CHAPTER 1

ACCOUNTING IN
ACTION

Mohammad Rakibul Islam Bhuiyan

Chapter
Lecturer, Dept. of MIS, BRUR
1-1
 Study Objectives

1. Explain what accounting is.

2. Identify the users and uses of accounting.
3. Understand why ethics is a fundamental business concept.
4. Explain generally accepted accounting principles and the
cost principle.
5. Explain the monetary unit assumption and the economic
entity assumption.
6. State the accounting equation, and define assets, liabilities,
and owner’s equity.
7. Analyze the effects of business transactions on the
accounting equation.
8. Understand the four financial statements and how they are
prepared.

Chapter
1-2
 Accounting in Action

The Building The Basic Using the

What is Basic Financial
Blocks of Accounting
Accounting? Accounting Statements
Accounting Equation Equation

• Three • Ethics in • Assets • Transaction • Income

activities financial • Liabilities analysis statement
• Who uses reporting • Summary of • Owner’s
• Owner’s
accounting • Generally equity transactions equity
data accepted statement
accounting • Balance
principles sheet
• Assumptions • Statement of
cash flows

Chapter
1-3
 What is Accounting?

The purpose of accounting is to:

(1) identify, record, and communicate the
economic events of an
(2) organization to
(3) interested users.

Chapter
1-4 LO 1 Explain what accounting is.
 What is Accounting?
Illustration 1-1
Three Activities Accounting process

The accounting process includes

the bookkeeping function.

Chapter
1-5 LO 1 Explain what accounting is.
 Who Uses Accounting Data?
Internal Users
Management IRS/NBR

Human Investors
Resources
There are two broad
groups of users of Labor
financial information: Unions
Finance
internal users and
external users. Creditors
Marketing
Customers SEC
External
Users
Chapter
1-6 LO 2 Identify the users and uses of accounting.
 Who Uses Accounting Data?
Common Questions Asked User
1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income? Investors
3. Do we need to borrow in the
near future? Management
4. Is cash sufficient to pay
dividends to the stockholders? Finance
5. What price for our product
will maximize net income? Marketing
6. Will the company be able to
pay its short-term debts? Creditors
Chapter
1-7 LO 2 Identify the users and uses of accounting.
 The Building Blocks of Accounting

Ethics In Financial Reporting

Standards of conduct by which one’s actions are
judged as right or wrong, honest or dishonest, fair or
not fair, are Ethics.
• Recent financial scandals include: Enron,
WorldCom, HealthSouth, AIG, and others.
• Congress passed Sarbanes-Oxley Act of 2002.
• Effective financial reporting depends on sound
ethical behavior.

Chapter
1-8 LO 3 Understand why ethics is a fundamental business concept.
 The Building Blocks of Accounting

Financial Statements
Various users • Balance Sheet
need financial • Income Statement
• Statement of Owner’s Equity
information • Statement of Cash Flows
• Note Disclosure

The accounting profession

has attempted to develop Generally Accepted
a set of standards that
Accounting
are generally accepted
and universally practiced.
Principles (GAAP)

Chapter
1-9 LO 4 Explain generally accepted accounting principles and the cost principle.
 The Building Blocks of Accounting

Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)

http://www.sec.gov/

Financial Accounting Standards Board (FASB)

http://www.fasb.org/

International Accounting Standards Board

(IASB)
http://www.iasb.org/

Chapter
1-10 LO 4 Explain generally accepted accounting principles and the cost principle.
 The Building Blocks of Accounting

Cost Principle (Historical) – dictates that companies

record assets at their cost.
• Reported at cost when purchased and also over the
time the asset is held.

Chapter
1-11 LO 4 Explain generally accepted accounting principles and the cost principle.
 Assumptions

Monetary Unit Assumption – include in the

accounting records only transaction data that 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.
• Partnership.
Forms of
Business Ownership
• Corporation.

Chapter LO 5 Explain the monetary unit assumption

1-12
and the economic entity assumption.
 Forms of Business Ownership

Proprietorship Partnership Corporation

• Generally owned • Owned by two or • Ownership

by one person. more persons. divided into
• Often small • Often retail and shares of stock
service-type service-type • Separate legal
businesses businesses entity organized
• Owner receives • Generally under state
any profits, unlimited corporation law
suffers any personal liability • Limited liability
losses, and is
• Partnership
personally liable
agreement
for all debts.
Chapter LO 5 Explain the monetary unit assumption
1-13
and the economic entity assumption.
 The Basic Accounting Equation

Assets Liabilities Owner’s

= +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership

claims.

