ACCOUNTING I

Chapter 1: Accounting and Business Environment

Dr. E. Esra BİLGİÇ

Week 1
Chapter 1: Accounting and Business Environment

What You Will Learn In This Chapter?

● Identify the activities and information users associated with accounting

● Explain the ethical behaviour, measurement principles and basic
assumptions
● Describe the accounting equation and understand the elements of financial
statements
● Analyze the effects of financial transactions on the accounting equation
● Describe and prepare the basic financial statements
Chapter 1: Accounting and Business Environment

Chapter Outline

● Accounting Definition
● Accounting Information: Basic Activities and Information Users
● Ethical Behavior, Measurement Principles, and Basic Assumptions
● Basic Accounting Equation and Elements of Financial Statements
● Effects of Financial Transactions on the Accounting Equation
● Financial Statements
Chapter 1: Accounting and Business Environment

Accounting Is...

● Accounting is an information
system which provides financial
information about the entity for
decision makers.

● “The language of the business”

Chapter 1: Accounting and Business Environment

Basic Activities In Accounting

● Identify business activities.

● Record the business transactions and,
● Communicates the results to decision makers
Chapter 1: Accounting and Business Environment

Information Users

● Internal Users- managers, employees etc.

● External Users- individuals or organizations outside a company
Chapter 1: Accounting and Business Environment

Ethical Behaviour, Measurement Principles and Basic Assumptions

● The financial information must be sufficient, useful, and understandable.

● Like other professions, accounting has a theory consisting certain rules,

principles, assumptions, and standards.

● The quality of financial information primarily depends on ethical behavior of

individuals/accountants.

Ethics are the humanly devised rules, procedures, and norms to judge
one’s action as right or wrong, honest or dishonest, and fair or not fair.
Chapter 1: Accounting and Business Environment

Ethical Behaviour, Measurement Principles and Basic Assumptions

Accounting standards are a set of principles companies follow when they

prepare and publish their financial statements, in other words it provides a
standard way of describing the company’s financial performance.
● International Accounting Standards Board(IASB) issued IFRS (except US)
● Financial Accounting Standards Board(FASB) issued GAAP

These boards aims to develop a single set of high-quality, understandable,

enforceable and globally accepted accounting standards.
Chapter 1: Accounting and Business Environment

Ethical Behaviour, Measurement Principles and Basic Assumptions

Measurement Principles
Measurement refers the valuation of assets and liabilities in accounting process.
Standards generally use one of two main principles in measurement:
● Historical cost principle states that assets are recorded at their cost.
● Fair value principle states that assets and liabilities are reported at their
fair value.
Chapter 1: Accounting and Business Environment

Ethical Behaviour, Measurement Principles and Basic Assumptions

Basic Assumptions
● The monetary unit assumption: “transactions can only be recorded if the
transaction data can be expressed in terms of money.”
● The economic entity assumption: “the financial transactions of the entity
should be recorded separately from the economic activities of its owner”
● Sole proprietorship,
● Partnership and
● Corporation
● The going concern assumption: “the business entity will remain in
operation forever”
Chapter 1: Accounting and Business Environment

Basic Accounting Equation

● The basic accounting equation provides the underlying framework for

recording and summarizing the financial transactions of a business entity.
● It shows the relationship among assets, liabilities, and owner’s equity.
Chapter 1: Accounting and Business Environment

Elements Of Basic Accounting Equation

There are three elements which reflect the financial situation of an organization:

● Assets are economic resources that are expected to benefit the business in
the future.
● Liabilities are debts that are owed to creditors. Liabilities are claims of
creditors against to assets of the company.
● Owner’s equity is the owner’s claims to the assets of the business.
Chapter 1: Accounting and Business Environment

Factors Affecting The Level Of Owner’s Equity

Four main factors which increase or decrease the level of owner’s equity:

● Contributions by owner(s), (invested capital)

● Distributions to owner(s), (dividends)
● Revenues: For examples, selling goods (sales), performing services (fees),
lending money (interest), leasing machine (rent)
● Expenses: For example, to earn revenue by selling a good, company
needs to consume raw materials, supplies, labor, energy etc
Chapter 1: Accounting and Business Environment

Expanded Version Of Basic Accounting Equation

Chapter 1: Accounting and Business Environment

Effects Of Financial Transactions On The Accounting Equation

● A financial transaction is any event that affects the financial position of the
business and can be measured with faithful representation.
● Transactions may be identified as either external(btw the company and
third party) or internal(entirely within company) transactions.
Chapter 1: Accounting and Business Environment

Effects Of Financial Transactions On The Accounting Equation

Identification of transaction includes analyzing of each transaction in terms of

its effect on the items of the accounting equation, identifying the specific items
affected and determining the amount of the change in each item.
Chapter 1: Accounting and Business Environment
Effects Of Financial Transactions On The Accounting
Equation

