. BalanceSheet 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 CashFlows 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 toowner’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’sequity = Rs.400 Rs.26,050 Tools for Financial Analysis and Interpretation = 0.015 / 15% Ratio of liabilities to owner’s equity
- 90.