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Chapter 1 Accounting in Action

Learning Objectives
After studying this chapter, you should be able to:

1. Explain what accounting is.

2. Identify the users and uses of accounting.
3. Explain accounting standards and the measurement principles.
4. Explain the monetary unit assumption and the economic entity
assumption.
5. State the accounting equation, and define its components.
6. Analyze the effects of business transactions on the accounting equation.
7. Understand the four financial statements and how they are prepared.

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 Preview of Chapter 1

Financial Accounting
IFRS Second Edition
Weygandt Kimmel Kieso
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 What is Accounting?

Accounting consists of three basic activities - it

u identifies,

u records, and

u communicates

the economic events of an organization to interested users.

1-4 LO 1 Explain what accounting is.

 What is Accounting?
Illustration 1-1

Three Activities The activities of the

accounting process

The accounting process includes

the bookkeeping function.

1-5 LO 1 Explain what accounting is.

 Who Uses Accounting Data

External
Internal Users
Human Taxing
Users Resources Authorities
Labor
Unions
Finance
Management Customers

Creditors
Marketing Regulatory
Agencies
Investors

1-6 LO 2 Identify the users and uses of accounting.

 The Building Blocks of Accounting

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 LO 4 Explain accounting standards and the measurement principles.

 The Building Blocks of Accounting

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.
u Proprietorship.
u Partnership. Forms of Business
Ownership
u Corporation.

LO 5 Explain the monetary unit assumption

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and the economic entity assumption.
 Forms of Business Ownership

Proprietorship Partnership Corporation

u Generally owned u Owned by two or u Ownership

by one person more persons divided into
Often small shares
u u Often retail and
service-type service-type u Separate legal
businesses businesses entity organized
under corporation
u Owner receives u Generally
any profits, law
unlimited
suffers any personal liability u Limited liability
losses, and is
u Partnership
personally liable
agreement
for all debts

LO 5 Explain the monetary unit assumption

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and the economic entity assumption.
 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.

1-10 LO 6 State the accounting equation, and define its components.

 The Basic Accounting Equation

Assets = Liabilities + Equity

Provides the underlying framework for recording and

summarizing economic events.

Assets
u Resources a business owns.
u Provide future services or benefits.
u Cash, Account receivable, Inventory, Equipment, etc.

1-11 LO 6 State the accounting equation, and define its components.

 The Basic Accounting Equation

Assets = Liabilities + Equity

Provides the underlying framework for recording and

summarizing economic events.

Liabilities
u Claims against assets (debts and obligations).
u Creditors - party to whom money is owed.
u Accounts payable, Notes payable, etc.

1-12 LO 6 State the accounting equation, and define its components.

 The Basic Accounting Equation

Assets = Liabilities + Equity

Provides the underlying framework for recording and

summarizing economic events.

Equity
u Ownership claim on total assets.
u Referred to as residual equity.
u Share capital-ordinary and retained earnings.

1-13 LO 6 State the accounting equation, and define its components.

 The Basic Accounting Equation
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.

1-14 LO 6 State the accounting equation, and define its components.

 The Basic Accounting Equation
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, interest
expense, property tax expense, etc.

1-15 LO 6 State the accounting equation, and define its components.

 The Basic Accounting Equation
Illustration 1-7

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

u Reduce retained earnings
u Not an expense

1-16 LO 6 State the accounting equation, and define its components.

 Using the Accounting Equation

Transactions are a business’s economic events recorded

by accountants.

u May be external or internal.

u Not all activities represent transactions.

u Each transaction has a dual effect on the accounting

equation.

1-17 LO 7 Analyze the effects of business transactions on the accounting equation.

 Using the Accounting Equation

Illustration: Are the following events recorded in the accounting

records?
Discuss Illustration 1-8

Purchase product
Pay rent.
Event computer. design with
customer.

Criterion Is the financial position (assets, liabilities, or equity)

of the company changed?

Record/
Don’t Record

1-18 LO 7 Analyze the effects of business transactions on the accounting equation.

 Using the Accounting Equation

Transaction Analysis
Illustration 1-9
Expanded accounting equation

1-19 LO 7 Analyze the effects of business transactions on the accounting equation.

 Transaction Analysis
Transaction (1). Investment by Shareholders. Ray and Barbara Neal
decides to open a computer programming service which he names
Softbyte. On September 1, 2014, they invest €15,000 cash in exchange for
€15,000 of ordinary shares.
Illustration 1-10

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 Transaction Analysis
Transaction (2). Purchase of Equipment for Cash. Softbyte purchases
computer equipment for €7,000 cash.

Illustration 1-10

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LO 7
 Transaction Analysis
Transaction (3). Purchase of Supplies on Credit. Softbyte purchases
for €1,600 from Acme Supply Company computer paper and other supplies
expected to last several months. The purchase is on account.

Illustration 1-10

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 Transaction Analysis
Transaction (4). Services Provided for Cash. Softbyte receives €1,200
cash from customers for programming services it has provided.

Illustration 1-10

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 Transaction Analysis
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.

Illustration 1-10

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 Transaction Analysis
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.
Illustration 1-10

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LO 7
 Transaction Analysis
Transaction (7). Payment of Expenses. Softbyte pays the following
expenses in cash for September: store rent €600, salaries and wages of
employees €900, and utilities €200.

Illustration 1-10

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 Transaction Analysis
Transaction (8). Payment of Accounts Payable. Softbyte pays its €250
Daily News bill in cash.

Illustration 1-10

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 Transaction Analysis
Transaction (9). Receipt of Cash on Account. Softbyte receives €600 in
cash from customers who had been billed for services [in Transaction (6)].

Illustration 1-10

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 Transaction Analysis
Transaction (10). Dividends. The corporation pays a dividend of €1,300 in
cash.

Illustration 1-10

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 Financial Statements

Companies prepare four financial statements :

Retained Statement Statement

Income
Earnings of Financial of Cash
Statement
Statement Position Flows

1-30 LO 8 Understand the four financial statements and how they are prepared.
 Net income is needed to determine the
Financial Statements ending balance in retained earnings.

Illustration 1-11
Financial statements and
their interrelationships

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 The ending balance in retained earnings is
Financial Statements needed in preparing the balance sheet

Illustration 1-11

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 The balance sheet and income statement are
Financial Statements needed to prepare statement of cash flows.

Illustration 1-11

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