Accounting Principles

1-1
Accounting
Accounting is an information systems that
identifies , records economic events and
communicates financial information to interested
users for taking economic decisions.
1-2
Three Activities
Illustration 1-1
The activities of the accounting process
The accounting process includes

the bookkeeping function.
1-3
LO 1
Who Uses Accounting Data

Internal
Users
Human
Resources
Taxing
Authorities
External
Users
Labor
Unions
Finance
Management
Customers
Creditors
Marketing
1-4
Regulatory
Agencies
Investors
LO 2 Identify the users and uses of accounting.
DO IT! 1
Basic Concepts
Indicate whether the following statements are true or false.

1. The three steps in the accounting process are identification,
recording, and communication.
2. Bookkeeping encompasses all steps in the accounting process.
3. Accountants prepare, but do not interpret, financial reports.
4. The two most common types of external users are investors and
company officers.
5. Managerial accounting activities focus on reports for internal users.
Solution: 1. True
2. 3. 4. False
5.
1-5
False
False
True
LO 1
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)
1-6

Measurement Principles
Cost Principle or historical cost principle, dictates that
companies record assets at their cost.
Fair Value Principle states that assets and liabilities

should be reported at fair value (the price received to sell an
asset or settle a liability).
1-7

Assumptions
Monetary Unit include in the accounting records only
transaction data that can be expressed in money terms.
Economic Entity requires that activities of the entity be

kept separate and distinct from the activities of its owner and
all other economic entities.
1-8
Proprietorship.
Partnership.
Corporation.
Forms of Business
Ownership
Forms of Business Ownership

Proprietorship
Owned by one
person
Owned by two or
more persons
Owner is often
manager/operator
Often retail and

service-type
businesses
1-9
Partnership
Owner receives
any profits, suffers
any losses, and is
personally liable
for all debts
Generally
unlimited
personal liability
Corporation
Ownership
divided into
shares of stock
Separate legal
entity organized
under state
corporation law
Limited liability
Partnership
agreement
LO 2
Assumptions
Question
Combining the activities of Kellogg and General Mills
would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
1-10
LO 2
LEARNING
OBJECTIVE
Assets
State the accounting equation, and define

its components.
Liabilities
Owner's
Equity
Basic Accounting Equation
1-11
Provides the underlying framework for recording and

summarizing economic events.
Assets are claimed by either creditors or owners.
If a business is liquidated, claims of creditors must be paid

before ownership claims.
LO 3
Assets
Liabilities
Owner's
Equity
Assets
Resources a business owns.
Provide future services or benefits.
e.g. Cash, Supplies, Equipment, etc.
1-12
LO 3
Assets
Liabilities
Owner's
Equity
Liabilities
Claims against assets (debts and obligations).
Creditors (party to whom money is owed).
e.g. Accounts Payable, Notes Payable, Salaries and Wages

Payable, etc.
1-13
LO 3
Assets
Liabilities
Owner's
Equity
Owner's Equity
1-14
Ownership claim on total assets.
Referred to as residual equity.
Investment by owners and revenues (+)
Drawings and expenses (-).
LO 3
Owners Equity
Illustration 1-6
Expanded accounting
equation
Increases in Owners Equity
Investments by owner are the assets the owner puts into the
business.
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.
1-15
LO 3
Owners Equity
Illustration 1-6
Expanded accounting
equation
Decreases in Owners Equity
Drawings An owner may withdraw cash or other assets for

personal use.
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.
1-16
LO 3
DO IT!
Owner's Equity Effects
Classify the following items as investment by owner, owners

drawings, revenue, or expenses. Then indicate whether each
item increases or decreases owners equity.
Classification
Effect on Equity
1. Rent Expense
Expense
Decrease
2. Service Revenue
Revenue
Increase
3. Drawings
Drawings
Decrease
Expense
Decrease
4. Salaries and Wages

Expense
1-17
LO 3
LEARNING
OBJECTIVE
Analyze the effects of business transactions

on the accounting equation.
Transactions are a businesss economic events recorded

by accountants.
1-18
Not all activities represent transactions.
Each transaction has a dual effect on the accounting

equation.
LO 4
Transaction Analysis
Illustration: Are the following events recorded in the accounting
records?
Illustration 1-7
Event
Criterion
Purchase
computer
Discuss product
design with
potential customer
Pay rent
Is the financial position (assets, liabilities, or

owners equity) of the company changed?
Record/
Dont Record
1-19
LO 4
Transaction Analysis
TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to start a
smartphone app development company which he names Softbyte. On
September 1, 2017, he invests $15,000 cash in the business. This
transaction results in an equal increase in assets and owners equity.
Assets
Transaction
1.
Cash
= Liabilities +
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies +Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
+15,000
- Exp.
+15,000
Illustration 1-8
Tabular summary of
Softbyte transactions
1-20
LO 4
TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte

