SEEK WISDOM, ELEVATE YOUR EXCELLENCE & SERVE HUMANITY

AcFn 2011
Chapter One
Introduction to Accounting &
Business
Fundamentals of Accounting I-AAUSC, AAUSC, 2022
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 CHAPTER

1 Introduction to Accounting
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1 Explain what accounting is.
2 Identify the users and uses of accounting.
3 Understand why ethics is a fundamental business concept.
4 Explain accounting standards and measurement principles.
5 Explain the monetary unit assumption and the economic entity
assumption.
6 State the accounting equation, and define its components.
7 Analyze the effects of business transactions on the accounting equation.
8 Understand the five financial statements and how they are prepared.
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 The Nature of Business

 A business is an organization in which that

buys or sells goods or services for money.
 Businesses come in several types and sizes,
(Small shops, Supermarkets, Laundry,
Hotels, Garage, educational institutions,
banks, insurance and so on)

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 Activity:

Write 5 business activities/organizations that

you know.

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 Forms of Business Ownership

Proprietorship Partnership Corporation

 Owned by one  Owned by two or  Ownership

person more persons divided into
 Owner is often  Often retail and shares
manager/operator service-type  Separate legal
 Owner receives businesses entity organized
any profits, suffers  Generally under corporation
any losses, and is unlimited law
personally liable personal liability  Limited liability
for all debts  Partnership
agreement

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 Activity: (Homework)

1. Write forms of business organizations as stated

in the Commercial code of Ethiopia 1960 and
2021.
2. List and briefly describe 10 organized business
activities in your sub-city in light of the
commercial code of 1960 and 2021

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 Business and Accounting

 Regardless of the objective (whether they are established

for profit or not), size, function and form of ownership,
all organizations are required to keep records showing
their financial activities.
 This implies the fact that accounting is needed in all
types of organizations.
 So what is Accounting? Why it is needed in all
organizations?
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 What is Accounting?
Learning
Accounting consists of three basic Objective 1
Explain what
activities—it accounting is.

 identifies,

 records, and

 communicates

the economic events of an organization to interested users.

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 Three Activities
Illustration 1-1
The activities of the accounting process

The accounting process includes

the bookkeeping function.

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 ……What is Accounting?

 Accounting is the language of business – it

can be viewed as an information system that
identifies, measures, and communicates
financial information about economic
entities to interested persons.
 Accounting mainly deals with information
that is quantitative in nature.
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 Assumptions

Review Question
Which of the following is not a step in the accounting
process?
a. Identification.
b. Recording.
c. Economic entity.
d. Communication

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 Who Uses Accounting Data?

INTERNAL
USERS

Illustration 1-2
Questions that internal
users ask

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 Who Uses Accounting Data?
Learning
Objective 2
EXTERNAL Identify the
USERS users and uses
of accounting.

Illustration 1-3
Questions that external users ask
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 > DO IT!

Indicate whether the following statements are true or false.

1. The three steps in the accounting process are identification,

recording, and communication.

2. Bookkeeping encompasses all steps in the accounting process.

3. Accountants prepare, but do not interpret, financial reports.

4. The two most common types of external users are investors and
company officers.

5. Managerial accounting activities focus on reports for internal

users.

Solution: 1. True
2. 3. 4. False
5. False False True
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 The Evolution of Accounting

 Similar to other fields of study, Accounting has

evolved to meet the increasing needs of the society
 As organizations increase in type, size and
complexities, the demand for financial information has
also increased
 Accounting has developed new concepts and
principles to meet these demands

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 The Evolution…

 Primitive Accounting
 The oldest accounting record was the one that was found in
Babylonia in around 3600 B.C.
 Primitive accounting deals with limited aspect of
transactions
 There was no systematic recording
 Modern Accounting
 Modern accounting for business was developed in response
to the needs of Italian commercial orgs.
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 Evolution…

 Modern accounting was started with the invention

of a system of recording known as “Double
Entry Accounting System”, a complete
recording system
 This system was invented in 1494 in Italy by an
Italian Monk and mathematician named Luca
Pacioli.
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 Evolution…

Influential factors for the Development of

Accounting
 The Industrial Revolution;
 The formation of Corporate forms of organizations;
 The development of Public Accounting;
 The Government influence through tax regulation
and others.

