Course Name: Managerial Accounting

Course Code:
Credit Hours: 2
Pre-requisite: None
Instructor : Netsanet Shiferaw. (Assist. Professor In
Acfn)
 CHAPTER ONE
Introduction to Accounting
1.1 Meaning of Business
➢Businesses exist to provide goods or services to
customers in exchange for a financial reward.
➢The objective of most businesses is to earn a profit.
➢Shortly business mean any activity done for profit
purpose.
Every business asks three key questions:
1. How much money came in? The revenue.
2. Where did the money go? The costs and expenses
3. How much money is left? The profit
❑The answer to each question can come only from
the practice known as accounting.
 What is Accounting?

❑Simply, accounting is the language of

business, because it is the method of
communicating business information.
❑

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1-3 SO 1 Explain what accounting is.
 ⚫ Accounting involves the process of
identifying, analyzing, measuring ,
recording, classifying and summarizing of
past events and transactions of financial
nature to help the users of the information
to make rational decisions.

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 What is Accounting?
Illustration 1-1

Three Activities The activities of the

accounting process

The accounting process includes

the bookkeeping function.

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1-5 SO 1 Explain what accounting is.
 Cont’d
❑ Generally, the main purpose of accounting is to provide
financial information to be used for rational decision-
making.
❑ The people who use accounting information basically
fall in to two categories:
1. External Users: External Users of accounting
information are parties, which are not directly
involved in running the business enterprise.
(regulatory bodies) and others.

❑ The area of accounting aimed at serving external

users is called Financial Accounting.
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 Cont’d
2. Internal users: These are persons that are
directly involved in managing and operating
an organization.
➢ The internal role of accounting is to provide
information to help improve the efficiency
and effectiveness of an organization.
❑ The area of accounting aimed at serving the
decision-making needs of internal users is called
Management Accounting.
❑ So that this course is directly related with
management Accounting
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 Who Uses Accounting Data

External
Internal Users
Human Taxing
Users
Resources Authorities
Labor
Unions
Finance
Management Customers

Creditors

Marketing Regulatory
Agencies
Investors

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1-9 SO 2 Identify the users and uses of accounting.
 The Building Blocks of Accounting
Indicate whether each of the following
statements presented below is true or false.

1. The three steps in the accounting process are

True
identification, recording, and communication.

2. The two most common types of external users

False
are investors and company officers.

3. Shareholders in a corporation enjoy limited legal

True
liability as compared to partners in a partnership.

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 Cont’d

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 Cont’d

IFRS??

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 Cont’d
❑ But currently there is new accounting standard
which is developed by “international Accounting
standard board” and the standard is known as
“International Financial Reporting standard
(IFRS)” which over come most of the above
limitations.

❑ Currently this standard is acceptable and adopted by

more than 160 countries including our country
Ethiopia.

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 Accounting principle and Concepts

❑ Accounting as any profession has its own principles

and concepts
❑ Presently, there are two primary accounting
standard-setting bodies.
1. The International Accounting Standards Board
(IASB) and standard is called international
financial reporting standards(IFRS)
2. The Financial Accounting Standards Board (FASB)
and the standard is called Generally Accepted
Accounting principles(GAAP).

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 Cont’d
❑ In recent years the two standard setting bodies
have made efforts to reduce the differences
between IFRS and U.S. GAAP. This process is
referred to as convergence and in the future we
may have one international accounting standard

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 The Building Blocks of Accounting

Measurement Principles
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, market value is often subjective.

Fair value information may be more useful.

Fair Value Principle – indicates that assets and liabilities should be

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reported at fair value.
1-16 SO 4 Explain accounting standards and the measurement principles.
 The Building Blocks of Accounting

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.
Forms of Business
Partnership. Ownership
Corporation.

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1-17 SO 5 Explain the monetary unit assumption and the economic entity assumption.
 The Building Blocks of Accounting

Proprietorship Partnership Corporation

Generally owned Owned by two or Ownership divided

by one person. more persons. into shares
Often small Often retail and Separate legal
service-type service-type entity organized
businesses businesses under state
Owner receives corporation law
Generally unlimited
any profits, suffers personal liability Limited liability
any losses, and is
Partnership
personally liable for
agreement
all debts.
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1-18 SO 5 Explain the monetary unit assumption and the economic entity assumption.
 The Building Blocks of Accounting

Review Question
A business organized as a separate legal entity under
state law having ownership divided into shares is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.

