CHAPTER 1 BUSINESS DECISIONS BUSINESS DECISIONS And FINANCIAL ACCOUNTING..

O BJECTIVES : 1. ACCOUNTING FOR BUSINESS DECISIONS 2. Users of accounting. 3. Generally Accepted Accounting Principles (GAAP). 4. THE BASIC ACCOUNTING EQUATION 5. FINANCIAL STATEMENTS

ACCOUNTING FOR BUSINESS DECISIONS Accounting : Accounting : A system of (analyze, record, and summarize) the results of a business’s activities and then reporting the results to decision makers.

Users of accounting can be divided into two groups:  Internal Users  external users

This information can be presented in two kinds of reports. Managerial accounting reports. Include detailed financial plans and continually updated reports about the operating performance of the company. These reports are made available only to the company’s employees (internal users). 1-

Financial accounting reports, called financial statements. 2- Which are prepared periodically to provide information to people not employed by the business. These external financial statement users aren’t given access to detailed internal records of the company. Creditors and investors are the two primary external user.

G enerally A ccepted A ccounting P rinciples GAAP

accounting concept Principles 1- cost 2- Revenues recognition 3- Matching 4- Full Disclosure Assumptions 1- unit of measure 2- separate Entity 3- Going Concern 4- time period

Some of Accounting Concepts GAAP

Assets An assets is an economic resource presently controlled by the company. It has measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the future.

Land Equipment Buildings Cash Store Supplies Notes Receivable Accounts Receivable Resources owned or controlled by a company A SSETS A1 1-13

Liabilities Liabilities are measurable amounts that the company owes to creditors. If Almarai borrows from bank, it would owe a liability called a Note Payable. when a company buys a goods from another company, it usually does so on credit by promising to pay for them at a later date. The amount owed is called am Account Payable. “Liabilities must be paid before any amounts are paid to stockholders”.

Taxes Payable Wages Payable Notes Payable Accounts Payable Creditors’ claims on assets L IABILITIES A1 1-15

owner’s Equity It represent the owner’s claims on the business.

THE BASIC ACCOUNTING EQUATION Assets=Liabilities + Assets=Liabilities + Owner’s Equity Credit Accounts If  Credit, and if  Debit Debit Accounts If  Debit, and if  Credit

Assets Liabilities + Equity A CCOUNTING E QUATION Liabilities Equity Assets =+ A1 1-18

FINANCIAL STATEMENTS

Order Prepare d Financial Statement Description of Statements 1 Income Statement A summary of the revenue and expenses for a specific period of time, such as a month or a year. 2 Statement of Owner's Equity A summary of the changes in the owner's equity that have occurred during a specific period of time, such as a month or a year. 3 Balance Sheet A list of the assets, liabilities, and owner's equity as of a specific date, usually at the close of the last day of a month or a year. 4 Statement of Cash flows A summary of cash receipts and cash payments for a specific period of time, such as a month or a year.

NetSolutions Income statement For the Month Ended November 30, 2011 Fees earned…………………………………………………………………… …………. $ 7,500 Expenses: Wages expense………………………………………………………………… …. $ 2,125 Rent expense………………………………………………………………… …… Supplies expense…………………………………………………………………. 800 Utilities expense…………………………………………………………………. 450 Miscellaneous expense………………………………………………………… 275 Total expense……………………………………………………………….. 4,450 Net Income…………………………………………………………………… ………….. $ 3,050

NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2011 Chris Clark, Capital, November 1, 2011 ………………………………. $ 0 Investment on November 1, 2011 …………………………………………. $ 25,000 Net income for November……………………………….……………………. 3,050 $ 28,050 Less withdrawals ……………………………….……………………………………. 2,000 Increase in owner’s equity ……………………………….…………………… 26,050 Chris Clark, Capital, November 30, 2011 …………………………… $ 26,050

NetSolutions Balance Sheet November 30, 2011 Assets Liabilities Cash …………………………… … $ 5,900 Account payable …………………………………… $ 400 Supplies ……………………….. 550Owner’s Equity Land …………………………… … 20,000 Chris Clark, capital ……………………………… 26,050 Total assets ……………….. $ 26,050Total liabilities and owner’s equity …..$26,050

Self-Study Practice In the space provided, indicate: (1) the type of account (A = asset, L = liability, OE = ownership equity, R = revenue, E = expense), and (2) whether it is reported on the income statement (I/S), statement of cash flows (SCF), or balance sheet (B/S). Account Title Type Statement 1.Land 2.Wages Expense 3.Accounts Receivable 4.Rent Revenue 5.Contributed Capital 6.Note Payable ـــــــــــــــــــــ