ACCT6172 - Introduction to

Accounting
Week 1 – Accounting in Action
 Learning Outcome
Explain the concepts, accounting principles as
a basis in the preparation of financial
statements, and all stages in the accounting
cycle (LO1).
 Outline Materi
• What is Accounting?
• The Building Blocks of Accounting
• The Basic Accounting Equation
• Using the Accounting Equation
• Financial Statements
WHAT IS ACCOUNTING?
 What is Accounting?

Accounting is an information system that identifies, records,

and communicates the economic events of an organization to
interested users.
 Three Activities
Accounting consists of three basic activities:

Identification

Recording

Communication

The accounting process includes the

bookkeeping function
Who Uses Accounting Data?
Internal External
Users Users
Finance Investors

Management Creditors

Tax
Marketing Authorities

Human
Labor Unions
Resources

Customers
THE BUILDING BLOCKS OF
ACCOUNTING
 Ethics in Financial Reporting

The standards of conduct by which one’s action are judged as

right or wrong, honest or 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.
 Ethics in Financial Reporting

Steps in analyzing ethics cases and situations

Source : Weygandt,Kimmel,Kieso, (2013), Financial Accounting IFRS

Edition, 2nd edition, John Wiley and Sons Inc., New Jersey, Page 8
 Accounting Standards

International Accounting Standards Board (IASB)

International Financial Reporting Standards (IFRS)

Financial Accounting Standards Board (FASB)

Generally Accepted Accounting Principles (GAAP)

 Measurement Principles

Measurement
Principles

Cost Principle Fair Value

(Historical) Principle
 Measurement Principles
• Cost Principle
dictates that companies record assets at their cost.

Issues:

1. Reported at cost when purchased and also over the

time the asset is held.

2. Cost easily verified, market value is often subjective.

3. Fair value information may be more useful.

 Measurement Principles

• Fair Value Principle

The 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).

 In determining which measurement principle to use,

companies weight the factual nature of cost figures versus
the relevance of fair value.

 Only in situations where assets are actively traded, such as

investment securities, is the fair value principle applied.
 Assumptions

Assumptions

Monetary Unit Economic Entity

Assumption Assumption
 Assumptions
Monetary Unit Assumption
The monetary unit assumption requires that companies
include in the accounting records only transaction data that
can be expressed in money terms.

Economic Entity Accumption

requires that activities of the entity be kept separate and
distinct from the activities of its owner and all other
economic entities.
 Assumptions
• Forms of Business Ownership:
– Proprietorship
– Partnership
– Corporation
THE BASIC ACCOUNTING EQUATION
 The Basic Accounting Equation

ASSETS LIABILITIES EQUITY

Asset must equal the sum of liabilities and equity.

The Equation provides the underlying framework for

recording and summarizing economic events.

Applies to all economic entities regardless of size.

 The Basic Accounting Equation

ASSETS LIABILITIES EQUITY

Assets are resources a business owns.

 The business uses its assets in carrying such activities as
production and sales.
 The capacity to provide future services or benefits
 Ex: Cash, Accounts Receivable, Inventory, Equipment, etc
 The Basic Accounting Equation

ASSETS LIABILITIES EQUITY

Liabilities are claims against assets (debts and obligations.

 The business uses its assets in carrying such activities as
production and sales.
 Creditors – party to whom money is owed.
 Ex: Accounts Payable, Notes Payables, etc
 The Basic Accounting Equation

ASSETS LIABILITIES EQUITY

Equity is the ownership claim on total assets.

 Referred to as residual equity – that is, the equity
left over” after creditors’ claims are satisfied.
 Equity generally consists of: Share Capital – ordinary and
Retained Earnings.
 Retained Earnings
Retained earnings is determined by three items: revenues,
expenses, and dividends.

Revenues are the gross increases in equity resulting from business

activities entered into for the purpose of earning income.

Expenses are the cost of assets consumed or services used in the

process of earning revenue. They are decreases in equity that result
from operating the business.

Dividends are the distribution of cash or other assets to

shareholders. Dividend reduce retained earnings.
Dividends are not an expense.
USING THE ACCOUNTING
EQUATION
 Transactions
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.
 Transaction Analysis
Expanded Accounting Equation

Source : Weygandt,Kimmel,Kieso, (2013), Financial Accounting IFRS

Edition, 2nd edition, John Wiley and Sons Inc., New Jersey, Page 15
 Financial Statements

Companies prepare four financial statements

from the summarized accounting data.

Retained Statement Statment of

Income Earnings of Financial
Statement Cash Flows
Statement Position
 Summary

• Accounting is an information system that identifies, records,

and communicates the economic events of an organization
to interested users.
• The users and uses of accounting data are as follows:
Internal users and external users.
• Ethics are the standard of conduct by which actions are
judged as right or wrong.
 Summary
• Accounting is based on standards, such as IFRS.
• The monetary unit assumption required that companies
include in the accounting records only transaction data that
can be expressed in terms of money.
• The economic entity assumptionrequires that the activities
of each economic entity be kept separate from the activities
of its owner and other economic entities.
• The basic accounting equation is:
Asset = Liabilities + Equity
 Summary
• Each business transaction must have a dual effect on the
accounting equation.
• Companies prepare four financial statements from the
summarized accounting data:
1. Income statement
2. Retained earnings statement
3. Statement of financial position
4. Statement of cash flows
 Reference
Weygandt,Kimmel,Kieso, (2013), Financial
Accounting IFRS Edition, 2nd edition, John
Wiley and Sons Inc., New Jersey, chapter 1
Thank You