Solution on SO 5 Explain the monetary unit assumption

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notes page
1-19 and the economic entity assumption.
 Cont’d

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 Cont’d

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 Cont’d

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 Cont’d

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 Cont’d

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 Cont’d

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 Cont’d

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 Cont’d

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 Cont’d

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 Cont’d

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 Cont’d

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 The Building Blocks of Accounting

Review Question
Combining the activities of Kellogg and General Mills
would violate
a. cost the
principle.
a.
b. cost principle.
economic entity assumption.
b.
c. economic entity
monetary unit assumption.
assumption.
c.
d. monetary unit assumption.
ethics principle.
d. ethics principle.

Solution on SO 5 Explain the monetary unit assumption

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notes page
1-31 and the economic entity assumption.
 Cont’d

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 Cont’d

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 Cont’d

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 The Basic Accounting Equation

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 The Basic Accounting Equation

Assets = Liabilities + Equity

Provides the underlying framework for recording and

summarizing economic events.

Applies to all economic entities regardless of size.

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1-44 SO 6 State the accounting equation, and define its components.
 The Basic Accounting Equation

Assets = Liabilities + Equity

Provides the underlying framework for recording and

summarizing economic events.

Assets
Resources a business owns.
Provide future services or benefits.
Cash, Inventory, Equipment, etc.

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1-45 SO 6 State the accounting equation, and define its components.
 The Basic Accounting Equation

Assets = Liabilities + Equity

Provides the underlying framework for recording and

summarizing economic events.

Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.

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1-46 SO 6 State the accounting equation, and define its components.
 The Basic Accounting Equation

Assets = Liabilities + Equity

Provides the underlying framework for recording and

summarizing economic events.

Equity
Ownership claim on total assets.
Referred to as residual equity.
Share capital and retained earnings.

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1-47 SO 6 State the accounting equation, and define its components.
 The Basic Accounting Equation
Illustration 1-7

Revenues result from business activities entered into for the purpose
of earning income.
Generally results from selling merchandise, performing services,
renting property, and lending money.

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1-48 SO 6 State the accounting equation, and define its components.
 The Basic Accounting Equation
Illustration 1-7

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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1-49 SO 6 State the accounting equation, and define its components.
 The Basic Accounting Equation
Illustration 1-7

Dividends are the distribution of cash or other assets to shareholders.

➢ Reduce retained earnings
➢ Not an expense

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1-50 SO 6 State the accounting equation, and define its components.
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 Basic concepts in Accounting
❑ Business Transaction
➢ A business activity or event that causes a measurable
change in the items in the accounting equation.
➢ An economic event that affects the assets and equities
of the firm, is reflected in its accounts, and is
measured in monetary terms.
➢ For a given transaction to qualify criteria to be
recorded as transaction:
A. To be related to the business enterprise
B. To be measurable in terms of money
C. To be completed / happened/ action.

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 Cont’d

❑ Financial statements: The accounting

reports that provide information to users
after transactions are recorded ,classified
and summarized.
❑ The primary (basic) Financial statements of a
company are income statement, retained
earnings(statement of owners equity) , balance
sheet, and statement of cash flows.

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 Cont’d
❑ Balance sheet: an element of financial statement that
lists a assets, liabilities, and equity (including dollar
amounts) as of a specific date. Also called a statement
of financial position.
❑ Income statement: A financial statement that
summarizes the amount of revenues earned and
expenses incurred by a business over a period of
time. Also called statement of Financial performance
❑ Owner’s Equity Statement :This is a statement
that summarizes the changes in owner’s equity for a
specific period of time.

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 Cont’d
❑ Statement of Cash Flows: Summarizes cash inflows
and out flow of the business
❑ Revenues: Inflows of assets (such as cash) resulting
from the sale of products or the rendering of
services to customers.
❑ Expenses: Costs incurred to produce revenues,
measured by the assets consumed in serving
customers.
❑ Net income: Amount by which the revenues of a
period exceed the expenses of the same period.

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 Cont’d
❑ Net loss: Amount by which the expenses of a period
exceed the revenues of the same period.
❑ Cost: Recourses Sacrifice or the resources given up,
measured in money terms, to acquire some desired
thing, such as a new equipment, machine,
merchandize or truck (asset).
❑ Dividend: it is a distribution of income to owners
(investors) in a corporation; it is not an expense of
doing business.

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 ⚫ END OF CHAPTER
⚫ THANK YOU !!!

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