ACCT 102 -Chapter 1 Spring 2015-2016

8/17/2019 ACCT 102 -Chapter 1 Spring 2015-2016

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Accounting 102

Dr. Nancy Ibrahim Riad

Lecturer of Accounting

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Text Book

Jerry Weygandt, Paul Kimmel, and Donald Kieso,

Accounting Principles, International Student Edition,

t! Edition, "#$, Jo!n Wiley % Sons&

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Assessment'

Assignments (" x # marks) "# *

+uies (" x # marks) "#*

-id term exam "#*

.inal exam /# *

Total ## *

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0ourse 1utline'

0!apter ' Accounting in action

0!apter "' T!e recording process

0!apter $' Ad2usting t!e accounts

0!apter /' 0ompleting t!e accounting cycle

0!apter 3'

.inancial Statement Analysis

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0!apter ' Accounting in action

& W!at is Accounting4

"& T!e 5uilding 5locks o6 accounting

$& T!e 5asic accounting e7uation

/& 8sing t!e accounting e7uation

3& .inancial statements

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Accounting

Identi6ies 9ecords 0ommunicates

Economic e:ents o6

an organisation

Interested

usersExternal Internal

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Accounting is t!e in6ormation system t!at identi6ies, records,

and communicates t!e economic e:ents o6 an organiation to

interested users&

Accounting consists o6 t!ree 5asic acti:ities'

& To identi6y economic e:ents, a company selects t!e economic e:ents

rele:ant to its 5usiness (ex& sales, purc!ases, paying cas!, 5uying an

e7uipment, paying salaries to employees, etc)&

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"& 1nce a company identi6ies economic e:ents, it records t!ose e:ents in

order to pro:ide a !istory o6 its 6inancial acti:ities&

$& .inally, a company communicates t!e collected in6ormation to

interested users 5y means o6 accounting reports& T!e most common o6

t!ese reports are called 6inancial statements&

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W!o 8ses Accounting Data

T!e in6ormation t!at a user o6 6inancial in6ormation needs depends upon

t!e kinds o6 decisions t!e user makes&

T!ere are t;o 5road groups o6 users o6 6inancial in6ormation' internal users

and external users&

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W!o 8ses Accounting Data

8sers o6 6inancial in6ormation

Internal users arethose

individuals inside a

company

who plan, organize, and

run the business

For ex. management,

production managers,

finance directors,

marketing managers, etc.

(-anagerial accounting)

External users areindividuals and

organizations

outside a company

who want financial

information about the

company. For ex. investors,

creditors, shareholders,customers, banks, tax

authorities,

government, etc.

(.inancial accounting)

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Various usersneed financialinformation

Various usersneed financialinformation

The accountingprofession has attempted

to develop a set ofstandards that are

generally accepted anduniversally practiced.

Financial StatementsBalance SheetIncome StatementStatement of Owner’s EquityStatement of Cash lows

Financial StatementsBalance SheetIncome StatementStatement of Owner’s EquityStatement of Cash lows

!enerally "ccepted!enerally "ccepted"ccounting"ccounting

#rinciples $!""#%#rinciples $!""#%

!enerally "ccepted!enerally "ccepted"ccounting"ccounting

#rinciples $!""#%#rinciples $!""#%

"& T!e Building Blocks o6 Accounting"& T!e Building Blocks o6 Accounting"& T!e Building Blocks o6 Accounting"& T!e Building Blocks o6 Accounting

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Cost #rinciple $&istorical% – dictates that companiesrecord assets at their cost.

Asset is reported at cost when purchased and alsoover the time it is held.

Cost easily verified, whereas market value is oftensubjective.

"& T!e Building Blocks o6 Accounting"& T!e Building Blocks o6 Accounting"& T!e Building Blocks o6 Accounting"& T!e Building Blocks o6 Accounting

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'onetary (nit "ssumption – include in the accountinrecords only transaction data that can be e!pressed interms of money.

Economic Entity "ssumption – re"uires that activitiesof the entity be kept separate from the activities ofits owner and all other economic entities.

#roprietorship.#artnership.

Corporation.

AssumptionsAssumptionsAssumptionsAssumptions

orms ofBusiness Ownership

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#roprietorship #artnership Corporation

$wned by$wned by two ortwo or

moremore persons.persons.

$ften$ften retail andretail andservice%typeservice%type businessesbusinesses

&nlimited personal&nlimited personalliabilityliability

#artnership#artnershipareementareement

$wnership divided$wnership dividedintointo sharesshares ofofstockstock

Separate lealSeparate leal

entity orani'edentity orani'edunder stateunder statecorporation lawcorporation law

(imited liability(imited liability

.orms o6 Business 1;ners!ip.orms o6 Business 1;ners!ip.orms o6 Business 1;ners!ip.orms o6 Business 1;ners!ip

)enerally owned by)enerally owned by

oneone person.person.

