1. Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems
Accounting I BA 104
Lecture 2
Accounting Equation
Dr. Mohamed A. Hamada
Lecturer of Accounting Information Systems

2. The Building Blocks of Accounting
Financial Statements
Balance Sheet
Income Statement
Statement of Owner’s Equity
Statement of Cash Flows
Note Disclosure
Various users need financial information
The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.
Generally Accepted Accounting Principles (GAAP)

3. The Building Blocks of Accounting
Organizations Involved in Standard Setting:
Securities and Exchange Commission (SEC)
Financial Accounting Standards Board (FASB)
International Accounting Standards Board (IASB)

4. The Building Blocks of Accounting
Cost Principle (Historical) – dictates that companies record assets at their cost.
Issues:
Reported at cost when purchased and also over the time the asset is held.
Cost easily verified, whereas market value is often subjective.
Fair value information may be more useful.

5. 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 and distinct from the activities of its owner and all other economic entities.
Proprietorship.
Partnership.
Corporation.
Forms of Business Ownership

6. Forms of Business Ownership
Proprietorship
Partnership
Corporation
Generally owned by one person.
Often small service-type businesses
Owner receives any profits, suffers any losses, and is personally liable for all debts.
Owned by two or more persons.
Often retail and service-type businesses
Generally unlimited personal liability
Partnership agreement
Ownership divided into shares of stock
Separate legal entity organized under state corporation law
Limited liability
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

7. Forms of Business Ownership
Review Question
A business organized as a separate legal entity under state law having ownership divided into shares of stock is a
proprietorship.
partnership.
corporation.
sole proprietorship.

8. The Basic Accounting Equation
Assets
Liabilities
Owner’s Equity = +
Provides the underlying framework for recording and summarizing economic events.

9. Asset
The instructional strategy on this page is Eg-Rule. I am providing examples of assets & students should be able to determine that assets are “good things” or things of value.

10. Asset - New Computer
New computer worth $

11. Checking account balance $525.00
Asset - Cash in Bank
Checking account balance $525.00

12. Asset - Business Car
Business car worth $20,000.00

13. Building you purchased for $250,000.00
Asset - Building
Building you purchased for $250,000.00

14. Asset - Office Supplies
Office supplies purchased for $75.00

15. Asset – Accounts Receivable
I will receive the money later
When a person owes YOU money, this is also an asset.
The asset is called “Accounts Receivable”.
The strategy here is rule-eg – I’m stating an additional/expanded accounting definition of an asset.

16. Asset – Prepaid Insurance
I’ve paid my 6 month insurance premium
When you pay insurance premiums covering your property, this is also an asset.
Making payments in advance is called a “prepaid asset”.
The strategy here is rule-eg – I’m stating an additional/expanded accounting definition of an asset.

17. Definition of an Asset An asset is anything of value that is owned
An asset may be something which is paid for in advance, like prepaid insurance or prepaid rent.
Money you will receive later – Accounts Receivable

18. Check and Review Which account is NOT an asset. Desk Prepaid insurance
Money you owe another person
Money that another person owes you
The instructional strategy on this slide is scaffolding whereby I’m guiding students to the correct answer. It’s a review slide after the basic concept of asset has been explained.

19. Prepaid Insurance
Try again… Remember, prepaid insurance is an asset because it has value.

20. Desk
a desk is an asset because it has value.

21. Money you owe to another person
Great job! Money $ you owe another person would not be of value to you because you will eventually have to pay the person off.
Money you owe is a LIABILITY

22. Liability
I will pay you later
A liability is when you owe to another person or business money.
The instructional strategy on this page is Rule-Eg – I’m explaining the definition of a liability.

23. Liability
A liability is when you owe to another person or business money.
Liabilities typically include the word “payable” in the description.

24. Examples of Liability Accounts
Accounts Payable
Notes Payable
Income Tax Payable
Social Security Tax Payable

25. Check and Review So what’s the key word for a liability? Payable
Receivable
The instructional strategy on this page is scaffolding whereby students are building upon previously taught material. They’re reviewing the key concepts payable & receivable – using a scaffolding technique.

