Lecture 1 - Accounting in Action

Accounting Principles
(BUS 505)
1
Your Lecturer:
Professor Dr. Mohammad Azim

PhD in Accounting
Chartered Accountant (CA)

Certified Public Accountant (CPA)
Certified Management Accountant (CMA)
Contact Detail:
Room No: NAC 737
Email: mohammad.azim@northsouth.edu
Accounting Principles
Twelfth Edition
Weygandt ● Kimmel ● Kieso
Lecture 1
Chapter 1:
Accounting in Action
Class Outline
Learning Objectives
LO 1 Identify the activities and users associated with
accounting.
LO 2 Explain the building blocks of accounting: ethics,
principles, and assumptions.
LO 3 State the accounting equation, and define its components.
LO 4 Analyze the effects of business transactions on the
accounting equation.
LO 5 Describe the four financial statements and how they are
prepared.
4
Accounting Activities and Users
LEARNING OBJECTIVE 1
Identify the activities and users associated with
accounting.
Accounting consists of three activities
1. Identification – Select economic events (transactions)
2. Recording - Record, classify, and summarize
3. Communication
• Prepare accounting reports
• Analyze and interpret for users
LO 1 5
Who Uses Accounting Data (1 of 2)
Internal Users
• Finance - Is cash sufficient to pay dividends to Bata
Shoe Company stockholders?
• Marketing – What price should Navana CNG Limited
charge for an CNG conversion to maximize net income?
• Human Resources – Can LankaBangla Finance Ltd
afford to give its employees pay raises?
• Management - Which Pran product line is most
profitable? Should any products be eliminated?
LO 1 6
Who Uses Accounting Data (2 of 2)
External Users
• Investors
o Is British American Tobacco Bangladesh Company
Limited earning satisfactory income?
o How does City Bank compare in size and profitability with
Prime Bank?
• Creditors – Will Beximco Ltd be able to pay its debts as
they come due?
LO 1 7
The Building Blocks of Accounting
Explain the building blocks of accounting: ethics,
principles, and assumptions.
Ethics in Financial Reporting
• Financial scandals such as: Crescent Group (2019),
Hallmark- Sonali Bank Loan Scandal (2012), etc.
• Regulators and lawmakers concerned that economy
would suffer if investors lost confidence in corporate
accounting
• Effective financial reporting depends on sound ethical
behavior
LO 2 8
Big bank scams, slow actions
LO 2 9
Forms of Business Ownership
Proprietorship Partnership Corporation
• Owned by one person • Owned by two or • Ownership
more persons divided into
• Owner is often shares of stock
manager/operator • Often retail and
service-type • Separate legal
• Owner receives any entity organized
profits, suffers any businesses
under state
losses, and is • Generally unlimited corporation law
personally liable for personal liability
all debts • Limited liability
• Partnership
agreement
LO 2 10
Global Accounting Practices
• Initially, many countries developed their own accounting standards.
• All these standards were different from others in a way that each had
a different approach, such as tax-oriented, principle-based, business-
oriented, rules-based and more.
• However, with the globalization, the need was felt to unify all
different standards. After the 90’s, there were two dominant
standards – the GAAP and IFRS.
• Generally Accepted Accounting Principles (GAAP) and International
Financial Reporting System (IFRS) are the two primary accounting
frameworks in the world currently.
• Although similar in most areas, there are a few differences between
GAAP vs IFRS.
LO 2 11
GAAP vs IFRS – All You Need To Know
• GAAP is primarily in use in the United States and has a different set of
rules and regulations than IFRS.
• International Financial Reporting Standard, on the other hand, is followed
by over 110 countries and, thus, has a global appeal.
• Companies that expand internationally prefer to keep their books as per
IFRS. This makes it easier for the organization and the stakeholders to
understand and compare the financial statements.
• A major difference between GAAP vs. IFRS is that the latter is principle-
based whereas GAAP is rule-based.
• The principle-based approach opens the window for different
interpretations of similar transactions. This gives the organizations some
leeway but requires extensive disclosure.
• IFRS, however, also has guidelines that can be considered more like a set of
rules rather than a set of principles.
LO 2 12
Accounting and Accounting Rules in Bangladesh
Tax Year From 1 July to 30 June
Accounting Standards The main source of accounting principles is the series of

