FINANCIAL Session 1

ACCOUNTING
Definition of Accounting
Process of:
Identifying,
Measuring,
Recording
Communicating

Economic information of an organization

To interested users to make decisions

Definition of Accounting
Process of:
Identifying,
Measuring,
Recording
Communicating

Economic information of an organization

To interested users to make decisions

Definition of Accounting
Process of:
Identifying,
Measuring,
Recording
Communicating

Economic information of an organization

To interested users to make decisions

Definition of Accounting
Process of:
Identifying,
Measuring,
Recording
Communicating

Economic information of an organization

To interested users to make decisions

Definition of Accounting
Process of:
Identifying,
Measuring,
Recording
Communicating

Economic information of an organization

To interested users to make decisions

Definition of Accounting
Process of:
Identifying,
Measuring,
Recording
Communicating

Economic information of an organization

To interested users to make decisions

Definition of Accounting
Process of:
Identifying,
Measuring,
Recording
Communicating

Economic information of an organization

To interested users to make decisions

Definition of Accounting
Process of:
Identifying,
Measuring,
Recording
Communicating

Economic information of an organization

To interested users to make decisions

 Operating Information
Process of: ■ Needed to conduct day-to-day
activities.
Identifying, ■ Largest quantity of accounting
Measuring, data.
Recording ■ Examples:
Communicating – Hours worked by employees.
– Inventory on hand.
– Amounts owed by customers.
– Amount of money in bank.
Processing of Financial Accounting
Information
Economic ■ For external users (investors)
information of an and managers.
organization ■ Used by investors to make
decisions to buy, sell, or hold
To interested users shares of a company.
to make decisions ■ Annual report and its financial
statements.
– Common rules used so investors can compare
with other companies’ financial statements.
– No “tailor-made” information
 Management
Processing of
Accounting
Economic Information
information of an ■ For internal users such as
organization president, marketing manager,
production manager, etc.
To interested users ■ Used for three management
to make decisions functions:
– Planning.
– Implementation.
– Control.
 Tax Accounting
Processing of
Information
Economic
information of an ■ Prepare returns for taxing
organization authorities
■ Tax accounting rules can differ
To interested users from financial accounting rules.
to make decisions
PROCESS OF:

IDENTIFYING,
MEASURING,
RECORDING AND
COMMUNICATING

TELLS THE STORY OF A COMPANY



WHAT STORY DOES IT TELL?

FINANCIAL ACCOUNTING IS A SYSTEM THAT PROVIDES INFORMATION ON:

AMOUNTS OF RESOURCES.
HOW RESOURCES WERE FINANCED.
RESULTS ACHIEVED BY USING RESOURCES.
Accounting is governed by rules and principles

GAAP -> FASB

Generally Accepted Accounting Principles -> Financial Accounting Standards Board

IFRS-> IASB
International Financial Reporting Standards -> International Accounting Standards Board

SEC
Security and Exchange Commission
Watchdog that oversees compliance
THE STORY IS TOLD THROUGH

FINANCIAL STATEMENTS
 Balance Sheet PW Audio Supply
Balance Sheet
As of December 31, 2018

• Statement of Financial Position

• Status report
• Story it tells is how much a company
Owns (ASSETS)
Owes (LIABILITY)
Is Worth* (EQUITY)

*Worth is the value of the company per its own records

This is also known as Book Value, and not to
be mistaken with Market Value
 Balance Sheet PW Audio Supply
Balance Sheet
As of December 31, 2018

• Statement of Financial Position

• Status report
• Story it tells is how much a company
Owns (ASSETS)
Owes (LIABILITY)
Is Worth* (EQUITY)

*Worth is the value of the company per its own records

This is also known as Book Value, and not to
be mistaken with Market Value
 Balance Sheet PW Audio Supply
Balance Sheet
As of December 31, 2018

• Statement of Financial Position

• Status report
• Story it tells is how much a company
Owns (ASSETS)
Owes (LIABILITY)
Is Worth* (EQUITY)

*Worth is the value of the company per its own records

This is also known as Book Value, and not to
be mistaken with Market Value
 Balance Sheet PW Audio Supply
Balance Sheet
As of December 31, 2018

• Statement of Financial Position

• Status report
• Story it tells is how much a company
Owns (ASSETS)
Owes (LIABILITY)
Is Worth* (EQUITY)

*Worth is the value of the company per its own records

This is also known as Book Value, and not to
be mistaken with Market Value
Balance Sheet

Assets: Resources of entity

 Owned (or controlled) by the entity

 Has monetary value
An objectively measurable cost at time of acquisition
 Will provide future benefits
 Acquired in a transaction
Balance Sheet

Assets: Resources of entity

 Owned (or controlled) by the entity

 Has monetary value
An objectively measurable cost at time of acquisition
 Will provide future benefits
 Acquired in a transaction
Balance Sheet

Assets: Resources of entity

 Owned (or controlled) by the entity

 Has monetary value
An objectively measurable cost at time of acquisition
 Will provide future benefits
 Acquired in a transaction
Balance Sheet

Assets: Resources of entity

 Owned (or controlled) by the entity

 Has monetary value
An objectively measurable cost at time of acquisition
 Will provide future benefits
 Acquired in a transaction
Balance Sheet Balance Sheet

