Introduction to Accounting
Lecturer: Yusuf Hussein Mohamed
DEFINITION OF
ACCOUNTING
"Accounting
is
the
art
of
recording,
and
in
terms
of
money;
on
become the
OBJECTIVES OF
ACCOUNTING
of
ACCOUNTING PROCESS
Communicating to the
Users
Summarizing
Trial Balance
Trading and Profit and Loss
Account
Balance Sheet.
Financial Transactions
or Events
1.
2.
3.
4.
5.
6.
7.
8.
Journal
Cash Book
Purchase Book
Sales Book
Purchases Return
Book
Sales Return Book
Bills Payable Book
Bills Receivable
Book
Journal Proper
Recording
Classifying (Posting
into Ledger)
12
BRANCHES OF
ACCOUNTING
Branches of
Accounting
Financial
Accounting
Cost
Accounting
Management
Accounting
13
USERS OF ACCOUNTING
INFORMATION
Internal Users
Owners
Management
External Users
Creditors
Researchers
Consumers
14
BASIS OF ACCOUNTING
1. Cash Basis Of Accounting
Cash Basis of Accounting is a method in
which
. income is recorded when cash is received, and
. expenses are recorded when cash is paid out
2. Accrual Basis of Accounting
System of accounting is based on 'accrual
concept'
. Revenue is recognized (recorded) when earned
. Expenses are recognized when incurred
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SYSTEMS OF ACCOUNTING
The systems of recording transactions in
the books of accounts are classified into
two types:
(a) Double Entry System of Accounting
(b) Single Entry System of Accounting
Matching Principle
Revenues and related expenses be recorded in the
same accounting period
Disclosure Principle
Companies must include information that may
impact decision of users of financial information
Constraints of Accounting
Materiality
Only record events that are significant enough to justify the
usefulness of the information
Cost-Benefit Relationship
Financial information provided by an organization is
beneficial enough to justify the cost of preparing it
Consistency Principle
Once an entity adopts a method of accounting, they must
use that same method for all subsequent events
Conservatism Principle
Select accounting methods that are least likely to overstate
assets (revenues) an understate liabilities (expenses) in the
current period
Accounting Equation
The funds of a
business
provided
by
its owners and
the
profits
entitled to him
Debts
owed by
a
business
to
external
parties
such as
Capital
Creditors
Profits
OE
ASSET
LIABILITY
ASSET
LIABILITY
ASSET
ASSET
OWNERS EQUITY
OWNERS EQUITY
OE
ASSET ASSET
TRANSACTION THAT AFFECTS
LIABILITIES ONLY
LIABILITY
LIABILITY
BUSINESS ENTERPRISES
A business owned by one person is
generally a proprietorship (owners equity).
A business owned by two or more persons
associated as partners is a partnership
(partners equity).
A business organized as a separate legal
entity under corporation law and having
ownership divided into transferable shares
is called a corporation (shareholders
equity).
OWNERS EQUITY AS
A BUILDING BLOCK
Owners Equity is equal to total
INVESTMENTS BY OWNERS
AS A BUILDING BLOCK
Investments by owner are the
assets put into the business by
the owner.
These investments in the
business increase owners equity.
DRAWINGS AS A
BUILDING BLOCK
Drawings are withdrawals of
cash or other assets by the
owner for personal use.
Drawings decrease total
owners equity.
REVENUES AS A
BUILDING BLOCK
Revenues are the gross increases in
owners equity resulting from
business activities entered into for
the purpose of earning income.
Revenues may result from sale of
merchandise, performance of
services, rental of property, or
lending of money.
Revenues usually result in an
increase in an asset.
EXPENSES AS A
BUILDING BLOCK
Expenses are the decreases in
owners equity that result from
operating the business.
Expenses are the cost of assets
consumed or services used in the
process of earning revenue.
Examples of expenses include utility
expense, rent expense, and supplies
expense.
ILLUSTRATION
Revenues
Revenues
DECREASES
Owners
Equity
Withdrawals
Withdrawals
by
byOwner
Owner
Expenses
Expenses
TRANSACTION ANALYSIS
Start decides to open a computer
programming service.
BANK
Softb
yte
TRANSACTION ANALYSIS
TRANSACTION 1
On September 1, he invests $15,000
cash in the business, which he names
Star Comapny.
