Accounting 102

Dr. Nancy Ibrahim Riad

Lecturer of Accounting

ACCT 102 Spring 2015 - 2016

Text Book
Jerry Weygandt, Paul Kimmel, and Donald Kieso,
Accounting Principles, International Student Edition,
11th Edition, 2013, John Wiley & Sons.

ACCT 102 Spring 2015 - 2016

Assessment:
Assignments (2 x 10 marks)
Quizzes (2 x 10 marks)
Mid term exam
Final exam
Total

ACCT 102 Spring 2015 - 2016

20 %
20%
20%
40 %
100 %

Course Outline:
Chapter 1: Accounting in action
Chapter 2: The recording process
Chapter 3: Adjusting the accounts
Chapter 4: Completing the accounting cycle
Chapter 5: Financial Statement Analysis
ACCT 102 Spring 2015 - 2016

Chapter 1: Accounting in action

1.

What is Accounting?

2.

The building blocks of accounting

3.

The basic accounting equation

4.

Using the accounting equation

5.

Financial statements
ACCT 102 Spring 2015 - 2016

1. What is Accounting?

Accounting

Identifies

Records

Communicates

Economic events of
an organisation
External

Interested
users
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Internal

1. What is Accounting?

Accounting is the information system that identifies, records,

and communicates the economic events of an organization to
interested users.
Accounting consists of three basic activities:
1. To identify economic events, a company selects the economic events
relevant to its business (ex. sales, purchases, paying cash, buying an
equipment, paying salaries to employees, etc).

ACCT 102 Spring 2015 - 2016

1. What is Accounting?
2. Once a company identifies economic events, it records those events in
order to provide a history of its financial activities.
3. Finally, a company communicates the collected information to
interested users by means of accounting reports. The most common of
these reports are called financial statements.

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1. What is Accounting?

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Who Uses Accounting Data

The information that a user of financial information needs depends upon
the kinds of decisions the user makes.

There are two broad groups of users of financial information: internal users
and external users.

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Who Uses Accounting Data

Users of financial information

Internal users are

those
individuals inside a
company
who plan, organize, and
run the business
For ex. management,
production managers,
finance directors,
marketing managers, etc.
(Managerial accounting)

External users are

individuals and
organizations
outside a company
who want financial
information about the
company. For ex. investors,
creditors, shareholders,
customers, banks, tax
authorities,
government, etc.
(Financial accounting)

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2.
2.The
The Building
Building Blocks
Blocks of
ofAccounting
Accounting
Financial Statements

Various users
need financial
information

Balance Sheet
Income Statement
Statement of Owners Equity
Statement of Cash Flows

The accounting
profession has attempted
to develop a set of
standards that are
generally accepted and
universally practiced.

Generally Accepted
Accounting
Principles (GAAP)

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2.
2.The
The Building
Building Blocks
Blocks of
ofAccounting
Accounting

Cost Principle (Historical) dictates that companies

record assets at their cost.

Asset is reported at cost when purchased and also

over the time it is held.
Cost easily verified, whereas market value is often
subjective.

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Assumptions
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 from the activities of
its owner and all other economic entities.
Proprietorship.
Partnership.

Forms of
Business Ownership

Corporation.
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Forms
Forms of
of Business
Business Ownership
Ownership

Proprietorship

Partnership

Generally owned by
one person.

Owned by two or
more persons.

Often small
service-type
businesses

Often retail and

service-type
businesses

Owner receives
any profits,
suffers any losses,
and is personally
liable for all debts.

Unlimited personal
liability
Partnership
agreement
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Corporation
Ownership divided
into shares of
stock
Separate legal
entity organized
under state
corporation law
Limited liability
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3.
3.The
The Basic
BasicAccounting
Accounting Equation
Equation
Assets

Liabilities

Owners
Equity

The accounting equation provides a framework for recording and

summarizing economic events.
The accounting equation applies to all economic entities regardless of size, nature of
business, or form of business organization.

The two basic elements of a business are what it owns

(assets) and what it owes (liabilities).
Assets must equal the sum of liabilities and owners equity
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The
The Basic
BasicAccounting
Accounting Equation
Equation
Assets

Liabilities

Owners
Equity

Assets
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, buildings, land, cars, furniture,
etc.
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The
The Basic
BasicAccounting
Accounting Equation
Equation
Assets

Liabilities

Owners
Equity

Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, notes payable, salaries payable, interest
payable, etc.
(Businesses of all sizes usually borrow money and purchase goods on
credit).
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The
The Basic
BasicAccounting
Accounting Equation
Equation
Assets

Liabilities

Owners
Equity

Owners Equity
Ownership claim on total assets.
Capital, Drawings, etc.
The assets of a business are claimed by either creditors or owners.
To find out what belongs to owners, we subtract the liabilities from assets. The
remainder is the owners claim on the assetsthe owners equity.

