Transcript Fundamental Accounting Principles

Second Semester
Course Code: BBA-1204
Course Title: Principles Accounting
Prepared By
Md. Masukujjaman
Lecturer
Northern University Bangladesh
Text Book…..
 Accounting Principles,
7th Edition
 Weygandt • Kieso •
Kimmel
Reference Book:
Fundamental Accounting Principles
17th Edition
Larson
Wild
Chiappetta
Chapter
1
Accounting in
Business
CHAPTER 1
ACCOUNTING IN ACTION
After studying this chapter, you should be able to:




1 Explain what accounting is.
2 Identify users and uses of
accounting.
3 Understand why ethics is a
fundamental business concept.
4 Explain the meaning of generally
accepted accounting principles and the
cost principle.
CHAPTER 1
ACCOUNTING IN ACTION
After studying this chapter, you should be able to:




5 Explain the meaning of the monetary unit
assumption and the economic entity
assumption.
6 State the basic accounting equation and
explain the meaning of assets, liabilities, and
owner’s equity.
7 Analyze the effect of business transactions
on the basic accounting equation.
8 Understand what the four financial
statements are and how they are prepared.
Definition
& Importance of Accounting
is a
Accounting
system that
Identifies
Records
information
Relevant
that is
Communicates
Reliable
Comparable
to help users make
better decisions.
Accounting Activities
 Identifying
Business
Activities
 Recording
Business
Activities

Communicating
Business
Activities
Users of Accounting Information
Internal Users
External Users
•Lenders
•Consumer Groups
•Managers
•Sales Staff
•Shareholders •External Auditors
•Officers
•Budget Officers
•Governments •Customers
•Internal Auditors •Controllers
Users of Accounting Information
External Users
Internal Users
Financial accounting provides
external users with financial
statements.
Managerial accounting provides
information needs for internal
decision makers.
QUESTIONS ASKED BY
INTERNAL USERS
STUDY OBJECTIVE 2
QUESTIONS ASKED BY
EXTERNAL USERS
What is the correct accounting process
sequence ?
•
•
•
•
identification, communication, recording.
recording, communication, identification.
identification, recording, communication.
communication, recording, identification.
The accounting process is correctly
sequenced as
•
•
•
•
identification, communication, recording.
recording, communication, identification.
identification, recording, communication.
communication, recording, identification.
Opportunities in Accounting
Financial
•Preparation
•Analysis
•Auditing
•Regulatory
•Consulting
•Planning
•Criminal
investigation
Accountingrelated
Managerial
Taxation
•General accounting
•Cost accounting
•Budgeting
•Internal auditing
•Consulting
•Controller
•Treasurer
•Strategy
•Preparation
•Planning
•Regulatory
•Investigations
•Consulting
•Enforcement
•Legal services
•Estate planning
•Lenders
•Consultants
•Analysts
•Traders
•Directors
•Underwriters
•Planners
•Appraisers
•FBI investigators
•Market researchers
•Systems designers
•Merger services
•Business valuation
•Human services
•Litigation support
•Entrepreneurs
Accounting Jobs by Area
Private
accounting
60%
Public
accounting
25%
Auditing
Taxation
Management
consulting
Government,
not-for-profit,
& education
15%
NGO’s,
SEC
Ethics—A Key Concept
Ethics
Beliefs that
distinguish
right from
wrong
Accepted
standards of
good and bad
behavior
Guidelines for Ethical Decision Making
 Identify
ethical concerns
 Analyze
options
Use personal Consider all good
ethics to
and bad
recognize ethical consequences.
concern.
 Make ethical
decision
Choose best
option after
weighing all
consequences.
Generally Accepted Accounting
Principles
Financial accounting practice is governed by
concepts and rules known as generally accepted
accounting principles (GAAP).
Relevant
Information
Affects the decision of
its users.
Reliable Information
Is trusted by
users.
Comparable
Information
Is helpful in contrasting
organizations.
Setting Accounting Principles
Financial Accounting
Standards Board is the private
group that sets both broad and
specific principles.
The Securities and Exchange Commission is
the government group that establishes
reporting requirements for companies that
issue stock to the public.
Principles of Accounting
Objectivity Principle
Accounting information is
supported by independent,
unbiased evidence.
It demands more
than one person’s
opinion/
verification
Now
Cost Principle
Accounting information is
based on actual cost.
Future
Going-Concern Principle
Reflects assumption that the
business will continue operating
instead of being closed or sold.
