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All you got to do isListen, use Common Sense and Grab the
Concepts Step by Step
IdentifiesIdentifies
RecordsRecords
CommunicatesCommunicatesRelevantRelevant
ReliableReliable
ComparableComparable
AccountingAccounting
is a
system that
information
that is
to help users make better decisions.
to help users make better decisions.
Identifying Business Activities
Recording Business Activities
Communicating Business Activities
Accounting
FinancialAccounting
ManagementAccounting
External Users Internal Users
Reportingto
Reportingto
For reporting financial position and financial performance to external users.Balance Sheet, Income Statement, etc.
For planning, control and decision making by Internal Users.Monthly sales report, Production analysis report , Internal memos etc.
Shareholders
External auditor
Suppliers
Lenders
Labors unions
Governments & agencies
Board of Directors
Managers
External Users
Internal Users
Information Needs and Costs
Benefits
Costs
Information RequirementsInternal requirements by Management for better decision making, planning and controlExternal requirements by Regulatory authorities, International frameworks, Government agencies etc.
Administrative costsFees for Expert opinionsAdditional burden on employeesSurveys and Researchesetc
Type of Costs incurred
>Benefits drawn from information should be greater
than the cost incurred to produce that information.
Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Relevant Information
Relevant Information
Affects the decision of its users.
Affects the decision of its users.
Reliable InformationReliable Information Is trusted by users.
Is trusted by users.
Comparable Information
Comparable Information
Is helpful in contrasting organizations.
Is helpful in contrasting organizations.
Accounting Principles
Matching Principle
Company records the expenses it incurred to generate the revenue
reported.
Revenue Recognization Principle
Cost Principle
Full Disclosure PrincipleCompany reports the details behind
financial statements that would impact users decisions.
Accounting information is based on actual cost
•Cost is measured on a cash or equal to cash basis
1. Recognize revenue when it is earned.
2. Proceeds need not be in cash.3. Measure revenue by cash
received plus cash value of items received.
Accounting Assumptions
Monetary Unit assumption Express transactions and events in
monetary, or money, units.
Business Entity assumption A business is accounted for
separately from other business entities, including its owner.
Time period Assumption
Life of a company can be divided into time periods .
Now Future
Going-Concern PrincipleReflects assumption that the
business will continue operating instead of being closed or sold.
Types of businesses
Advantages:- Owner’s total control- Least regulated- Minimal accounting and reporting requirementsDisadvantages:- Limited Resources- Unlimited Liability- Management problems- Owner dies, Business dies
Advantages:- Larger resources- Risk sharing- Experience pool- Minimal accounting and reporting requirementsDisadvantages:- Unlimited liability- Limited resources- Conflicts & disputes- Existence uncertainty- Non-transferability
Advantages:- Can raise capital- Limited risk- Ownership transferability- Perpetual existence- Board experienceDisadvantages:- Registrations - Administrative and regulatory costs- Excessive accounting and reporting requirements- Organizational issues- Complex structure- Double Taxation
Sole Proprietorship
Partnership
Corporation
Owners of a corporation are called shareholders (or stockholders).
When a corporation issues only one class of stock, we call it common stock (or capital
stock).
Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes
Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes
**
Board of Directors
Share holder (s)
Managers
Business
appointhire
manage & run
audit
Financial Auditors
produce
External Users
distributed to
Financial Reports
1. Balance Sheet
2. Income Statement
3. Statement of Cash Flows
4. Statement of Stockholders’ Equity
A Balance Sheet is a quantitative summary of the financial position of a business at any point in time.
Income statement shows the performance of a company, how did the company made net income out of revenues.
Cash flow statement is concerned with the cash inflows and outflows of the company
This statement shows the changes in owners’ interest and application of retained earning between two accounting periods
Statement of Cash flows
The movement of money into or out of a business, is called
JeansCo
EmployeesCreditorsPurchase of assetsInvestmentsDividends
CustomersLoansShare issue
Cash Inflo
w
Cash Inflo
w
Cash Outflo
w
Cash Outflo
w
Overview: What is Cash flow
Statement of Cash flows
11
Overview: Types of Cash flows
Operational Cash flows: received or spent as a result of company’s business activities
Selling clothing
Purchasing merchandize Paying
salaries
Statement of Cash flows
22
Overview: Types of Cash flows
Investment Cash flows: spent or received through company’s investing activities
Loan repaymentsFixed assets
Investing inStocks & bonds
Statement of Cash flows
33
Overview: Types of Cash flows
Financing Cash flows: cash received through debt or paid out as debt repayments
Issuance of stocks
Repaying loans
Bank loan
Statement of Cash flows
Managers affect cash by three types of decisions:
1. Operating decisions
2. Financing decisions
3. Investing decisions
Typical Activities Affecting Cash
Statement of Cash flows
Typical Activities Affecting CashOperating activities are transactions that affect the purchase, processing, and selling of a company’s products and services
Making sales
Collecting accounts receivable
Purchasing inventory
Paying accounts payable
The first major section of the statement of cash flows is labeled cash flows from operating activities
Statement of Cash flows
Typical Activities Affecting CashFinancing decisions are concerned with how to obtain or repay cash
Financing activities are a company’s transactions that obtain resources from debt and equity transactions
Issuance of additional stock
Borrowing money from the bank
Repaying previous loans
