PRINCIPLE

ACCOUNTING

Meeting 01
Introduction to Accounting and
Business
& Accounting Cycle
 Nature of
Business and Accounting
• A business is an organization in which basic resources
(inputs), such as materials and labor, are assembled
and processed to provide goods or services (outputs)
to customers.
• The objective of most businesses is to earn a profit.
• Profit is the difference between the amounts received
from customers for goods or services and the amounts
paid for the inputs used to provide the goods or
services.

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 Types of Businesses
Service Businesses Service
Delta Air Lines Transportation services
The Walt Disney Company Entertainment services

Merchandising Businesses Product

Walmart General merchandise
Amazon.com Internet books, music, videos

Manufacturing Businesses Product

Ford Motor Co. Cars, trucks, vans
Dell Inc. Personal computers

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 Role of Accounting
in Business
• Accounting can be defined as an information system
that provides reports to users about the economic
activities and condition of a business.
• The process by which accounting provides information
to users is as follows:
o Identify users.
o Assess users’ information needs.
o Design the accounting information system to meet users’
needs.
o Record economic data about business activities and events.
o Prepare accounting reports for users.

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 Managerial Accounting
• The area of accounting that provides internal users
with information is called managerial accounting, or
management accounting.
• Managerial accountants employed by a business are
employed in private accounting.

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 Financial Accounting

• The area of accounting that provides external users

with information is called financial accounting.
• The objective of financial accounting is to provide
relevant and timely information for the decision-
making needs of users outside of the business.
• General-purpose financial statements are one type
of financial accounting report that is distributed to
external users.

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 Role of Ethics in
Accounting and Business
(slide 1 of 3)
• The objective of accounting is to provide relevant,
timely information for user decision making.
• Accountants must behave in an ethical manner so that
the information they provide users will be trustworthy
and, thus, useful for decision making.
• Ethics are moral principles that guide the conduct of
individuals.

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 Role of Ethics in
Accounting and Business
(slide 2 of 3)
What went wrong for these managers
and companies?
• The answer to the preceding question normally
involved one or both of the following two factors:
o Failure of individual character
o Culture of greed and ethical indifference

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 Role of Ethics in
Accounting and Business
(slide 3 of 3)
• Guidelines for behaving ethically follow:
1. Identify an ethical decision by using your personal ethical
standards of honesty and fairness.
2. Identify the consequences of the decision and its effect on
others.
3. Consider your obligations and responsibilities to those who
will be affected by your decision.
4. Make a decision that is ethical and fair to those affected
by it.

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 Opportunities for Accountants

• Accountants and their staff who provide services on a

fee basis are said to be employed in public
accounting.
• Accountants employed by a business firm, government,
or a not-for-profit organization are said to be
employed in private accounting.
• Public accountants who have met a state’s education,
experience, and examination requirements may
become Certified Public Accountants (CPAs).

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 Basic Accounting Systems
(slide 1 of 2)
• An accounting system is the methods and procedures
for collecting, classifying, summarizing, and reporting
a business’s financial and operating information.
• As a business grows and changes, its accounting
system also changes in the following three-step
process.
o Step 1: Analyze user information needs.
o Step 2: Design the system to meet the user needs.
o Step 3: Implement the system.

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 Basic Accounting Systems
(slide 2 of 2)
• Internal controls are the policies and procedures that
protect assets from misuse, ensure that business
information is accurate, and ensure that laws and
regulations are being followed.
• Processing methods are the means by which the
accounting system collects, summarizes, and reports
accounting information. These methods may be either
manual or computerized.

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 Accounting Information
System

Accounting Information System

◆ Collects and processes transaction data.
◆ Disseminates financial information to interested parties.
◆ Varies widely from business to business.
► Nature of business
► Type of transactions
► Size of business
► Volume of data to be handled
► Informational demands

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 Accounting
Information System

Helps management answer such questions as:

◆ How much and what kind of debt is outstanding?
◆ Were our sales higher this period than last?
◆ What assets do we have?
◆ What were our cash inflows and outflows?
◆ Did we make a profit last period?
◆ Are any of our product lines or divisions operating at a loss?
◆ Can we safely increase our dividends to shareholders?
◆ Is our rate of return on net assets increasing?

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 Accounting
Information System
Basic Terminology
◆ Event ◆ Journal

◆ Transaction ◆ Posting

◆ Account ◆ Trial Balance

◆ Real Account ◆ Adjusting Entries

◆ Nominal Account ◆ Financial Statements

◆ Ledger ◆ Closing Entries

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 THE ACCOUNTING CYCLE
ILLUSTRATION 3.6
Transactions

Reversing entries Journalization

Post-closing trail balance Posting

Closing Trial balance

Work
Statement preparation Sheet
Adjustments

Adjusted trial balance

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 The Accounting Cycle
Summarized

1. Enter the transactions of the period in appropriate journals.

2. Post from the journals to the ledger (or ledgers).
3. Prepare an unadjusted trial balance (trial balance).
4. Prepare adjusting journal entries and post to the ledger(s).
5. Prepare a trial balance after adjusting (adjusted trial balance).
6. Prepare the financial statements from the adjusted trial balance.
7. Prepare closing journal entries and post to the ledger(s).
8. Prepare a trial balance after closing (post-closing trial balance).
9. Prepare reversing entries (optional) and post to the ledger(s).

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