approved accounting standards (known as BFRS/BAS) issued by the Institute of Chartered
Accountants of Bangladesh (ICAB). Most of these standards are based on international accounting
standards IFRS and IAS.
Accounting Regulation Bodies Securities and Exchange Commission of Bangladesh
Accounting Reports The financial statements consist of a balance sheet, an income

statement (profit and loss) and cash flows. Accounts should be accompanied by an Auditer's reports and
Director's report.
Publication Requirements Financial statements must be prepared annually. Companies with

shares listed on the stock exchanges in Dhaka or Chittagong must comply with additional
requirements Government may ask for, via notification in the Official Gazette..
Professional Accountancy Bodies The Institute of Chartered Accountants of Bangladesh (ICAB)

Institute of Cost and Management Accountants of Bangladesh (ICMAB)
Certification and Auditing Only members of the Institute of Chartered Accountants of Bangladesh
(ICAB) can apply for an audit license, which allows them to audit companies.
LO 2 13
The Institute of Chartered Accountants of Bangladesh (ICAB)
• Established under the Bangladesh Chartered Accountants Order, 1973

(President's Order No. 2 of 1973).
• The total number of Members of the Institute is 1544 as of 01 July 2017

of whom 1432 are residing in Bangladesh and 112 in abroad.
• There are 1035 Fellows and 509 Associates enrolled with the Institute.
• Out of 1544 members, 370 are practicing as public accountants and the
rest are either serving in various key positions in public and private
organizations, both at home and abroad, and self employed running
their own business.
ICAB web link: https://www.icab.org.bd/icabweb/ • 14

The Institute of Cost and Management Accountants of Bangladesh (ICMAB)
• ICMAB is a statutory organization constituted by the Government under

the Cost and Management Accountants Ordinance 1977 (Ordinance No
Llll of 1977) and regulated under the Cost and Management Accountants
Regulations 1980 (as amended up-to date).
• Membership and Firms Statistics (As on July 01, 2017)

• Total Membership ...........................................................1271
• Fellow Members ............................................................ 854
• Associate Members ....................................................... 417
• Members in practice.......................................................173
• Practicing Firms.............................................................145
ICAB web link: http://www.icmab.org.bd/ • 15

• The largest international firms are known as the 'Big Four':
– PricewaterhouseCoopers (PwC) - Revenue $41.3 bn
– EY - Revenue $34.8 bn
– KPMG - Revenue $29.0 bn
– Deloitte – Revenue $43.2 bn
In Bangladesh, who represent what !
– PricewaterhouseCoopers (PwC) – PwC Private Limited

– EY - A.Qasem & Co.
– KPMG - Rahman Rahman Huq & Co.
– Deloitte – NUFHAS
16
The Accounting Equation
State the accounting equation, and define its components.
Basic Accounting Equation

• Provides underlying framework for recording and
summarizing economic events
• Assets are claimed by either creditors or owners
• If a business is liquidated, claims of creditors must be
paid before ownership claims
LO 3 17
The Accounting Equation (1 of 5)
Assets
• Resources a business owns
• Provide future services or benefits
• Cash, Supplies, Equipment, etc.
LO 3 18
Liabilities
• Claims against assets (debts and obligations)
• Creditors (party to whom money is owed)
• Accounts Payable, Notes Payable, Salaries and Wages
Payable, etc.
LO 3 19
Owner’s Equity
• Ownership claim on total assets
• Referred to as residual equity
• Investment by owners and revenues (+)
• Drawings and expenses (−)
LO 3 20
Increase in Owner’s Equity

• Investment by Owner. Assets the owner puts into the
business
• Revenues. Increases in assets or decreases in liabilities
resulting from sale of goods or performance of services
in normal course of business
LO 3 21
Decrease in Owner’s Equity