There
There is
is an
an increase
increase in
in the
the asset
asset Cash,
Cash,
$15,000,
$15,000, and
and an
an equal
equal increase
increase in
in the
the
owners
owners equity,
equity, Ahmed,
Ahmed, Capital,
Capital,
$15,000.
$15,000.
TRANSACTION ANALYSIS
TRANSACTION 2
Stare Company purchases computer
equipment for $7,000 cash.
Trans. #
(2)
Balance
Assets
Cash
Supplies
15,000
(7,000)
8,000 +
= Liabilities +
Owner's Equity
Accounts
M. Doucet,
Equipment
Payable
Capital
15,000 Investment
7,000
7,000 =
15,000
Cash
Cash is
is decreased
decreased $7,000,
$7,000, and
and the
the
asset
asset Equipment
Equipment is
is increased
increased
$7,000.
$7,000.
TRANSACTION ANALYSIS
TRANSACTION 3
Star company purchases computer paper and supplies expected
to last several months from Chuah Supply Company for $1,600 on
account.
Trans. #
Balance
(3)
Balance
Assets
== Liabilities
Liabilities ++
Owner's
Owner's Equity
Accounts
Accounts
M.
M. Doucet,
Cash
Supplies
Equipment
Equipment
Payable
Payable
Capital
8,000
8,000
7,000
7,000
15,000
15,000
1,600
1,600
8,000 +
1,600 +
7,000 =
1,600 +
15,000
The
The asset
asset Supplies
Supplies is
is increased
increased $1,600,
$1,600, and
and
the
the liability
liability Accounts
Accounts Payable
Payable is
is increased
increased
by
by the
the same
same amount.
amount.
TRANSACTION ANALYSIS
TRANSACTION 4
Star company receives $1,200 cash
from customers for programming
services it has provided.
Trans. #
Balance
(4)
Balance
Assets
= Liabilities +
Owner's Equity
Accounts
M. Doucet,
Cash
Supplies
Equipment
Payable
Capital
8,000
1,600
7,000
1,600
15,000
1,200
1,200 Service Revenue
9,200 +
1,600 +
7,000 =
1,600 +
16,200
Cash
Cash is
is increased
increased $1,200,
$1,200, and
and
M.
M. Doucet,
Doucet, Capital
Capital is
is increased
increased
$1,200.
$1,200.
TRANSACTION ANALYSIS
TRANSACTION 5
Star comapny receives a bill for $250 for
advertising its business but pays the bill on
a later date.
Trans. #
Balance
(5)
Balance
Assets
= Liabilities ++
Owner's
Owner's Equity
Accounts
M. Doucet,
Cash
Supplies
Equipment
Payable
Capital
9,200 +
1,600
1,600 +
7,000
7,000 =
1,600
1,600 ++
16,200
16,200
250
(250) Advertising Expense
9,200
1,600
7,000
1,850
15,950
Accounts
Accounts Payable
Payable is
is increased
increased
$250,
$250, and
and M.
M. Doucet,
Doucet, Capital
Capital is
is
decreased
decreased $250.
$250.
TRANSACTION ANALYSIS
TRANSACTION 6
Star company provides programming
services of $3,500 for customers and
receives cash of $1,500, with the balance
payable
on account.
Trans.
#
Assets
== Liabilities
Liabilities ++
Owner's
Owner's Equity
Balance
(6)
Balance
Cash
9,200
9,200
1,500
10,700
Account
Account
Accounts
Accounts
Receivable
Receivable Supplies
Supplies Equipment
Equipment
Payable
Payable
++
00 ++ 1,600
1,600 ++
7,000
7,000 ==
1,850
1,850
2,000
2,000
1,600
7,000
1,850
M.
M. Doucet,
Doucet,
Capital
Capital
15,950
15,950
3,500 Service Revenue
19,450
Cash
Cash is
is increased
increased $1,500;
$1,500; Accounts
Accounts
Receivable
Receivable is
is increased
increased $2,000;
$2,000; and
and M.
M.
Doucet,
Doucet, Capital
Capital is
is increased
increased $3,500.
$3,500.