(Owners equity is equal to total assets minus total liabilities)

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Owners
OwnersEquity
Equity

Note:
Owners investments and revenues increase owners equity.
Owners drawings and expenses decrease owners equity.

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Owners
OwnersEquity
Equity

Revenues result from business activities entered into for the purpose
of earning income.
Common sources of revenue are: sales, fees, services, commissions,
interest, and rent.

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Owners
OwnersEquity
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, tax expense, etc.

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4.
4. Using
UsingThe
The Basic
BasicAccounting
Accounting Equation
Equation

Transactions are a businesss economic events

recorded by accountants.

May be external (between company and

outsiders) or internal (within the company).
Each transaction has a dual effect on the
accounting equation.

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Transactions
Transactions (Question?)
(Question?)
Q: Are the following events recorded in the accounting records?

An employee
is hired.

Owner
withdraws
cash for
personal use.

Event

Supplies are
purchased
on account.

Criterion

Is the financial position (assets, liabilities, or

owners equity) of the company changed?

Record/
Dont Record
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Transactions
TransactionsAnalysis
Analysis

Transaction (1). Investment By Owner.

Neal decides to open a computer programming service which
he names Microsoft. On September 1, 2014, he invests
$15,000 cash in the business. The effect of this transaction
on the basic equation is:

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Transactions
TransactionsAnalysis
Analysis

Transaction (2). Purchase of Equipment for Cash.

Microsoft purchases computer equipment for $7,000 cash.

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Transactions
TransactionsAnalysis
Analysis

Transaction (3). Purchase of Supplies on Credit. Microsoft

purchases from ABC Supply Company for $1,600 office supplies expected
to last several months. ABC agrees to allow Microsoft to pay this bill in
October. This transaction is a purchase on account (a credit purchase).

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Transactions
TransactionsAnalysis
Analysis

Transaction (4). Services Provided for Cash.

Microsoft receives $1,200 cash from customers for programming
services it has provided.

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Transactions
TransactionsAnalysis
Analysis

Transaction (5). Purchase of Advertising on Credit.

Microsoft receives a bill for $250 from the Daily News for
advertising but postpones payment until a later date.

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Transactions
TransactionsAnalysis
Analysis

Transaction (6). Services Provided for Cash and Credit.

Microsoft provides $3,500 of programming services for
customers. The company receives cash of $1,500 from
customers, and it bills the balance of $2,000 on account.

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Transactions
TransactionsAnalysis
Analysis

Transaction (7). Payment of Expenses. Microsoft pays the

following Expenses in cash for September: rent $600,
salaries of employees $900, and utilities $200.

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Transactions
TransactionsAnalysis
Analysis

Transaction (8). Payment of Accounts Payable.

Microsoft pays its $250 Daily News bill in cash.

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Transactions
TransactionsAnalysis
Analysis

Transaction (9). Receipt of Cash on Account.

Microsoft receives $600 in cash from customers who had
been billed for services in Transaction no. 6.

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Transactions
TransactionsAnalysis
Analysis

Transaction (10). Withdrawal of Cash by Owner.

Neal withdraws $1,300 in cash from the business for his
personal use.

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Transactions
TransactionsAnalysis
Analysis
Summary of Transactions

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Financial
Financial Statements
Statements
Companies
Companies prepare
prepare four
four financial
financial statements
statements from
from
the
the summarized
summarized accounting
accounting data:
data:

Income
Statement

Owners
Equity
Statement

Balance
Sheet

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Statement
of Cash
Flows

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Financial
Financial Statements
Statements

Income Statement

Reports the revenues and expenses for a specific period of time.

Net income (revenues exceed expense).
Net loss (expenses exceed revenues).
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Net income is needed to determine the

ending balance in owners equity.