Assets: Resources of entity

Assets: Resources of entity




Owned (or controlled) by the
entity
Has monetary value

 Will provide future benefits

Cash  Acquired in a transaction

Accounts Receivable
Inventory
Supplies
Prepaid Expenses
Equipment
Investments
Other resources
Balance Sheet

Liabilities: Claims by or Obligations to Creditors

Accounts payable
Notes or Loans payable
Salaries and wages payable
Taxes payable
Rent payable
Unearned revenues
 Balance Sheet PW Audio Supply
Balance Sheet
As of December 31, 2018

• Statement of Financial Position

• Status report
• Story it tells is how much a company
Owns (ASSETS)
Owes (LIABILITY)
Is Worth* (EQUITY)

*Worth is the value of the company per its own

records
This is also known as Book Value, and not to
be mistaken with Market Value
Balance Sheet

Equity: Claims by Investors or Residual value

Owners’ Equity for Sole Proprietorships and Partnerships

Stockholders’ Equity for Corporations
Amounts provided directly by equity investors (Paid-in-capital).
Amounts retained from earnings, i.e. profits (Retained earnings).
 PW Audio Supply

Income Statement
Income Statement
For the Year Ended December 31, 2018

• Statement of Results of
Operations, Profit and Loss (P&L)
Statement, Statement of Earnings
• Flow report
• Story it tells is how much a
company profited from its
operations
Income Statement

Revenues – Expenses = Net Income.

Summarizes results of operating activity over a period of time.

Net income (or net loss) is the amount added to (subtracted from) Equity.
Basic Accounting Equation

Assets
Assets = Liabilities
Liabilities Owner's
Owner's Equity
Equity
+

LO 3
Expanded Accounting Equation

Assets
Assets
= Liabilities
Liabilities
+ Owner's
Owner's Equity
Equity

(Owner’s capital – Owner’s Drawings +

Assets
Assets
= Liabilities
Liabilities + Revenues – Expenses)

LO 3
Expanded Accounting Equation

Assets
Assets
= Liabilities
Liabilities
+ Owner's
Owner's Equity
Equity

(Owner’s capital – Owner’s Drawings +

Assets
Assets
= Liabilities
Liabilities + Revenues – Expenses)

LO 3
Expanded Accounting Equation

Assets
Assets
= Liabilities
Liabilities
+ Owner's
Owner's Equity
Equity

(Owner’s capital – Owner’s Drawings

Assets
Assets
= Liabilities
Liabilities + + Revenues – Expenses)

LO 3
Expanded Accounting Equation

Assets
Assets
= Liabilities
Liabilities
+ Owner's
Owner's Equity
Equity

(Owner’s capital – Owner’s Drawings + Revenues

Assets
Assets
= Liabilities
Liabilities
+ – Expenses)

LO 3
ONCE UPON A
TIME…
 Transaction Analysis

TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to start

a smartphone app development company which he names Softbyte. On
September 1, 2017, he invests $15,000 cash in the business. This
transaction results in an equal increase in assets and owner’s equity.

Assets = Liabilities + Owner's Equity

Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + - + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000

LO 4
 TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte
Inc. purchases computer equipment for $7,000 cash.
Illustration 1-8

Assets = Liabilities + Owner's Equity

Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + - Drawings + Rev. - Exp.
action Receivable Payable Capital

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
 TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc.
purchases for $1,600 headsets and other accessories expected to last
several months. The supplier allows Softbyte to pay this bill in October.
Illustration 1-8 Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + - + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
 TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc.
receives $1,200 cash from customers for app development services it has
performed. Illustration 1-8

Assets = Liabilities + Owner's Equity

Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + - + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
 TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte
Inc. receives a bill for $250 from the Daily News for advertising on its
online website but postpones payment until a later date.
Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + - + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
 TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT.
Softbyte performs $3,500 of services. The company receives cash of
$1,500 from customers, and it bills the balance of $2,000 on account.
Illustration 1-8 Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + - + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
 TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the
following expenses in cash for September: office rent $600, salaries and
wages of employees $900, and utilities $200.
Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + - + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
 TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc.
pays its $250 Daily News bill in cash. The company previously (in
Transaction 5) recorded the bill as an increase in Accounts Payable.
Illustration 1-8 Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's - Owner's
Cash + + Supplies +Equipment = + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
 TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc.
receives $600 in cash from customers who had been billed for services
(in Transaction 6).
Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + - + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
 TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal
withdraws $1,300 in cash in cash from the business for his personal use.
Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + - + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 - $1,300 + $4,700 - $1,950

$18,050 $18,050
 Net income is needed to determine the
Financial Statements ending balance in owner’s equity.

SOFTBYTE
Income Statement
For the Month Ended September 30, 2017

SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017
 SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017

Illustration 1-9
The ending
balance in SOFTBYTE
owner’s equity Balance Sheet
is needed in September 30, 2017
preparing the
balance sheet.
Financial SOFTBYTE
Balance Sheet
September 30, 2017
Statements

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
Accounting is NOT MATH!
Accounting is The Language of Business
• Most of what we will do is establish terms
• Like any language many words have similar, but not same, meaning.
• Some rules are definite others are not.
• Rules continue to evolve.
• Differing presentations.