Accounting Definition

Transcription

1 Accounting Definition MINSK MINSK INNOVATION UNIVERSITY Oct, 2015

2 Learning Objectives After this lecture, you should be able to: 1. Define accounting. 2. Describe the primary forms of business organization. 3. Identify the users and uses of accounting information. 4. Explain the three principal types of business activity. 5. Explain the basic accounting equation. 6. Identify the financial statements and describe its purpose 7. Explain the meaning of basic accounting terminologies.

3 Preview of lecture

4 Accounting is the process of identifying, recording, and communicating the economic events of an organization to interested users.

5 Process: The accounting process includes the bookkeeping function.

6 Economic event: Economic Event is a transaction that change the financial position of the business. May be external or internal. Not all activities represent transactions. Each transaction has a dual effect on the accounting equation.

7 Economic event: Examples Event Criteria Is the financial position (assets, liabilities, or owner s equity) of the company changed? Decision

8 Economic event: Illustration Event Criteria Is the financial position (assets, liabilities, or owner s equity) of the company changed? Decision

9 Forms of business organization Proprietorship Partnership Corporation Owned by one person. Often small service-type businesses Owner receives any profits, suffers any losses, and is personally liable for all debts. Owned by two or more persons. Often retail and service-type businesses Generally unlimited personal liability Partnership agreement Tax advantages Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability Multi-Tax Tax advantages

10 In choosing the organizational form for your outdoor guide service, you should consider the pros and cons of each. Identify each of the following organizational characteristics with the organizational form or forms with which it is associated. 1. Easier to raise funds. 2. Simple to establish. 3. No personal legal liability. 4. Tax advantages. 5. Easier to transfer ownership. Solution 1. Corporation. 2. Sole proprietorship and partnership. 3. Corporation. 4. Sole proprietorship and partnership. 5. Corporation.

11 Accounting users Internal Users Human Resources Finance Marketing Management Government There are two broad groups of users of financial information: internal users and external users. Customers SEC Investors Labor Unions Creditors External Users

12 Accounting users: Internal users Internal Users

13 Accounting users: External users External Users

14 Accounting users: Illustration Common Questions Asked User 1. Can we afford to give our employees a pay raise? 2. Did the company earn a satisfactory income? 3. Do we need to borrow in the near future? 4. Is cash sufficient to pay dividends to the stockholders? 5. What price for our product will maximize net income? 6. Will the company be able to pay its short-term debts? Human Resources Investors Management Finance Marketing Creditors

15 Accounting users: Illustration User Usage 1. Government Tax declaration accuracy 2. Customers 3. Labor unions 4. SEC Stability, Support, Innovation Compensation Funds safety Financial statements compatibility

16 Business activities All businesses are involved in three types of activity: Financing, Investing, Operating. The accounting information system keeps track of the results of each of these business activities.

17 Business activities: Financing Financing Activities Two primary sources of outside funds are: 1. Borrowed money (debt financing) Borrowing money from creditors Amounts owed are called liabilities. 2. Owner equity Issuing (selling) shares of stock for shareholders. Payments to stockholders are called dividends.

18 Business activities: Investing Investing Activities Purchase of resources a company needs to generate revenues. Computers, delivery trucks, furniture, buildings, etc. (property, plant, and equipment). Resources owned by a business are called assets. Investments are another example of an investing activity.

19 Business activities: Operating Operating Activities Once a business has the assets it needs, it can begin its operations. 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. 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.

20 Classify each item as an asset, liability, common stock, revenue, or expense. 1. Cost of renting property. 2. Truck purchased. 3. Notes payable. 4. Issuance of ownership shares. 5. Amount earned from providing service. 6. Amounts owed to suppliers. Solution 1. Expense. 2. Asset. 3. Liabilities. 4. Common stock. 5. Revenue. 6. Liabilities.

21 Accounting equation: Dual effect Assets = Liabilities + Owner s Equity Accounting equation provides the underlying framework for recording and summarizing economic events.

22 Accounting equation: Dual effect Assets Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc. Assets = Liabilities + Owner s Equity

23 Accounting equation: Dual effect Liabilities Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc. Assets = Liabilities + Owner s Equity

24 Accounting equation: Dual effect Owner s Equity Ownership claim on total assets. Referred to as residual equity. Investment by owners and revenues (+) Drawings and expenses (-). Assets = Liabilities + Owner s Equity

25 Accounting equation: Dual effect 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. 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.

26 Accounting equation: Dual effect Transaction (1): Sergey decides to open a computer programming service which he names Softbyte. On September 1, 2012, Sergey invests $15,000 cash in the business.

27 Accounting equation: Dual effect Transaction (2): Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash.

28 Accounting equation: Dual effect Transaction (3): Softbyte purchases for $1,600 from Olga Supply Company computer paper and other supplies expected to last several months. The purchase is made on account.

29 Accounting equation: Dual effect Transaction (4): Softbyte receives $1,200 cash from customers for programming services it has provided.

30 Accounting equation: Dual effect Transaction (5): Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.

31 Accounting equation: Dual effect Transaction (6): Softbyte provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.

32 Accounting equation: Dual effect Transaction (7): Softbyte pays the following expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.

33 Accounting equation: Dual effect Transaction (8): Softbyte pays its $250 Daily News bill in cash.

34 Accounting equation: Dual effect Transaction (9): Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].

35 Accounting equation: Dual effect Transaction (10): Sergey withdraws $1,300 in cash from the business for his personal use.

36 Financial Statements Companies prepare four financial statements from the summarized accounting data: Income Statement Owner Equity Statement Balance Sheet Cash Flow Statement Note The primary types of financial statements required by International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (GAAP) are the same.

37 Financial Statements Net income is needed to determine the ending balance in owner s equity.

38 Financial Statements The ending balance in owner s equity is needed in preparing the balance sheet

39 Financial Statements The balance sheet and income statement are needed to prepare statement of cash flows.

40 Financial Statements Review Question Net income will result during a time period when: a. assets exceed liabilities. b. assets exceed revenues. c. expenses exceed revenues. d. revenues exceed expenses.

41 Financial Statements Question Which of the following financial statements is prepared as of a specific date? a. Balance sheet. b. Income statement. c. Owner's equity statement. d. Statement of cash flows.

42 Accounting Terminologies Accounting Glossary