The financing section on the statement is labeled cash flows from financing activities
Statement of Cash flows
Typical Activities Affecting CashInvesting decisions include the choices to acquire or dispose of long-term productive assets or long-term investments
Investing activities are transactions that acquire or dispose of assets that are expected to provide services for more than one year
- Purchasing or disposing of equipment
The investing section on the statement is labeled cash flows from investing activities
Statement of Cash flows
Typical Activities Affecting CashCash Inflows Cash Outflows
Operating Activities: Collections from customers Cash payments to suppliers Interest and dividends collected Cash payments to employees Other operating receipts Interest and taxes paid Other operating cash payments Investing Activities: Sale of property, plant, and equipment Purchase of property, plant, and equipment Sale of securities that are not Purchase of securities that are not cash equivalents cash equivalents Receipt of loan repayments Making loans Financing: Borrowing cash from creditors Repayment of amounts borrowed Issuing equity securities Repurchase of equity shares (including the Issuing debt securities purchase of treasury stock) Payment of dividends
Cash Inflows Cash Outflows Operating Activities: Collections from customers Cash payments to suppliers Interest and dividends collected Cash payments to employees Other operating receipts Interest and taxes paid Other operating cash payments Investing Activities: Sale of property, plant, and equipment Purchase of property, plant, and equipment Sale of securities that are not Purchase of securities that are not cash equivalents cash equivalents Receipt of loan repayments Making loans Financing: Borrowing cash from creditors Repayment of amounts borrowed Issuing equity securities Repurchase of equity shares (including the Issuing debt securities purchase of treasury stock) Payment of dividends
Balance SheetA Balance Sheet is a quantitative summary of the financial position of a business at any point in time. It summarizes the assets, liabilities and the shareholders’ equity of a company.Assets
Liabilities
Owner’s Equity
+=Assets
Liabilities
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity e.g, land & building, plant & machinery, fixtures, delivery vans etc.
A present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from enterprise of resources embodying economic benefits e.g., loan, bonds, creditors/account payables etc.Owners’ EquityThis is the amount by which a company is financed through common and preferred shares.This is residual claim of common stockholders in assets after all the liabilities are paid
LandLand
EquipmentEquipment
BuildingsBuildings
CashCash
VehiclesVehicles
Store Supplies
Store Supplies
Notes Receivable
Notes Receivable
Accounts Receivable
Accounts Receivable
Resources owned or controlled
by a company
Resources owned or controlled
by a company
Taxes Payable
Taxes Payable
Wages Payable
Wages Payable
Notes PayableNotes PayableAccounts Payable
Accounts Payable
Creditors’ claims on
assets
Creditors’ claims on
assets
Owner’sclaims
on assets
Owner’sclaims
on assets
RevenuesRevenues
Owner Investments
Owner Investments
Owner Withdrawals
Owner Withdrawals
ExpensesExpenses
LiabilitiesLiabilities EquityEquityAssetsAssets = +
RevenuesRevenues ExpensesExpensesOwner CapitalOwner Capital
Owner Withdrawals
Owner Withdrawals
_ + _
Let’s start a business!J. Scott, forms a consulting business, named
Fast forward and accessories
J.Scott owns and manage the business
The accounts involved are:(1) Cash (asset)(2) J. Scott, Capital (equity)
J. Scott, the owner, contributed $20,000 cash to start the business.
J. Scott, the owner, contributed $20,000 cash to start the business.
The accounts involved are:(1) Cash (asset)(2) Supplies (asset)
Purchased supplies paying $1,000 cash.
Purchased supplies paying $1,000 cash.
The accounts involved are:(1) Cash (asset) (2) Equipment (asset)
Purchased equipment for $15,000 cash.
Purchased equipment for $15,000 cash.
Transaction Analysis
The accounts involved are:(1) Supplies (asset)(2) Equipment (asset)(3) Accounts Payable (liability)
Purchased Supplies of $200 and Equipment of $1,000 on account.
Purchased Supplies of $200 and Equipment of $1,000 on account.
Transaction Analysis
The accounts involved are:(1) Cash (asset) (2) Notes payable (liability)
Borrowed $4,000 from 1st American Bank.
Borrowed $4,000 from 1st American Bank.
The balances so far appear below. Note that the Balance Sheet Equation is still in balance.
Now let’s look at transactions involving revenue, expenses and withdrawals.
Transaction Analysis
The accounts involved are:(1) Cash (asset) (2) Revenues (equity)
Rendered consulting services receiving $3,000 cash.
Rendered consulting services receiving $3,000 cash.
Transaction Analysis
The accounts involved are:(1) Cash (asset)(2) Salaries expense (equity)
Paid salaries of $800 to employees.
Remember that the balance in the salaries expense account actually increases.
But, equity actually decreases because expenses reduce equity.
Remember that expenses decrease equity.
Paid salaries of $800 to employees.
Transaction Analysis
The accounts involved are:(1) Cash (asset)(2) J. Scott, Withdrawals (equity)
J. Scott withdrew $500 from the business for personal use.
Remember that the balance in the J. Scott, Withdrawals account actually increases.
But, equity actually decreases because withdrawals reduce equity.
Remember that withdrawals decrease equity.
J. Scott withdrew $500 from the business for personal use.
Financial StatementsLet’s prepare the Financial Statements
reflecting the transactions we have recorded.
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
Net income is the difference between
Revenues and Expenses.
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.
The net income of $2,200 increases
Scott’s capital by $2,200.
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.
The Balance Sheet describes a company’s
financial position at a point in time.
The Balance Sheet describes a company’s
financial position at a point in time.
The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.
