The document provides an introduction to accounting, discussing what accounting is, its three main activities of identifying, recording and communicating financial information, and who uses accounting data. It also covers the basic accounting equation, forms of business, and key accounting concepts like assets, liabilities and equity.
The document provides an introduction to accounting, discussing what accounting is, its three main activities of identifying, recording and communicating financial information, and who uses accounting data. It also covers the basic accounting equation, forms of business, and key accounting concepts like assets, liabilities and equity.
The document provides an introduction to accounting, discussing what accounting is, its three main activities of identifying, recording and communicating financial information, and who uses accounting data. It also covers the basic accounting equation, forms of business, and key accounting concepts like assets, liabilities and equity.
The document provides an introduction to accounting, discussing what accounting is, its three main activities of identifying, recording and communicating financial information, and who uses accounting data. It also covers the basic accounting equation, forms of business, and key accounting concepts like assets, liabilities and equity.
1 What Is Accounting? • Accounting is the financial information system concerned with identification, record and communication of financial information useful for decision making.
• Financial information -quantitative information expressed in
monetary terms
• Accounting consists of three basic activities—it identifies, records,
and communicates the economic events of an organization to interested users.
2 Three Activities of Accounting • Identifying As a starting point to the accounting process, a company identifies the economic events relevant to its business. Examples of economic events are the sale of food and snacks by cafteria.
• Recording Once a company identifies economic events, it records
those events in order to provide a history of its financial activities.
• Communication Finally, communicate the collected information to
interested users by means of accounting reports (financial statements).
3 Bookkeeping Vs Accounting
• Bookkeeping usually involves only the recording of economic events.
It is therefore just one part of the accounting process.
• Accounting involves the entire process of identifying, recording, and
communicating economic events.
4 Who Uses Accounting Data? • Internal users of accounting information are managers who plan, organize, and run the business. These include marketing managers, production supervisors, finance directors, and company officers.
• EXTERNAL USERS External users are individuals and organizations
outside a company who want financial information about the company. • For example: investors and creditors.
5 Accounting Standards • In order to ensure high-quality financial reporting, accountants present financial statements in conformity with accounting standards that are issued by standard setting bodies. • Presently, there are two primary accounting standard-setting bodies 1. International Accounting Standards Board (IASB) and 2. Financial Accounting Standards Board (FASB). More than 130 countries follow standards referred to as International Financial Reporting Standards (IFRS). • IFRSs are determined by the IASB.
6 Measurement Principles • IFRS generally uses one of two measurement principles, the historical cost principle or the fair value principle. • Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation. • Relevance means that financial information is capable of making a difference in a decision. • Faithful representation means that the numbers and descriptions match what really existed or happened—they are factual.
7 1. HISTORICAL COST PRINCIPLE • The historical cost principle dictates that companies record assets at their cost. This is true not only at the time the asset is purchased, but also over the time the asset is held.
• For example, if Gazprom (RUS) purchases land for P300,000, the
company initially reports it in its accounting records at P300,000. But what does Gazprom do if, by the end of the next year, the fair value of the land has increased to P 400,000? Under the historical cost principle, it continues to report the land at P300,000
8 2. 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).
• Fair value information may be more useful than historical cost for certain types of assets and liabilities. For example, certain investment securities are reported at fair value because market value information is usually readily available for these types of assets.
9 Assumptions 1. 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. This assumption enables accounting to quantify (measure) economic events. • This assumption prevents the inclusion of some relevant information in the accounting records. • For example, the health of a company’s owner, the quality of service, and the morale of employees are not included.
10 2. ECONOMIC ENTITY ASSUMPTION
• An economic entity can be any organization or unit in society.
• The economic entity assumption requires that the activities of the
entity be kept separate and distinct from the activities of its owner and all other economic entities.
• To illustrate, Sally Rider, owner of Sally’s Boutique, must keep her
personal living costs separate from the expenses of the boutique.
11 Financial Reporting Requirements in Ethiopia and AABE AABE is an autonomous governing organ to promote high quality reporting of financial and reporting entities Regulate the accounting and auditing profession of Ethiopia. AABE has established the following three phase IFRS implementation road map under its four year strategic plan running from the year 2016-2020. Phase I: Significant Public Interest Entities (PIEs) Primarily financial institutions and Federal public enterprises –are required to adopt IFRS standards from calendar year 2017, with reporting under IFRS starting in 2018. Phase II: Other PIEs- including ECX members–and private companies that meet the PIE thresholds criteria and IPSAS for Charities and Societies are required to report under IFRS by the end of 2019. Phase III: Small and Medium-Sized Entities (SMEs) are required to follow IFRS for SMEs, a simplified self-contained standard, by the end of 2020.
12 Forms of Business 1. PROPRIETORSHIP • A business owned by one person. The owner is often the manager/operator of the business.
• There is no legal distinction between the business as an economic unit
and the owner (unlimited liability).
• But the accounting records of the business activities are kept separate from the personal records and activities of the owner.
13 2. PARTNERSHIP • A business owned by two or more persons associated as partners is a partnership.
• Typically a partnership agreement (written or oral) sets forth such
terms as initial investment, duties of each partner, division of net income (or net loss), and settlement to be made upon death or withdrawal of a partner.
• Each partner generally has unlimited personal liability for the debts of the partnership.
14 3. CORPORATION • A business organized as a separate legal entity under corporation law and having ownership divided into transferable shares. • The holders of the shares are not personally liable for the debts of the corporate entity. • Shareholders may transfer their share to third parties easly. • Ownership can change adds to the attractiveness of investing in a corporation. • Corporation enjoys an unlimited life.
