 The function of education is to teach one

to think intensively and to think critically...

Intelligence plus character – that is the
goal of true education.

— Martin Luther King Jr., American civil rights leader (1929-1968)

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DEFINITION OF
ACCOUNTING
"Accounting is the art of recording, classifying and summarising in a
significant manner and in terms of money; transactions and events which
are, in part at least, of a financial character, and interpreting the results
thereof."

-American Institute of Certified Public Accountants

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DEFINITION OF
ACCOUNTING
"Accounting is the science of recording and classifying business transactions
and events, primarily of a financial character, and the art of making
significant summaries, analysis and interpretations of those transactions
and events and communicating the results to persons who must make
decisions or form judgment."

-Smith and Ashburne

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DEFINITION OF
ACCOUNTING
"Accounting is the process of identifying, measuring and
communicating economic information to permit informed
judgments and decisions by users of the information."

-American Accounting Association

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Meaning of Accounting
Thus, accounting is a process of
▪ collecting,
▪ recording,
▪ summarising and
▪ communicating financial information to the users
for decision-making.

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THE PURPOSE OF ACCOUNTING

TO PROVIDE:

➢ FINANCIAL INFORMATION
➢ ABOUT A BUSINESS
➢ TO INDIVIDUALS
➢ AND ORGANIZATIONS
 Forms of Business
Organization

 Sole proprietorship

 Partnership

 Corporation

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Sole Proprietorship

 Business owned by
one person
 Simple to establish
 Owner controlled
 Tax advantages
 Owner personally
liable
 Financing difficult

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Partnership

 Two or more owners

 Simple to establish
 Shared control
 Broader skills &
resources
 Tax advantages
 Personal liability

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Corporation

 Separate legal entity

owned by
stockholders
 Easy to transfer
ownership
 Greater capital raising
potential
 Lower legal liability
 Unfavorable tax
treatment

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 THE ACCOUNTING PROCESS

Accounting Is A System Of:

➢ Gathering financial information

➢ About a business
➢ And reporting it to users

It is accomplished in 6 steps:
 STEP ONE

ANALYZING

Looking at events that have taken

place and thinking about how
they affect the business
 STEP TWO

RECORDING

Entering financial information

about events into the accounting
system
 STEP THREE

CLASSIFYING

Sorting and grouping similar items

together
 STEP FOUR

SUMMARIZING

Bringing the various items of

information together to
determine a result
 STEP FIVE

REPORTING

Giving the results to interested

parties
 STEP SIX

INTERPRETING

Deciding the meaning and

importance of the information in
various reports
Content and Purpose of Financial Statements

 How would you answer

the question, “How is
your business doing?”

 Businesses tell users how

they are doing through
four financial statements:
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 Four Financial Statements

 Income Statement Over Time

 Retained Earnings Statement Over Time

 Balance Sheet At some point in

Time

 Statement of Cash Flows Over Time

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Income Statement

 Did you make any money???

 Summarizes revenues and expenses for
period: month, quarter, year.
 If revenue > expense = Net Income.

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Income Statement
 Revenues are the increases in assets
resulting from the sale of a product or
service
 Expenses are the cost of assets
consumed or services used in generating
revenue.
 If revenue > expense = Net Income
 If revenue < expense = Net Loss!

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Income Statement
REVENUES
• Service Revenues
• Sales Revenues

EXPENSES
• Cost of Sales – cost of goods sold
• Salaries or wages expense
• Telecommunication, Electricity, Fuel and Water Expenses
• Rent Expense
• Supplies Expense – expense of using supplies
• Depreciation Expense – portion of the cost of tangible asset
allocated as expense
• Uncollectible Accounts Expense – amount of receivables
estimated to be doubtful of collection.
• Interest Expense – expenses related to the use of borrowed funds

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Income Statement

Do this statement first! 23

 Retained Earnings Statement

 Shows changes in retained earnings for

period: month, quarter, year
 Beginning balance
 Add Net Income from income statement.
 Deduct Dividends
 Ending balance

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Retained Earnings Statement

Do this statement second! 25

 Balance Sheet

 Reports assets and claims to assets.

 Claims of creditors, liabilities.
 Claims of owners, stockholders’ equity.
 Assets = Liabilities + Stockholders’ Equity
 Specific date – one point in time!

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Balance Sheet

From Retained
Earnings
Statement

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 Statement of Cash Flows

 Provides information about cash

receipts and cash payments
 Summarizes for period: month, quarter,
year.
 Cash effects of operating, investing,
and financing activities.

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 Statement of Cash Flows

 Where did the cash come from?

 How was cash used during the period?
 What was the change in the cash balance
during the period?
 A company cannot survive without cash!

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Statement of Cash Flows..