Inc. purchases computer equipment for $7,000 cash.
Illustration 1-8
Assets
Transaction
Cash
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
- Exp.
+15,000
5.
1-21
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400 + $1,600 +
$7,000
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc.

purchases for $1,600 headsets and other accessories expected to last
several months. The supplier allows Softbyte to pay this bill in October.
Illustration 1-8
Transaction
Cash
Assets
+
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
- Exp.
+15,000
5.
1-22
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400 + $1,600 +
$7,000
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc.

receives $1,200 cash from customers for app development services it has
performed.
Illustration 1-8
Assets
Transaction
Cash
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
- Exp.
+15,000
5.
1-23
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400 + $1,600 +
$7,000
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte

Inc. receives a bill for $250 from the Daily News for advertising on its
online website but postpones payment until a later date.
Illustration 1-8
Assets
Transaction
Cash
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
- Exp.
+15,000
5.
1-24
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400 + $1,600 +
$7,000
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT.

Softbyte performs $3,500 of services. The company receives cash of
$1,500 from customers, and it bills the balance of $2,000 on account.
Illustration 1-8
Transaction
Cash
Assets
+
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
- Exp.
+15,000
5.
1-25
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400 + $1,600 +
$7,000
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the

following expenses in cash for September: office rent $600, salaries and
wages of employees $900, and utilities $200.
Illustration 1-8
Assets
Transaction
Cash
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
- Exp.
+15,000
5.
1-26
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400 + $1,600 +
$7,000
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc.

pays its $250 Daily News bill in cash. The company previously (in
Transaction 5) recorded the bill as an increase in Accounts Payable.
Illustration 1-8
Transaction
Cash
Assets
+
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
- Exp.
+15,000
5.
1-27
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400 + $1,600 +
$7,000
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc.

receives $600 in cash from customers who had been billed for services
(in Transaction 6).
Illustration 1-8
Assets
Transaction
Cash
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
- Exp.
+15,000
5.
1-28
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400 + $1,600 +
$7,000
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal

withdraws $1,300 in cash in cash from the business for his personal use.
Illustration 1-8
Transaction
Cash
Assets
+
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
- Exp.
+15,000
5.
1-29
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
-250
+2,000
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400 + $1,600 +
$18,050
$7,000
$1,600 + $15,000 + $1,300 - $4,700 - $1,950
$18,050
LO 4
Summary of Transactions
1. Each transaction is analyzed in terms of its effect on:
a. The three components of the basic accounting
equation.
b. Specific of items within each component.
2. The two sides of the equation must always be equal.
1-30
LO 4
DO IT!
Tabular Analysis
Transactions made by Virmari & Co., a public accounting firm, for

the month of August are shown below. Prepare a tabular analysis
which shows the effects of these transactions on the expanded
accounting equation, similar to that shown in Illustration 1-8.
1. The owner invested $25,000 cash in the business.
2. The company purchased $7,000 of office equipment on credit.
3. The company received $8,000 cash in exchange for services
performed.
4. The company paid $850 for this months rent.
5. The owner withdrew $1,000 cash for personal use.
1-31
LO 4
DO IT!
Tabular Analysis
1. The owner invested $25,000 cash in the business.
Transaction
1.
Assets
+ Equipment
Cash
Accounts
Payable
+25,000
2.
+8,000
4.
-850
5.
-1,000
$31,150 +
Owner's Equity
Owner's
Owner's
+
+ Rev.
Capital
Drawings
- Exp.
+25,000
+7,000
3.
1-32
Liabilities +
+7,000
+8,000
-850
-1,000
$7,000
$18,050
$7,000
$25,000 + $8,000 -
$18,050
$850 - $1,000
LO 4
DO IT!
Tabular Analysis
2. The company purchased $7,000 of office equipment on credit.
Transaction
1.
Assets
+ Equipment
Cash
Accounts
Payable
+25,000
2.
+8,000
4.
-850
5.
-1,000
$31,150 +
Owner's Equity
Owner's
Owner's
+
+ Rev.
Capital
Drawings
- Exp.
+25,000
+7,000
3.
1-33
Liabilities +
+7,000
+8,000
-850
-1,000
$7,000
$18,050
$7,000
$25,000 + $8,000 -
$18,050
$850 - $1,000
LO 4
DO IT!
Tabular Analysis
3. The company received $8,000 cash in exchange for services

