Adopted from: Accounting Principles, 13th Edition

Weygandt • Kieso • Kimmel

Chapter 1

Accounting in Action

By: Dr (Cand) Annisa Fitri Anggraeni., SE., MM., CISA

John Wiley & Sons, Inc. © 2018

 Curriculum Vitae
Nama : Annisa Fitri Anggraeni
Nama Panggilan : Icha, Nisa
Tanggal Lahir : Bandung, 24 Oktober 1991
Agama Pekerjaan : Islam
Riwayat Pendidikan : Dosen
:
 Sarjana Akuntansi- Universitas Pendidikan Indonesia 2009
 Magister Manajemen- UNWIM 2013
 Doktor Ilmu Akuntansi- Universitas Padjajaran (2015-OnGoing)
 CHAPTER 1
ACCOUNTING IN ACTION
After studying this chapter, you should be able to:
 Three Main Activities on
Accounting

Accounting is an information system

that
•Identifies
•Records
•Communicates the economic events
of an organization to interested users
THE ACCOUNTING
PROCESS
QUESTIONS ASKED BY
INTERNAL USERS
QUESTIONS ASKED BY
EXTERNAL USERS
BOOKKEEPING DISTINGUISHED
FROM ACCOUNTING

• Accounting
Includes bookkeeping
Also includes much more

• Bookkeeping
The recording of economic events
One part of accounting
 THE BUILDING BLOCKS OF
ACCOUNTING
STUDY OBJECTIVES 3, 4 & 5
• Ethics
Standards by which actions are judged as right or
wrong, honest or dishonest.
• Generally Accepted Accounting Principles
Established by the F.A.S.B and the S.E.C.
• Assumptions
– Monetary Unit
Only data that can be expressed in terms of money
is included in the accounting records.
– Economic Entity
Includes any organization or unit in society.
MEASUREMENT PRINCIPLES

GAAP generally uses one of two measurement

principles, the historical cost principle or the fair
value principle. Selection of which principle to
follow generally relates to trade-off s between
relevance and faithful representation. Relevance 
means that financial information is capable of
making a difference in a decision. Faithful
representation  means that the numbers and
descriptions match what really existed or
happened—they are factual.
 MEASUREMENT PRINCIPLES

• Historical Cost Principle

The historical cost principle  (or cost principle)
dictates that companies record assets at their cost.
This is true not only at the time the asset is
purchased, but also over the time the asset is held.
For example, if Best Buy  purchases land for
$300,000, the company initially reports  it in its
accounting records at $300,000. But what does
Best Buy do if, by the end of the next year, the fair
value of the land has increased to $400,000?
Under the historical cost principle, it continues to
report the land at $300,00
 MEASUREMENT PRINCIPLES
• The fair value
The 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). Fair value information may be more useful than
historical cost for certain types of assets and liabilities.
For example, certain investment securities are reported at fair value
because market price information is usually readily available for
these types of assets. In determining which measurement
principle to use, companies weigh the factual nature of cost
figures versus the relevance of fair value. In general, most
companies choose to use cost. Only in situations where assets
are actively traded, such as investment securities, do companies
apply the fair value principle extensively
 BUSINESS ENTERPRISES

• Proprietorship
Owned by one person.

• Partnership
Owned by two or more persons.

• Corporation
Organized as a separate legal entity under
state corporation law and having ownership
divided into transferable shares of stock.
The accounting process is correctly
sequenced as
a. identification, communication, recording.
b. recording, communication, identification.
c. identification, recording, communication.
d. communication, recording, identification.

Chapter 1
The accounting process is correctly
sequenced as
a. identification, communication, recording.
b. recording, communication, identification.
c. identification, recording, communication.
d. communication, recording, identification.

Chapter 1
 BASIC ACCOUNTING
EQUATION
STUDY OBJECTIVE 6

Assets = Liabilities + Owner’s Equity

 ASSETS AS A BUILDING
BLOCK

• Assets are resources owned by a

business.

