ACCT6328

Introduction to Accounting
Week 1
Accounting In Action
&
The Recording Process
ACCOUNTING IN ACTION
 Objectives
1. What is Accounting?
2. The Building Blocks of Accounting
3. The Basic Accounting Equation
4. Using the Accounting Equation
5. Financial Statements
6. The Account
7. Steps in the Recording Process
8. The Recording Process Illustrated
9. The Trial Balance
 What is Accounting?
Accounting consist of three activities:

1. identifies,

2. records, and

3. communicates
 User of Accounting
Information

• Internal Users: External Users:

- Management - Suppliers
- Finance Division - Customers
- Creditors
- HR Division
- Government
- Marketing Division - Investors
- Employee
 Accounting Standards
1. International Accounting Standards Board (IASB) for
International Financial Reporting Standards (IFRS)
2. Financial Accounting Standards Board (FASB) for Generally
Accepted Accounting Principles (GAAP)
 Building Blocks of
Accounting
Measurement Pricipals

• Cost Principle (historical cost principle) dictates that

companies record assets at their cost.

• 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).
 Building Blocks of
Accounting
Assumptions

• Monetary Unit means that accounting records only

transaction data that can be expressed in money terms.

• Economic Entity requires that activities of the entity be kept

separate and distinct from the activities of its owner and all
other economic entities.
 Forms of Business
Ownership
There are 3 forms of business:
1. Proprietorship
• Owned by one person
• E.g. small service-type businesses
• Owner receives any profits, suffers any losses, and is
personally liable for all debts
 Forms of Business
Ownership
2. Partnership
• Owned by two or more persons, there will an agreement
• E.g. retail and service-type businesses
• Unlimited personal liability for the owners
 Forms of Business
Ownership
3. Corporation
• Ownership divided into shares
• Regulated by corporate law
• Separate legal entity (separation between company and
shareholders)
• Limited liability
 Basic Accounting
Equation

Assets Liabilities Equity

Assets : Resources a business owns that will provide future

service or benefit
Liabilities : Claims and obligations against assets
Equity : Residual of assets and liabilities
 Basic Accounting
Equation

Source from Financial Accounting, IFRS 2 nd Edition, Wiley

Revenues are the inflow or result from business activities.

Expenses are the cost of assets consumed or services used
to earn revenue.
Dividend is contribution to shareholders
 Basic Accounting
Equation

Source from Financial Accounting, IFRS 2nd Edition, Wiley

 Transactions
What is transaction?
a business’s economic events need to be recorded by
accountants.
Not all events should be recorded by Accountants. Only for
events that has a dual effect on the accounting equation.
For example:
1. Buy computer – record
2. Meeting – no need to record
 Financial Statements

Companies prepare financial statements which consist of:

1. Statement of Profit of Loss
2. Statement of Retained Earnings
3. Statement of Financial Positions
4. Statement of Cash Flow
 The Account
Account is to record the increases and decreases in a
specific asset, liability, equity, revenue, or expense item.
Debit on “Left”, Credit on “Right”
Double entry system means each transaction must affect
two or more accounts to keep the basic accounting equation
in balance.

Debits must Equal Credits

 The Account
Normal Balance is on the increase side
Normal balance for:
• Assets : on Debit
• Liabilities : on Credit
• Equity : on Credit
• Dividend : on Debit
• Revenue : on Credit
• Expense : on Debit
 Summary of Debit/Credit
Rules

• Relationship among the assets, liabilities and equity :

Source from Financial Accounting, IFRS 2nd Edition, Wiley

 Steps in Recording
1. Analyze the transactions and business documents (e.g.
bills, checks, invoices)
2. Journal
Discloses the complete effects of a transaction and
provides a chronological record of transactions.
 Steps in Recording
Illustration:
On January 1, shareholders’ invested $15,000 cash in the corporation
in exchange for share of stock, and Sun Co. purchased computer
equipment for $7,000 cash.
Journal:
Dr. Cash 15,000
Cr. Share Capital – Ordinary 15,000
Dr. Equipment 7,000
Cr. Cash 7,000
Steps
Posting –
process of
transferring
amounts from
the journal to
the ledger
accounts.

Source from Financial Accounting, IFRS 2nd Edition, Wiley

 Steps in Recording
3. General Ledger

Source from Financial Accounting, IFRS 2nd Edition, Wiley

 Steps in Recording
4. Trial Balance

Source from Financial Accounting, IFRS 2nd Edition, Wiley

THE RECORDING PROCESS
 The Account
Account is to record the increases and decreases in a
specific asset, liability, equity, revenue, or expense item.
Debit on “Left”, Credit on “Right”
Double entry system means each transaction must affect
two or more accounts to keep the basic accounting equation
in balance.

Debits must Equal Credits

 The Account
Normal Balance is on the increase side
Normal balance for:
• Assets : on Debit
• Liabilities : on Credit
• Equity : on Credit
• Dividend : on Debit
• Revenue : on Credit
• Expense : on Debit
 Summary of Debit/Credit
Rules

• Relationship among the assets, liabilities and equity :

Source from Financial Accounting, IFRS 2nd Edition, Wiley

 Steps in Recording
1. Analyze the transactions and business documents (e.g.
bills, checks, invoices)
2. Journal
Discloses the complete effects of a transaction and
provides a chronological record of transactions.
 Steps in Recording
Illustration:
On January 1, shareholders’ invested $15,000 cash in the
corporation in exchange for share of stock, and Sun Co.
purchased computer equipment for $7,000 cash.
Journal:
Dr. Cash 15,000
Cr. Share Capital – Ordinary 15,000
Dr. Equipment 7,000
Cr. Cash 7,000
Steps
Posting –
process of
transferring
amounts from
the journal to
the ledger
accounts.

Source from Financial Accounting, IFRS 2nd Edition, Wiley

 Steps in Recording
3. General Ledger

Source from Financial Accounting, IFRS 2nd Edition, Wiley

 Steps in Recording
4. Trial Balance

Source from Financial Accounting, IFRS 2nd Edition, Wiley

 References
Jerry J. Weygandt. (2013). Financial accounting. IFRS Edition.
02. Wiley. Danver. ISBN: 9781118285909.
Thank You