CHAPTER 1

INTRODUCTION
1.1 What is bookkeeping?
 It is a process of recording data relating to
accounting transactions in the accounting
book.
 In normal circumstances, it will handle:

(i) record all transactions

(ii) post debits and credits
(iii) produce financial statements
(iv) prepare reports and summaries for
supervisors/managers
1.2 What is accounting?

 Accounting is a process of identifying,

measuring, recording and communicating
economic information to allow users to make
appropriate decisions.
1.2 What is accounting?
 Identifying

- involves observing economic events and

determining which of those events represent
economic activities relevant to a particular
business.
1.2 What is accounting?
 Measurement

- measurement must take place before any

transactions can be recorded.
- it must be expressed in terms of common
measuring units
- e.g. RM and sen
1.2 What is accounting?
 Recording

 it is done to provide history of the

transactions after they have been identified
and measured.
 the recorded data must be classified into
categories or groups and summarized in
reports and financial statements.
1.2 What is accounting?
 Communication

- it consists of placing accounting data,

which have been classified and summarized
into reports and disclosures are necessary to
make data understandable by users to make
informed economic events.
Accounting — An Information Process
Identification
of Users
Accounting — An Information Process
Identification
of Users

User
Information
Needs
Accounting — An Information Process
Identification
of Users

User
Information
Needs

Accounting
System
 Accounting — An Information Process
Identification
of Users

User
Information
Needs

Economic Data Accounting

and Activities System
 Accounting — An Information Process
Identification
of Users

User
Information
Needs

Economic Data Accounting

and Activities System

Reports
 Accounting — An Information Process
Identification
of Users

User
Information
Needs

Economic Data Accounting

and Activities System

User
Reports
Decisions
 Users of Accounting Information

 investors
Financial Accounting  creditors
 regulators
EXTERNAL USERS
 customers
 competitors
 Users of Accounting Information

• investors
Financial Accounting • creditors
• regulators
EXTERNAL USERS
• customers
• competitors
Managerial Accounting
INTERNAL USERS  owners
 managers
 employees
There are three types of
business organizations

 Proprietorship
 Partnership
 Corporation
A proprietorship Advantages
is owned by one • Ease in organizing
individual. • Low cost of
organizing
Disadvantage
Joe’s • Limited source of
financial resources
• Unlimited liability
 Advantages
A partnership is • More financial
owned by two or resources than a
more individuals. proprietorship.
• Additional
management skills.
Joe and Marty’s Disadvantage
• Unlimited liability.
 A corporation is
organized under state Advantage
or federal statutes as a • The ability to obtain
separate legal entity. large amounts of
resources by issuing
stocks.
J & M, Inc. Disadvantage
• Double taxation.
Generally Accepted
Accounting
Principles (GAAP)
The business entity concept
limits the economic data in
the accounting system to
data related directly to the
activities of the business.
The cost concept is the
basis for entering the
exchange price, or cost
of an acquisition in the
accounting records.
 The objectivity concept
requires that the accounting
records and reports be based
upon objective evidence.
The unit-of-measure
concept requires that
economic data be
recorded in dollars.
 CHAPTER 2

ACCOUNTING EQUATION
1.3 The Accounting Equation

ASSETS = CAPITAL + LIABILITIES

 The Accounting Equation

Assets = Liabilities + Owners’ Equity

The resources
owned by a
business
1.3 The Accounting Equation
 ASSETS
- resources owned by the business.
- common characteristics possess by all
assets is the capacity to provide future
services/benefits to the entities that use
them.
1.3 The Accounting Equation

 CURRENT ASSETS
- assets that are expected to be converted to
cash in less than 1 year.
- e.g. stock, debtors, cash, cash at bank
1.3 The Accounting Equation

 FIXED ASSETS
- long life
- bought to be used in business
- were not bought for the thought of resale
- e.g. land, buildings, machinery, furniture
 The Accounting Equation

Assets = Liabilities + Owners’ Equity

The rights of the

creditors, which
represent debts
of the business
1.3 The Accounting Equation
 LIABILITIES
- liabilities are existing debts and obligations.
There are 2 categories:

(a) Short-term liabilities

- obligations that are expected to be repaid in
less than 1 year.

(b) Long term liabilities

- obligations that are expected to be repaid after
1 year.
 The Accounting Equation

Assets = Liabilities + Owners’ Equity

The rights of the

owners
1.3 The Accounting Equation

 CAPITAL / OWNER EQUITY

- also known as owner’s equity, it is the

owners’ claim on the total assets. Capital will
be affected by 4 factors:
1.3 The Accounting Equation
(i) Investments by owner – resources
supplied by owner.

(ii) Drawings – withdrawal for personal use

(iii) Revenues

(iv) Expenses
 The Accounting Equation
Resources

What are an organization’s resources called?

 The Accounting Equation
Resources = Sources

Assets

Cost of What are the

sources of the
resources used
assets?
in the business
 The Accounting Equation
Resources = Sources

Liabilities

Assets
Owner’s
Equity

Cost of Resources
resources used supplied by
in the business creditors and
owners
 Business Transactions

a. Chris Clark deposits $25,000 in a bank account

for NetSolutions.

ASSETS LIABILITIES

= OWNER’S EQUITY
 Business Transactions

a. Chris Clark deposits $25,000 in a bank account

for NetSolutions.

ASSETS LIABILITIES

Cash
25,000 = OWNER’S EQUITY
 Business Transactions

a. Chris Clark deposits $25,000 in a bank account

for NetSolutions.