15 Types of Business 1. Service: render professional /technical service. E.g transportation
2. Merchandizing: buys and sells finished goods to customer.
E.g. supermarkets
3. Manufacturing: converts raw materials into finished goods for sale
to other business( merchandising) or directly to consumers. E.g. cement factories
16 The Basic Accounting Equation • The two basic elements of a business are what it owns and what it owes. Assets are the resources a business owns.
• This relationship is the basic accounting equation. Assets must equal
the sum of liabilities and equity.
17 1. Assets • Assets are resources a business owns. The business uses its assets in carrying out such activities as production and sales. • The common characteristic possessed by all assets is the capacity to provide future services or benefits. In a business, that service potential or future economic benefit eventually results in cash inflows (receipts). • For example, consider Taipai Pizza, owns a delivery truck that provides economic benefits from delivering pizzas.
18 2. Liabilities • Liabilities are claims against assets—that is, existing debts and obligations. • Businesses of all sizes usually borrow money and purchase merchandise on credit. These economic activities result in payables of various sorts: • For instance Taipai Pizza,, purchases cheese, sausage, flour, and beverages on credit from suppliers (accounts payable). • Creditors may legally force the liquidation of a business that does not pay its debts. In that case, the law requires that creditor claims be paid before ownership claims. 19 3. Equity • The ownership claim on a company’s total assets is equity.
• It is equal to total assets minus total liabilities. Here is why: The assets of a business are claimed by either creditors or shareholders.
• The remainder (after creditors) is the shareholders’ claim on the
assets—equity.
• It is often referred to as residual equity—that is, the equity “left over”
after creditors’ claims are satisfied. 20 Equity classification
• SHARE CAPITAL—ORDINARY • Share capital—ordinary is the term used to describe the amounts paid in by shareholders for the ordinary shares they purchase. • RETAINED EARNINGS • Retained earnings is determined by three items: revenues, expenses, and dividends.
21 4. REVENUES • Revenues are the gross increases in equity resulting from business activities entered into for the purpose of earning income. • Generally, revenues result from selling merchandise, performing services, renting property, and lending money. • Revenues usually result in an increase in an asset.
• Other titles for and sources of revenue are sales, fees, services, commissions, interest, dividends, royalties, and rent.
22 5. EXPENSES • 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. • For example, (for Taipai Pizza) cost of ingredients (flour, cheese, tomato paste, meat, mushrooms, etc.), cost of beverages, wages expense, utilities expense (electric, gas, and water expense), telephone expense, delivery expense (gasoline, repairs, licenses, etc.), supplies expense (napkins, detergents, aprons, etc.), rent expense, interest expense, and property tax expense.
23 6. DIVIDENDS (withdrawal) • The distribution of cash or other assets to shareholders is called a dividend. • Net income represents an increase in net assets which is then available to distribute to shareholders. • Dividends reduce retained earnings but not expenses. • A corporation first determines its revenues and expenses and then computes net income or net loss. If it has net income, and decides it has no better use for that income, a corporation may decide to distribute a dividend to its owners (the shareholders)
24 Equity and its constituents summary
25 Summary of Accounting equation
26 Business transactions • Transactions (business transactions) are a business’s economic events recorded by accountants. • External transactions involve economic events between the company and some outside enterprise. • For example, Taipai Pizza’s purchase of cooking equipment from a supplier, payment of monthly rent to the landlord, and sale of pizzas to customers. • Internal transactions are economic events that occur entirely within one company. • For example The use of cooking and cleaning supplies are internal transactions for Taipai Pizza. 27 Transaction Analysis (recording) • TRANSACTION 1. INVESTMENT BY SHAREHOLDERS Ray and Barbara Neal decide to start a smartphone app development company that they incorporate as Softbyte SA. On September 1, 2017, they invest €15,000 cash in the business in exchange for €15,000 of ordinary shares.
28 TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte SA purchases computer equipment for €7,000 cash.
• This transaction results in an equal increase and decrease in total assets, though the composition of assets changes. Observe that total assets are still €15,000. Share Capital—Ordinary also remains at €15,000, the amount of the original investment. 29 TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte SA purchases for €1,600 from Mobile Solutions Company headsets and other computer accessories expected to last several months. Mobile Solutions agrees to allow Softbyte to pay this bill in October.
30 TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte SA receives €1,200 cash from customers for app development services it has performed.
31 TRANSACTION 5. PURCHASE (paid) OF ADVERTISING ON CREDIT Softbyte SA receives a bill for €250 from Programming News for advertising on its website but postpones payment until a later date.
32 TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT Softbyte SA performs €3,500 of app development services for customers. The company receives cash of €1,500 from customers, and it bills the balance of €2,000 on account
33 TRANSACTION 7. PAYMENT OF EXPENSES Softbyte SA pays the following expenses in cash for September: office rent €600, salaries and wages of employees €900, and utilities €200
34 TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte SA pays its €250 Programming News bill in cash.
35 TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte SA receives €600 in cash from customers who had been billed for services (in Transaction 6).
36 TRANSACTION 10. DIVIDENDS The corporation pays a dividend of €1,300 in cash to Ray and Barbara Neal, the shareholders of Softbyte SA.
37 Summary of Transactions
38 Exercise DO IT!!
39 Financial Statements 1. An income statement presents the revenues and expenses and resulting net income or net loss for a specific period of time. 2. A retained earnings statement summarizes the changes in retained earnings for a specific period of time. 3. A statement of financial position (balance sheet) reports the assets, liabilities, and equity of a company at a specific date. 4. A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time.
"The Language of Business: How Accounting Tells Your Story" "A Comprehensive Guide to Understanding, Interpreting, and Leveraging Financial Statements for Personal and Professional Success"
"The Language of Business: How Accounting Tells Your Story" "A Comprehensive Guide to Understanding, Interpreting, and Leveraging Financial Statements for Personal and Professional Success"
