Chapter 1 Introduction

Slide 1.
Faculty of Business, Finance, and

Hospitality
FINANCIAL ACCOUNTING 1/PRINCIPLES OF
ACCOUNTING
(BAA1163/ACC1014)
CHAPTER 1: INTRODUCTION
Prepared by: Mdm Dahlia Fernandez
If its important to you, you will find a way. If its not, you’ll find an excuse.
Frank Wood and Alan Sangster, Frank Wood's Business Accounting 1, 13th edition © Pearson Education Limited 2016
Copyright© 2017 MAHSA UNIVERSITY 1
Slide 1.2
Chapter objectives
• Explain what accounting is about
• Briefly describe the history of accounting
• Explain the relationship between bookkeeping and accounting
• List the main users of accounting information and what accounting information they
are interested in
• Describe the main difference between financial accounting and management
accounting
Slide 1.3
What is accounting?
Accounting can be defined as:
The process of identifying, measuring and
communicating economic information
to permit informed judgements and
decisions by users of that information.
Slide 1.4
The history of accounting

• Accounting has existed for at least 10,000 years, with
early records indicating its use in Mesopotamia.
• The ‘Pipe Roll’ is the earliest system in England, which
was an annual description of rents, fines and taxes
due to the King.
• Double entry bookkeeping was first used by an Italian
firm in Southern France in 1299.
Slide 1.5
What are the objectives of accounting?
• Is the business making a profit or a loss?

• What is the business worth?
• What is a transaction worth?
• How much cash is in the business?
• How wealthy is the business?
• How much is the business owed?
• How much does the business owe?
• Keeping a financial check on activities.
Slide 1.6
What is bookkeeping?
Bookkeeping is the process of recording

data relating to accounting transactions
in the accounting books.
Slide 1.7
Users of accounting information

• Managers
• Owner(s) of the business
• A prospective buyer
• The bank
• Tax inspectors
• A prospective partner
• Investors
• Creditors
Slide 1.8
The two branches of accounting

• Financial accounting
Performed for the owners.
Used to show them how much profit has been made and
what the business is worth.
• Management accounting
Produces reports that help managers plan and enables them
to control the business.
Slide 1.9
Faculty of Business, Finance, and

Hospitality
FINANCIAL ACCOUNTING 1/PRINCIPLES OF
ACCOUNTING
(BAA1163/ACC1014)
CHAPTER 2: THE ACCOUNTING EQUATION
Prepared by: Mdm Dahlia Fernandez
If its important to you, you will find a way. If its not, you’ll find an excuse.
Slide 1.10
Chapter objectives
• Present and explain the accounting equation
• Explain the relationship between the accounting equation and
the layout of the statement of financial position (balance
sheet)
• Explain the meaning of the terms assets, capital, liabilities,
accounts receivable (debtors) and accounts payable (creditors)
• Describe how accounting transactions affect the items in the
accounting equation
• Draw up statements of financial position after different
accounting transactions have occurred
Slide 1.11
The Basic Accounting Equation
• Financial accounting is based upon the accounting

equation.
Assets = Liabilities + Owners' Equity
• This is a mathematical equation which must balance.
• If assets total $300 and liabilities total $200, then owners'
equity must be $100.
Slide 1.12

The balance sheet is an expanded expression of the accounting equation.
Balance Sheet
Assets Liabilities and Owners’ Equity
Cash 5,000 Liabilities
Accounts receivable 7,000 Accounts payable 8,000
Inventory 10,000 Notes payable 2,000
Equipment 7,000 Total liabilities 10,000
Owners’ equity 19,000
Total assets 29,000 Total liabilities and
owners’ equity 29,000
Slide 1.13
• Assets are valuable resources that are owned by a firm.

• They represent probable future economic benefits and arise as
the result of past transactions or events.
Liabilities are present obligations of the firm.