Principles of Accounting
Monetary Unit Principle
Express transactions and events in
monetary, or money, units.
Money is a common denominator in
Business.
Business Entity Principle
A business is accounted for
separately from other business
entities, including its owner.
Revenue Recognition Principle
1. Recognize revenue when it is
earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash
received plus cash value of items
received.
Business Entity Forms
Proprietorship
Partnership
Corporation
Exh.
1.8
Characteristics of Businesses
Characteristics
Proprietorship Partnership Corporation
Business entity
yes
yes
yes
Legal entity
no
no
yes
Limited liability
no*
no*
yes
Unlimited life
no
no
yes
Business taxed
no
no
yes
One owner allowed
yes
no
yes
* Proprietorships and partnerships that are set up as LLC’s
provide limited liability.
Corporation
Owners of a corporation are called
shareholders (or stockholders).
When a corporation issues only
one class of stock, we call it
common stock (or capital stock).
Accounting Equation
Assets
=
Liabilities
Assets
+
Liabilities
& Equity
Equity
Assets
Cash
Accounts
Receivable
Vehicles
Store
Supplies
Resources
owned or
controlled
by a
company
Notes
Receivable
Land
Buildings
Equipment
Liabilities
Accounts
Payable
Notes
Payable
Creditors’
claims on
assets
Taxes
Payable
Wages
Payable
Equity
Owner
Withdrawals
Owner
Investments
Owner’s
claims
on
assets
Revenues
Expenses
Expanded Accounting Equation
=
Assets
Owner
Capital
_
Liabilities
Owner
Withdrawals
+
+
Revenues
Equity
_
Expenses
DRAWINGS AS A BUILDING
BLOCK
•
Drawings
• are withdrawals of cash or other assets
by the owner for personal use
• decrease owner’s equity
INCREASES AND
DECREASES IN OWNER’S
EQUITY
INCREASES
Investments
by Owner
Revenues
DECREASES
Owner’s
Equity
Withdrawals
by Owner
Expenses
Transaction Analysis
 Exchange of economic consideration between
at least two parties.
 Economic consideration include products,
services, money, rights to collect money
(A/R,B/R)
TRANSACTION IDENTIFICATION
PROCESS
STUDY OBJECTIVE 6
Transaction Analysis Equation
The accounting equation must remain in
balance after each transaction.
Assets
=
Liabilities
+
Equity
Transaction Analysis
J. Scott, the owner, contributed $20,000
cash to start the business.
The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Capital (equity)
Transaction Analysis
J. Scott, the owner, contributed $20,000
cash to start the business.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
$ 20,000 $
-
$ 20,000
$
-
Liabilities
Accounts
Notes
Payable Payable
$
=
-
$
-
$
20,000
+
Equity
J. Scott,
Capital
$ 20,000
$ 20,000
Transaction Analysis
Purchased supplies paying $1,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Transaction Analysis
Purchased supplies paying $1,000
cash.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
$ 19,000 $ 1,000 $
$ 20,000
-
Liabilities
Accounts
Notes
Payable Payable
$
=
-
$
-
$
20,000
+
Equity
J. Scott,
Capital
$ 20,000
$ 20,000
Transaction Analysis
Purchased equipment for $15,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Transaction Analysis
Purchased equipment for $15,000
cash.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
$
4,000 $ 1,000 $
$ 20,000
15,000
Liabilities
Accounts
Notes
Payable Payable
$
=
-
$
-
$
20,000
+
Equity
J. Scott,
Capital
$ 20,000
$ 20,000
Transaction Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.
The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Transaction Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
(4)
200
1,000
$
4,000 $ 1,200 $
$ 21,200
Liabilities
Accounts
Notes
Payable Payable
+
Equity
J. Scott,
Capital
$ 20,000
$ 1,200
16,000
$ 1,200 $
=
$
21,200
$ 20,000
Transaction Analysis
Borrowed $4,000 from 1st American
Bank.
The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
Transaction Analysis
Borrowed $4,000 from 1st American
Bank.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
(4)
200
1,000
(5)
4,000
$ 8,000 $ 1,200 $ 16,000
$ 25,200
Liabilities
Accounts
Notes
Payable Payable
+
Equity
J. Scott,
Capital
$ 20,000
$ 1,200
=
$
$ 1,200 $
4,000
4,000
$
25,200
$ 20,000
Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Assets
=
Cash Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
$ 8,000 $ 1,200 $
$ 25,200
16,000
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
J. Scott,
Capital
$ 20,000
$
$ 20,000
1,200 $
=
Now let’s look at transactions involving
revenue, expenses and withdrawals.
