Introduction to

Accounting
Module 1

1
 Learning Objective

Explain the purpose and

importance of accounting.
 Importance of Accounting Exhibi
t
1.1

For example, the sale Keep a chronological Prepare reports such as

by Apple of an iPhone. log of transactions. financial statements.

Accounting is an information and measurement system that identifies,

records, and communicates relevant, reliable, and comparable information
about an organization’s business activities.
 Learning Objective

Identify users and uses of, and

opportunities in, accounting.
 Users of Financial Information Exhibi
t
Accounting is called the language of business because all organizations set1.2
up an accounting information system to communicate data to help people make
better decisions. Accounting serves many users who can be divided into two
groups: external users and internal users.

5
 Opportunities in Accounting Exhibi
t
1.3

Accounting information is in all aspects of our lives. When we

earn money, pay taxes, invest savings, budget earnings, and
plan for the future, we use accounting.
6
 NEED-TO-KNOW 1-1
Identify the following users of accounting information as either an (a) external or (b) internal user.

Regulator a) External user

CEO b) Internal user
Shareholder c) External user
Controller d) Internal user
Executive Employee b) Internal user
External Auditor e) External user
Production Manager f) Internal user
Nonexecutive Employee a) External user

External users of accounting information are NOT directly involved in running the organization.

Internal users of accounting information ARE directly involved in managing and operating an organization.
 Learning Objective

Explain why ethics

are crucial to accounting.
 Ethics – A Key Concept Exhibi
t
1.6
The goal of accounting is to provide useful information for
decisions. For information to be useful, it must be trusted.
This demands ethics in accounting. Ethics are beliefs that
distinguish right from wrong. They are accepted standards of
good and bad behavior.
 Fraud Triangle
Three factors must exist for a person to commit fraud:
opportunity, pressure, and rationalization.

Envision a way to commit Fails to see the criminal

fraud with a low perceived nature of the fraud or
risk of getting caught justifies the action

Must have some pressure to

commit fraud, like unpaid bills
10
 Sarbanes–Oxley (SOX)
Congress passed the Sarbanes–Oxley Act to help curb financial abuses at
companies that issue their stock to the public. SOX requires that these public
companies apply both accounting oversight and stringent internal controls.
The desired results include more transparency, accountability, and
truthfulness in reporting transactions.
 Generally Accepted
Accounting Principles (GAAP)
Financial accounting is governed by concepts and rules known
as generally accepted accounting principles (GAAP). GAAP aims
to make information relevant, reliable, and comparable.

Reliable information is
trusted by users.

Relevant information Comparable information

affects decisions is helpful in contrasting
of users. organizations.
 International Standards
In today’s global economy, there is increased demand by external users
for comparability in accounting reports. This demand often arises when
companies wish to raise money from lenders and investors in different
countries.
International International Financial
Accounting Standards Reporting Standards (IFRS)
Board (IASB)
An independent group Identify preferred accounting
(consisting of individuals from practices
many countries), issues
International Financial
Reporting Standards (IFRS)

Differences between U.S. GAAP and IFRS are decreasing as the FASB
and IASB pursue a convergence process aimed to achieve a single set
of accounting standards for global use.
 Accounting Principles

Measurement Principle Revenue Recognition Principle

(or Cost Principle) 1. Recognize revenue when it is earned.
Accounting information is based on 2. Proceeds need not be in cash.
actual cost. Actual cost is considered 3. Measure revenue by cash received
objective. plus cash value of items received.

Expense Recognition Principle

Full Disclosure Principle
(or Matching Principle)
A company is required to report the details
A company must record its expenses
behind financial statements that would impact
incurred to generate the revenue
users’ decisions.
reported.
 Accounting Assumptions
Going-Concern
Monetary Unit Assumption
Assumption Reflects Express transactions and events in
assumption that the business will monetary, or money, units.
continue operating instead of being
closed or sold.

Business Entity
Assumption A business is
accounted for separately from other
business entities, including its
owner.
Time Period Assumption
Presumes that the life of a company
can be divided into time periods, such
as months and years.
 Proprietorship, Partnership, Exhibi

and Corporation t
1.8
Here are some of the major attributes of proprietorships, partnerships, and
corporations:
 Accounting Constraints
Materiality
Cost-benefit
Only information that would
Only information with benefits of
influence the decisions of
disclosure greater than their
a reasonable person need
cost need be disclosed.
be disclosed.
 NEED-TO-KNOW 1-2 Part 1
Identify the following terms/phrases as either an accounting (a) principle, (b) assumption, or (c) constraint.

Materiality
Measurement
Business entity
Going concern
Expense recognition
Time period
Full disclosure
Revenue recognition
 NEED-TO-KNOW 1-2 Part 1
Principles: Govern the amount and/or timing of information to be reported in financial statements.

