Introduction to Financial Accounting (1).pptx

This PPT describe the definition, importance and relevance of Financial Accounting

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

2. The Nature of Accounting Accounting is the process of identifying, recording, summarizing, and reporting economic information for decision makers Accountants present this information in reports called financial statements 2 of 43 Accountant’s Analysis and Recording Financial Statements Users Event

3. Branches of Accounting Financial Accounting (Record keeping) Cost Accounting (Price fixation & Operating efficiency) Management Accounting (Analysis for decision making) 3 of 43

4. Definition of Accounting Accounting is ‘the process of identifying, measuring, recording and communicating economic transactions’ (Collis and Hussey, 2007, p. 5) Identifying economic transactions of the business and not the personal affairs of the owners or managers Measuring the economic transactions in monetary terms Recording them in the accounting system Communicating them to users by producing financial statements that summarise the information 4 of 43

5. Illustration 1-1 The activities of the accounting process The accounting process includes the bookkeeping function. Three Activities LO 1

6. INTERNAL USERS Illustration 1-2 Questions that internal users ask Who Uses Accounting Data LO 1

7. LO 1 Illustration 1-3 Questions that external users ask Who Uses Accounting Data EXTERNAL USERS

8. 1 DO IT! 1 Solution: 1. 2. 3. 4. 5. Indicate whether the following statements are true or false . The three steps in the accounting process are identification, recording, and communication. Bookkeeping encompasses all steps in the accounting process. Accountants prepare, but do not interpret, financial reports. The two most common types of external users are investors and company officers. Managerial accounting activities focus on reports for internal users. LO 1 True False False False True Basic Concepts

9. Types of Transactions Sales: the exchange of a good/service from buyer to seller for money or credit. Record as: 1) for the seller, it’s a debit to cash or A/R and 2) a credit to the sales account. Purchases: the transactions that are required by a business in order to obtain the goods or services needed to successfully create the goods or services the business offers. Record as: If the purchase is made in cash, 1) debit to the inventory account, and 2) credit to cash.

10. Receipts: This transaction refers to a business getting paid for delivering goods or services to another business. Record as: 1) Debit to cash, and 2) credit to A/R. Payments: The transaction that refers to a business receiving money for a good or service. Record as: 1) Credit to cash, and 2) debit to A/P.

11. Measurement Principles HISTORICAL COST PRINCIPLE (or cost principle) dictates that companies record assets at their cost. FAIR VALUE PRINCIPLE states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation . LO 2

12. 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 Assumptions LO 2

13. Proprietorship Partnership Corporation Owned by two or more persons Often retail and service-type businesses Generally unlimited personal liability Partnership agreement Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability Owned by one person Owner is often manager/operator Owner receives any profits, suffers any losses, and is personally liable for all debts Forms of Business Ownership LO 2

14. Sole Proprietorship © 2011 Pearson Prentice Hall. All rights reserved. 1- 14 Business owned by an individual Owner maintains title to assets and profits Unlimited liability Termination occurs on owner’s death or by owner’s choice

15. Partnerships © 2011 Pearson Prentice Hall. All rights reserved. 1- 15 ▪ ▪ Two or more persons come together as co-owners General Partnership : All partners are fully responsible for liabilities incurred by the partnership. Limited Partnerships : One or more partners can have limited liability, restricted to the amount of capital invested in the partnership. There must be at least one general partner with unlimited liability. Limited partners cannot participate in the management of the business and their names cannot appear in the name of the firm. ▪

16. Corporation © 2011 Pearson Prentice Hall. All rights reserved. 1- 16 ▪ Legally functions separate and apart from its owners Corporation can sue, be sued, purchase, sell, and own property Owners (shareholders) dictate direction and policies of the corporation, oftentimes through elected board of directors. Shareholder’s liability is restricted to amount of investment in company Life of corporation does not depend on the owners … corporation continues to exist through easy transfer of ownership Taxed separately ▪ ▪ ▪ ▪

17. A business organized as a separate legal entity under state law having ownership divided into shares of stock is a proprietorship. partnership. corporation. sole proprietorship. Question LO 2 Assumptions

18. Assets Liabilities Owner's Equity = + LO 3 LEARNING OBJECTIVE State the accounting equation, and define its components. 3 Basic Accounting Equation Provides the underlying framework for recording and summarizing economic events. Assets are claimed by either creditors or owners. If a business is liquidated, claims of creditors must be paid before ownership claims.