They are probable future sacrifices of economic benefits which arise as the
result of past transactions or events.
• Owners' equity (capital) represents the owners' residual interest in the assets
of the business.
• Residual interest is another name for owners' equity.
• Owners may make a direct investment in the business or operate at a profit
and leave the profit in the business.
Slide 1.14
Owners' Equity
• Yet another name for owners' equity is net assets

• Indicates that owners' equity results when liabilities are
subtracted from assets.
Owners’ Equity = Assets – Liabilities
Slide 1.15
• Both liabilities and owners' equity represent claims on

the assets of a business.
• Liabilities are claims by people external to the business.
• Owners' equity is a claim by the owners.
Slide 1.16
Analyzing Transactions
• Transaction analysis is the central component of the

financial accounting process.
• Remember that every transaction must keep the accounting
equation in balance.
Slide 1.17
The statement of financial position and the

effects of business transactions
On 1 May 2015, B. Blake started in business and
deposited £60,000 into a bank account opened
specially for the business.
Statement of financial position as at 1 May 2015

Assets: Cash at bank £60,000
Capital £60,000
Slide 1.18
On 3 May 2015, Blake buys a kiosh (a small shop) for

£32,000, paying for it by Internet transfer from
the business bank account.
Assets £
Shop 32,000
Cash at bank 28,000
60,000
Capital 60,000
Slide 1.19
On 6 May 2015, Blake buys some goods for £7,000 from D. Smith
and agrees to pay for them some time within the next two
weeks.
Assets £
Shop 32,000
Inventory 7,000
Cash at bank 28,000
67,000
Less: account payable (7,000)
60,000
Capital 60,000
Slide 1.20
The statement of financial position and the effects of business transactions (Continued)
On 10 May 2015, goods which cost £600 were sold to

J. Brown for the same amount, the money to be paid later.
Assets £
Shop 32,000
Inventory 6,400
Account receivable 600
Cash at bank 28,000
67,000
60,000
Capital 60,000 Frank Wood and Alan Sangster, Frank Wood's Business Accounting 1, 13th edition © Pearson Education Limited 2016
Slide 1.21
The statement of financial position and the effects of business transactions (Continued)
On 13 May 2015, goods which cost £400 were sold to D. Daley for the
same amount. Daley paid for them immediately by debit card.
Assets £
Shop 32,000
Inventory 6,000
Cash at bank 28,400
67,000
60,000
Capital 60,000
Slide 1.22
On 15 May 2015, Blake pays D. Smith £3,000 by Internet

transfer in part payment of the amount owing.
Assets £
Shop 32,000
Inventory 6,000
Cash at bank 25,400
64,000
60,000
Capital 60,000
Slide 1.23
J. Brown, who owed Blake £600, makes a part payment of

£200 by cheque on 31 May 2015.

Assets £
Shop 32,000
Inventory 6,000
Cash at bank 25,600
64,000
60,000
Capital 60,000

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Slide 1.

Faculty of Business, Finance, and

Prepared by: Mdm Dahlia Fernandez

The history of accounting

What are the objectives of accounting?

• Is the business making a profit or a loss?

Bookkeeping is the process of recording

Users of accounting information

The two branches of accounting

Faculty of Business, Finance, and

CHAPTER 2: THE ACCOUNTING EQUATION

Prepared by: Mdm Dahlia Fernandez

The Basic Accounting Equation

• Financial accounting is based upon the accounting

The Basic Accounting Equation

• Assets are valuable resources that are owned by a firm.

Liabilities are present obligations of the firm.

• Yet another name for owners' equity is net assets

The Basic Accounting Equation

• Both liabilities and owners' equity represent claims on

• Transaction analysis is the central component of the

The statement of financial position and the

Statement of financial position as at 1 May 2015

On 3 May 2015, Blake buys a kiosh (a small shop) for

On 10 May 2015, goods which cost £600 were sold to

On 15 May 2015, Blake pays D. Smith £3,000 by Internet

J. Brown, who owed Blake £600, makes a part payment of

Statement of financial position as at 31 May 2015

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