Accounting in Action, Chapter 1 of Managerial Accounting

Chapter 1

1. Learning Objectives Identify the activities and users associated with accounting. Explain the building blocks of accounting: Assumptions and principles. State the accounting equation, and define its components. 3 Analyze the effects of business transactions on the accounting equation. 2 1 4 Describe the four financial statements and how they are prepared. 5 Accounting in Action 1

2. Accounting as language of Business Profit as a performance measure of business Amount of resources and the related liabilities represents the financial condition of the business Accounting data are the basis of managerial decision both for short and ling term. Accounting helps the managers in forecasting the future. To make the externals informed about the business. Azharul Islam 2

3. Accounting Process Azharul Islam 3 Accounting consists of three basic activities—it identifies, (Transactions) records, and (record, classify and summarize) communicates (financial Statements) the economic events of an organization to interested users.

4. Three important activities Azharul Islam 4 Bookkeeping

5. Users of Accounting Information Azharul Islam 5

6. Various users need financial information The accounting profession has developed standards that are generally accepted and universally practiced. Financial Statements Balance Sheet Income Statement Statement of Owner's Equity Statement of Cash Flows Note Disclosure Generally Accepted Accounting Principles (GAAP) Generally Accepted Accounting Principles LO 2

7. Generally Accepted Accounting Principles Azharul Islam 7 Assumptions: Economic Entity Going concern Periodicity Monetary unit Principles Constants

8. Assumptions Azharul Islam 8 MONETARY UNIT ASSUMPTION requires that companies include in the accounting records only transaction data that can be expressed in terms of money. ECONOMIC ENTITY ASSUMPTION requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. Proprietorship Partnership Corporation Forms of Business Ownership

9. Assumptions Azharul Islam 9 Going concern Assumption: An accounting guideline which allows the readers of financial statements to assume that the company will continue on long enough to carry out its objectives and commitments. Time period Assumption: The accounting guideline that allows the accountant to divide up the complex, ongoing activities of a business into periods of a year, quarter, month, week, etc

10. Elements of Financial Statements Azharul Islam 10

11. Elements of Financial Statements Azharul Islam 11 Assets: provide future benefits Cash Accounts Receivable Prepaid Expense Equipment Land Liabilities: Outside claims on the total asset Accounts payable Notes Payable Unearned revenue Accrued expenses Owners Equity: Residual/Ownership claims on the total assets Capital Drawing Profits

12. Elements of financial statements Azharul Islam 12 Revenues: Increase in owners’ equity resulting from business activities Sales revenue Service revenue Interest revenue Expenses: Assets consumed and services used in the process of earning revenue. Cost of goods sold Salaries expenses Rent expense

13. Basic accounting Equation Azharul Islam 13

14. Basic accounting Equation Azharul Islam 14 Investment of 10,000 Cash 10000 Capital 10000

15. Basic accounting Equation Azharul Islam 15 Investment of 10,000 By MR. X Cash 10000 Capital 10000 Borrow from AB Bank 15,000 Cash 10000+15000=25000 N/P 15,000

16. Basic accounting Equation Azharul Islam 16 Investment of 10,000 By MR. X Cash 10000 Capital 10000 Borrow from AB Bank 15,000 Cash 10000+15000=25000 N/P 15,000 Purchase Furniture of 8000 Cash 25000-5000=20000 Furniture 8000 A/P 3000

17. Expansion of Accounting Equation Azharul Islam 17 Investments by owner are the assets the owner puts into the business. Revenues result from business activities entered into for the purpose of earning income. Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.

18. Expansion of Accounting Equation Azharul Islam 18 Drawings An owner may withdraw cash or other assets for personal use. Expenses are the cost of assets consumed or services used in the process of earning revenue. Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc.

19. Classification of Accounts Azharul Islam 19 We can classify accounts using accounting equation-

20. Transaction Analysis Azharul Islam 20 Falske Computer Timeshare Company entered into the following transactions during May 2017. 1 . Purchased computers for $20,000 from Digital Equipment on account. 2. Paid $4,000 cash for May rent on storage space. 3. Received $17,000 cash from customers for contracts billed in April. 4. Performed computer services for Viking Construction Company for $4,000 cash. 5. Paid Tri-State Power Co. $11,000 cash for energy usage in May. 6. Falske invested an additional $29,000 in the business. 7. Paid Digital Equipment for the computers purchased in (1) above. 8. Incurred advertising expense for May of $1,200 on account.

21. Companies prepare four financial statements : Balance Sheet Income Statement Statement of Cash Flows Owner’s Equity Statement The four financial statements and how they are prepared. LO 5

22. Net income is needed to determine the ending balance in owner’s equity. Financial Statements LO 5 Illustration 1-9 Financial statements and their interrelationships SOFTBYTE Income Statement For the Month Ended September 30, 2017 SOFTBYTE Owner’s Equity Statement For the Month Ended September 30, 2017

23. The ending balance in owner’s equity is needed in preparing the balance sheet. Illustration 1-9 Illustration 1-9 Financial statements and their interrelationships SOFTBYTE Owner’s Equity Statement For the Month Ended September 30, 2017 SOFTBYTE Balance Sheet September 30, 2017

24. Balance sheet and income statement are needed to prepare statement of cash flows. SOFTBYTE Balance Sheet September 30, 2017 SOFTBYTE Statement of Cash Flows For the Month Ended September 30, 2017 Illustration 1-9 Financial statements and their interrelationships Financial Statements

25. Azharul Islam 25 Jodi salem's Law office Tabular analysis of the transactions For the month of August 30, 2017 Date Cash A/R Supplies Equip = N/P A/P Cap Rev Exp Draw Aug-01 5,000 1500 500 6000 =   4200 8800       1 1200 -1200     =             2 -2800       =   -2800         3 3000 4500     =       7500     4 -400     2000 =   1600         5 -2500       =         -2500     -900       =         -900     -400       =         -400   6 -700       =           -700 7 2000       = 2000           8         =   270     -270   Total 3,500 4,800 500 8,000 = 2,000 3,270 8,800 7,500 - 4,070 - 700 16800 = 16800

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