Agrees
with
Balance
Sheet

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Three Business Activities that
affect Cash

 Operating

 Investing

 Financing

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Operating Activities
 Revenues are the increases in assets
resulting from the sale of a product or
service
 Expenses are the cost of assets
consumed or services used in generating
revenue.
 If revenue > expense = Net Income
 If revenue < expense = Net Loss!

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Operating Activities

 What the business

does to make money;
◦ Selling goods
◦ Providing services
◦ Manufacturing
◦ Cost of Sales
◦ Advertising
◦ Paying employees
◦ Paying utilities

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 Investing Activities

 Investments in the
company’s future
(Obtaining resources or assets to
operate the business)

◦ Land
◦ Buildings
◦ Vehicles
◦ Computers
◦ Furniture
◦ Equipment

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Financing Activities – Raising money to
finance the business

 Borrowing creates
liabilities
◦ Bank loans
◦ Debt securities
◦ Goods on credit or
payables

 Selling stock creates

stockholders’ equity

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 Users of Financial Information
Internal

 Internal
vs.

 External

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USERS OF ACCOUNTING
INFORMATION
Internal Users
• Owners
• Management
• Employees and Workers

External Users
• Banks and Financial Institutions
• Investors and Potential Investors
• Creditors
• Government and its Authorities
• Researchers
• Consumers
• Public 37
 Assets
 Resources owned by the business to be used to generate future
revenue
◦ Cash
◦ Cash Equivalents
◦ Notes Receivable
◦ Accounts receivable
◦ Inventories
◦ Prepaid Expenses
◦ Supplies

◦ Long-term Investments
◦ Furniture and fixtures
◦ Equipment
◦ Buildings
◦ Land
◦ Intangibles
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Assets
CURRENT ASSETS
• Cash – currency, checks, bank deposits etc.
• Cash equivalents – short term investments ( 3 months or less)
• Notes Receivable – Promissory Note
• Accounts Receivable – a promise to pay by customers
• Inventory – a.) Held for sale b.) In the process of production for such sale c.)
To be consumed in the production of goods and services to be available for sale.
• Prepaid Expenses - expenses paid in advance (insurance or rent)
• Supplies
NON-CURRENT ASSET
• Long-term Investments
• Furniture and Fixtures
• Equipment
• Buildings
• Land
• Intangibles – patents, copyrights, licenses, franchises, trademarks and
noncompetition agreements

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Liabilities
 Obligations or debts of the business
◦ Notes payable
◦ Accounts payable
◦ Accrued Liabilities
◦ Interest payable
◦ Salaries payable
◦ Unearned revenue

◦ Mortgage Payable
◦ Bonds Payable

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 Liabilities
CURRENT LIABILITIES
• Notes payable
• Accounts payable
• Accrued Liabilities – unpaid expenses. Example: Salaries payable, wages
payable, interest payable, taxes payable
• Interest Payable
• Salaries Payable
• Unearned Revenues – payments received before providing customers with
goods or services.

LONG-TERM LIABILTIES
• Mortgage Payable – business entity has pledged certain assets as a security
to the creditor
• Bonds Payable – bond is a contract between the issuer and the lender
specifying the terms of repayments and interest to be charged.

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 Equity
 Ownership claims on assets
◦ Corporation
◦ Common Stock
◦ Retained earnings
◦ Partnership
◦ Capital
◦ Withdrawals / Drawings

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Equity
• Capital – original and additional investments of
the owner

• Withdrawals or drawings – withdrawals of cash

or other assets

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 Basic Accounting Equation

Assets
=
Liabilities + Stockholders’ Equity

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 Question 1

Which is not one of the three forms of

business organization?

a. Sole proprietorship.
b. Creditorship.
c. Partnership.
d. Corporation.
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 Question 2

Which is an advantage of corporations

relative to partnerships and sole
proprietorships?

a. Lower taxes.
b. Harder to transfer ownership
c. Reduced legal liability for investors.
d. Most common form of business organization.

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 Question 3

Which is not one of the three primary

business activities that affect cash?

a. Financing.
b. Operating.
c. Advertising.

d. Investing.
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 Question 4

Which of the following is not a correct

representation of the accounting equation?

a. Assets = Liabilities + Stockholders’ Equity

b. Assets - Liabilities = Stockholders’ Equity
c. Assets + Stockholders’ Equity = Liabilities
d. Assets - Stockholders’ Equity = Liabilities

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 Question 5

Using the accounting equation, answer

the following question.

If Liabilities = $10,000 and

Stockholders’ Equity = $20,000
Then Assets =

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 Question 6

Using the accounting equation, answer

the following question.

If Assets = $75,000
And Liabilities = $35,000
Then Stockholders’ Equity =

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ANSWERS

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 Question 1

Which is not one of the three forms of

business organization?

a. Sole proprietorship.
b. Creditorship.
c. Partnership.
d. Corporation.
52
 Question 2

Which is an advantage of corporations

relative to partnerships and sole
proprietorships?

a. Lower taxes.
b. Harder to transfer ownership
c. Reduced legal liability for investors.
d. Most common form of business organization.

