Lecture 1: Introduction & Presentation of Accounting 1 course Lecturer: Ms. Durdona Davletova 1 Learning Objectives 1 Identify the activities and users associated with accounting. 2 Explain the building blocks of accounting: ethics, principles, and assumptions. 3 State the accounting equation, and define its components. 4 Analyze the effects of business transactions on the accounting equation. 5 Describe the four financial statements and how they are prepared. Contents of this Session • Introduction to the module • Presentation of financial statements for external users • The Conceptual Framework for Financial Reporting Introduction to this module • Contents • Assessment • Lectures • Tutorials • Resources WHAT IS ACCOUNTING FOR YOU? Accounting is all about calculation Accounting is the language of business Accounting is not mathematics Despite what some people think, accounting is not a branch of mathematics, although the man credited with writing the first book on the subject, Father Luca Pacioli (1445–1517), was a mathematician. What Pacioli wrote is contained in a mathematics textbook (Summa de arithmetica, geometria, proportioni et proportionalita – Everything about Arithmetic, Geometry and Proportion) which was first published in Italy in 1494. It has been translated into many languages, including English. Accounting may not require a knowledge of mathematics but you do need to be able to add, subtract, multiply and divide – things you need to be able to do in your daily life anyway. The history of accounting Accounting began because people needed to: - record business transactions, - know if they were being financially successful, and - know how much they owned and how much they owed 4 Steps in Accounting It is an art of recording, classifying, and summarizing in a significant manner and in terms of money transactions and events, which are in part at least of financial character, and interpret the results thereof. Assessment Mode Weightage Mid-term(class-test) 30% Project work (group assignment) 20% Final exam 50 % History of Accounting • In early stages of civilization transactions were recorded by businessman for their business operation. • Twenty three centuries ago accounting was practiced in India • The book “Arthashastra” by Kautaliya, minister of King Chandragupta (not only politics and economics, but clear explanation of keeping accounts) • “Principles of Double entry system” by Luco Pacioli in 1494 Venice Italy ( modern system of accounting basement) 2 BOOK-KEEPING OR ACCOUNITING? Accounting • Designs accounting system • Supervises transactions • Checks work of book-keeping • It is part of accounting • Records transaction • Clerical and routine work Financial Statements Income Statement or Profit & Loss Account Balance Sheet Asset – Liability = Owners Equity Revenue – Expenses = Income (or profit) Cash flow statement $ Receipts - $ Payments = Changes in cash balance Nature of Accounting I. Accounting as a service activity II. Accounting as a profession III. Accounting as a social force IV. Accounting as a language V. Accounting as science or art VI. Accounting as information system Objectives of Accounting I. To keep systematic records II. To protect business properties III. To ascertain the operational profit or loss IV. To ascertain the financial position of the business V. To facilitate rational decision-making VI. Information system Users of Accounting System External Users of Accounting Investors Creditors Members of non-profit organization Government Consumers Research Scholars Internal users of Accounting Owners Management Employees Who Uses Accounting Data INTERNAL USERS Illustration 1-2 Questions that internal users ask LO 1 Who Uses Accounting Data EXTERNAL USERS Illustration 1-3 Questions that external users ask LO 1 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. False 3. False 4. False 5. True LEARNING OBJECTIVE Assets 3 State the accounting equation, and define its components. = Liabilities + Owner's Equity Basic Accounting Equation 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 Basic Accounting Equation Assets = Liabilities + Owner's Equity Assets Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc. LO 3 Basic Accounting Equation Assets = Liabilities + Owner's Equity Liabilities Claims against assets (debts and obligations). Creditors (party to whom money is owed). Accounts Payable, Notes Payable, Salaries and Wages Payable, etc. LO 3 Basic Accounting Equation Assets = Liabilities + Owner's Equity Owner's Equity Ownership claim on total assets. Referred to as residual equity. Investment by owners and revenues (+) Drawings and expenses (-). LO 3 Owner’s Equity Illustration 1-6 Expanded accounting equation Increases in Owner’s 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. LO 3 Owner’s Equity Illustration 1-6 Expanded accounting equation Decreases in Owner’s 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. LO 3 DO IT! 3 Owner's Equity Effects Classify the following items as investment by owner, owner’s drawings, revenue, or expenses. Then indicate whether each item increases or decreases owner’s 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 LO 3 Branches of Accounting Financial Accounting Cost Accounting Management Accounting Common Accounting Terminology Capital Resources supplied by the owners to the business Assets Resources owned by the business Liabilities What the business owes for the assets supplied Purchase Goods bought by the business for processing and selling again Sales