Chapter 1: Accounting in Action

1. Accounting Activities and Users

- Three activities
o Identification: Select economic events (transaction)
o Recording: Record, classify and summarize
o Communication: Prepare accounting reports + Analyze and interpret for users
- Groups of users
o Internal users: Question asked by internal users:
 Finance
 Marketing
 Human resources
 Management
o External users: Question asked by external users:
 Investors
 Creditors
 Taxing authorities
 Regulatory agencies
 Labor unions
2. The Building Blocks of Accounting
- Ethics in Financial Reporting
o Recognize an ethical situation and the ethical issues involved
o Identify and analyze the principal elements in the situation
o Identify the alternatives, and weigh the impact of each alternative on varous
stakeholders
- Accounting Standards
o Primary accounting standard-setting bodies:
 International Accounting Standards Board (IASB)
 Financial Accounting Standards Board (FASB)
- Measurement Principles
o Historical cost principle: Dictates that companies record assets at their cost.
This is true not only at the time the asset is purchased, but also over the time
the asset is held
o 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)
- Selecting Measurement Principles
o Relevance: financial information is capable of making a difference in a
decision
o Faithful representation: the numbers and descriptions match what really
existed or happened – they are factual
- Assumptions
o Monetary unit assumption: requires that companies include in the accounting
records only transaction data that can be expressed in money terms
 o Economic Entity assumption: requires that the activies of the entity be kept
separate and distinct from the activities of its owner and all other economic
entities. Typical entity forms are proprietorship, partnership, corporation
3. The Accounting Equation
- The basic accounting equation:

o Assets: resources a business owns

o Liabilities: blaims against asets, i.e. existing debts and obligations
o Equity: the ownership claim on a company’s total assets
- The expanded accounting equation:

o Share capital – ordinary: describes the amounts paid in by shareholders for the
ordinary shares they purchase
o Revenues: the gross increases in equity resulting from business activities
entered into for the purpose of earning income. Revenues usually result in an
increase in an asset.
o Expenses: the cost of assets consumed or services used in the process of
earning revenue
o Dividends: distribution of cash or other assets to shareholders. They are not an
expense.

4. Analyzing business transactions

- Accounting information system:
 o the system of collecting and processing transaction data and communicating
financial information to decision-makers
o 9 steps:
 Analyze –> Journalize –> Post –> Trial Balance –> Adjusting Entries -
> Adjusted Trial Balance –> Financial Statements –> Closing Entries –
> Post-closing Trial Balance
- Analyzing Business Transactions
o Identifying Accounting transactions

- Key points
o Each transaction must be analyzed in terms of its effect on:
 The three components of the basic accounting equation
 Specific types of items within each component
o The two sides of the equation must always be equal
o The Share Capital – Ordinary and Retained Earnings columns indicate the
causes of each change in the shareholders’ claim on assets.
5. Financial statements
a. Income statement:
- Presents the revenues and expenses and resulting net income or net loss for a specific
period of time
- Lists revenues first, followed by expenses. Then, the statement shows net income (or
net loss)
- Structure:
o The income statement lists revenues first, followed by expenses.
o Then, the statement shows net income (or net loss).
o When revenues exceed expenses, net income results.
o When expenses exceed revenues, a net loss results.
o The income statement does not include investment and dividend transactions
between the shareholders and the business in measuring net income.
b. Retained earnings statement:
- Summarizes the changes in retained earnings for a specific period of time. 
 - Indicates the reasons why retained earnings increased or decreased during the period.
If there is a net loss, it is deducted with dividends in the retained earnings statement.
- Structure:
o The first line of the statement shows the beginning retained earnings amount.
o Then add net income (or subtract net loss) and subtract dividends.
o The retained earnings ending balance is the final amount on the statement.
c. Statement of financial position:
- Reports the assets, liabilities, and equity of a company at a specific date. (Sometimes
referred to as a balance sheet) 
- The statement of financial position is like a snapshot of the company’s financial
condition at a specific moment in time (usually the month-end or year-end).
- Structure:
o Lists assets at the top, followed by equity and then liabilities.
o Total assets must equal total equity and liabilities.
d. Statement of cash flows:
- Summarizes information about the cash inflows (receipts) and outflows (payments)
for a specific period of time. 
- Provides information on the cash receipts and payments for a specific period of time.
- Structure:
o the cash effects of a company’s operations during a period,
o its investing activities,
o its financing activities,
o the net increase or decrease in cash during the period, and
o the cash amount at the end of the period.
e. Comprehensive income statement:
- Presents other comprehensive income items that are not included in the determination
of net income but are considered important enough to be reported separately.
- This statement immediately follows the income statement.
Homework: E1.14, P1.2, P1.3

Chapter 2: The Recording Process

1. Accounts, Debits, and Credits
a. The Account
- An individual accounting record of increases and decreases in a specific asset,
liability, or equity item
- Consists three parts
o A title
o A left or debit side
o A right or credit side
b. Debits and Credits
- Dr./Cr. Procedures for Assets and Liabilities
 o Both sides of the basic equation must be equal
o Increases and decreases in liabilities have to be recorded opposite from
increases and decreases in assets.
o Thus, increases in liabilities are entered on the right or credit side, and
decreases in liabilities are entered on the left or debit side.

o Asset accounts normally show debit balances. That is, debits to a specific asset
account should exceed credits to that account.
o Liability accounts normally show credit balances. That is, credits to a liability
account should exceed debits to that account.
o Equity is same as Liabilities.
- Dr./Cr. Procedures for Equity
o Share Capital – Ordinary

o Retained Earnings

o Dividends
 o Revenues and Expenses

2. The Journal
a. The Recording Process

b. The Journal
- Disclose the complete effects of a transaction
- Provides a chronological record of a transaction
- Helps to prevent errors
- Rule: DEBIT = CREDIT
c. The Ledger
- Posting is the process of transfering journal entry into ledger
- Ledger is a group of accounts maintained by a company
- Order:
o Assets
o Liabilities
o Equity
o Dividend
o Revenue
o Expense
d. The Trial Balance
- A list of accounts and their balances as a given time
- Order:
o Assets
o Liabilities
o Equity
o Dividend
o Revenue
o Expenses
- Purpose: to prove that debits equal credits