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 The ACCOUNTING Profession/CAREER OPPORTUNITIES

Public Accounting Private Accounting

Careers in auditing, taxation, Careers in industry working in
and management consulting cost accounting, budgeting,
serving the general public. accounting information
systems, and taxation.

Government Forensic Accounting

Careers with the tax Uses accounting, auditing, and
authorities, law enforcement investigative skills to conduct
agencies, and corporate investigations into theft and
regulators. fraud.

1-19 LO 9 Explain the career opportunities in accounting.

 The Building Blocks of Accounting
Learning
Ethics in Financial Reporting Objective 3
Understand why
ethics is a
Standards of conduct by which one’s actions fundamental
are judged as right or wrong, honest or business
concept.
dishonest, fair or not fair, are ethics.
 Recent financial scandals include: Enron (USA),
Parmalat (ITA), Satyam Computer Services (IND),
AIG (USA), and others.
 Effective financial reporting depends on sound ethical
behavior.

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 Ethics in Financial Reporting

Illustration 1-4
Steps in analyzing ethics cases
and situations
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 Ethics Insight Dewey & LeBoeuf (USA)

I Felt the Pressure—Would You?

“I felt the pressure.” That’s what some of the employees of the now-
defunct law firm of Dewey & LeBoeuf LLP (USA) indicated when they
helped to overstate revenue and use accounting tricks to hide losses
and cover up cash shortages. These employees worked for the former
finance director and former chief financial officer (CFO) of the firm.
Here are some of their comments:
• “I was instructed by the CFO to create invoices, knowing they would
not be sent to clients. When I created these invoices, I knew that it
was inappropriate.”
• “I intentionally gave the auditors incorrect information in the course
of the audit.”

(continued)
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LO 3
 Ethics Insight Dewey & LeBoeuf (USA)

I Felt the Pressure—Would You?

What happened here is that a small group of lower-level employees
over a period of years carried out the instructions of their bosses. Their
bosses, however, seemed to have no concern as evidenced by
various e-mails with one another in which they referred to their
financial manipulations as accounting tricks, cooking the books, and
fake income.
Source: Ashby Jones, “Guilty Pleas of Dewey Staff Detail the Alleged Fraud,”
Wall Street Journal (March 28, 2014).

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 Accounting Standards
Learning
Objective 4
International Accounting Standards Explain accounting
standards and the
Board (IASB) http://www.iasb.org/ measurement
principles.
International Financial
Reporting Standards

Financial Accounting Standards Board

(FASB) http://www.fasb.org/

Generally Accepted Accounting Principles (GAAP)

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 Measurement Principles

HISTORICAL COST PRINCIPLE (or cost principle)

dictates that companies record assets at their cost.

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).

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 Global Insight The Korean Discount
If you think that accounting standards don’t matter, consider recent events in
South Korea. International investors expressed concerns that the financial
reports of some South Korean companies were inaccurate. Accounting
practices sometimes resulted in differences between stated revenues and
actual revenues. Because investors did not have complete faith in the
accuracy of the numbers, they were unwilling to pay as much for the shares of
these companies relative to shares of comparable companies in different
countries. This difference in share price was referred to as the “Korean
discount.” In response, Korean regulators decided to require companies to
comply with international accounting standards. This change was motivated by
a desire to “make the country’s businesses more transparent” in order to build
investor confidence and spur economic growth. Many other Asian countries,
including China, India, Japan, and Hong Kong, have also decided either to
adopt international standards or to create standards that are based on the
international standards.
Source: Evan Ramstad, “End to ’Korea Discount’?” Wall Street Journal (March 16,
2007).

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LO 4
 Assumptions
Learning
MONETARY UNIT ASSUMPTION Objective 5
Explain the
requires that companies include in the monetary unit
assumption and
accounting records only transaction data that the economic
entity assumption.
can be expressed in terms of money.