performed.
Transaction
1.
Assets
+ Equipment
Cash
Accounts
Payable
+25,000
2.
+8,000
4.
-850
5.
-1,000
$31,150 +
Owner's Equity
Owner's
Owner's
+
+ Rev.
Capital
Drawings
- Exp.
+25,000
+7,000
3.
1-34
Liabilities +
+7,000
+8,000
-850
-1,000
$7,000
$18,050
$7,000
$25,000 + $8,000 -
$18,050
$850 - $1,000
LO 4
DO IT!
Tabular Analysis
4. The company paid $850 for this months rent.
Transaction
1.
Assets
+ Equipment
Cash
Accounts
Payable
+25,000
2.
+8,000
4.
-850
5.
-1,000
$31,150 +
Owner's Equity
Owner's
Owner's
+
+ Rev.
Capital
Drawings
- Exp.
+25,000
+7,000
3.
1-35
Liabilities +
+7,000
+8,000
-850
-1,000
$7,000
$18,050
$7,000
$25,000 + $8,000 -
$18,050
$850 - $1,000
LO 4
DO IT!
Tabular Analysis
5. The owner withdrew $1,000 cash for personal use.
Transaction
1.
Assets
+ Equipment
Cash
Accounts
Payable
+25,000
2.
+8,000
4.
-850
5.
-1,000
$31,150 +
Owner's Equity
Owner's
Owner's
+
+ Rev.
Capital
Drawings
- Exp.
+25,000
+7,000
3.
1-36
Liabilities +
+7,000
+8,000
-850
-1,000
$7,000
$38,150
$7,000
$25,000 + $1,000
$38,150
+ $8,000 -
$850
LO 4

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1-1

The accounting process includes

Who Uses Accounting Data

LO 2 Identify the users and uses of accounting.

Indicate whether the following statements are true or false.

The Building Blocks of Accounting

Financial Accounting Standards Board (FASB)

The Building Blocks of Accounting

Fair Value Principle states that assets and liabilities

The Building Blocks of Accounting

Economic Entity requires that activities of the entity be

Forms of Business Ownership

Often retail and

State the accounting equation, and define

Basic Accounting Equation

Provides the underlying framework for recording and

Assets are claimed by either creditors or owners.

If a business is liquidated, claims of creditors must be paid

Basic Accounting Equation

Resources a business owns.

Provide future services or benefits.

e.g. Cash, Supplies, Equipment, etc.

Basic Accounting Equation

Claims against assets (debts and obligations).

Creditors (party to whom money is owed).

e.g. Accounts Payable, Notes Payable, Salaries and Wages

Basic Accounting Equation

Ownership claim on total assets.

Referred to as residual equity.

Investment by owners and revenues (+)

Drawings and expenses (-).

Increases in Owners Equity

Revenues result from business activities entered into for the

Common sources of revenue are: sales, fees, services,

Decreases in Owners Equity

Drawings An owner may withdraw cash or other assets for

Expenses are the cost of assets consumed or services used in

Common expenses are: salaries expense, rent expense,

Owner's Equity Effects

Classify the following items as investment by owner, owners

4. Salaries and Wages

Analyze the effects of business transactions

Transactions are a businesss economic events recorded

Not all activities represent transactions.

Each transaction has a dual effect on the accounting

Is the financial position (assets, liabilities, or

TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte

$1,600 + $15,000 + $4,700 - $1,950 - $1,300

TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc.

$1,600 + $15,000 + $4,700 - $1,950 - $1,300

TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc.

$1,600 + $15,000 + $4,700 - $1,950 - $1,300

TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte

$1,600 + $15,000 + $4,700 - $1,950 - $1,300

TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT.

$1,600 + $15,000 + $4,700 - $1,950 - $1,300

TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the

$1,600 + $15,000 + $4,700 - $1,950 - $1,300

TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc.

$1,600 + $15,000 + $4,700 - $1,950 - $1,300

TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc.

$1,600 + $15,000 + $4,700 - $1,950 - $1,300

TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal