Chapter 1

Introduction to Accounting
 Chapter Outline
After studying this chapter, you should be able to

1. Natures of Business and Business Activities

2. Identify definition of Accounting
3. Users of Accounting Information
4. Purpose of Accounting and Function of Accounting System
5. Advantages of Accounting
6. Career in Accounting
7. Types of Accounting Information
8. Differences between Accountant & Bookkeeper
9. Types of Business
10. Types of Business Organization
11. Accounting Equation
12. Components of Chart of Accounts & Financial Statements
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 Natures of Business

A business is an organization in which basic resources (inputs), such as materials and

labor, are assembled and processed to provide goods or services (outputs) to customers.
The goals of mostBUSINESS
businessesGOALS BUSINESS ACTIVITIES
is to earn a profit and liquidity.
Profit is the difference between the amounts received from customers for goods or
services and the amounts paid for the inputs used to provide the goods or services.
PROFITABILITY
Liquidity a business must have enough funds available
FINANCINGto pay OPERATING
debts when they are due.

INVESTING
LIQUIDITY

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 Definition of Accounting

is a
Accounting Identifies
system that

Records

information
Relevant Communicates
that is

Reliable

to help users make

better decisions.
Comparable

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 Users of Accounting Information

External Users Internal Users

•Lenders •Consumer Groups •Managers •Sales Staff

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

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 Purpose of Accounting

The purpose of accounting is to provide relevant, timely and reliable information for
user decision making.

Accountants must behave in an ethical manner so that the information they provide
users will be trustworthy and, thus, useful for decision making.

Ethics are moral principles that guide the conduct of individuals.

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 Function of Accounting System

Basic Functions of an Accounting System

 Interpret and record business transactions.

 Classify similar transactions into useful reports.

 Summarize and communicate information to decision makers.

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 Advantages of Accounting

 Advantages of accounting is helping management answer such questions as:

 How much and what kind of debt is outstanding?
 Were sales higher this period than last?
 What assets do we have?
 What were our cash inflows and outflows?
 Did we make a profit last period?
 Are any of our product lines or divisions operating at a loss?
 Can we safely increase our dividends to stockholders?
 Is our rate of return on net assets increasing?

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 Careers in Accounting

 Public Accounting: Accountants and their staff who

provide services on a fee basis.
 Public accountants who have met a state’s
education, experience, and examination
requirements may become Certified Public
Accountants (CPAs)
 Management Accounting or Private Accounting:
Accountants employed by a business firm or a not-for-
profit organization.
 Governmental Accounting: Accountants employed
by government authorities, government agencies…
 Accounting Education: Accountants employed by
education institution as lecturers, writers accounting
books or accounting researchers…

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 Types of Accounting Information

Financial Accounting Tax Accounting

Cost and Management Accounting

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 Types of Accounting Information

 Financial accounting systems ensure that the assets and liabilities of a business
are properly accounted for, and provide information about profits and so on for
shareholders and for other interested parties.
 Cost accounting is part of management accounting. Cost accounting provides a
bank of data for the management accountant to use. Cost accounting is concerned
with the following.
 Preparing statements (e.g. budgets, costing)
 Cost data collection
 Applying costs to inventory, products and services
 Management accounting systems provide information specifically for the use of
managers within an organization. The roles of the management accountant:

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 Types of Accounting Information

 Analysis of past financial information which includes costs and revenues.

 Forecast of future financial information which includes costs and revenues.
 Preparation of regular reports, for example, monthly management accounts.
 Analysis of past non-financial information (orders processed, number of staff
leaving etc.).
 Planning, decision making and control - the main role.
 Tax accounting is a set of methods for accounting and a useful tool that
companies use to understand their tax liability and avoid penalties. Tax accounting
is key not only for businesses but also for individuals to declare the correct income,
pay appropriate taxes, and avoid penalties or GDT audits.

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Differences Between Accounting and Bookkeeping

Bookkeeping -> Bookkeeper

 Bookkeeping is the mechanical and repetitive process of recording financial

transactions and keeping financial records.

 Bookkeeping is a small part of accounting.

Accounting -> Accountant

 Accounting includes the design of an information system that meets user’s needs.

 Accounting goals are the analysis, interpretation, and use of information.

 Computers are used extensively in accounting as a tool for the accountant.

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 Types of Business

Service Business Service

Delta Air Lines Transportation services

Merchandising Business Product

Wal-Mart General merchandise

Manufacturing Business Product

General Motors Corp. Cars, trucks, vans

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 Types of Business Organization

Proprietorship Partnership Corporation

is owned by one is owned by two or is organized under state or
individual more individuals. federal statutes as a
separate legal taxable entity.

• They are easy and • Similar to a • Ownership is divided into

cheap to organize. proprietorship shares, called stock.

• Resources are limited • Combined with limited • Issues stock.

to those of the owner. liability companies
• Used by large firms.
• Used by small • Combines the skills and
• Has tax and legal liability
businesses. resources of more than
advantages for owners.
one person.

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 Accounting Equation

 Economics Resources = Owner’s Equities

 Assets = Liabilities + Owner’s Equities

The resources The rights of creditors The rights of the

owned by a business are the debts of the owners
business

Liabilities
Assets & Equity

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 Business Transaction Analysis

A business transaction is an economic event or condition that directly changes an

entity’s financial condition or its results of operations.