ECONOMIC ENTITY ASSUMPTION requires that

activities of the entity be kept separate and distinct from the
activities of its owner and all other economic entities.
 Proprietorship
Forms of Business
 Partnership
Ownership
 Corporation
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 Assumptions

Review Question
The historical cost principle states that:
a. assets should be initially recorded at cost and
adjusted when the fair value changes.
b. activities of an entity are to be kept separate and
distinct from its owner.
c. assets should be recorded at their cost.
d. only transaction data capable of being expressed in
terms of money be included in the accounting
records.
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 Accounting Across the Organization
Spinning the Career Wheel
One question that students frequently ask is, “How will the study of
accounting help me?” A working knowledge of accounting is desirable
for virtually every field of endeavor. Some examples of how accounting
is used in other careers include:
General management: Imagine running Volkswagen (DEU), Saudi
Telecom (SAU), a Subway (USA) franchise, or a Fuji (JPN) bike
shop. All general managers need to understand where the company’s
cash comes from and where it goes in order to make wise business
decisions.
Marketing: Marketing specialists at a company like Hyundai Motor
(KOR) develop strategies to help the sales force be successful. But
making a sale is meaningless unless it is profitable. Marketing people
must be sensitive to costs and benefits, which accounting helps them
quantify and understand.
(continued)
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LO 5
 Accounting Across the Organization
Spinning the Career Wheel
Finance: Do you want to be a banker for Société Générale (FRA) or
a financial analyst for ICBC (CHN)? These fields rely heavily on
accounting. In all of them, you will regularly examine and analyze
financial statements. In fact, it is difficult to get a good finance job
without two or three courses in accounting.
Real estate: Are you interested in being a real estate broker for
Sotheby’s International Realty (GBR)? Because a third party—the
bank—is almost always involved in financing a real estate transaction,
brokers must understand the numbers involved: Can the buyer afford
to make the payments to the bank? Does the cash flow from an
industrial property justify the purchase price? What are the tax benefits
of the purchase?

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 The Basic Accounting Equation
Learning
Basic Accounting Equation Objective 6
State the
accounting
 Provides the underlying framework for equation, and
define its
recording and summarizing economic components.
events.
 Assets must equal the sum of liabilities
and equity.

Assets = Liabilities + Equity

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 Basic Accounting Equation

Assets = Liabilities + Equity

Assets
 Resources a business owns.
 Provide future services or benefits.
 Cash, Inventory, Equipment, etc.

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 Basic Accounting Equation

Assets = Liabilities + Equity

Liabilities
 Claims against assets (debts and obligations).
 Creditors (party to whom money is owed).
 Accounts Payable, Notes Payable, Salaries and Wages
Payable, etc.

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 Basic Accounting Equation

Assets = Liabilities + Equity

Equity
 Ownership claim on total assets.
 Referred to as residual equity.
 Share Capital—Ordinary and Retained Earnings.

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 Equity Illustration 1-7
Increases and
decreases in equity

Investments by shareholders represent the total amount paid

in by shareholders for the ordinary shares they purchase.

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 Stockholders’ Equity Illustration 1-7
Increases and
decreases in equity

Revenues result from business activities entered into for the

purpose of earning income.
Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.

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 Stockholders’ Equity Illustration 1-7
Increases and
decreases in equity

Expenses are the cost of assets consumed or services used in

the process of earning revenue.
Common expenses are: salaries expense, rent expense, utilities
expense, property tax expense, etc.

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 Stockholders’ Equity Illustration 1-7
Increases and
decreases in equity

Dividends are the distribution of cash or other assets to

shareholders.
Dividends reduce retained earnings. However, dividends are not
expenses.

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 > DO IT!

Classify the following items as issuance of stock, dividends,

revenues, or expenses. Then indicate whether each item
increases or decreases stockholders’ equity.

Classification Effect on Equity

1. Rent Expense Expense Decrease

2. Service Revenue Revenue Increase

3. Dividends Dividends Decrease

4. Salaries and Wages
Expense Expense Decrease

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 The Basic Accounting Equation
Learning
Transactions are a business’s economic Objective 7
Analyze the
events recorded by accountants. effects of
business
transactions on
 May be external or internal. the accounting
equation.
 Not all activities represent transactions.
 Each transaction has a dual effect on the accounting
equation.

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 Transaction Analysis

Illustration: Are the following events recorded in the accounting

records?
Discuss product
Purchase
Event design with Pay rent
computer
potential customer

Criterion Is the financial position (assets, liabilities, or

stockholder’s equity) of the company changed?