19. Assets Liabilities Owner's Equity = + Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc. Assets LO 3 Basic Accounting Equation

20. Assets Liabilities Owner's Equity = + Basic Accounting Equation Claims against assets (debts and obligations). Creditors (party to whom money is owed). Accounts Payable, Notes Payable, Salaries and Wages Payable, etc. Liabilities LO 3

21. Owner's Equity Assets Liabilities Owner's Equity = + Basic Accounting Equation LO 3 Ownership claim on total assets. Referred to as residual equity. Investment by owners and revenues (+) Drawings and expenses (-). https://www.youtube.com/watch?v=OYql7Y9NnBg

22. Transactions are a business’s economic events recorded by accountants. May be external or internal . Not all activities represent transactions. Each transaction has a dual effect on the accounting equation. LO 4 LEARNING OBJECTIVE Analyze the effects of business transactions on the accounting equation. 3

23. TRANSACTION IDENTIFICATION PROCESS

24. Double entry system Double entry concept states that 'for every debit, there is a credit'. Every transaction should have two-sided effect to the extent of same amount. This concept has resulted in accounting equation which states that at any point of time assets of any entity must be equal (in monetary terms) to the total of owner's equity and outsider's liabilities. 24 of 43

25. Transaction Analysis TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to start a smartphone app development company which he names Softbyte . On September 1, 2017, he invests $15,000 cash in the business. This transaction results in an equal increase in assets and owner’s equity. Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Owner's Capital 1. +15,000 +15,000 Assets = Liabilities + Owner's Equity + + + + + = LO 4 Owner's Drawings Rev. Exp. + - Illustration 1-8 Tabular summary of Softbyte transactions

26. 8. -250 -250 9. [phone]. -1,300 -1,300 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + + + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte Inc. purchases computer equipment for $7,000 cash . Illustration 1-8 LO 4 Owner's Capital Owner's Drawings Rev. Exp. + -

27. Ethics in Financial Reporting Recent financial scandals include: Enron , WorldCom , HealthSouth , AIG , and other companies. Regulators and lawmakers concerned that economy would suffer if investors lost confidence in corporate accounting. In response, Congress passed Sarbanes-Oxley Act (SOX) . Effective financial reporting depends on sound ethical behavior. LO 2 LEARNING OBJECTIVE Explain the building blocks of accounting: ethics, principles, and assumptions. 4

28. Illustration 1-4 Steps in analyzing ethics cases and situations Ethics in Financial Reporting LO 2

29. Ethics are the standards of conduct by which one's actions are judged as: right or wrong. honest or dishonest. fair or not fair. all of these options. Question Ethics in Financial Reporting LO 2

30. 2-1: Record in equation form the financial effects of a business transaction. Practice Questions The company buys equipment for $5,000 cash $100,000 = $100,000

31. Section 1, Objective 2-1: Record in equation form the financial effects of a business transaction. Practice Questions The company buys $6,000 of equipment on account (on credit) $106,000 = $106,000 Notice the new claim against the firm ’ s property – the creditor’ s claim of $6,000.

32. Section 1, Objective 2-1: Record in equation form the financial effects of a business transaction. Business Transaction (5 of 7) The firm purchases supplies for $1,500 cash $106,000 = $106,000

33. Section 1, Objective 2-1: Record in equation form the financial effects of a business transaction. Practice Questions The firm makes a payment of $2,500 on account $103,500 = $103,500