53
 Question 3

Which is not one of the three primary

business activities that affect cash?

a. Financing.
b. Operating.
c. Advertising.

d. Investing.
54
 Question 4

Which of the following is not a correct

representation of the accounting equation?

a. Assets = Liabilities + Stockholders’ Equity

b. Assets - Liabilities = Stockholders’ Equity
c. Assets + Stockholders’ Equity = Liabilities
d. Assets - Stockholders’ Equity = Liabilities

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 Question 5

Using the accounting equation, answer

the following question.

If Liabilities = $10,000 and

Stockholders’ Equity = $20,000
Then Assets = $30,000

$30,000 = $10,000 + $20,000

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 Question 6

Using the accounting equation, answer

the following question.

If Assets = $75,000
And Liabilities = $35,000
Then Stockholders’ Equity = $40,000

$75,000 = $35,000 + $40,000

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 QUIZ 1

Accounting Basics
Account Identification
 Problem: CSU Corporation

Service revenue $17,000 ◼ CSU begins on

Accounts receivable $4,000
Accounts payable $2,000 Jan. 1, 2007
Building rental expense
Notes payable
$9,000
$5,000
◼ For year ended
Common stock $10,000 Dec. 31, 2007,
Retained earnings
Equipment
?
$16,000
prepare
Insurance expense $1,000 ◼ Income
Supplies
Supplies expense
$1,800
$200
statement
Cash $1,400 ◼ Retained
Dividends $600 earnings
statement
◼ Balance sheet
59
 Problem: CSU Corporation

Service revenue $17,000 ◼ Action step 1:

Accounts receivable $4,000
Accounts payable $2,000 Report the
Building rental expense $9,000 revenues &
Notes payable $5,000
Common stock $10,000 expenses for a
Retained earnings ? period of time,
Equipment $16,000
Insurance expense $1,000 Income
Supplies $1,800 Statement
Supplies expense $200
Cash $1,400
Dividends $600

60
 Problem: CSU Corporation

Service revenue $17,000 ◼ Action step 1:

Accounts receivable $4,000
Accounts payable $2,000 Report the
Building rental expense $9,000 revenues &
Notes payable $5,000
Common stock $10,000 expenses for a
Retained earnings ? period of time,
Equipment $16,000
Insurance expense $1,000 Income
Supplies $1,800 Statement
Supplies expense $200
Cash $1,400
Dividends $600

61
 Problem: CSU Corporation

Create the heading

Name of the
CSU Corporation
company Name of the
Income Statement
statement
For the Year Ended December 31, 2007
Period
of time

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 Problem: CSU Corporation

CSU Corporation
Income Statement
For the Year Ended December 31, 2007
Revenues
Service revenue $17,000

List the revenues

Use dollar signs to denote U.S. currency
63
 Problem: CSU Corporation

CSU Corporation
Income Statement
For the Year Ended December 31, 2007
Revenues
Service revenue $17,000
Expenses
Rent expense $9,000
Insurance expense 1,000
Supplies expense 200
________
Total expenses 10,200

List the expenses & underline sub-totals

 Problem: CSU Corporation

CSU Corporation
Income Statement
For the Year Ended December 31, 2007
Revenues
Service revenue $17,000
Expenses
Rent expense $9,000
Insurance expense 1,000
Supplies expense 200
________
Total expenses 10,200
________
Net Income $ 6,800
________
________
Calculate net income: revenues - expenses
 Problem: CSU Corporation

Service revenue $17,000 ◼ Action step 2:

Accounts receivable $4,000
Accounts payable $2,000 Show amounts
Building rental expense $9,000 and causes of
Notes payable $5,000
Common stock $10,000 changes in
Retained earnings ? retained
Equipment $16,000
Insurance expense $1,000 earnings
Supplies
Supplies expense
$1,800
$200
◼ Use Net Income
Cash $1,400 from Income
Dividends $600
Statement
◼ Dividends
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 Problem: CSU Corporation

CSU Corporation
Retained Earnings Statement
For the Year Ended December 31, 2007

Retained earnings, January 1 $ 0

Add: Net income 6,800
6,800
Less: Dividends 600
______
Retained earnings, Dec. 31 $ 6,200

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 Problem: CSU Corporation

Service revenue $17,000 ◼ Action step 3:

Accounts receivable $4,000 Present assets
Accounts payable $2,000
Building rental expense $9,000 and claims to
Notes payable $5,000 those assets at
Common stock $10,000
Retained earnings $6,200 a specific point
Equipment $16,000 in time on the
Insurance expense $1,000
Supplies $1,800 Balance Sheet
Supplies expense
Cash
$200
$1,400
◼ Use $6,200
Dividends $600 Retained
earnings from
previous
statement! 68
69