Measurement principle Also called the cost principle

Revenue recognition principle
Expense recognition principle
Cost is measured on a cash or equal-to-cash basis.
Governs valuation of assets and liabilities on the balance sheet.
Governs the timing of revenues recognized on the income
statement.
Revenue is recognized when earned.
Also called the matching principle
Governs the timing of expenses reported on the income
statement.
Expenses are recognized in the same time period as the
revenues they help generate.

Full disclosure principle A company must report the details behind financial statements that
would impact users' decisions.
Disclosures are often in the footnotes to the financial
statements.
 NEED-TO-KNOW 1-2 Part 1
Assumptions: Generally related to the financial statement headings.

Going concern assumption
Monetary unit assumption
Time period assumption
Business entity assumption
Presumption that the business will continue operating instead of being
closed or sold.
We can express transactions and events in monetary units. (i.e.,
Dollars, Pesos, Euros)
Presumes that the life of a company can be divided into time
periods, and that useful reports can be prepared for those periods.
A business is accounted for separately from other business
entities, including its owner(s).

Accounting constraints: Reasonableness of information to be reported.

Materiality Only information that would influence the decisions of a

Benefits exceed cost
reasonable person needs to be disclosed.
Materiality is a function of the nature of the item and/or
dollar amount.
The benefits of the information disclosed must be greater than the
costs of providing the information.
 NEED-TO-KNOW Part 1 Solution
Identify the following terms/phrases as either an accounting (a) principle, (b) assumption, or (c) constraint.

Materiality c) Constraint
Measurement a) Principle
Business Entity b) Assumption
Going Concern b) Assumption
Expense Recognition a) Principle
Time Period b) Assumption
Full Disclosure a) Principle
Revenue Recognition a) Principle
 NEED-TO-KNOW 1-2 Part 2
Complete the following table with either a yes or a no regarding the attributes of a partnership and a corporation.

Attribute Present Partnership Corporation

Business taxed no yes
Limited liability no yes
Legal entity no yes
Unlimited life no yes
 Learning Objective

Define and interpret the

accounting equation and each
of its components.

© McGraw-Hill Education
23
 Transaction Analysis and the Accounting
Equation
The Accounting Equation

Assets = Liabilities + Equity

Expanded Accounting Equation:

Net Income
 NEED-TO-KNOW 1-3

Use the accounting equation to compute the missing financial statement amounts.

Assets = Liabilities + Equity

Bose $150 = $30 + $120
Vogue $400 = $100 + $300

Use the expanded accounting equation to compute the missing financial statement amounts.

Assets = Liabilities + Equity + Common - Dividends + Revenues - Expenses

Stock
Tesla $200 $80 $120 $100 $0 $60 ($40)
YouTube $400 $160 $240 $220 ($10) $120 ($90)
 Learning Objective

Analyze business transactions

using the accounting equation.

26
 Transaction 1:
Chas Taylor invests $30,000 cash to
start a company.

The accounts involved are:

(1) Cash (asset)
(2) Common Stock (equity)
 Accounting Equation:
Chas Taylor invests $30,000 cash to start
the business, Fast Forward.
Assets Liabilities + Equity
Accounts Notes Commo
Cash = Payable Payable n Stock
(1) $ $ 30,000
30,000 Supplies Equipment

$ 30,000 $ - $ - $ - $ - $ 30,000

$ 30,000 = $
30,000
 Transaction 2:
Company purchased supplies paying
$2,500 cash.

The accounts involved are:

(1) Cash (asset)
(2) Supplies (asset)
 Accounting Equation:
Company purchased supplies paying
$2,500 cash.
Assets Liabilities Equity
+
Accounts Commo
= Notes
Payable Payable n Stock
$ 30,000
Cash Supplies
Accounting Equation
Equipment (1) $ 30,000
must remain in
(2) (2,500) $ 2,500
balance!!

$ 27,500 $ 2,500 - $ - $ - $ 30,000

$
$ 30,000 = $
30,000
 Transaction 3:
Purchased equipment for $26,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)
 Accounting Equation:
Purchased equipment for $26,000 cash.

Assets Liabilities + Equity

Accounts Notes
= Common
Payable $ 30,000
(2) Cash $ Supplies
(2,500) 2,500 Payable Stock
Equipment
(3) (1) $
(26,000) 30,000
$ Accounting Equation
26,000 still remains in
balance!!
$ 1,500 $ $ $ - $ $ 30,000
2,500 26,000 -
$ 30,000 = $
30,000
 Transaction 4:
Purchased supplies of $7,100 on credit.

The accounts involved are:

(1) Supplies (asset)
(2) Accounts Payable (liability)
 Accounting Equation:
Purchased Supplies of $7,100 on credit.