• Drawings. A withdraw of cash or other assets
for personal use
• Expenses. Cost of assets consumed or services
used in the process of earning revenue
LO 3 22
Do It! : Owner’s Equity Effects
Classify the following items as investment by owner, owner’s
drawings, revenues, or expenses. Then indicate whether each item
increases or decreases owner’s equity.
Effect
Classification on Equity
1. Rent Expense
2. Service Revenue
3. Drawings
4. Salaries and Wages
Expense
LO 3 23
Do It! : Owner’s Equity Effects
Classify the following items as investment by owner, owner’s
drawings, revenues, or expenses. Then indicate whether each item
increases or decreases owner’s equity.
Effect
Classification on Equity
1. Rent Expense Expense Decrease
2. Service Revenue Revenue Increase
Owner’s Decrease
3. Drawings Drawings
4. Salaries and Wages Expense Decrease
Expense
LO 3 24
Analyzing Business Transactions
Analyze the effects of business transactions on the
accounting equation.
Transactions are a business’s economic events recorded by
accountants.
• May be external or internal
• Not all activities represent transactions
• Have a dual effect on the accounting equation
LO 4 25
Analyzing Business Transactions
Illustration: Are the following events recorded in the
accounting records?
LO 4 26
Transaction Analysis (1 of 10)
Transaction 1. Ray Neal decides to start a smartphone app development company which
he names Softbyte. On September 1, 2020, he invests $15,000 cash in the business. This
transaction results in an equal increase in assets and owner’s equity.
LO 4 27
Transaction 2. Softbyte purchases computer equipment for $7,000 cash.
LO 4 28
Transaction 3. 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.
LO 4 29
Transaction 4. Softbyte receives $1,200 cash from customers for app development
services it has performed.
LO 4 30
Transaction 5. Softbyte Inc. receives a bill for $250 from the Daily News for advertising
on its online website but postpones payment until a later date.
LO 4 31
Transaction 6. 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.
LO 4 32
Transaction 7. Softbyte pays the following expenses in cash for September: office rent
$600, salaries and wages of employees $900, and utilities $200.
LO 4 33
Transaction 8. Softbyte pays its $250 Daily News bill in cash. The company previously
(in Transaction 5) recorded the bill as an increase in Accounts Payable.
LO 4 34
Transaction 9. Softbyte receives $600 in cash from customers who had been billed for
services (in Transaction 6).
LO 4 35
Transaction 10. Ray Neal withdraws $1,300 in cash from the business for his personal use.
LO 4 36
Transaction Analysis
Together: Transaction 1 - Transaction 10
LO 4 37
Summary of Transactions
1. Each transaction analyzed in terms of effect on:
a. Three components of basic accounting equation
• Assets
• Liabilities
• Owner’s equity
b. Specific types of items, such as Cash
2. Two sides of equation must always be equal
LO 4 38
Do It! 1: Tabular Analysis (1 of 6)
Transactions made by Virmari & Co., a public accounting firm, for
the month of August are shown below. Prepare a tabular analysis
which shows the effects of these transactions on the expanded
accounting equation, similar to that shown in Illustration 1.8.
1. The owner invested $25,000 cash in the business.
2. The company purchased $7,000 of office equipment on credit.
3. The company received $8,000 cash in exchange for services
performed.
4. The company paid $850 for this month’s rent.
5. The owner withdrew $1,000 cash for personal use.
LO 4 39
Transaction 1. The owner invested $25,000 cash in the business.
LO 4 40
Transaction 2. The company purchased $7,000 of office equipment
on credit.
LO 4 41
Transaction 3. The company received $8,000 cash in exchange for
services performed.
LO 4 42
Transaction 4. The company paid $850 for this month’s rent.
LO 4 43
Transaction 5. The owner withdrew $1,000 cash for personal use.
LO 4 44
LO 4 45
The Four Financial Statements
Describe the four financial statements and how they are
prepared.
LO 5 46
Income Statement
• Reports revenues and expenses for a specific period of
time
• Lists revenues first, followed by expenses
• Shows net income (or net loss)
• Does not include investment and withdrawal
transactions between owner and business in measuring
net income
LO 5 47
Owner’s Equity Statement
• Reports changes in owner’s equity for a specific period
of time
• Time period is the same as that covered by the income
statement
LO 5 48
Balance Sheet
• Reports assets, liabilities, and owner’s equity at a
specific date
• Lists assets at top, followed by liabilities and owner’s
equity
• Total assets must equal total liabilities and owner's
equity
• Snapshot of company’s financial condition at a specific
moment in time (usually month-end or year-end)
LO 5 49
Statement of Cash Flows
• Information on cash receipts and payments
for a specific period of time
• Answers the following:
o Where did cash come from?
o What was cash used for?
o What was change in cash balance?
LO 5 50
Financial Statements (1 of 3)
Softbyte statements
for the Month Ended
September 30, 2020
LO 5 51
Softbyte statements
for the Month Ended
September 30, 2020
LO 5 52
Softbyte statements
for the Month Ended
September 30, 2020
LO 5 53
Class Quiz: Financial Statements
Which of the following financial statements is prepared as
of a specific date?
a. Balance sheet
b. Income statement
c. Owner’s equity statement
d. Statement of cash flows
LO 5 54
Answer: Class Quiz
Which of the following financial statements is prepared as
of a specific date?
a. Answer: Balance sheet
b. Income statement
c. Owner’s equity statement
d. Statement of cash flows
LO 5 55
Class Quiz: Financial Statements
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
LO 5 56
Answer: Class Quiz
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. Answer: revenues exceed expenses.
LO 5 57
Do It! 2: Financial Statement Items (1 of 4)
Presented below is selected information related to Flanagan Company
at December 31, 2020. Flanagan reports financial information monthly.
Equipment 10,000 Utilities Expense 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000
a. Determine the total assets of at December 31, 2020.