Chapter LO 6 State the accounting equation, and define

1-14
assets, liabilities, and owner’s equity.
 The Basic Accounting Equation

Assets Liabilities Owner’s

= +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Assets
• Resources a business owns.
• Provide future services or benefits.
• Cash, Supplies, Equipment, etc.
Chapter LO 6 State the accounting equation, and define
1-15
assets, liabilities, and owner’s equity.
 The Basic Accounting Equation

Assets Liabilities Owner’s

= +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Liabilities
• Claims against assets (debts and obligations).
• Creditors - party to whom money is owed.
• Accounts payable, Notes payable, etc.
Chapter LO 6 State the accounting equation, and define
1-16
assets, liabilities, and owner’s equity.
 The Basic Accounting Equation

Assets Liabilities Owner’s

= +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Owner’s Equity
• Ownership claim on total assets.
• Referred to as residual equity.
• Capital, Drawings, etc. (Proprietorship or
Partnership).
Chapter LO 6 State the accounting equation, and define
1-17
assets, liabilities, and owner’s equity.
 Owners’ Equity
Illustration 1-6

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.
Chapter LO 6 State the accounting equation, and define
1-18
assets, liabilities, and owner’s equity.
 Owners’ Equity
Illustration 1-6

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, tax expense, etc.
Chapter LO 6 State the accounting equation, and define
1-19
assets, liabilities, and owner’s equity.
 Using The Basic Accounting Equation

Transactions are a business’s economic events

recorded by accountants.
• May be external or internal.
• Not all activities represent transactions.
• Each transaction has a dual effect on the
accounting equation.

Chapter LO 7 Analyze the effects of business transactions

1-20
on the accounting equation.
 Transactions (Question?)

Q1-15: Are the following events recorded in the

accounting records? Owner
Supplies are An employee withdraws
Event purchased is hired. cash for
on account. personal use.

Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?

Record/
Don’t Record

Chapter LO 7 Analyze the effects of business transactions

1-21
on the accounting equation.
 Transactions

Discussion Question
Q18. In February 2008, Paula King invested an
additional $10,000 in her business, King’s
Pharmacy, which is organized as a proprietorship.
King’s accountant, Lance Jones, recorded this
receipt as an increase in cash and revenues. Is
this treatment appropriate? Why or why not?

See notes page for discussion

Chapter LO 7 Analyze the effects of business transactions

1-22
on the accounting equation.
 Transactions (Problem)

P1-1A: Barone’s Repair Shop was started on May 1 by

Nancy. Prepare a tabular analysis of the following
transactions for the month of May.

1. Invested $10,000 cash to start the repair shop.

Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment

Chapter LO 7 Analyze the effects of business transactions

1-23
on the accounting equation.
 Transactions (Problem)
2. Purchased equipment for $5,000 cash.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000

Chapter LO 7 Analyze the effects of business transactions

1-24
on the accounting equation.
 Transactions (Problem)
3. Paid $400 cash for May office rent.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense

Chapter LO 7 Analyze the effects of business transactions

1-25
on the accounting equation.
 Transactions (Problem)
4. Received $5,100 from customers for repair service.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue

Chapter LO 7 Analyze the effects of business transactions

1-26
on the accounting equation.
 Transactions (Problem)
5. Withdrew $1,000 cash for personal use.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings

Chapter LO 7 Analyze the effects of business transactions

1-27
on the accounting equation.
 Transactions (Problem)
6. Paid part-time employee salaries of $2,000.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense

Chapter LO 7 Analyze the effects of business transactions

1-28
on the accounting equation.
 Transactions (Problem)
7. Incurred $250 of advertising costs, on account.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense

Chapter LO 7 Analyze the effects of business transactions

1-29
on the accounting equation.
 Transactions (Problem)
8. Provided $750 of repair services on account.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. +750 +750 Revenue

Chapter LO 7 Analyze the effects of business transactions

1-30
on the accounting equation.
 Transactions (Problem)
9. Collected $120 cash for services previously billed.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. +750 +750 Revenue
9. +120 -120
6,820 + 630 + 5,000 = 250
+ 12,200
Chapter LO 7 Analyze the effects of business transactions
1-31
on the accounting equation.
 Financial Statements

Companies prepare four financial statements from

the summarized accounting data:

Owner’s Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows

Chapter
1-32 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements

Income Statement

• Reports the revenues

and expenses for a
specific period of time.
• Net income – revenues
exceed expenses.
• Net loss – expenses
exceed revenues.

Chapter
1-33 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements
Owner’s Equity
Income Statement Statement

Net income is needed to determine the

ending balance in owner’s equity.
Chapter
1-34 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements
Owner’s Equity
Statement
• Statement indicates the
reasons why owner’s
equity has increased or
decreased during the
period.

Chapter
1-35 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements
Owners’ Equity
Balance Sheet Statement

The ending balance in owner’s equity is

needed in preparing the balance sheet
Chapter
1-36 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements

Balance Sheet
• Reports the assets,
liabilities, and owner’s
equity at a specific date.
• Assets listed at the top,
followed by liabilities and
owner’s equity.
• Total assets must equal
total liabilities and
owner’s equity.

Chapter
1-37 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements
Statement of Cash Flows
Balance Sheet

Chapter
1-38 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements

• Information for a
Statement of Cash Flows
specific period of time.
• Answers the following:
1. Where did cash come
from?
2. What was cash used
for?
3. What was the change
in the cash balance?

Chapter
1-39 LO 8 Understand the four financial statements and how they are prepared.
 Accounting Career Opportunities

Public Accounting
Careers in auditing and taxation serving the general public.

Private Accounting
Careers in industry working in cost accounting, budgeting,
accounting information systems, and taxation.

Opportunities in Government
Careers with the IRS, the FBI, the SEC, and in public
colleges and universities.

Forensic Accounting
Careers with insurance companies and law offices to conduct
investigations into theft and fraud.
Chapter
1-40 LO 9 Explain the career opportunities in accounting.