Lecture 1

Accounting Principles 1
 • CHAPTER ONE – Accounting and users
of accounting information.
• CHAPTER TWO – the accounting
Accounting Equation and debit and credit rule.

Principles • CHAPTER THREE – Simple accounting

1 cycle.
• CHAPTER FOUR – the complete
accounting cycle in service firms.
• CHAPTER FIVE – ACCOUNTING FOR
merchandising operations.
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 CHAPTER ONE
Accounting and users of
accounting information
This chapter aims to develop the
learner’s knowledge and skills in
relation to the concept, objectives, and
fields of accounting through the
following sub-objectives:
1. Definition of Accounting.
2. Accounting information users.
3. Accounting Reports
4. Users of accounting information
 1/1 Any integrated definition must include a
Definition specification of:
1. The nature of financial accounting.
of 2. The area of interest of financial accounting.
accounting. 3. the activities of the accounting process:.
4. Objectives of financial accounting.
5. Users of accounting information.
6. Financial Accounting Functions.
 1- The Financial accounting is a science that belongs to the
nature of Department of Social Sciences "Humanities" and
the sciences can be generally classified into three
financial groups:
accounting. Natural Humanities or Pure
Sciences Social Sciences Sciences
Interested in the Interested in the study Sciences with
study of natural of human behavior, general laws
phenomena such i.e. interested in the such as
as chemistry human being as a mathematics
member of society and logic
such as psychology
2. The area • Financial accounting is concerned with the
financial transactions of an accounting unit, and
of interest an accounting unit is any unit that needs
of accounting.
• Accounting units can be classified based on
financial several grounds:
accounting.
 In terms of legal In terms of In terms of scope In terms of the natureIn terms of its size
purpose of the activity
form
Accounting units The accounting unit carries There are small,
An accounting 1- Profit Units: are divided into: out an industrial, medium and large
Such as individual units

2. The area
commercial, agricultural or
unit may be a service activity
enterprises and
Proprietorship companies
(sole trader), a Partial Accounting

of interest
2- Non-profit units:
partnership, or Unit
Such as sports Total Accounting
a corporation. clubs, and Represented in any
Unit

of
government units. accounting unit
It is represented in
Business
the society as a whole
Government sector
in all its sectors and it

financial
Sector
is
Proprietorship Partnership: Owned Corporation Outside Family
World Sector
by two or more

accounting.
◆Owned by one Sector
persons ◆Ownership
person
divided into shares
◆Often retail and
◆Owner is often of stock
service-type
manager/operator
businesses ◆Separate
legal
◆Owner receives
◆Generally unlimited entity organized
any profits, suffers
personal liability under state
any losses, and is
personally liable for ◆Partnership corporation law
all debts Agreement ◆Limited liability
 • The interest of financial accounting is focused on the
financial transactions of the accounting unit through the
so-called steps or stages of accounting work, namely:
• Recording: That is, the recording of financial transactions
3. the in a historical record in a book called the "journal".
activities of • Classification: i.e., dividing transactions into equivalent
groups in the form of accounts in a book called a "
the accounting ledger".
process: • Summarizing: the balance of each account is found, and
these balances are displayed in what is known as the "
trial balance ".
• Display: the display of accounts in financial statements.
• Interpretation and analysis: interpretation of some of the
numbers presented in the financial statements.
Three Activities
Illustration 1-1
The activities of the accounting
process

The accounting process includes

the bookkeeping function.
 Financial accounting aims to serve the owners of money (investor &
Lender)
It can be said that the basic objectives of financial accounting are:
1. Determine the result of the activity of the accounting unit of profit
or loss during a certain period usually a year
4.objectives of Ex: 1/1 We bought goods for 1000 pounds
Financial 31/1 we sold the goods for 1500 pounds

Accounting When do you make this profit???

during the period from 1/1 to 31/1
2. Determination of the financial position of the accounting unit at the
end of the financial period
The financial position is used in accounting in the sense of determining:
• Liabilities (obligations towards creditors and owners)
• the entity's economic resources
 Users of accounting information can be classified
to:
1. Internal users:
5. Users of
Management and employees, served by
accounting management accounting
information. 2. External users:
Current and potential investors, lenders, creditors,
and banks.
 5. Users of
accounting
information.
Who Uses Accounting Data

INTERNAL
USERS

Illustration 1-2
Questions that internal
users ask
Who Uses Accounting Data

EXTERNAL
USERS

Illustration 1-3
Questions that external
users ask
6. financial
Financial accounting performs four basic
accounting functions:
Functions.
Recognition Measurement Display Disclosure
function function function Function

