1-1

Chapter 1:
Accounting in Business
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C1

IMPORTANCE OF ACCOUNTING
Accounting is an information

Identifying
Select transactions and events

Recording
Input, measure and classify

Communicating
Prepare, analyze and interpret

Accounting is often called the language of business it

assists in the decision making process
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C2 USERS OF ACCOUNTING
INFORMATION

 Accountants prepare reports for both

external and internal users.
 External users of accounting information
are not directly involved in running the
organization.
 Internal users of accounting information
are those directly involved in managing
and operating an organization.
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C2 USERS OF ACCOUNTING
INFORMATION

External Users Internal Users

• Lenders • Consumer Groups • Managers • Sales Staff

• Shareholders • External Auditors • Officers/Directors • Budget Officers
• Customers • Internal Auditors • Controllers
• Governments

Financial accounting Managerial accounting

provides external users provides information needs
with financial statements. for internal decision-makers.
 OPPORTUNITIES IN 1-5

ACCOUNTING
C2
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C3

ETHICS - A KEY CONCEPT

Ethics

Beliefs that Accepted standards

distinguish right of good and bad
from wrong behavior
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C3

ETHICS - A KEY CONCEPT

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C4 GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Financial accounting practice is governed by concepts and
rules known as generally accepted accounting principles
(GAAP) in USA

Financial Accounting The Securities and Exchange

Standards Board is the Commission is the government
private group that sets agency that establishes
both broad and specific reporting requirements for
principles. listed companies in the stock
exchange.

The International Accounting Standards Board issues

International Financial Reporting Standards (IFRS) that
identify preferred accounting practices to create harmony
among accounting practices of different countries.
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C4

ACCOUNTING PRINCIPLES

Cost Principle

 Accounting information is based on actual

cost.
 We refer to this cost as “historical cost”
 Actual cost is considered objective.
 Objectivity means that information is
supported by independent, unbiased
evidence;
 it demands more than a person’s opinion.
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C4

ACCOUNTING PRINCIPLES

Revenue Recognition Principle

 Recognize revenue when it is earned.

 Proceeds need not be in cash.
 Measure revenue by cash received plus
cash value of items received.
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C4

ACCOUNTING PRINCIPLES
Matching Principle

 A company must record its expenses

incurred to generate the revenue
reported.
 Matching Revenues against Expenses
is important to identify net profit / loss.
 Is referred to as expense recognition
principle.
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C4

ACCOUNTING PRINCIPLES

Full Disclosure Principle

 All important information about a

company should be disclosed in its
financial statements, so that the users
can take informed decisions.
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C4

ACCOUNTING ASSUMPTIONS

Going-Concern Assumption

 Reflects assumption that the business

will continue operating instead of being
closed or sold.
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C4

ACCOUNTING ASSUMPTIONS

Business Entity Assumption

 A business is accounted for separately

from other business entities, including
its owner.
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C4

ACCOUNTING ASSUMPTIONS

Monetary Unit Assumption

 Express transactions and events in

monetary, or money, units.
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C4

ACCOUNTING ASSUMPTIONS

Time Period Assumption

 Presumes that the life of a company can

be divided into time periods, such as
months and years.
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C4

FORMS OF BUSINESS ENTITIES

 A sole proprietorship is a business

owned by just one individual with
unlimited liability.
 A partnership is owned by two or more
individuals with unlimited liability.
 A corporation is a business legally
separate from its owners, meaning it is
responsible for its own acts and its own
debts.
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C4
CORPORATION

 Owners of a corporation are called

shareholders (or stockholders).
 Shareholders are not personally liable
for corporate acts.
 Ownership of all corporations is divided
into units called shares or stock.
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A1 TRANSACTION ANALYSIS AND

THE ACCOUNTING EQUATION

Accounting Equation

Assets = Liabilities + Equity

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A1

ASSETS
Cash
Accounts Notes
Receivable Receivable
Resources
owned or
Vehicles controlled by Land
a company

Buildings
Supplies
Equipment
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A1

LIABILITIES

Accounts Notes
Payable Payable

Creditors’
claims on
assets
Taxes Wages
Payable Payable
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A1

EQUITY
Owner’s
Claims on
Assets
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P1
TRANSACTION ANALYSIS
EQUATION
The accounting equation MUST remain in
balance after each transaction.

Assets = Liabilities + Equity

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P1 TRANSACTION 1: INVESTMENT BY
OWNERS
On December 1, Chas Taylor invests
$30,000 cash to start a consulting business.

The accounts involved are:

(1) Cash (asset)
(2) Owner Capital (equity)
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P1 TRANSACTION 2: PURCHASE
SUPPLIES FOR CASH
Chas Taylor’s company, FastForward
purchases supplies paying $2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
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P1 TRANSACTION 3: PURCHASE
EQUIPMENT FOR CASH
FastForward purchases equipment for
$26,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
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P1 TRANSACTION 4: PURCHASE
SUPPLIES ON CREDIT
FastForward purchases Supplies of $7,100 on
account.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
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P1 TRANSACTION 5: PROVIDE
SERVICES FOR CASH
The company provides consulting services
receiving $4,200 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
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P1 TRANSACTION 6 AND 7: PAYMENT

OF EXPENSES IN CASH
The company pays $1,000 rent and $700 in
salary to the company’s only employee.
The accounts involved are:
(1) Cash (asset)
(2) Expenses (equity)
 TRANSACTION 8: PROVIDE 1 - 30

P1 SERVICES AND FACILITIES FOR

CREDIT
FastForward provides consulting services of
$1,600 and rents its test facilities for $300 to
another company
The accounts involved are:
(1) Accounts Receivables (asset)
(2) Revenues (equity)
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P1 TRANSACTION 9: RECEIPT OF CASH

FROM ACCOUNTS RECEIVABLE
The client in transaction 8 pays $1,900 to
FastForward 10 days after it is billed for
consulting services
The accounts involved are:
(1) Cash (asset)
(2) Accounts Receivable (assets)
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P1 TRANSACTION 10:
PAYMENT OF ACCOUNTS PAYABLE
FastForward pays CalTech Supply $900 cash as
partial payment for its earlier $7,100 purchase of
supplies (transaction 4), leaving $6,200 unpaid.
The accounts involved are:
(1) Cash (asset)
(2) Accounts Payable (liabilities)
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P1 TRANSACTION 11:
WITHDRAWAL OF CASH BY OWNER
The owner of FastForward withdraws
$200 cash for personal use
The accounts involved are:
(1) Cash (asset)
(2) Withdrawals (equity)