4,000
$ 25,200
Transaction Analysis
Rendered consulting services
receiving $3,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction Analysis
Rendered consulting services
receiving $3,000 cash.
Assets
=
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
$ 11,000 $
1,200 $
$ 28,200
16,000
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
J. Scott,
Capital Revenue
$ 20,000
$ 3,000
$ 1,200 $
$ 20,000 $ 3,000
4,000
$ 28,200
Transaction Analysis
Paid salaries of $800 to employees.
The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Remember that the balance in the salaries
expense account actually increases.
But, equity actually decreases because
expenses reduce equity.
Transaction Analysis
Paid salaries of $800 to employees.
Assets
=
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
(7)
(800)
$ 10,200 $
1,200 $
$ 27,400
16,000
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
J. Scott,
Capital Revenue Expenses
$ 20,000
$ 3,000
$
(800)
$ 1,200 $
$ 20,000 $ 3,000 $
4,000
$ 29,000
Remember that expenses decrease equity.
(800)
Transaction Analysis
J. Scott withdrew $500 from the
business for personal use.
The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)
Remember that the balance in the J. Scott,
Withdrawals account actually increases.
But, equity actually decreases because
withdrawals reduce equity.
Transaction Analysis
J. Scott withdrew $500 from the
business for personal use.
Assets
=
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
(7)
(800)
(8)
(500)
$ 9,700 $ 1,200 $ 16,000
$ 26,900
Liabilities
$ 1,200 $
=
4,000
+
Equity
J. Scott,
J. Scott,
Capital Withdrawal Revenue Expenses
$ 20,000
$ 3,000
$
(800)
$
(500)
$ 20,000 $
(500) $ 3,000 $
(800)
$ 29,500
Remember that withdrawals decrease equity.
Financial Statements
Let’s prepare the Financial Statements
reflecting the transactions we have recorded.
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
Scott Company
Income Statement
For Month Ended December 31, 2004
Revenues:
Consulting revenue
Expenses:
Salaries expense
Net income
$
3,000
$
800
2,200
Net income is the
difference
between
Revenues and
Expenses.
The income statement describes a
company’s revenues and expenses
along with the resulting net income or
loss over a period of time due to
earnings activities.
Scott Company
Income Statement
For Month Ended December 31, 2004
Revenues:
Consulting revenue
Expenses:
Salaries expense
Net income
The Statement of
Owner’s Equity
explains changes
in equity from net
income (or net
loss) and from
owner investments
and withdrawals for
a period of time.
$
3,000
$
800
2,200
The net income
of $2,200
increases
Scott’s capital
by $2,200.
Scott Company
Statement of Owner's Equity
For Month Ended December 31, 2004
J. Scott, Capital, Dec. 1, 2004 $
Plus: Investment by owner
Net income
Less: Withdrawals
J. Scott, Capital, Dec. 31, 2004 $
20,000
2,200
500
21,700
The Balance Sheet
describes a
company’s
financial position
at a point in time.
Scott Company
Statement of Owner's Equity
For Month Ended December 31, 2004
J. Scott, Capital, Dec. 1, 2004
Plus: Investment by owner
Net income
Less: Withdrawals
J. Scott, Capital, Dec. 31, 2004
Scott Company
Balance Sheet
December 31, 2004
Assets
$
Cash
Supplies
Equipment
Total assets
$
9,700
1,200
16,000
26,900
Liabilities & Equity
Accounts payable
$
Notes payable
Total liabilities
J. Scott, Capital
Total liabilities and equity $
1,200
4,000
5,200
21,700
26,900
$
$
20,000
2,200
500
21,700
Scott Company
Statement of Cash Flows
For Month Ended December 31, 2004
Cash flows from operating activities:
Cash received from clients
$ 3,000
Purchase of supplies
(1,000)
Cash paid to employees
(800)
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of equipment
(15,000)
Net cash used in investing activities
Cash flows from financing activities:
Investment by owner
20,000
Borrowed at bank
4,000
Withdrawal by owner
(500)
Net cash provided by financing activities
Net increase in cash
Cash balance, December 1, 2004
Cash balance, December 31, 2004
$
1,200
(15,000)
$
$
23,500
9,700
9,700
The Statement of Cash Flows identifies cash
inflows and cash outflows over a period of time.
Return on Assets (ROA)
Net income ÷ Average total assets
ROA is viewed as an
indicator of operating
efficiency.
End of Chapter 1