Prepared By Md. Masukujjaman Lecturer Northern University Bangladesh Second Semester Course Code: BBA-1204 Course Title: Principles Accounting Prepared By Md. Masukujjaman Lecturer Northern University Bangladesh

Text Book….. Accounting Principles, 7th Edition Weygandt • Kieso • Kimmel

Fundamental Accounting Principles Reference Book: Fundamental Accounting Principles 17th Edition Larson Wild Chiappetta

Accounting in Business Chapter 1 1 1 1 1 1

CHAPTER 1 ACCOUNTING IN ACTION After studying this chapter, you should be able to: 1 Explain what accounting is. 2 Identify users and uses of accounting. 3 Understand why ethics is a fundamental business concept. 4 Explain the meaning of generally accepted accounting principles and the cost principle.

CHAPTER 1 ACCOUNTING IN ACTION After studying this chapter, you should be able to: 5 Explain the meaning of the monetary unit assumption and the economic entity assumption. 6 State the basic accounting equation and explain the meaning of assets, liabilities, and owner’s equity. 7 Analyze the effect of business transactions on the basic accounting equation. 8 Understand what the four financial statements are and how they are prepared.

Definition & Importance of Accounting is a system that Accounting Identifies Records information that is Relevant Communicates Reliable to help users make better decisions. Comparable

Accounting Activities Identifying Business Activities Recording Business Activities Communicating Business Activities

Users of Accounting Information External Users Lenders Shareholders Governments Consumer Groups External Auditors Customers Internal Users Managers Officers Internal Auditors Sales Staff Budget Officers Controllers

Users of Accounting Information External Users Financial accounting provides external users with financial statements. Internal Users Managerial accounting provides information needs for internal decision makers.

QUESTIONS ASKED BY INTERNAL USERS STUDY OBJECTIVE 2

QUESTIONS ASKED BY EXTERNAL USERS

What is the correct accounting process sequence ? identification, communication, recording. recording, communication, identification. identification, recording, communication. communication, recording, identification.

The accounting process is correctly sequenced as identification, communication, recording. recording, communication, identification. identification, recording, communication. communication, recording, identification.

Opportunities in Accounting Financial Preparation Analysis Auditing Regulatory Consulting Planning Criminal investigation Managerial General accounting Cost accounting Budgeting Internal auditing Consulting Controller Treasurer Strategy Taxation Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate planning Accounting-related Lenders Consultants Analysts Traders Directors Underwriters Planners Appraisers FBI investigators Market researchers Systems designers Merger services Business valuation Human services Litigation support Entrepreneurs

Accounting Jobs by Area Auditing Taxation Management consulting NGO’s, SEC

Ethics Ethics—A Key Concept Beliefs that distinguish right from wrong Accepted standards of good and bad behavior

Guidelines for Ethical Decision Making Make ethical decision Identify ethical concerns Analyze options Use personal ethics to recognize ethical concern. Consider all good and bad consequences. Choose best option after weighing all consequences.

Generally Accepted Accounting Principles Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Is helpful in contrasting organizations.

Setting Accounting Principles Financial Accounting Standards Board is the private group that sets both broad and specific principles. The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public.

Principles of Accounting Objectivity Principle Accounting information is supported by independent, unbiased evidence. Cost Principle Accounting information is based on actual cost. Now Future Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. It demands more than one person’s opinion/ verification

Principles of Accounting Monetary Unit Principle Express transactions and events in monetary, or money, units. Money is a common denominator in Business. Revenue Recognition Principle Recognize revenue when it is earned. Proceeds need not be in cash. Measure revenue by cash received plus cash value of items received. Business Entity Principle A business is accounted for separately from other business entities, including its owner.

Business Entity Forms Proprietorship Partnership Corporation

Characteristics of Businesses Exh. 1.8 Characteristics of Businesses * * * Proprietorships and partnerships that are set up as LLC’s provide limited liability.

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).

= + Accounting Equation Liabilities Equity Assets Liabilities & Equity

Resources owned or controlled by a company Assets Cash Accounts Receivable Notes Receivable Resources owned or controlled by a company Vehicles Land Buildings Store Supplies Equipment

Creditors’ claims on assets Liabilities Accounts Payable Notes Payable Creditors’ claims on assets Wages Payable Taxes Payable

Equity Owner’s claims on assets Owner Investments Owner Withdrawals Revenues Expenses

Expanded Accounting Equation Liabilities Equity Assets = + Revenues Expenses Owner Capital Owner Withdrawals _ +

DRAWINGS AS A BUILDING BLOCK are withdrawals of cash or other assets by the owner for personal use decrease owner’s equity

INCREASES AND DECREASES IN OWNER’S EQUITY INCREASES DECREASES Investments by Owner Withdrawals by Owner Owner’s Equity Revenues Expenses

Exchange of economic consideration between at least two parties. Transaction Analysis Exchange of economic consideration between at least two parties. Economic consideration include products, services, money, rights to collect money (A/R,B/R)

TRANSACTION IDENTIFICATION PROCESS STUDY OBJECTIVE 6

Transaction Analysis Equation The accounting equation must remain in balance after each transaction. Liabilities Equity Assets = +

J. Scott, the owner, contributed $20,000 cash to start the business. Transaction Analysis J. Scott, the owner, contributed $20,000 cash to start the business. The accounts involved are: (1) Cash (asset) (2) J. Scott, Capital (equity) 21

J. Scott, the owner, contributed $20,000 cash to start the business. Transaction Analysis J. Scott, the owner, contributed $20,000 cash to start the business. 21

Purchased supplies paying $1,000 cash. Transaction Analysis Purchased supplies paying $1,000 cash. The accounts involved are: (1) Cash (asset) (2) Supplies (asset) 25

Purchased supplies paying $1,000 cash. Transaction Analysis Purchased supplies paying $1,000 cash. 25

Purchased equipment for $15,000 cash. Transaction Analysis Purchased equipment for $15,000 cash. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) 29

Purchased equipment for $15,000 cash. Transaction Analysis Purchased equipment for $15,000 cash. 29

Purchased Supplies of $200 and Equipment of $1,000 on account. Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account. The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability) 30

Purchased Supplies of $200 and Equipment of $1,000 on account. Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account. 30

Borrowed $4,000 from 1st American Bank. Transaction Analysis Borrowed $4,000 from 1st American Bank. The accounts involved are: (1) Cash (asset) (2) Notes payable (liability)

Borrowed $4,000 from 1st American Bank. Transaction Analysis Borrowed $4,000 from 1st American Bank.

Transaction Analysis 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. 32

Rendered consulting services receiving $3,000 cash. Transaction Analysis Rendered consulting services receiving $3,000 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity) 32

Rendered consulting services receiving $3,000 cash. Transaction Analysis Rendered consulting services receiving $3,000 cash. 32

Paid salaries of $800 to employees. 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.

Transaction Analysis Paid salaries of $800 to employees. Remember that expenses decrease equity.

J. Scott withdrew $500 from the business for personal use. Transaction Analysis J. Scott withdrew $500 from the business for personal use. The accounts involved are: (1) Cash (asset) (2) J. Scott, Withdrawals (equity) Remember that the balance in the J. Scott, Withdrawals account actually increases. But, equity actually decreases because withdrawals reduce equity.

Transaction Analysis J. Scott withdrew $500 from the business for personal use. Remember that withdrawals decrease equity.

Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded. Income Statement Statement of Owner’s Equity Balance Sheet Statement of Cash Flows 34

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 Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.

Net income ÷ Average total assets Return on Assets (ROA) Net income ÷ Average total assets ROA is viewed as an indicator of operating efficiency.

End of Chapter 1