Determine the value Interpretation

Inclusion of the View item in
of the item to be and
item in the Financial
included in the clarification of
financial Statements
financial statements the item in the
statements
supplementary
explanations
 •There are several definitions for “Accounting” in the
accounting literature. It can be defined as
•: It is a system to provide quantitative information with
financial nature, about an economic entity to help in
making sound economic decisions related to this unit.
•Accounting is the process of identifying, recording,
summarizing, and reporting economic information about
1 definition an economic entity to decision-makers.
a. Accounting is a process, this indicates that
of accounting has many steps and procedures. Without
such steps, we cannot achieve the accounting
accounting objectives of providing help to decision-makers.
b. Accounting identifies information that should be
included in the accounting records. As was stated
before, accounting is concerned only with
quantitative and financial information. The company
examines information resulting from different
activities and identifies this useful information for
decision-makers to include such information in the
accounting records and exclude any other
information from these records.
 c. Accounting records this information in different accounting
records for future reference and to utilize it in preparing the
accounting reports needed for decision-makers.
d. Accounting summarizes the information. Information from
different activities should be summarized before reporting to
decision-makers. This summarization provides a concise
picture of different activities without overloading them with
irrelevant information. Summarization also helps in

1 definition
integrating different reports and achieves completeness of
accounting reports.
e. Accountants prepare the reports in the form of financial
of statements to provide information about the results of
activities, resources and obligations towards creditors and
accounting owners, and cash resources and uses. These reports are the
final output of the accounting system that provides the
necessary information for decision-makers.
• Thus, this second definition deals with accounting as an
information system with data resulting from different activities
represent inputs to the system to be processed in different
processes of recording, classifications, summarization and
finally preparing the financial statements which is the final
output of the system. These reports are communicated to
decision makers to help them in making sound economic
decisions regarding the entity.
 • In our previous discussion we pointed out
that accountants prepare a set of
accounting reports to provide
information for decision-makers. These
reports can be classified into two
categories:
Accounting • Internal Reports
• Which are prepared to be used by users
Reports in the firm (management) to plan, direct,
and control daily activities. These reports
Include budgets, cost statements, and
related reports for measuring and
controlling the cost of products or
services. These reports also include
performance evaluation reports for
divisions and departments and
responsibility accounting reports.
 • External reports
• Accountants prepare a set of
accounting reports mainly for
external users. These reports are
called general-purpose financial
Accounting statements to satisfy the common
needs for these parties.
Reports Accountants may prepare special
reports for government or
controlling organizations, General-
purpose financial statements
include:
• Statement of financial position
shows the entity's economic
resources (Assets) and obligations
(Liabilities) at a certain date.
 • Statement of income or the income
statement shows the entity's revenues
and expenses during the accounting
period (normally a year) and net result of
the activities. If revenues are more than
expenses the entity has profit or net
Accounting income. If expenses exceed revenues the
Reports entity has a net loss. Thus, it can be said
that the income statement provides a
measure for the economic performance
of the entity.
• Statement of owner’s equity shows the
changes of owner's rights in the entity
and the amount of these rights at the end
of the accounting period.
 • Statement of cash flows shows cash
inflows and outflows during the
accounting period from operating,
investing, and financing activities. This
statement provides information to help
decision-makers to measure the liquidity
Accounting of the entity and its ability to pay its
obligations when due.
Reports
• There are many other external reports to
meet some special needs for some classes
of users such as controlling agencies,
capital markets commission, tax
authorities... etc. The main reason for
having several external reports is the
different needs of external parties that
cannot be met through on set of
accounting reports.
 • In the previous discussion, we pointed out two distinctive
classes of users: Internal and external both with different
needs for accounting information. External users group
needs information to help in evaluating profitability of the
entity and to determine the resources available and its uses to
judge the financial position of the entity and its ability to
grow and continue in business. Internal users need
information to help in making decisions related to planning,
coordinating, directing and controlling the activities. Then,
taking corrective actions when it is necessary.
Fields of
• The outcome of this difference in information needs is the
Accounting: existence of subsystems for serving each group. These
subsystems are integrated to achieve the overall objectives of
the entity. The Financial Accounting provides information
needed for external users and Managerial Accounting
provides information needed for internal users. Both
subsystems are supported with a set of concepts,
assumptions, and principles, which represent the conceptual
framework for each. In addition, there are other accounting
subsystems like Governmental Accounting, Tax Accounting,
International Accounting, National Accounting Auditing,
Social Accounting and Environmental Accounting.
 • Generally Accepted Accounting principles are rules,
methods, procedures, concepts, assumptions, and principles
used to prepare financial statements and that are accepted by
many accountants. These principles compose the general
framework to determine the information that should be
included in the financial statements now they are presented
and disclosed. These principles are generally accepted
Generally because they are in conformity with the objectives of
financial reporting, rules, and standards issued by
Accepted accounting organizations. It should be clear that there is no
Accounting
one complete list of these principles, but these principles are
subject to change depending on the surrounding
Principles circumstances. These principles come from the following:
• Accounting traditions, and experience.
(GAAP): • Law and standards regulating the accounting profession.
• Accounting studies and research.
Thank you