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Contents of the course<br>1.tCHAPTER: 1 : PRINCIPLE OF ACCOUNTING<br>1.1tExplain the meaning of accounting. <br>1.2tIdentify users and uses of accounting. <br>1.3tIdentify the three basic forms of business organization<br>1.4tState the basic accounting equation and explain the meaning of assets, liabilities, and owneru2019s equity. <br>1.5tAnalyse the effect of business transactions on the basic accounting equation. <br>1.6tInventory estimation methods.<br>1.7tUnderstand what the four financial statements are and how they are prepared. <br>
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Principle of Accounting 1 Chapter: 1 Ali Shukri Ismail (Heemaal)
Objectives • Explain the meaning of accounting. • Identify users and uses of accounting. • Identify the three basic forms of business organization. • State the basic accounting equation and explain the meaning of assets, liabilities, and owner’s equity. • Analyse the effect of business transactions on the basic accounting equation. • Understand what the four financial statements are and how they are prepared.
What is accounting? • A process of identifying, measuring, recording, summarizing, andreporting economic information to decision makers in the form of financial statements. • Accounting is a link between business activities and decision makers.
Fundamental Concepts and Principles Accounting has two main divisions: • Financial accounting • Financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization. • Primarily prepared for users external to the company • Revenues, expenses, assets, liabilities, owners equity, etc. • Management accounting • Management accounting is concerned with providing information to managers i.e. people inside an organization who direct and control its operations. • Primarily for internal purposes • Costing, budgeting, etc.
Accounting as an Aid to Decision Making • Accounting information is useful to anyone who makes decisions that have economic results. • Owners want to know which employees are productive. • investors want to know if a company is a good investment. • Legislators want to know how a proposed law will affect budgets. • Managers want to know if a new product will be profitable. • Creditors want to know if they should extend credit, how much to extend, and for how long.
Users of Financial InformationInternal • Managers who plan, organize and run a business • Marketing managers • Production supervisors • Finance directors • Company officers
Users of Financial InformationInternal Users Ask? Cash to pay bills? Cost per unit? Which product is profitable? Give raises?
Users of Financial InformationExternal • Investors • Creditors • Others • Tax authorities • Customers • Labor Unions • Economic planners
Users of Financial InformationExternal Users Ask? Earning enough? Compare to competition? Will the company be able to pay bills when due?
Forms of business Organization The basic forms of business organizations • Sole proprietorship • Partnership • Corporation 1- Sole proprietorship: is a business owned by one person. • The owner takes all the profits or losses of the business and is liable for all its obligations. • Sole proprietorship represent the largest number of businesses in the world. But typically they are the smallest in size. • Life of the business ends when the owner • Decides to stop operating business • Dies • Is incapacitated
Cont.… 2- Partnership: Business owned by two or more people. • The partners share all profits or losses according to an agreed upon formula. • At least one person is liable for all obligations of the business. 3- Corporation: is a type of business organization that is recognized under the law as an entity separate from its owners. • The stockholders whose ownership is represented by the shares of stocks, do not directly control the corporation’s operations. • They elect a board of directs to run the corporation for their benefit. • Limited liability
Match the descriptions on the left with forms of business enterprise on the right: Question _____1. Pays dividend _____2. Owned by only one person _____3. Multiple co-owners _____4. Management appointed by board of directs _____5. Most numerous but usually small in size. _____6. separate legal entity • Sole proprietorship • Partnership • Corporation Answers: 1.C. 2.A. 3. C 4. C 5.A 6.C
TYPES OF ACTIVITIES PERFORMED BY BUSINESS ORGANIZATIONS There are three major types of businesses as to product are: 1. Service Business • A service type of business provides intangible products (products with no physical form). Service type firms offer professional skills, expertise and advice. Examples of service businesses are: • Business services, such as accounting, advisory, taxation, advertising, engineering, legal, research agencies, computer programming, etc. • Personal services, such as laundry, beauty salon, photography, automotive repairs, car rental, car wash and parking spaces.