$ften$ften smallsmallservice%typeservice%type businessesbusinesses

$wner receives$wner receivesany profits,any profits,suffers any losses,suffers any losses,and is personallyand is personallyliable for all debts.liable for all debts.

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"ssets"ssets"ssets"ssets )ia*ilities)ia*ilities)ia*ilities)ia*ilities Owner’sOwner’s

EquityEquityOwner’sOwner’s

EquityEquity= +

The accounting equation provides a framewor+ for recording andsummari,ing economic events.

T!e accounting e7uation applies to all economic entities regardless o6 sie, nature o6

5usiness, or 6orm o6 5usiness organiation&

$& T!e Basic Accounting E7uation$& T!e Basic Accounting E7uation$& T!e Basic Accounting E7uation$& T!e Basic Accounting E7uation

T!e t;o 5asic elements o6 a 5usiness are ;!at it o;ns

(assets) and ;!at it o;es (lia5ilities)&

Assets must e7ual t!e sum o6 lia5ilities and o;ner


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EquityEquity= +

T!e Basic Accounting E7uationT!e Basic Accounting E7uationT!e Basic Accounting E7uationT!e Basic Accounting E7uation

*esources a business owns.#rovide future services or benefits.

Cash, Supplies, +"uipment, buildins, land, cars, furniture,etc.

"ssets"ssets"ssets"ssets

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EquityEquity= +


Claims aainst assets debts and obliations-.

Creditors % party to whom money is owed.

Accounts payable, notes payable, salaries payable, interestpayable, etc.

(Businesses o6 all sies usually 5orro; money and purc!ase goods on

credit)&

)ia*ilities)ia*ilities)ia*ilities)ia*ilities

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EquityEquity= +


$wnership claim on total assets.

Capital, rawins, etc.

T!e assets o6 a 5usiness are claimed 5y eit!er creditors or o;ners&To 6ind out ;!at 5elongs to o;ners, ;e su5tract t!e lia5ilities 6rom assets& T!e

remainder is t!e o;ner


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1;ners< E7uity1;ners< E7uity1;ners< E7uity1;ners< E7uity

>ote'

1;ner


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-evenues result from business activities entered into for the purposeof earnin income.

Common sources of revenue are/ sales, fees, services, commissions,interest, and rent.

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Epenses are the cost of assets consumed or services used in theprocess of earnin revenue.

Common e!penses are/ salaries e!pense, rent e!pense, utilitiese!pense, ta! e!pense, etc.

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/& 8sing T!e Basic Accounting/& 8sing T!e Basic Accounting E7uationE7uation/& 8sing T!e Basic Accounting/& 8sing T!e Basic Accounting E7uationE7uation

Transactions are a business0s economic eventsrecorded by accountants.

1ay be e!ternal between company and

outsiders- or internal within the company-.

+ach transaction has a dual effect on theaccountin e"uation.

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+'+' Are t!e 6ollo;ing e:ents recorded in t!e accounting records4

EventSupplies arepurchased

on account.

Criterion 2s the financial position assets, liabilities, orowner0s e"uity- of the company chaned3

An employeeis hired.

$wnerwithdrawscash for

personal use.

-ecord/0on’t -ecord

Transactions (+uestion4)Transactions (+uestion4)Transactions (+uestion4)Transactions (+uestion4)

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Transaction $1%. Investment By Owner.Transaction $1%. Investment By Owner.

4eal decides to open a computer prorammin service which

he names 1icrosoft. $n September 5, 6758, he invests95:,777 cash in the business. ;he effect of this transactionon the basic e"uation is/

Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis

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Transaction $2%. #urchase of Equipment for Cash.Transaction $2%. #urchase of Equipment for Cash. 1icrosoft purchases computer e"uipment for 9


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Transaction $3%. #urchase of Supplies on Credit.Transaction $3%. #urchase of Supplies on Credit. 1icrosoft purchases from A=C Supply Company for 95,>77 office supplies e!pectedto last several months. A=C arees to allow 1icrosoft to pay this bill in

$ctober. ;his transaction is a purchase on account a credit purchase-.

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Transaction $4%. Services #rovided for CashTransaction $4%. Services #rovided for Cash..

1icrosoft receives 95,677 cash from customers for prorammin

services it has provided.

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Transaction $5%. #urchase of "dvertising on Credit.Transaction $5%. #urchase of "dvertising on Credit. 1icrosoft receives a bill for 96:7 from the aily 4ews foradvertisin but postpones payment until a later date.

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Transaction $6%. Services #rovided for Cash and Credit.Transaction $6%. Services #rovided for Cash and Credit. 1icrosoft provides 9?,:77 of prorammin services for

customers. ;he company receives cash of 95,:77 fromcustomers, and it bills the balance of 96,777 on account.