b. Determine the net income reported for December 2020.
c. Determine the owner’s equity at December 31, 2020.
LO 5 58

Cash $ 8,000
Accounts receivable 9,000
Equipment 10,000
Total assets $27,000
LO 5 59

LO 5 60

Service revenue $36,000
Less: Rent expense 11,000
Less: Salaries and wages expense 7,000
Less: Utilities expense 4,000
Net income $14,000
LO 5 61

LO 5 62
c. Determine the owner’s equity at December 31,

2020. Total assets $27,000
Less: Notes payable 16,500
Less: Accounts payable 2,000
Owner’s equity $ 8,500
LO 5 63
Class Quiz: Basic Concepts (1 of 2)
Indicate whether each of the statements is true or false.
1. The three steps in the accounting process are identification,
recording, and communication.
2. Bookkeeping encompasses all steps in the accounting process.
3. Accountants prepare, but do not interpret, financial reports.
4. The two most common types of external users are investors and
company officers.
5. Managerial accounting focuses on reports for internal users.
Solution: 1. 2. 3. 4. 5.
LO 1 64
Answer: Class Quiz (Basic Concepts)
Indicate whether each of the statements is true or false.
1. The three steps in the accounting process are identification,
recording, and communication.
2. Bookkeeping encompasses all steps in the accounting process.
3. Accountants prepare, but do not interpret, financial reports.
4. The two most common types of external users are investors and
company officers.
5. Managerial accounting focuses on reports for internal users.
Solution: 1. True 2. False 3. False 4. False 5. True
LO 1 65
Do It! 3: Tabular Analysis

Lecture 1 - Accounting in Action

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Accounting Principles

Professor Dr. Mohammad Azim

Chartered Accountant (CA)

Tax Year From 1 July to 30 June

Accounting Standards The main source of accounting principles is the series of

Accounting Regulation Bodies Securities and Exchange Commission of Bangladesh

Accounting Reports The financial statements consist of a balance sheet, an income

Publication Requirements Financial statements must be prepared annually. Companies with

Professional Accountancy Bodies The Institute of Chartered Accountants of Bangladesh (ICAB)

• Established under the Bangladesh Chartered Accountants Order, 1973

• The total number of Members of the Institute is 1544 as of 01 July 2017

ICAB web link: https://www.icab.org.bd/icabweb/ • 14

• ICMAB is a statutory organization constituted by the Government under

• Membership and Firms Statistics (As on July 01, 2017)

ICAB web link: http://www.icmab.org.bd/ • 15

In Bangladesh, who represent what !

– PricewaterhouseCoopers (PwC) – PwC Private Limited

Basic Accounting Equation

Increase in Owner’s Equity

Decrease in Owner’s Equity

2. Two sides of equation must always be equal

a. Determine the total assets of at December 31, 2020.

a. Determine the total assets of at December 31, 2020.

a. Determine the total assets of at December 31, 2020.

b. Determine the net income reported for December 2020.

a. Determine the total assets of at December 31, 2020.

c. Determine the owner’s equity at December 31,

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