• They are used in carrying out such

activities as production,
consumption and exchange.
 LIABILITIES AS A
BUILDING BLOCK
• Liabilities

• are creditor claims against assets

• are existing debts and obligations

 OWNER’S EQUITY AS A
BUILDING BLOCK
• Owner’s Equity = total assets minus
total liabilities. (A - L = O.E.)
• Owner’s Equity represents the
ownership claim to total assets.
• Subdivisions of Owner’s Equity:
1 Capital or Investments by Owner (+)
2 Drawing (-)
3 Revenues (+)
4 Expenses (-)
INVESTMENTS BY OWNERS AS A
BUILDING BLOCK

• Investments

• are the assets the owner puts in

the business

• increase owner’s equity

DRAWINGS AS A BUILDING
BLOCK

• Drawings
• are withdrawals of cash or other
assets by the owner for personal
use

• decrease owner’s equity

 REVENUES AS A
BUILDING BLOCK

• Revenues
• gross increases in owner’s equity from
business activities entered into for the
purpose of earning income
• may result from sale of merchandise,
services, rental of property, or lending
money
• usually result in an increase in an asset
 EXPENSES AS A
BUILDING BLOCK
Expenses
• decreases in owner’s equity that result from
operating the business

• cost of assets consumed or services used in the

process of earning revenue

• examples: utility expense, rent expense, supplies

expense, and tax expense
Accounting Equation
 INCREASES AND
DECREASES IN OWNER’S
EQUITY
•INCREASES DECREASES

Investments Withdrawals
by Owner Owner’s by Owner

Equity
Revenues Expenses
TRANSACTION IDENTIFICATION
PROCESS
STUDY OBJECTIVE 6

Analiza
Trial
Business Journalize Posting
Balance
Transaction

Entries
Adjusted
Post-Closing
Entries Closing Financial
Entries Statements
Accounting Transaction

Transaction Identification Process

TRANSACTION ANALYSIS
TRANSACTION 1

• Ray Neal decides to open a

computer programming service.
• On September 1, he invests
$15,000 cash in the business,
which he names Softbyte.

Softbyte
 TRANSACTION ANALYSIS
TRANSACTION 1 SOLUTION

• Assets = Liabilities + Owner’s Equity

Cash R. Neal, Capital

+ 15,000 Investment + 15,000

$15,000 = $15,000

There
Thereisisan
anincrease
increasein
inthe
theasset
assetCash,
Cash,
$15,000,
$15,000,and
andananequal
equalincrease
increasein
inthe
theowner’s
owner’s
equity,
equity,R.
R.Neal,
Neal,Capital,
Capital,$15,000.
$15,000.
 TRANSACTION ANALYSIS
TRANSACTION 2

• Softbyte purchases computer

equipment for $7,000 cash.
 TRANSACTION ANALYSIS
TRANSACTION 2 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Equipment = + R. Neal, Capital
• Old
• $15,000 = $15,000
• (2) - 7,000 + 7,000______________________________
• New
• $ 8,000 + $7,000 = $15,000

Cash is decreased by $7,000 and the asset

Equipment is increased by $7,000.
TRANSACTION ANALYSIS
TRANSACTION 3

• Softbyte purchases supplies expected to

last for several months for $1,600 from
Acme Supply Company.
• Acme agrees to allow Softbyte to pay this
bill next month, in October.
• This transaction is referred to as a purchase
on account or a credit purchase.

Acme Supply
Company

Softbyte
 TRANSACTION ANALYSIS
TRANSACTION 3 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old $8,000 + $7,000 = $15,000
• (3) _____ + $1,600 _______ + $1,600 ________
• New $8,000 + $1,600 + $7,000 = + $1,600 + $15,000
•
• $16,600 $16,600

The
Theasset
assetSupplies
Suppliesisisincreased
increasedby
by$1,600,
$1,600,
and
andthe
theliability
liabilityAccounts
AccountsPayable
Payableisis
increased
increasedbybythe
thesame
sameamount.
amount.
 TRANSACTION ANALYSIS
TRANSACTION 4

• Softbyte receives $1,200 cash from

customers for programming services it has
provided.

• This transaction represents the Softbyte’s

principal revenue-producing activity.

Softbyte
 TRANSACTION ANALYSIS
TRANSACTION 4 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old $8,000 + $1,600 + $7,000 = $1,600 + $15,000
• (4) + 1,200 _____ _____ _______________ + 1,200
• New $9,200 + $1,600 + $7,000 = $1,600 $16,200

• $17,800 $17,800

Cash
Cashisisincreased
increasedbyby$1,200
$1,200and
andR.
R.Neal,
Neal,
Capital
Capitalisisincreased
increasedby
by$1,200.
$1,200.
 TRANSACTION ANALYSIS
TRANSACTION 5

•Softbyte receives a bill for $250

from the Daily News for advertising
but postpones payment of the bill
until a later date.