Goods sold by the business Purchase return/Return outwards Goods returned by the business to it's suppliers Sales return/Return inwards Goods returned to the business by it's customers Creditor A person to whom the business has to pay for goods and services rendered. Debtor A person from whom the business has to receive money for goods and services supplied. Stock Unsold goods Expense Cost of operating the business Revenue Money received for goods and services supplied by the business. Profit Revenue minus expenses Loss Expense minus revenue Types of Business • Sole Trader • Features • This is a one-man show • Capital put in by the owner • Business is run by the proprietor • Profits and losses at the year end are taken over by the proprietor • Usually small retail establishments • Unlimited liability Types of Business • Partnership • Features • Minimum 2 people, maximum 10 or 20, depending upon the type of partnership • Capital contributed by all partners • Every partner has a right to participate in the business • Each partner acts as the principal and agent of the firm • Profits or losses at the end of the year are shared in the agreed ratio • Usually professionals like doctors, lawyers, accountants, etc • Unlimited liability Types of Business • Company • • • • • • • • • Features Largest form of business organisation Capital contributed by the public, who are joint owners of the company Can be public or private Separate legal entity Registered under the company's act Ownership and management is usually separate No limit to the maximum amount of members Accounts must be prepared and audited yearly under the company's act LEARNING OBJECTIVE 4 Describe the four financial statements and how they are prepared. Companies prepare four financial statements : Income Statement Owner’s Equity Statement Balance Sheet Statement of Cash Flows LO 5 Financial Statements 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. LO 5 Financial Statements Net income is needed to determine the ending balance in owner’s equity. SOFTBYTE Income Statement For the Month Ended September 30, 2017 Illustration 1-9 Financial statements and their interrelationships SOFTBYTE Owner’s Equity Statement For the Month Ended September 30, 2017 LO 5 SOFTBYTE Owner’s Equity Statement For the Month Ended September 30, 2017 The ending balance in owner’s equity is needed in preparing the balance sheet. Illustration 1-9 Financial statements and their interrelationships Illustration 1-9 SOFTBYTE Balance Sheet September 30, 2017 Financial Statements SOFTBYTE Balance Sheet September 30, 2017 Balance sheet and income statement are needed to prepare statement of cash flows. SOFTBYTE Statement of Cash Flows For the Month Ended September 30, 2017 Illustration 1-9 Financial statements and their interrelationships Income Statement Reports the revenues and expenses for a specific period of time. Lists revenues first, followed by expenses. Shows net income (or net loss). Does not include investment and withdrawal transactions between the owner and the business in measuring net income. LO 5 Owner’s Equity Statement Reports the changes in owner’s equity for a specific period of time. The time period is the same as that covered by the income statement. LO 5 Balance Sheet Reports the assets, liabilities, and owner's equity at a specific date. Lists assets at the top, followed by liabilities and owner’s equity. Total assets must equal total liabilities and owner's equity. Is a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or yearend). LO 5 Statement of Cash Flows Information on the cash receipts and payments for a specific period of time. Answers the following: ► Where did cash come from? ► What was cash used for? ► What was the change in the cash balance? LO 5 Financial Statements Question Which of the following financial statements is prepared as of a specific date? a. Balance sheet. b. Income statement. c. Owner's equity statement. d. Statement of cash flows. LO 5 DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment Cash Service Revenue Rent Expense Accounts Payable $10,000 8,000 36,000 11,000 2,000 Utilities Expense Accounts Receivable Salaries and Wages Expense Notes Payable Owner’s Drawings $ 4,000 9,000 7,000 16,500 5,000 (a) Determine the total assets of at December 31, 2017. (b) Determine the net income reported for December 2017. (c) Determine the owner’s equity at December 31, 2017. LO 5 DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment Cash Service Revenue Rent Expense Accounts Payable $10,000 8,000 36,000 11,000 2,000 Utilities Expense Accounts Receivable Salaries and Wages Expense Notes Payable Owner’s Drawings $ 4,000 9,000 7,000 16,500 5,000 (a) Determine the total assets of at December 31, 2017. The total assets are $27,000, comprised of • Cash $8,000, • Accounts Receivable $9,000, and • Equipment $10,000. LO 5 DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment Cash Service Revenue Rent Expense Accounts Payable $10,000 8,000 36,000 11,000 2,000 Utilities Expense Accounts Receivable Salaries and Wages Expense Notes Payable Owner’s Drawings $ 4,000 9,000 7,000 16,500 5,000 (b) Determine the net income reported for December 2017. LO 5 DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment Cash Service Revenue Rent Expense Accounts Payable $10,000 8,000 36,000 11,000 2,000 Utilities Expense Accounts Receivable Salaries and Wages Expense Notes Payable Owner’s Drawings $ 4,000 9,000 7,000 16,500 5,000 (c) Determine the owner’s equity at December 31, 2017. LO 5