2. Merchandising Business • This type of business buys products at wholesale price and sells the same at retail price. They are known as "buy and sell" businesses. • They make profit by selling the products at prices higher than their purchase costs. • A merchandising business buys a product and sells it without changing its form. Examples department store, grocery, clothes and accessories shop, consumer electronics, home furniture, etc.
3. Manufacturing Business • Unlike a merchandising business, a manufacturing business buys products with the intention of using them as raw materials to make a new product. Thus, there is transformation of the products purchased. • A manufacturing business combines raw materials, labor, and overhead costs in its production process. The goods produced will then be sold to customers. • Examples include: Food processing, such as producing canned meat, frozen goods, dairy products, bottled drinks, also bakeries and oil mills.
Financial Position and Accounting • Financial position: refers to company economic resources, such as cash, inventory and buildings and the claims against of those resources at a particular time. • Every company have two types of equities: creditors equities: such as bank loan and owners equity. The sum of these equities equals a company’s resources. • Economic resources = Creditors Equities+ Owner’s Equity • In Accounting terminology, • Economic resources are called assets • Creditors equities are called liabilities. So the equations can • be written like this: • This equation is known as the accounting equation. The two sides of the equation must always be equal, or “in balance,”
Assets • Assets are the economic resources of a company that are expected to benefit the company’s future operations. • Certain kinds of assets—for example, cash and money that customers owe to the company (called accounts receivable)—are monetary items. • Other assets—inventories (goods held for sale), land, buildings, and equipment—are nonmonetary, physical items. • Still other assets—the rights granted by patents, trademarks, and copyrights—are nonphysical.
Liabilities • Liabilities are a business’s present obligations to pay cash, transfer assets, or provide services to other entities in the future. • Among these obligations are amounts owed to suppliers for goods or services bought on credit (called accounts payable), borrowed money (e.g., money owed on bank loans), salaries and wages owed to employees, taxes owed to the government, and services to be performed. • As debts, liabilities are claims recognized by law. That is, the law gives creditors the right to force the sale of a company’s assets if the company fails to pay its debts. • Creditors have rights over owners and must be paid in full before the owners receive anything, even if payment of the debt uses up all the assets of the business.
Owner’s Equity • Owner’s equity represents the claims by the owner of a business to the assets of the business. • Owner’s equity is equal to total asset minus total liabilities By rearranging the accounting equation, we can define owner’s equity this way Owner’s equity = Asset- Liabilities Owners equity is affected by • Owner’s investments in the business • Withdrawals from the business and by • The business’s revenue and expenses
Cont.……. • Owner’s investments are assets that the owner puts into the business (e.g., by transferring cash from a personal bank account to the business’s bank account). These investment in the business increase owner’s equity. • Owner’s withdrawals are assets that the owner takes out of the business (e.g., by transferring cash from the business’s bank account to a personal bank account). Drawings decrease total owner’s equity.
Revenues are the gross increase in owner’s equity resulting from business activities entered into for the purpose of earning income. • Sale of merchandise, performance of service, rental of property, or lending of money. • Revenue usually result in an increase in an owner’s equity. • Expenses are decreases in owner’s equity that result from operating the business. • Example of expenses include utility expenses, rent expenses, tax expenses and supplies expenses. Generally a company is successful if its revenues exceed its expenses. • When revenues exceed expenses, the difference is called net income • When the Expenses exceed revenues, the difference is called net loss
Companies prepare four financial statements from the summarized accounting date:
Statement of Owner’s Equity Income Statement for Weiss Consultancy
Preparation of a Balance Sheet Listed in random order are some of the account balances for the Ali Services Company as of December 31, 2020. Place the balances in proper order and prepare a balance sheet?
SBI CORPORATION Balance Sheet December 31, 2020 • Arrange the following items in proper balance sheet presentation: (Be sure to list only assets, liabilities and equity accounts)