Softbyte Bill
Daily News
 TRANSACTION ANALYSIS
TRANSACTION 5 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old $9,200 + $1,600 + $7,000 = $1,600 + $16,200
• (5) ___Advertising Expense__ + 250 _- 250
• New $9,200 + $1,600 + $7,000 = $1,850 + $15,950

• $17,800 $17,800

Accounts
AccountsPayable
Payableisisincreased
increasedby
by$250
$250and
andR.
R.
Neal,
Neal,Capital
Capitalisisdecreased
decreasedbyby$250.
$250.
 TRANSACTION ANALYSIS
TRANSACTION 6

• Softbyte provides $3,500 of

programming services for customers.
• Cash of $1,500 is received from
customers, and the balance of $2,000 is
billed on account.

Softbyte
Bill
 TRANSACTION ANALYSIS
TRANSACTION 6 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old
• $ 9,200 + $1,600 + $7,000 = $1,850 + $15,950
• (6)
• + 1,500 + 2,000 + 3,500
• New
• $10,700 + $2,000 + $1,600 + $7,000 = $1,850 + $19,450

• $21,300 $21,300

Cash
Cashisisincreased
increasedby
by$1,500;
$1,500;Accounts
AccountsReceivable
Receivableisisincreased
increased
by
by$2,000,
$2,000,and
andR.
R.Neal,
Neal,Capital
Capitalisisincreased
increasedby
by$3,500.
$3,500.
TRANSACTION ANALYSIS
TRANSACTION 7

•Expenses paid in cash for September

are store rent, $600; employees’
salaries, $900; and utilities, $200.

$600

Softbyte
$900
$200
 TRANSACTION ANALYSIS
TRANSACTION 7 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old
• $10,700 + $2,000 + $1,600 + $7,000 = $1,850 + $19,450
• (7)
• - 1,700 Rent Expense - 600
• Salaries Expense - 900
• Utilities Expense - 200
• New
• $ 9,000 + $2,000 + $1,600 + $7,000 = $1,850 + $17,750

• $19,600 $19,600
Cash
Cashisisdecreased
decreasedby
by$1,700
$1,700and
andR.
R.Neal,
Neal,Capital
Capitalisisdecreased
decreased
by
bythe
thesame
sameamount.
amount.
TRANSACTION ANALYSIS
TRANSACTION 8

• Softbyte pays its $250

Daily News advertising bill
in cash.

Softbyte
Daily News
 TRANSACTION ANALYSIS
TRANSACTION 8 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old
• $9,000 + $2,000 + $1,600 + $7,000 = $1,850 + $17,750
• (8)- 250 - 250 .
• New
• $8,750 + $2,000 + $1,600 + $7,000 = $1,600 + $17,750

• $19,350 $19,350

Both
BothCashCashand
andAccounts
AccountsPayable
Payableare
aredecreased
decreasedby
by
$250.
$250. Since
Sincethe
theexpense
expensewas
waspreviously
previouslyrecorded,
recorded,
ititisisnot
notrecorded
recordednow.
now.
TRANSACTION ANALYSIS
TRANSACTION 9

•The sum of $600 in cash is

received from customers who
have previously been billed for
services (in Transaction 6).

Softbyte
 TRANSACTION ANALYSIS
TRANSACTION 9 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old
• $8,750 + $2,000 + $1,600 + $7,000 = $1,600 + $17,750
• (9) + 600 - 600 .
• New
• $9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $17,750
•

• $19,350 $19,350

Cash
Cashisisincreased
increasedbyby$600
$600and
andAccounts
AccountsReceivable
Receivableisis
decreased
decreasedby bythe
thesame
sameamount.
amount. R.
R.Neal,
Neal,Capital
Capitalisisnot
not
increased
increasedbecause
becausethe
therevenue
revenuewas
wasalready
alreadyrecorded.
recorded.
TRANSACTION ANALYSIS
TRANSACTION 10

•Ray Neal withdraws

$1,300 in cash from the
business for his personal
use.