1. Owners invest $40,000 cash in order to start up new business.

Assets = Liabilities + Owner’s Equities

+ 40,000 (Cash) + 40,000 (Owner’s Capital)

2. Disburse $600 cash for secretarial wages.

Assets = Liabilities + Owner’s Equities

-600 (Cash) -600 (Wage Expense)

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 Business Transaction Analysis

3. Purchase office equipment priced at $5,200, giving a 10 percent promissory note in

exchange.

Assets = Liabilities + Owner’s Equities

+5,200 +5,200
Office Equipment Note Payable
4. Received $4,000 cash for services performed.

Assets = Liabilities + Owner’s Equities

+4,000 (Cash) +4,000 (Service Revenues)

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 Business Transaction Analysis

5. Pay off a short-term liability of $7,000.

Assets = Liabilities + Owner’s Equities

-7,000 -7,000
(Cash) Short term Liability

6. Borrowed money $5,000 from bank in order to put in business.

Assets = Liabilities + Owner’s Equities

+5,000 +5,000
(Cash) Note payable

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 Business Transaction Analysis

7. Owner withdraw of $2,000 in order to personal use.

Assets = Liabilities + Owner’s Equities

-2,000 (Cash) -2,000

8. Pay cash of $16,000 for a delivery van.

Assets = Liabilities + Owner’s Equities

-16,000 (Cash)
+16,000 (Van)
Note that the accounting equation equality is maintained after recording
each transaction.

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 Component of Chart of Accounts

A list of the account name and account number is called a chart of accounts.

The component of accounts or chat of accounts are:

 Assets are resources owned by the business.
 Liabilities are debts owed to outsiders (creditors).
 Owner’s equity is the owner’s right to the assets of the business after all
liabilities have been paid. A drawing account represents the amount of
withdrawals made by the owner.
 Revenues are increases in owner’s equity as a result of selling services or
products to customers.
 Expenses: The using up of assets or consuming services in the process of
generating revenues.

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 Assets

Accounts
Receivable
Cash Notes
Receivable

Resources
owned or Store
Buildings controlled by a Supplies
company

Land Equipment
Vehicles

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 Liabilities

Accounts
Payable

Creditors’ claims on
assets

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 Owner’s Equities

Owner Owner
Investments Withdrawals

Owner’s
claims
on assets

Revenues Expenses

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 Revenues

 Revenue is the total amount of income generated by the sale of goods and services
related to the primary operations of the business. Commercial revenue may also be
referred to as sales or as turnover. Some companies receive revenue from interest,
royalties, or other fees.

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 Expenses

 Expenses: The using up of assets or consuming services in the process of

generating revenues.

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 Preparing Financial Statements

Let’s prepare the Financial Statements reflecting the transactions we have recorded.
According to Accounting Standards, Financial Statements consist of:
1. Statement of Profit or Loss and Other Comprehensive Income or
Income Statement
2. Statement of Changes in Equity or Statement of Owner’s Equity
3. Statement of Financial Position or Balance Sheet
4. Statement of Cash Flows
5. Explanatory notes or Note to Financial accounts

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 Preparing Financial Statements

 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.
 Net income or Net Loss is the difference between Revenues and Expenses.

Scott Com pany

Incom e Statem ent
For Month Ended Decem ber 31, 2022

Rev enues:
Consulting rev enue $ 3,000
Ex penses:
Salaries ex pense 800
Net income $ 2,200

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 Preparing Financial Statements

 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.

Scott Com pany

Statem ent of Owner's Equity
For Month Ended Decem ber 31, 2022

J. Scott, Capital, Dec. 1 , 2022 $ -

Plus: Inv estment by owner 20,000
Net income 2,200
Less: Withdrawals 500
J. Scott, Capital, Dec. 31 , 2022 $ 21 ,7 00

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 Preparing Financial Statements

 The Balance Sheet describes a company’s financial position at a point in time.

Scott Com pany

Balance Sheet
Decem ber 31, 2022

Assets Liabilities & Equity

Cash $ 9,7 00 Accounts pay able $ 1,200
Supplies 1,200 Notes pay able 4,000
Equipment 16,000 Total liabilities 5,200
J. Scott, Capital 21,7 00
Total assets $ 26,900 Total liabilities and equity $ 26,900

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 Preparing Financial Statements

 The statement of cash flows shows how a company’s operating, investing, and
financing activities have affected cash during an accounting period.
 It explains the net increase (or decrease) in cash during the accounting period.
Com pany Nam e
Statem ent of Cash Flows
For Period Ended Date
Cash flows from operating activ ities:
[List of indiv idual inflows and outflows]
Net cash prov ided (used) by operating activ ites $ #####
Cash flows from inv esting activ ities:
[List of indiv idual inflows and outflows]
Net cash prov ided (used) by inv esting activ ites #####
Cash flows from financing activ ities:
[List of indiv idual inflows and outflows]
Net cash prov ided (used) by financing activ ites #####
Net increase (decrease) in cash $ #####
Cash (and equiv alents) balance at beginning of period#####
Cash (and equiv alents) balance at end of period $ #####

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Practices

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