Dual effect means that at least two items

must be affected by a transaction and
accounting equation has to remain in
balance after making the changes in
accounting equation.
Chapter 1: Accounting and Business Environment

Analysing The Effects Of Transactions

Transaction 1: Contributions by Owner: On January 1, 2020, company owner invests

20.000 TL into the business to establish a company titled ABC.
Chapter 1: Accounting and Business Environment

Analysing The Effects Of Transactions

Transaction 2: Purchasing Equipment for Cash:On January 3, 2020, ABC purchases

a laptop to use in the company by paying 7,000 TL for cash.
Chapter 1: Accounting and Business Environment

Analysing The Effects Of Transactions

Transaction 3: Purchasing Supplies on Credit. On January 10 ,2020, ABC purchases

computer accessories on credit, agreeing to pay 2.000TL in 60 days.
Chapter 1: Accounting and Business Environment

Analysing The Effects Of Transactions

Transaction 4: Earning Service Revenue for Cash:On January 20, 2020, ABC
receives 1,500 TL cash from its client for mobile application development service has
performed.
Chapter 1: Accounting and Business Environment

Financial Statements

Financial statements are the business documents that are used to

communicate financial information needed in decision making process.

There are four main financial statements prepared by using summarized

accounting data:
● Income statement,
● Owner’s equity statement,
● Balance sheet and
● Statement of cash flows.
Chapter 1: Accounting and Business Environment

Financial Statements

● Income statement reports the revenues and expenses and resulting net
income or loss of a company for a specific period of time.

● Owner’s equity statement details the changes in owner’s equity over an

accounting period.

● Balance sheet reports the assets, liabilities, and owner’s equity of the
business at a specific date.

● Statement of cash flows summarizes information concerning the cash

inflows (receipts) and outflows (payments) for a specific period of time.
Chapter 1: Accounting and Business Environment

Order Of Preparing Financial Statements

1. They need to calculate net income/loss to prepare owner’s equity

statement,
2. Calculate the closing balance of owner’s equity to prepare Balance Sheet
3. Need the balance amount of cash item reported in balance sheet
4. Check the accuracy of the closing balance of statement of cash flows.
Chapter 1: Accounting and Business Environment

Questions & Answers

Recording consists of ....

A. Identifying financial transactions.

B. Measuring financial transactions.
C. Preparing and distributing accounting reports.
D. Keeping a systematic, chronological diary of events, measured in dollars
and cents.
E. Identifying, measuring, receiving, and communicating financial transactions
to information users.
Chapter 1: Accounting and Business Environment

Answer

Recording consists of ....

A. Identifying financial transactions.

B. Measuring financial transactions.
C. Preparing and distributing accounting reports.
D. Keeping a systematic, chronological diary of events, measured in dollars
and cents.
E. Identifying, measuring, receiving, and communicating financial transactions
to information users.
Chapter 1: Accounting and Business Environment

Question

Which of the following is not an acceptable statement of the basic accounting

equation?

A. Assets – Liabilities = Owner’s equity

B. Assets = Liabilities + Revenues - Expenses

C. Assets = Liabilities + Owner’s equity

D. Assets – Owner’s equity = Liabilities

E. Assets = Owner’s equity + Revenue - Expenses

Chapter 1: Accounting and Business Environment

Answer

Which of the following is not an acceptable statement of the basic accounting

equation?

A. Assets – Liabilities = Owner’s equity

B. Assets = Liabilities + Revenues - Expenses

C. Assets = Liabilities + Owner’s equity

D. Assets – Owner’s equity = Liabilities

E. Assets = Owner’s equity + Revenue - Expenses

Chapter 1: Accounting and Business Environment

Question

The financial statement that summarizes information about the cash inflows and
outflows during a period is the....

A. Income statement.

B. Owner’s equity statement.

C. Balance Sheet

D. Audit report.

E. Statement of cash flows.

Chapter 1: Accounting and Business Environment

Answer

The financial statement that summarizes information about the cash inflows and
outflows during a period is the....

A. Income statement.

B. Owner’s equity statement.

C. Balance Sheet

D. Audit report.

E. Statement of cash flows.

Chapter 1: Accounting and Business Environment

Question

Which of the following financial statements is prepared as of a specific date?

A. Balance sheet.

B. Income statement.

C. Owner’s equity statement

D. Statement of cash flows.

E. Statement at profit
Chapter 1: Accounting and Business Environment

Answer

Which of the following financial statements is prepared as of a specific date?

A. Balance sheet.

B. Income statement.

C. Owner’s equity statement

D. Statement of cash flows.

E. Statement at profit
Chapter 1: Accounting and Business Environment

Further Reading

● Read the chapter on ekampus platform.

● Further reading about Enron and WorldCom Case(watch documentaries)
● Check the “Learn with questions” part for Chapter I.