Principles of Accounting: Week 2

Principles of Accounting
Week 2
Dr. Mohammad Tareq
Slide
1-1
What is Accounting?
The purpose of accounting:
(1)
to identify, record, and communicate the economic

events of an
Slide
1-2
(2)
organization to
(3)
interested users.
SO 1 Explain what accounting is.
The Accounting Process
Slide
1-3
33
School of Business
Difference between Financial and

Management Accounting
Financial Accounting
Management Accounting
Use of GAAP (i.e ICAB

and other related laws:
SEC laws and
notifications )
Yes
No
Users
All stakeholders of a
business: shareholders,
banks, ATO and so on
Only managers
Timeliness
Mostly outdated
Both historical or
forecasted information
Level of detail
Mostly quantitative in
nature and less detail
Much detail information
Slide
1-4
What is Accounting?
Who Uses Accounting Data
Internal
Users
Human
Resources
External
Users
Taxing
Authorities
Labor
Unions
Finance
Management
Customers
Creditors
Marketing
Slide
1-5
Regulatory
Agencies
Investors
SO 2 Identify the users and uses of accounting.
Users of Accounting
Common Questions Asked
User
1. Can we afford to give our

employees a pay raise?
Human Resources
2. Did the company earn a

satisfactory income?
Investors
3. Should any product lines be

eliminated?
Management
4. Is cash sufficient to pay

dividends to shareholders?
Finance
5. What price for our product will

maximize net income?
Marketing
6. Will the company be able to

pay its debts?
Creditors
Slide
1-6
SO 2 Identify the users and uses of accounting.
The Building Blocks of Accounting

Accounting Standards
International Accounting Standards Board (IASB)
http://www.iasb.org/
International Financial Reporting Standards (IFRS)
Financial Accounting Standards Board (FASB)

http://www.fasb.org/
Generally Accepted Accounting Principles (GAAP)
Slide
1-7
SO 4 Explain accounting standards and the measurement principles.

Measurement Principles
Cost Principle (Historical) dictates that companies record
assets at their cost.
Issues:
Reported at cost when purchased and also over the time the
asset is held.
Cost easily verified, market value is often subjective.
Fair value information may be more useful.
Slide
1-8

Measurement Principles
Fair Value Principle indicates that assets and liabilities should
be reported at fair value.

In determining which measurement principle to use, companies
weigh the factual nature of cost figures versus the relevance of
fair value.
Only in situations where assets are actively traded, such as
investment securities, is the fair value principle applied.
Slide
1-9

Assumptions
Monetary Unit Assumption include in the accounting records
only transaction data that can be expressed in terms of money.
Economic Entity Assumption requires that activities of the
entity be kept separate and distinct from the activities of its
owner and all other economic entities.
Proprietorship.
Partnership.
Forms of Business
Ownership
Corporation.
Slide
1-10
SO 5 Explain the monetary unit assumption and the economic entity assumption.
Slide
1-11
Proprietorship
Partnership
Corporation
Generally owned
by one person.
Owned by two or
more persons.
Ownership divided
into shares
Often small
service-type
businesses
Often retail and

service-type
businesses
Owner receives
any profits, suffers
any losses, and is
personally liable for
all debts.
Generally unlimited
personal liability
Separate legal
entity organized
under state
corporation law
Limited liability
Partnership
agreement
SO 5 Explain the monetary unit assumption and the economic entity assumption.
Review Question
A business organized as a separate legal entity under
state law having ownership divided into shares is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
Slide
1-12
Solution on
notes page
SO 5 Explain the monetary unit assumption

and the economic entity assumption.

Indicate whether each of the following
statements presented below is true or false.
1. The three steps in the accounting process are
identification, recording, and communication.
2. The two most common types of external users
are investors and company officers.
3. Shareholders in a corporation enjoy limited legal
liability as compared to partners in a partnership.
Slide
1-13
Solution on
notes page
True
False
True


Indicate whether each of the following
statements presented below is true or false.
4. The primary accounting standard-setting body
outside the United States is the International
True
Accounting Standards Board (IASB).
5. The cost principle dictates that companies

record assets at their cost. In later periods,
False
however, the fair value of the asset must be
used if fair value is higher than its cost.
Slide
1-14
Solution on
notes page

The Basic Accounting Equation

Assets
Liabilities
Equity
Provides the underlying framework for recording and

summarizing economic events.
Applies to all economic entities regardless of size.
Slide
1-15
SO 6
State the accounting equation, and define its components.

Assets
Liabilities
Equity

Assets
Resources a business owns.
Provide future services or benefits.

Cash, Inventory, Equipment, etc.
Slide
1-16
SO 6

Assets
Liabilities
Equity

Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.

Accounts payable, Notes payable, etc.
Slide
1-17
SO 6

Assets
Liabilities
Equity

Equity
Ownership claim on total assets.
Referred to as residual equity.