26. Let’s think…
Receivable means that you will “receive” money at a later date.

27. Check and Review - Asset
Select the asset below
Money I owe
to a business
Money that someone
owes to me
The instructional strategy on this page is scaffolding whereby students are building upon previously taught material. They’re having to analyze or decide if it’s preferable to owe someone money or have someone owe you money.

28. Review – Accounts Payable
Remember, if you owe another person money it’s not really a good thing. When you owe to another person, you have a Liability.

29. Which asset would require you to borrow more money from the bank?
Scaffolding strategy (students need to make a decision on the value of assets and how it would affect the amount of money they would need to borrow.)

30. Larger asset/larger debt
Great job,
Since the building is a larger asset which costs more than a car, you would incur a higher debt.

31. Smaller asset/smaller debt
Try Again,
Since the car probably costs less than the building, you would not need to borrow as much money from the bank.
Scaffolding – lead students to correct answer, based upon prior knowledge.

32. The Basic Accounting Equation
Assets
Liabilities
Owner’s Equity = +
Assets
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.

33. The Basic Accounting Equation
Assets
Liabilities
Owner’s Equity = +
Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.

34. The Basic Accounting Equation
Assets
Liabilities
Owner’s Equity = +
Owner’s Equity
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or Partnership).

35. Owners’ Equity
Illustration 1-6
Revenues result from business activities entered into for the purpose of earning income.
Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.

36. Owners’ Equity
Illustration 1-6
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.

37. Using The Basic Accounting Equation
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.

38. Transactions (Question?)
Q1-15: Are the following events recorded in the accounting records?
Owner withdraws cash for personal use.
Supplies are purchased on account.
An employee is hired.
Event
Is the financial position (assets, liabilities, or owner’s equity) of the company changed?
Criterion
Record/ Don’t Record

39. Discussion Question Transactions
Q1-18: In February 2010, Ahmed invested an additional $10,000 in his business, ABC, which is organized as a proprietorship. ABC’s accountant, recorded this receipt as an increase in cash and revenues. Is this treatment appropriate? Why or why not?
See notes page for discussion
Question 18 (Chapter 1) No, this treatment is not proper. While the transactions does involve a receipt of cash, it does not represent revenues. Revenues are the gross increase in owner’s equity resulting from business activities entered into for the purpose of earning income. This transactions is simply an additional investment made by the owner in the business.

40. Transactions Analysis
Transaction (1). Investment By Owner. Ray Neal decides to open a computer programming service which he names ABS. On September 1, 2010, he invests $15,000 cash in the ABS. The effect of this transaction on the basic equation is:

41. Transactions Analysis
Transaction (2). Purchase of Equipment for Cash.
ABS purchases computer equipment for $7,000 cash.

42. Transactions Analysis
Transaction (3). Purchase of Supplies on Credit. ABS purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months.

43. Transactions Analysis
Transaction (4). Services Provided for Cash. ABS receives $1,200 cash from customers for programming services it has provided.

44. Transactions Analysis
Transaction (5). Purchase of Advertising on Credit. ABS receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.

45. Transactions Analysis
Transaction (6). Services Provided for Cash and Credit. ABS 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.

46. Transactions Analysis
Transaction (7). Payment of Expenses. ABS pays the following Expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.

47. Transactions Analysis
Transaction (8). Payment of Accounts Payable. ABS pays its $250 Daily News bill in cash.

48. Transactions Analysis
Transaction (9). Receipt of Cash on Account. ABS receives $600 in cash from customers who had been billed for services [in Transaction (6)].

49. Transactions Analysis
Transaction (10). Withdrawal of Cash by Owner. Ray Neal withdraws $1,300 in cash from the business for his personal use.

50. Transactions Analysis
Illustration 1-8
Tabular summary of
Softbyte transactions
Summary of Transactions

51. Very thanks