Record/
Don’t Record
Illustration 1-8
Transaction-identification
process
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 Transaction Analysis

Illustration 1-9
Expanded accounting equation

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 Transaction Analysis
TRANSACTION 1. INVESTMENT BY STOCKHOLDERS Ray and
Barbara Neal decide to start a smartphone app development company that
they incorporate as Softbyte SA. On September 1, 2017, they invest
€15,000 cash in the business in exchange for €15,000 of ordinary
shares. The ordinary shares indicates the ownership interest that the
Neals have in Softbyte SA. This transaction results in an equal increase in
both assets and equity. Illustration 1-10

Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000

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 TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte
SA purchases computer equipment for €7,000 cash.
Illustration 1-10

Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte SA
purchases for €1,600 headsets and other accessories expected to last
several months. The supplier allows Softbyte to pay this bill in October.
Illustration 1-10 Assets = Liabilities + Equity
Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte SA
receives €1,200 cash from customers for app development services it has
performed. Illustration 1-10

Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte
SA receives a bill for €250 from the Programming News for advertising on
its website but postpones payment until a later date. Illustration 1-10

Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 6. SERVICES PROVIDED FOR CASH AND CREDIT.
Softbyte provides €3,500 of services. The company receives cash of
€1,500 from customers, and it bills the balance of €2,000 on account.
Illustration 1-10 Assets = Liabilities + Equity
Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 7. PAYMENT OF EXPENSES Softbyte SA pays the
following expenses in cash for September: office rent €600, salaries and
wages of employees €900, and utilities €200. Illustration 1-10

Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte SA
pays its €250 Programming News bill in cash. The company previously (in
Transaction 5) recorded the bill as an increase in Accounts Payable.
Illustration 1-10 Assets = Liabilities + Equity
Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte SA
receives €600 in cash from customers who had been billed for services
(in Transaction 6). Illustration 1-10

Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
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 TRANSACTION 10. DIVIDENDS The corporation pays a dividend of
€1,300 in cash to Ray and Barbara Neal, the shareholders of Softbyte SA.
Illustration 1-10
Assets = Liabilities + Equity
Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
€8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 + €4,700 - €1,950 - €1,300

1-52 €18,050 €18,050 LO 7

 Summary of Transactions

1. Each transaction must be analyzed in terms of its

effect on:
a. The three components of the basic accounting
equation.
b. Specific types (kinds) of items within each
component.
2. The two sides of the equation must always be equal.
3. The Share Capital—Ordinary and Retained Earnings
columns indicate the causes of each change in the
shareholders’ claim on assets.

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 > DO IT!

Transactions made by Virmari & Co. SA, a public accounting firm, for
the month of August are shown below. Prepare a tabular analysis
which shows the effects of these transactions on the expanded
accounting equation, similar to that shown in Illustration 1-10.

1. The company issued ordinary shares for €25,000 cash.

2. The company purchased €7,000 of office equipment on credit.

3. The company received €8,000 cash in exchange for services

performed.

4. The company paid €850 for this month’s rent.

5. The company paid a dividend of €1,000 in cash to shareholders.

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 > DO IT!

1. The company issued ordinary shares for €25,000 cash.

Assets = Liabilities + Equity

Trans- Accounts Share Retained Earnings
Cash + Equipment = + +
action Payable Capital Rev. – Exp. – Div.
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000

$18,050 $18,050
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 > DO IT!

2. The company purchased €7,000 of office equipment on credit.

Assets = Liabilities + Equity

Trans- Accounts Share Retained Earnings
Cash + Equipment = + +
action Payable Capital Rev. – Exp. – Div.
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000

$18,050 $18,050
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 > DO IT!

3. The company received €8,000 cash in exchange for services

performed.
Assets = Liabilities + Equity
Trans- Accounts Share Retained Earnings
Cash + Equipment = + +
action Payable Capital Rev. – Exp. – Div.
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000

$18,050 $18,050
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 > DO IT!

4. The company paid €850 for this month’s rent.

Assets = Liabilities + Equity

Trans- Accounts Share Retained Earnings
Cash + Equipment = + +
action Payable Capital Rev. – Exp. – Div.
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000

$18,050 $18,050
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 > DO IT!

5. The company paid a dividend of €1,000 in cash to shareholders.

Assets = Liabilities + Equity

Trans- Accounts Share Retained Earnings
Cash + Equipment = + +
action Payable Capital Rev. – Exp. – Div.
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

€31,150 + €7,000 = €7,000 + €25,000 + €8,000 - €850 - €1,000

€38,150 €38,150
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 The Basic Accounting Equation
Learning
Companies prepare five financial Objective 8
Understand
statements : the five
financial
statements and
Statement how they are
Retained prepared.
Income of
Earnings
Statement Financial
Statement
Position

Statement Comprehensive
of Cash Income
Flows Statement

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 Income Statement

 Reports the profitability of the company’s operations

over a specific period of time.
 Lists revenues first, followed by expenses.
 Shows net income (or net loss).
 Does not include investment and dividend
transactions between the shareholders and the
business.