Share capital and retained earnings.
Slide
1-18
SO 6

Illustration 1-7
Revenues result from business activities entered into for the purpose
of earning income.
Generally results from selling merchandise, performing services,
renting property, and lending money.
Slide
1-19
SO 6

Illustration 1-7
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.
Slide
1-20
SO 6

Illustration 1-7
Dividends are the distribution of cash or other assets to shareholders.

Reduce retained earnings
Not an expense
Slide
1-21
SO 6
Using The Accounting Equation

Transaction Analysis
Slide
1-22
SO 7
Analyze the effects of business transactions on the accounting equation.

Classify the following items as issuance of
shares, dividends, revenues, or expenses.
Then indicate whether each item increases or decreases
equity.
Slide
1-23
Classification
Effect on Equity
1. Rent expense
Expense
Decrease
2. Service revenue
Revenue
Increase
3. Dividends
Dividends
Decrease
4. Salaries expense
Expense
Decrease
Solution on
notes page
SO 6
Business Transaction
What is Business Transaction?
An economic event that affects assets, liabilities

or owners equity
and can be measured in monetary terms
ASSET = Liability +Owners Equity
Event
Transaction
Slide
1-24
Using The Accounting Equation
Each transaction has at least a dual effect on the

accounting equation.
Slide
1-25
SO 7
Are these events business transactions?
Withdrawal of $5000 by owner ?

Yes
NSU purchased $1 million books for its library?

Yes
Walton recently announced that it won a $5 million export contract in

China
No
Biman appoints a new GM for its marketing division who will be paid
Tk. 300,000/month.
- No
One of the directors of Regent Air buys a flat at Bashundhara area
Slide
1-26
Transactions Analysis
Transaction (1). Investment by Shareholders. Ray and
Barbara Neal decide to open a computer programming service
which they name Softbyte. On September 1, 2011, they invest
$15,000 cash in exchange for capital shares. The effect of this
transaction on the basic equation is:
Slide
1-27
Solution on
notes page
SO 7
Analyze the effects of business transactions

on the accounting equation.
Transaction (2). Purchase of Equipment for Cash. Softbyte
purchases computer equipment for $7,000 cash.
Slide
1-28
Solution on
notes page
SO 7

Transaction (3). Purchase of Supplies on Credit. Softbyte
purchases for $1,600 from Acme Supply Company computer
paper and other supplies on credit which they expected to last
several months.
Slide
1-29
Solution on
notes page
SO 7

Transaction (4). Services Provided for Cash. Softbyte
receives $1,200 cash from customers for programming services
it has provided.
Slide
1-30
Solution on
notes page
SO 7

Transaction (5). Purchase of Advertising on Credit. Softbyte
receives a bill for $250 from the Daily News for advertising but
postpones payment until a later date.
Slide
1-31
Solution on
notes page
SO 7

Transaction (6). Services Provided for Cash and Credit.
Softbyte provides $3,500 of programming services for
customers. The company receives cash of $1,500 from
customers, and it bills the balance of $2,000 on account.
Slide
1-32
Solution on
notes page
SO 7

Transaction (7). Payment of Expenses. Softbyte pays the
following Expenses in cash for September: store rent $600,
salaries of employees $900, and utilities $200.
Slide
1-33
Solution on
notes page
SO 7

Transaction (8). Payment of Accounts Payable. Softbyte
pays its $250 Daily News bill in cash.
Slide
1-34
Solution on
notes page
SO 7

Transaction (9). Receipt of Cash on Account. Softbyte
receives $600 in cash from customers who had been billed for
services [in Transaction (6)].
Slide
1-35
Solution on
notes page
SO 7

Transaction (10). Dividends. The corporation pays a dividend
of $1,300 in cash.
Slide
1-36
Solution on
notes page
SO 7

Summary of Transactions
Slide
1-37
SO 7
Illustration 1-10
Tabular summary of
Softbyte transactions
Financial Statements
Companies prepare four financial statements from the
summarized accounting data:
Income
Statement
Slide
1-38
Retained
Earnings
Statement
Statement
of Financial
Position
Statement
of Cash
Flows
SO 8 Understand the four financial statements and how they are prepared.
Review Question
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
Solution on
notes page
Slide
1-39
Income Statement
Reports the revenues and expenses for a specific period of time.

Net income revenues exceed expenses.
Illustration 1-11
Financial statements and
Net loss expenses exceed revenues.
their interrelationships
Slide
1-40
Net income is needed to determine the

ending balance in retained earnings.
Illustration 1-11
Slide
1-41
SO 8
Statement indicates the reasons why

retained earnings has increased or
decreased during the period.
Slide
1-42
Retained Earnings
Statement
Illustration 1-11
Financial
Statements
The ending
balance in
retained
earnings is
needed in
preparing the
statement of
financial position
Illustration 1-11
Slide
1-43
Balance Sheet
Illustration 1-11
Slide
1-44
Financial
Statements
Illustration 1-11
Slide
1-45
Statement of Cash Flows
Information for a specific period of time.
Answers the following:
1. Where did cash come from?
2. What was cash used for?