Asset = Liabilities +
s Accounts Notes Equity
Cash Supplies Common
Equipment (1) $ 30,000 Payable Payable Stock
(2) (2,500) $ 2,500 $ 30,000
(3) (26,000) $ 26,000 Accounting Equation still
(4) 7,100 remains in balance!!
$ 7,100
$ 1,500 $ 9,600 $ 26,000
$ 7,100 $ - $ 30,000
$ 37,100 = $
37,100
 Transaction Analysis

Now, let’s look at transactions involving

revenues, expenses and dividends.

© McGraw-Hill Education
Learning Objective P1: Analyze business transactions using the accounting
 Transaction 5:
Provided consulting services to a customer
and received $4,200 cash right away.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

© McGraw-Hill Education
Learning Objective P1: Analyze business transactions using the accounting
 Accounting Equation:
Provided consulting services to a customer
and received $4,200 cash right away.

Assets = Liabilities +
Accounts Equity
Notes
Common
Payable Payable Stock Revenue
Bal. $ Cash
1,500 $Supplies Equipment
$ 26,000 $ 7,100 $
9,600
30,000
(5) 4,200 $
4,200
$ 5,700 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000 $ 4,200

$ 41,300 = $ 41,300
 Transactions 6 and 7:
Paid rent of $1,000 and
salaries of $700 to employees.

The accounts involved are:

(1) Cash (asset)
(2) Rent expense (equity)
(3) Salaries expense
Remember that the balance
in the Expense accounts
(equity)But, total Equity
actually increase. decreases, because
expenses reduce equity.
 Accounting Equation:
Paid rent of $1,000 and
salaries of $700 to employees.
Assets = Liabilities +
Accoun Equity
Notes Common
ts Payab Stock Expens
Bal. $ Cash
5,700 $Supplies
9,600 Equipment
$ 26,000 Payable
7,10 le $ Revenue
30,000 $ es
(6) $ 0 4,200 (1,000)
(1,000) $
(7) (700)
(700) $ 4,000 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000 $ 4,200 $
(1,700)
$ 39,600 = $ 39,600

Remember that expenses decrease equity.

 Transaction 8:
Provided consulting services of $1,600 and
rents facilities for $300 to a customer for
credit.

The accounts involved are:

(1) Accounts receivable
(asset)
(2) Consulting Revenues
(equity)
(3) Rental Revenue
(equity)
 Accounting Equation:
Provided consulting services of $1,600 and rents
facilities for $300 to a customer for credit.

Assets = Liabilities + Equity Accounts

Accounts Common
Cash Receivable Supplies Equipment
Bal. Payable
$ 4,000 Stock $Revenue $ 26,000 Expenses
$ $ $ 4,200 (1,700)
9,600 7,100 30,000
(8) 1,900 $ 1,600
300
$ 4,000 $ 1,900 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 6,100 $
(1,700)
$ 41,500 = $
41,500
 Transaction 9:
Client in transaction 8 pays $1,900 for consulting
services.

The accounts involved are:

(1) Cash (asset)
(2) Accounts receivable
(asset)
 Accounting Equation:
Client in transaction 8 pays $1,900 for consulting services.

Assets + Equity

Liabilities
Accounts Common

Accounts
Cash Receivable Supplies Equipment Payable Stock Revenue
Expenses
Bal. $ 4,000 1,900 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200
(1,700)
(9) 1,900 (1,900) $ 1,600
300

$ 5,900 0 $ 9,600 $ 26,000 $ $ 30,000 $ 6,100 $

7,100 (1,700)
 Transaction 10:
FastForward pays $900 as partial payment for
supplies purchased in transaction 4.

The accounts involved are:

(1) Cash (asset)
(2) Accounts payable
(liability)
 Accounting Equation:
FastForward pays $900 as partial payment for supplies
purchased in transaction 4.
Assets + Equity

Liabilities
Accounts Common
Accounts
Receivable Supplies Equipment Payable Stock R
Cash Expense
Bal. $ 5,900 0 $ 9,600 $ 26,000 $ 30,000 $ 4,2
$ 7,100 (1,700)
(10) (900) $ 1,600
(900)
300

$ 5,000 0 $ 9,600 $ 26,000 $ $ 30,000 $ 6,10

6,200 (1,700)
 Transaction 11:
Dividends of $200 are paid to shareholders.

The accounts involved are:

(1) Cash (asset)
(2) Dividends
(equity) But, total Equity
Remember that the decreases because
Dividend account actually dividends cause
increases (just like our equity to go
Expenses account . . . ) down !!
 Accounting Equation:
Dividends of $200 are paid to shareholders.