ASSETS LIABILITIES

Cash
25,000 = OWNER’S EQUITY

Chris Clark, Capital

25,000
 Business Transactions

b. NetSolutions buys land for $20,000.

ASSETS LIABILITIES

= OWNER’S EQUITY
 Business Transactions

b. NetSolutions buys land for $20,000.

ASSETS LIABILITIES

Cash
(20,000)
= OWNER’S EQUITY
 Business Transactions

b. NetSolutions buys land for $20,000.

ASSETS LIABILITIES

Cash
(20,000)
= OWNER’S EQUITY
Land
20,000
 Business Transactions

c. NetSolutions buys supplies for $1,350, agreeing to

pay the supplier in the near future.

ASSETS LIABILITIES

= OWNER’S EQUITY
 Business Transactions

c. NetSolutions buys supplies for $1,350, agreeing to

pay the supplier in the near future.

ASSETS LIABILITIES

Supplies
1,350 = OWNER’S EQUITY
 Business Transactions

c. NetSolutions buys supplies for $1,350, agreeing to

pay the supplier in the near future.

ASSETS LIABILITIES
Accounts Payable
1,350
Supplies
1,350 = OWNER’S EQUITY
 Business Transactions

d. NetSolutions earns fees of $7,500, receiving cash.

ASSETS LIABILITIES

= OWNER’S EQUITY
 Business Transactions

d. NetSolutions earns fees of $7,500, receiving cash.

ASSETS LIABILITIES

Cash
7,500 = OWNER’S EQUITY
 Business Transactions

d. NetSolutions earns fees of $7,500, receiving cash.

ASSETS LIABILITIES

Cash
7,500 = OWNER’S EQUITY

Fees Earned 7,500

 Business Transactions

e. NetSolutions paid: wages, $2,125; rent, $800;

utilities, $450; and miscellaneous, $275.

ASSETS LIABILITIES

= OWNER’S EQUITY
 Business Transactions

e. NetSolutions paid: wages, $2,125; rent, $800;

utilities, $450; and miscellaneous, $275.

ASSETS LIABILITIES

Cash
(3,650) = OWNER’S EQUITY
 Business Transactions

e. NetSolutions paid: wages, $2,125; rent, $800;

utilities, $450; and miscellaneous, $275.

ASSETS LIABILITIES

Cash
(3,650) = OWNER’S EQUITY

Expenses
(3,650)
 Business Transactions

f. NetSolutions pays $950 to creditors on account.

ASSETS LIABILITIES

= OWNER’S EQUITY
 Business Transactions

f. NetSolutions pays $950 to creditors on account.

ASSETS LIABILITIES

Cash
(950) = OWNER’S EQUITY
 Business Transactions

f. NetSolutions pays $950 to creditors on account.

ASSETS LIABILITIES
Accounts Payable
(950)
Cash
(950) = OWNER’S EQUITY
 Business Transactions

g. At the end of the month, the cost of supplies on

hand is $550.

ASSETS LIABILITIES

= OWNER’S EQUITY
 Business Transactions

g. At the end of the month, the cost of supplies on

hand is $550.

ASSETS LIABILITIES

Supplies
(800) = OWNER’S EQUITY
 Business Transactions

g. At the end of the month, the cost of supplies on

hand is $550.

ASSETS LIABILITIES

Supplies
(800) = OWNER’S EQUITY

Supplies Expense
(800)
 Business Transactions

h. Chris Clark withdraws $2,000 in cash.

ASSETS LIABILITIES

= OWNER’S EQUITY
 Business Transactions

h. Chris Clark withdraws $2,000 in cash.

ASSETS LIABILITIES

Cash
(2,000) = OWNER’S EQUITY
 Business Transactions

h. Chris Clark withdraws $2,000 in cash.

ASSETS LIABILITIES

Cash
(2,000) = OWNER’S EQUITY

Chris Clark, Drawing

(2,000)
 Transaction Summary

ASSETS LIABILITIES

Cash 5,900 OWNER’S EQUITY

Supplies
Land
550
20,000
=
 Transaction Summary

ASSETS LIABILITIES
Accts. Payable 400

Cash 5,900 OWNER’S EQUITY

Supplies
Land
550
20,000
=
 Transaction Summary

ASSETS LIABILITIES
Accts. Payable 400

Cash 5,900 OWNER’S EQUITY

Supplies
Land
550
20,000
= C. Clark, Capital 25,000
C. Clark, Drawing (2,000)
Fees Earned 7,500
Wages Expense (2,125)
Rent Expense (800)
Supplies Expense (800)
Utilities Expense (450)
Misc. Expense (275)

26 450
Effects of Transactions on Owner’s Equity

OWNER’S EQUITY
Effects of Transactions on Owner’s Equity

OWNER’S EQUITY

decreased by
Effects of Transactions on Owner’s Equity

OWNER’S EQUITY

decreased by

Owner’s withdrawals

Expenses
Effects of Transactions on Owner’s Equity

OWNER’S EQUITY

increased by
Effects of Transactions on Owner’s Equity

OWNER’S EQUITY

increased by

Owner’s investments

Revenues
Effects of Transactions on Owner’s Equity

OWNER’S EQUITY

decreased by increased by

Owner’s withdrawals Owner’s investments

Expenses Revenues
Effects of Transactions on Owner’s Equity

OWNER’S EQUITY

decreased by increased by

Owner’s withdrawals Owner’s investments

Expenses Revenues

NET INCOME
END OF CHAPTER