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Transaction $7%. #ayment of Epenses.Transaction $7%. #ayment of Epenses. 1icrosoft pays thefollowin +!penses in cash for September/ rent 9>77,

salaries of employees 9@77, and utilities 9677.

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Transaction $8%. #ayment of "ccounts #aya*le.Transaction $8%. #ayment of "ccounts #aya*le.

1icrosoft pays its 96:7 aily 4ews bill in cash.

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Transaction $9%. -eceipt of Cash on "ccount.Transaction $9%. -eceipt of Cash on "ccount.

1icrosoft receives 9>77 in cash from customers who had

been billed for services in ;ransaction no. >.

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Transaction $1:%. ;ithdrawal of Cash *y Owner.Transaction $1:%. ;ithdrawal of Cash *y Owner.

4eal withdraws 95,?77 in cash from the business for hispersonal use.

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Summary of TransactionsSummary of Transactions

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Companies prepare four financial statements fromthe summari'ed accountin data/Companies prepare four financial statements fromthe summari'ed accountin data/

=alanceSheet

2ncomeStatement

Statementof CashFlows

$wner0s+"uity

Statement

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements Income Statement

*eports the revenues and e!penses for a specific period of time.4et income revenues e!ceed e!pense-.4et loss e!penses e!ceed revenues-.

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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements4et income is needed to determine the

endin balance in owner0s e"uity.

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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

Statement indicates the reasonswhy owner0s e"uity has increased ordecreased durin the period.

Owner’s Equity Statement

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FinancialFinancial

StatementsStatements

FinancialFinancial


;he endinbalance inowner0s e"uityis needed inpreparin thebalance sheet

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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements Balance Sheet

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FinancialFinancial


FinancialFinancial


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Exercise '

Selected transactions 6or Sai6 ?ealt! 0are 0ompany are listed 5elo;&

& -ade cas! in:estment to start 5usiness&

"& Paid mont!ly rent&

$& Purc!ased e7uipment on account&

/& Billed customers 6or ser:ices per6ormed&

3& Wit!dre; cas! 6or o;ner


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Exercise "'

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Exercise $

A!mad started a programming o66ice operating as a sole proprietors!ip& T!e

6ollo;ing transactions took place during January "#3'

Jan , A!mad in:ests 3",3## in cas! in starting t!e 5usiness&

Jan $, purc!ased @## o6 o66ice supplies on credit&

Jan 3, purc!ased e7uipment 6or ",###, paying $,### in cas! and t!e remainder

on credit&Jan , ser:ices 5illed to customers amount to @,###&

Jan ", paid ,#3# in cas! 6or t!e current mont!Fs rent&

Jan , paid $## cas! on account 6or o66ice supplies purc!ased in Jan $&

Jan ", recei:ed a 5ill 6or C## 6or ad:ertising 6or t!e current mont!&

Jan ", paid $,$## cas! 6or salaries&

Jan $#, A!mad ;it!dre; ,## 6rom t!e 5usiness 6or personal use&Jan $, recei:ed /,3## cas! 6rom a customers in payment 6or ser:ices 5illed in Jan

&

9e7uired' S!o; t!e e66ect o6 t!e a5o:e transactions on t!e accounting e7uation&

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0!oose t!e 5est ans;er 6or t!e 6ollo;ing 7uestions'

& 1;nerFs e7uity can 5e expressed as'

a. Assets = iabilities.

b. iabilities ! Assets.

c. "esidual e#uity ! Assets.

d. Assets $ iabilities.

"& T!e 5asic accounting e7uation cannot 5e restated as

a. Assets $ iabilities = %wner&s '#uity.

b. Assets $ %wner&s '#uity = iabilities.

c. %wner&s '#uity ! iabilities = Assets.

d. Assets ! iabilities = %wner&s '#uity.

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$& I6 total lia5ilities increased 5y 3,### and o;ner


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3& As o6 June $#, "##C, Dallas 0ompany !as assets o6 ##,### and o;ner


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.ill in t!e spaces'

1. Assets -------------------------- !------------------------------------.

2. "ia#ilities --------------------- --------------------------------------.

3. $%ner&s e'(it) ----------------------------------- ------------------------------------.

4. *et inc+me ------------------------------ -------------------------------.

5. ,ning capital #eginning capital !

---------------------- - -----------------------.

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State whether the following statements are true or false and

correct the wrong statements0

-. A partnership must have more than one owner.

). 1he basic accounting e#uation states that Assets =

iabilities.

. 1he purchase of office e#uipment on credit increasestotal assets and total liabilities.

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ACCT 102 -Chapter 1 Spring 2015-2016