Assets = Liabilities + Equity

Accounts Accounts Common
Receivable Supplies Payable Stock Dividends Revenue
Cash Equipment 0 $ Expenses
Bal. $ $ 6,200 $ 30,000 $ 4,200
9,600 $ 26,000
5,000 (1,700)
(11) (200) $ 1,600
(200)
300
0 $ 9,600
$ 26,000
$ 4,800 $ 6,200 $ 30,000 $ (200) $ 6,100 $
(1,700)
$ 40,400
= $ 40,400
 NEED-TO-KNOW 1-4
Assume Tata Company began operations on January 1 and completed the following transactions during its first month of
operations.

Jan. 1 Jamsetji invested $4,000 cash in the Tata company in exchange for its common stock. The
Jan. 5 company purchased $2,000 of equipment on credit.
Jan. 14 The company provided $540 of services for a client on credit.
Jan. 21 The company paid $250 cash for an employee’s salary

Arrange the following asset, liability, and equity titles in a table: Cash; Accounts Receivable; Equipment; Accounts
Payable; Common Stock; Dividends; Revenues; and Expenses.

Assets Liabilities + Equity

=
Jan. 1 Cash
$4,000 Accounts Accounts + Common
$4,000 - Dividends + Revenues - Expenses
Jan. 5 Equipment Receivable
$2,000 Payable
$2,000 Stock
Jan. 14 $540 $540
Jan. 21 ($250) ($250)
$3,750 $540 $2,000 $2,000 $4,000 $0 $540 ($250)

Total Assets $6,290

Total Liabilities 2,000
Total Equity $4,290

48
 Learning Objective

P2:
Identify and prepare basic financial
statements and explain how they
interrelate.
 Financial Statements
The four financial statements and their purposes are:
1.Income statement — describes a company’s revenues and
expenses along with the resulting net income or loss over a
period of time due to earnings activities.
2.Statement of retained earnings— explains changes in
equity from net income (or loss) and from any dividends over
a period of time.
3.Balance sheet — describes a company’s financial position
(types and amounts of assets, liabilities, and equity) at a point
in time.
4.Statement of cash flows — identifies cash inflows (receipts)
and cash outflows (payments) over a period of time.
 1 - 51

Exhibit 1.10
Financial Statements
and Their Links

(cont. next slide)

 1 - 52

Exhibit 1.10
Financial Statements
and Their Links

52
 NEED-TO-KNOW 1-5
Prepare the (a) income statement, (b) statement of retained earnings, and (c) balance sheet, for Apple using the following
condensed data from its fiscal year ended September 26, 20X2.
Accounts payable $35,490 Investments and other assets $230,039
Other liabilities 135,634 Land and equipment 22,471
Cost of sales (expense) 140,089 Selling and other expense 40,232
Cash 21,120 Accounts receivable 16,849
Retained earnings, September 29, 20X1 87,152 Net income 53,394
Dividends in fiscal year 20X2 48,262 Retained earnings, September 26, 20X2 92,284
Revenues 233,715 Common stock 27,071

Income Statement Statement of Retained Earnings Balance Sheet

Assets Detail of Assets
Liabilities Detail of Liabilities
Equity:
+ Beginning Retained earnings
Retained - Dividends Ending Retained earnings
earnings Detail of Revenues ± Net income (loss) Ending
- Divide Detail of Expenses Retained earnings
nds Net income (loss)
+
Revenue
s
- Expen
ses
 NEED-TO-KNOW 1-5
Accounts payable $35,490 Investments and other assets 30,039
$2
Other liabilities 135,634 Land and equipment 22,471
Cost of sales (expense) 140,089 Selling and other expense 40,232
Cash 21,120 Accounts receivable 16,849
Retained earnings, September 26, 20X1 87,152 Net income 53,394
Dividends in fiscal year 20X2 48,262 Retained earnings, September 28, 20X2 92,284
Revenues 233,715 Common stock 27,071
APPLE APPLE
Income Statement Statement of Retained Earnings
For Fiscal Year Ended September 26, 20X2 For Fiscal Year Ended September 26, 20X2
Revenues $233,715 Retained earnings, September 29, 20X1 $ 87,152
Expenses Plus: Net income 53,394
Cost of sales (expense) $140,089 Less: Dividends 48,262
Selling and other expense 40,232 Retained earnings, September 28, 20X2 $ 92,284
Total expenses 180,321
Net income $53,394

APPLE
Balance Sheet
September 26, 20X2
Assets Liabilities
Cash $21,120 Accounts payable $35,490
Accounts receivable 16,849 Other liabilities 135,634
Land and equipment 22,471 Total liabilities 171,124
Investments and other assets 230,039 Equity
Common Stock 27,071
Retained earnings $ 92,284
Total assets $290,479 Total equity 119,355
Total liabilities and equity $290,479 54