Financial
Financial Statements
Statements

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Financial
Financial Statements
Statements

Owners Equity Statement

Statement indicates the reasons

why owners equity has increased or
decreased during the period.
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Financial
Financial
Statements
Statements

The ending
balance in
owners equity
is needed in
preparing the
balance sheet

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Financial
Financial Statements
Statements

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Balance Sheet

41

Financial
Financial
Statements
Statements

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Exercise 1:
Selected transactions for Saif Health Care Company are listed below.
1. Made cash investment to start business.
2. Paid monthly rent.
3. Purchased equipment on account.
4. Billed customers for services performed.
5. Withdrew cash for owners personal use.
6. Received cash from customers billed in (4).
7. Incurred advertising expense on account.
8. Purchased additional equipment for cash.
9. Received cash from customers when service was performed.
Required:
Describe the effect of each transaction on assets, liabilities, and owners equity.

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Exercise 2:
Salems Hospital was started on May 1 by Salem. A summary of May transactions
is presented below.
1. Invested $10,000 cash to start the hospital.
2. Purchased medical equipment for $5,000 cash.
3. Paid $400 cash for May rent.
4. Paid $500 cash for supplies.
5. Incurred $250 of advertising expenses in the Daily News on account.
6. Received $5,100 in cash from patients for medical services.
7. Withdrew $1,000 cash for personal use.
8. Paid part-time employee salaries $2,000.
9. Paid utility bills $140.
10. Provided medical service on account to patients $750.
11. Collected cash of $120 for medical services billed in transaction (10).
Required: a. Show the effect of each transaction on the accounting equation.
b. Prepare the financial statements of Salem Hospital at May 31.
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Exercise 3
Ahmad started a programming office operating as a sole proprietorship. The
following transactions took place during January 2015:
Jan 1, Ahmad invests $52,500 in cash in starting the business.
Jan 3, purchased $600 of office supplies on credit.
Jan 5, purchased equipment for $12,000, paying $3,000 in cash and the remainder
on credit.
Jan 8, services billed to customers amount to $6,000.
Jan 12, paid $1,050 in cash for the current month's rent.
Jan 18, paid $300 cash on account for office supplies purchased in Jan 3.
Jan 21, received a bill for $900 for advertising for the current month.
Jan 27, paid $3,300 cash for salaries.
Jan 30, Ahmad withdrew $1,800 from the business for personal use.
Jan 31, received $4,500 cash from a customers in payment for services billed in Jan
8.
Required: Show the effect of the above transactions on the accounting equation.
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Choose the best answer for the following questions:

1. Owner's equity can be expressed as:
a. Assets = Liabilities.
b. Liabilities + Assets.
c. Residual equity + Assets.
d. Assets Liabilities.

2. The basic accounting equation cannot be restated as

a. Assets Liabilities = Owner's Equity.
b. Assets Owner's Equity = Liabilities.
c. Owner's Equity + Liabilities = Assets.
d. Assets + Liabilities = Owner's Equity.
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Choose the best answer for the following questions:

3. If total liabilities increased by $15,000 and owners equity increased by $5,000
during a period of time, then total assets must change by what amount and
direction during that same period?
a. $20,000 decrease
b. $20,000 increase
c. $25,000 increase
d. $30,000 increase

4. If total liabilities decreased by $15,000 and owners equity increased by

$5,000 during a period of time, then total assets must change by what
amount and direction during that same period?
a. $20,000 increase
b. $10,000 decrease
c. $10,000 increase
d. $15,000 decrease

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Choose the best answer for the following questions:

5. As of June 30, 2009, Dallas Company has assets of $100,000 and owners
equity of $5,000. What are the liabilities for Dallas Company as of June 30,
2009?
a. $85,000
b. $90,000
c. $95,000
d. $100,000

6. Sairas Service Shop started the year with total assets of $100,000 and total
liabilities of $80,000. During the year, the business recorded $210,000 in
revenues, $110,000 in expenses, and owner drawings of $20,000.
Owners equity at the end of the year was
a. $120,000.
b. $100,000.
c. $80,000.
d. $90,000.

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Fill in the spaces:

1. Assets = -------------------------- +
------------------------------------.
2. Liabilities = --------------------- -------------------------------------.
3. Owners equity = ----------------------------------- -----------------------------------.
4. Net income = ------------------------------ ------------------------------.
5. Ending capital = beginning capital +
---------------------- - -----------------------.

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State whether the following statements are true or false and

correct the wrong statements:
1. A partnership must have more than one owner.
2. The basic accounting equation states that Assets =
Liabilities.
3. The purchase of office equipment on credit increases
total assets and total liabilities.

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