$1,300
Softbyte
 TRANSACTION ANALYSIS
TRANSACTION 10 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Accts. Rec. + Supplies + Equip = Accts. Pay. + R. Neal, Capital
• Old
• $9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $17,750
• (10)
• - 1,300 Drawing - 1,300
• New
• $8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $16,450

• $18,050 $18,050

Cash is decreased by $1,300 and R. Neal, Capital is

decreased by the same amount. This is not an
expense, but rather a withdrawal of owner’s equity.
 FINANCIAL STATEMENTS
STUDY OBJECTIVE 8

•Four financial statements are prepared from

the summarized accounting data:

• Income Statement
revenues and expenses and resulting net income or net loss for
a specific period of time
• Owner’s Equity Statement
changes in owner’s equity for a specific period of time
• Balance Sheet
assets, liabilities, and owner’s equity at a specific date
• Statement of Cash Flows
cash inflows (receipts) and outflows (payments) for a specific
period of time
 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE, INC.
Income Statement
For the Month Ended September 30, 2005
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
• $ 2,750
Net income

Net income of $2,750 shown on the income statement is added to the

beginning balance of owner’s capital in the owner’s equity statement.
FINANCIAL STATEMENTS AND
THEIR INTERRELATIONSHIPS
SOFTBYTE, INC.
Owner’s Equity Statement
For the Month Ended September 30, 2005
Retained earnings, September 1, 2005 $ -0-
Add: Investments $ 15,000
Net income 2,750 17,750
17,750
Less: Drawings 1,300
Retained earnings, September 30, 2005 •$16,450

Net income of $2,750 carried forward from the income statement to the
owner’s equity statement. The owner’s capital of $16,450 at the end of the
reporting period is shown as the final total of the owner’s equity column of the
Summary of Transactions (Illustration 1-8).
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
SOFTBYTE, INC.
Balance Sheet
September 30, 2005
Assets
Cash $ 8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $ 18,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable $ 1,600
Owner’s equity

R. Neal, capital •16,450

Total liabilities and owner’s equity $ 18,050

Owner’s capital of $16,450 at the end of the reporting period shown

in the owner’s equity statement is shown on the balance sheet.
FINANCIAL STATEMENTS AND
THEIR INTERRELATIONSHIPS
SOFTBYTE, INC.
Balance Sheet
September 30, 2005
Assets
Cash • $ 8,050

Accounts receivable 1,400

Supplies 1,600
Equipment 7,000
Total assets $ 18,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable $ 1,600
Owner’s equity

R. Neal, capital 16,450

Total liabilities and owner’s equity $ 18,050

Cash of $8,050 on the balance sheet is reported on the statement of cash

flows.
FINANCIAL STATEMENTS AND
THEIR INTERRELATIONSHIPS
SOFTBYTE, INC.
Statement of Cash Flows
For the Month Ended September 30, 2005
Cash flows from operating activities
Cash receipts from revenues $ 3,300
Cash payments for expenses (1,950)
Net cash provided by operating activities 1,350
Cash flows from investing activities
Purchase of equipment (7,000)
Cash flows from financing activities
Sale of common stock $ 15,000
Payment of cash dividends (1,300)
Net cash provided by financing activities 13,700
Net increase in cash 8,050
Cash at the beginning of the period –0–
Cash at the end of the period •$ 8,050

Cash of $8,050 on the balance sheet and statement of cash flows is shown as the
final total of the cash column of the Summary of Transactions (Illustration 1-8).
THE ACCOUNTING PROFESSION
• Public Accountants
Service to the general public through the
services they perform.
• Private Accountants
Individuals in companies involved in activities
including cost and tax accounting, systems, and
internal auditing.
• Not For Profit Accountants
Reporting and control for government units,
foundations, hospitals, labor unions,
colleges/universities, and charities.
THE ACCOUNTING PROFESSION

• Forensic Accounting
uses accounting, auditing, and investigative
skills to conduct investigations into theft and
fraud. This career includes tracing money-
laundering and identity-theft activities as well
as tax evasion.
Insurance companies hire forensic
accountants to detect frauds such as arson,
and law office employ forensic accountants to
identify marital assets in divorces. Forensic
accountants often have FBI, IRS, or similar
government experience
Which of the following is not an advantage of the
corporate form of business organization?
a. Limited liability of stockholders
b. Transferability of ownership
c. Unlimited personal liability for stockholders
d. Unlimited life

Chapter 1
Which of the following is not an advantage of the
corporate form of business organization?
a. Limited liability of stockholders
b. Transferability of ownership
c. Unlimited personal liability for stockholders
d. Unlimited life

Chapter 1