3. What was the change in the cash balance?
Slide
1-46
Statement of Cash Flows
Illustration 1-11
Slide
1-47
Answer on
notes page
Slide
1-48
Review Question
Which of the following financial statements is prepared
as of a specific date?
a. Balance sheet.
b. Income statement.
c. Retained earnings statement.
d. Statement of cash flows.
Solution on
notes page.
Slide
1-49
Understanding U.S. GAAP

Key Differences
Accounting in Action
In 2002, the U.S. Congress issued the Sarbanes-Oxley Act (SOX),

which mandated certain internal controls for large public
companies listed on U.S. exchanges. Debate about international
companies (non-U.S.) adopting SOX-type standards centers on
whether the benefits exceed the costs. The concern is that the
higher costs of SOX compliance are making the U.S. securities
markets less competitive.
Financial frauds have occurred at companies such as Satyam
Computer Services (IND), Parmalat (ITA), and Royal Ahold (NLD).
They have also occurred at large U.S. companies such as Enron,
WorldCom, and AIG.
Slide
1-50

Key Differences
IFRS tends to be less detailed in its accounting and disclosure

requirements than GAAP. This difference in approach has resulted
in a debate about the merits of principles-based (IFRS) versus
rules-based (GAAP) standards.
U.S. regulators have recently eliminated the need for foreign
companies that trade shares in U.S. markets to reconcile their
accounting with GAAP.
GAAP is based on a conceptual framework that is similar to that
used to develop IFRS.
Slide
1-51

Key Differences
The three common forms of business organization that are

presented in the chapter, proprietorships, partnerships, and
corporations, are also found in the United States. Because the
choice of business organization is influenced by factors such as
legal environment, tax rates and regulations, and degree of
entrepreneurism, the relative use of each form will vary across
countries.
Transaction analysis is basically the same under IFRS and GAAP
but, as you will see in later chapters, the different standards may
impact how transactions are recorded.
Slide
1-52

Looking to the Future
Both the IASB and the FASB are hard at work developing
standards that will lead to the elimination of major differences in
the way certain transactions are accounted for and reported.
Consider, for example, that as a result of a joint project on the
conceptual framework, the definitions of the most fundamental
elements (assets, liabilities, equity, revenues, and expenses) may
actually change. However, whether the IASB adopts internal
control provisions similar to those in SOX remains to be seen.
Slide
1-53
Career Opportunities
APPENDIX
Public accounting
Government
Private accounting
Forensic accounting
Show me
the Money
Slide
1-54
SO 9 Explain the career opportunities in accounting.
Slide
1-55
Slide
1-56

Principles of Accounting: Week 2

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Principles of Accounting

Dr. Mohammad Tareq

to identify, record, and communicate the economic

SO 1 Explain what accounting is.

The Accounting Process

Difference between Financial and

Use of GAAP (i.e ICAB

Much detail information

SO 2 Identify the users and uses of accounting.

1. Can we afford to give our

2. Did the company earn a

3. Should any product lines be

4. Is cash sufficient to pay

5. What price for our product will

6. Will the company be able to

SO 2 Identify the users and uses of accounting.

The Building Blocks of Accounting

Financial Accounting Standards Board (FASB)

SO 4 Explain accounting standards and the measurement principles.

The Building Blocks of Accounting

Fair value information may be more useful.

SO 4 Explain accounting standards and the measurement principles.

The Building Blocks of Accounting

be reported at fair value.

SO 4 Explain accounting standards and the measurement principles.

The Building Blocks of Accounting

The Building Blocks of Accounting

Often retail and

The Building Blocks of Accounting

SO 5 Explain the monetary unit assumption

The Building Blocks of Accounting

SO 5 Explain the monetary unit assumption

The Building Blocks of Accounting

Accounting Standards Board (IASB).

5. The cost principle dictates that companies

however, the fair value of the asset must be

used if fair value is higher than its cost.

SO 5 Explain the monetary unit assumption

The Basic Accounting Equation

Provides the underlying framework for recording and

State the accounting equation, and define its components.

The Basic Accounting Equation

Provides the underlying framework for recording and

Provide future services or benefits.

State the accounting equation, and define its components.

The Basic Accounting Equation

Provides the underlying framework for recording and

Creditors - party to whom money is owed.

State the accounting equation, and define its components.

The Basic Accounting Equation

Provides the underlying framework for recording and

Referred to as residual equity.

State the accounting equation, and define its components.

The Basic Accounting Equation

State the accounting equation, and define its components.

The Basic Accounting Equation

Expenses are the cost of assets consumed or services used in the

State the accounting equation, and define its components.

The Basic Accounting Equation

Dividends are the distribution of cash or other assets to shareholders.

State the accounting equation, and define its components.

Using The Accounting Equation