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 Financial Statements

Review Question
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.

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 Retained Earnings Statement

 Reports the changes in retained earnings for a

specific period of time.
 The time period is the same as that covered by the
income statement.
 Information provided indicates the reasons why
retained earnings increased or decreased during the
period.

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 Statement of Financial Position

 Reports the assets, liabilities, and equity at a specific

date.
 Lists assets at the top, followed by liabilities and
equity.
 Total assets must equal total liabilities and equity.
 Is a snapshot of the company’s financial condition at
a specific moment in time (usually the month-end or
year-end).

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 Financial Statements

Review Question
The financial statement that reports assets, liabilities, and
equity is the:
a. income statement.
b. retained earnings statement.
c. statement of financial position.
d. statement of cash flows.

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 Accounting Across the Organization
A Wise End Vodafone (GBR)
Not every company uses December 31 as the accounting year-
end. Some companies whose year-ends differ from December 31
are Vodafone Group (GBR), March 31; Walt Disney Productions
(USA), September 30; and JJB Sports (GBR), the Sunday that
falls before, but closest to, January 31. Why do companies choose
the particular year-ends that they do? Many opt to end the
accounting year when inventory or operations are at a low.
Compiling accounting information requires much time and effort by
managers, so companies would rather do it when they aren’t as
busy operating the business. Also, inventory is easier and less
costly to count when it is low.

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 Statement of Cash Flows

 Information on the cash receipts and payments for a

specific period of time.
 Answers the following:
HELPFUL HINT
► Where did cash come from? Investing activities
pertain to investments
made by the company,
► What was cash used for?
not investments made
by the owners.
► What was the change in the
cash balance?

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 TRANSACTION 10. DIVIDENDS The corporation pays a dividend of
€1,300 in cash to Ray and Barbara Neal, the shareholders of Softbyte SA.
Illustration 1-10
Assets = Liabilities + Equity
Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies + Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
€8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 + €4,700 - €1,950 - €1,300

1-68 €18,050 €18,050 LO 7

 Illustration 1-10
Financial statements and
their interrelationships

Illustration 1-11
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Financial statements and their interrelationships
LO 8
1-70 LO 8
Illustration 1-11
 Balance sheet and
income statement
are needed to
prepare statement of
cash flows.

Illustration 1-11
Financial statements
and their
interrelationships

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LO 8
 Comprehensive Income Statement

 Other comprehensive income items are not part of

net income.
 Reported either by
► Combining with income statement, or
Illustration 1-13
► Separate statement. Comprehensive
income
statement

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 > DO IT!

Presented below is selected information related to Flanagan Group plc

at December 31, 2017. Flanagan reports financial information monthly.
Equipment £10,000 Utilities Expense £ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Dividends 5,000
(a) Determine the total assets of Flanagan at December 31, 2017.
(b) Determine the net income that Flanagan reported for December
2017.
(c) Determine the equity of Flanagan at December 31, 2017.

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 Information related to Flanagan Group plc at December 31, 2017.
Equipment £10,000 Utilities Expense £ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Dividends 5,000
(a) Determine the total assets of Flanagan at December 31, 2017.

Equipment £10,000
Cash 8,000
Accounts Receivable 9,000
Total assets £27,000

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 Information related to Flanagan Group plc at December 31, 2017.
Equipment £10,000 Utilities Expense £ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Dividends 5,000
(b) Determine the net income reported for December 2017.
Revenues
Service revenue £36,000
Expenses
Rent expense £11,000
Salaries and wages expense 7,000
Utilities expense 4,000
Total expenses 22,000
Net income £14,000
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 Information related to Flanagan Group plc at December 31, 2017.
Equipment £10,000 Utilities Expense £ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Dividends 5,000
(c) Determine the equity of Flanagan at December 31, 2017.

Total assets [as computed in (a)] £27,000

Less: Liabilities
Notes payable £16,500
Accounts payable 2,000 18,500
Equity £ 8,500

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