TRANSACTION ANALYSIS
TRANSACTION 7
Expenses paid in cash for September
are store rent, $600, salaries of
employees, $900, and utilities, $200.
Trans. #
Balance
(7)
Balance
Cash
10,700
(600)
(900)
(200)
9,000 +
Assets
Account
Receivable
Supplies
2,000
1,600
2,000 +
= Liabilities +
Owner's Equity
Accounts
M. Doucet,
Equipment
Payable
Capital
7,000
1,850
19,450
(600) Rent Exp.
(900) Salaries Exp.
(200) Utilities Exp.
1,600 +
7,000 =
1,850 +
17,750
Cash
Cash is
is decreased
decreased $1,700
$1,700 and
and M.
M.
Doucet,
Doucet, Capital
Capital is
is decreased
decreased the
the
same
same amount.
amount.
TRANSACTION ANALYSIS
TRANSACTION 8
Star company pays its advertising bill
of $250 in cash.
Trans. #
Balance
Balance
(8)
Balance
Cash
Cash
9,000
9,000
(250)
8,750 +
AccountAssets
Receivable
Account
Supplies
Receivable
2,000
Supplies
1,600
2,000
1,600
2,000 +
1,600 +
Equipment
Equipment
7,000
7,000
7,000
= Liabilities
Accounts + M. Doucet,
Owner's Equity
Accounts
Payable
M.Capital
Doucet,
Payable
1,850
Capital
17,750
1,850
17,750
(250)
=
1,600 +
17,750
Cash
Cash is
is decreased
decreased $250
$250 and
and
Accounts
Accounts Payable
Payable is
is decreased
decreased
the
the same
same amount.
amount.
TRANSACTION ANALYSIS
TRANSACTION 9
The sum of $600 in cash is received from
customers who have previously been billed
for services in Transaction 6.
Trans. #
Balance
Assets
= Liabilities +
Owner's Equity
Account
Accounts
M. Doucet,
Cash
Receivable
Supplies
Equipment
Payable
Capital
8,750 +
2,000 +
1,600 +
7,000 =
1,600 +
17,750
Cash
Cash is
is increased
increased $600
$600 and
and
Accounts
Accounts Receivable
Receivable is
is decreased
decreased
by
by the
the same
same amount.
amount.
TRANSACTION ANALYSIS
TRANSACTION 10
Trans. #
Balance
Cash
9,350
Account
Receivable
1,400
Supplies
1,600
= Liabilities +
Owner's Equity
Accounts
M. Doucet,
Equipment
Payable
Capital
7,000
1,600
17,750
Cash
Cash is
is decreased
decreased $1,300
$1,300 and
and
Ahmed,
Ahmed, Capital
Capital is
is decreased
decreased by
by
the
the same
same amount.
amount.
FINANCIAL STATEMENTS
After transactions are identified,
recorded, and summarized, four
financial statements are prepared
from the summarized accounting
data:
1. An income statement presents the
revenues
and expenses and
resulting net income or net
loss
of a company for a specific period of
time.
2. A statement of owners equity
FINANCIAL STATEMENTS
In addition to the income statement and
statement of owners equity, two
additional statements are prepared:
3. A balance sheet reports the assets,
liabilities, and
owners equity of a
business enterprise at a
specific date.
4. A cash flow statement summarizes
information
concerning the cash
inflows (receipts) and
outflows (payments) for a specific period
ILLUSTRATION 1-10
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
ILLUSTRATION 1-10
ILLUSTRATION 1-10
ILLUSTRATION 1-10
SOFTBYTE
Balance Sheet
September 30, 2002
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
8,050
1,400
1,600
7,000
18,050
1,600
16,450
18,050
ILLUSTRATION 1-10
SOFTBYTE
Cash Flow Statement
For the Month Ended September 30, 2002
Cash flows from operating activities
Cash receipts from customers
$ 3,300
Cash payments to suppliers and employees
(1,950)
Net cash provided by operating activities
Cash flows from investing activities
Purchase of equipment
$ (7,000)
Net cash used by investing activities
Cash flows from financing activities
Investments by owner
$ 15,000
Drawings by owner
(1,300)
Net cash provided by financing activities
Net increase in cash
Cash, September 1
Cash, September 30
$ 1,350
(7,000)
13,700
$ 8,050
$ 8,050