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The Accounting Process

The document discusses the accounting process and provides details about bookkeeping, accounting, internal and external users of accounting information, management accounting, financial accounting, the basic accounting equation, assets, liabilities, owner's equity, increases and decreases to owner's equity, transaction analysis examples, and the four basic financial statements.

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Fatima Saleem
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42 views46 pages

The Accounting Process

The document discusses the accounting process and provides details about bookkeeping, accounting, internal and external users of accounting information, management accounting, financial accounting, the basic accounting equation, assets, liabilities, owner's equity, increases and decreases to owner's equity, transaction analysis examples, and the four basic financial statements.

Uploaded by

Fatima Saleem
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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THE ACCOUNTING PROCESS

BOOKKEEPING DISTINGUISHED
FROM ACCOUNTING
Accounting
1. Includes bookkeeping
2. Includes much more such as the entire process of
identifying, recording, and communicating economic
events.
Bookkeeping
1. Involves only the recording of economic events
2. Is just one part of accounting
Users of Accounting Information
Internal External
Users Users
QUESTIONS ASKED BY INTERNAL USERS
(Management)

What is the cost of manufacturing


Is cash sufficient to pay bills? each unit of product?

Can we afford to give employees Which product line is the most


pay raises this year? profitable?
Management Accounting
• Management accounting provides internal decision
makers (management), who are charged with
achieving the goals of profitability and liquidity, with
information about operating, investing, and
financing activities.
• Examples are financial comparisons of operating
alternatives, projections of income from new sales
campaigns, and forecasts of cash needs for the next
year.
External users
• External users are individuals and organizations outside a company
who want financial information about the company.
• The two most common types of external users are investors and
creditors.
• Investors (owners) use accounting information to make decisions to
buy, hold, or sell ownership shares of a company.
• Creditors (such as suppliers and bankers) use accounting information to
evaluate the risks of granting credit or lending money.
QUESTIONS ASKED BY EXTERNAL USERS

How does the company compare in


Is the company earning size and profitability with its
satisfactory income? competitors?
What do we
do if they
catch us?

Will the company be able to pay its debts as they come due?
Financial Accounting
• Financial accounting generates reports and communicates them
to external decision makers so they can evaluate how well the
business has achieved its goals. These reports are called
financial statements.
• Financial statements report directly on the goals of profitability
and liquidity and are used extensively both inside and outside a
business to evaluate the business’s success.
• It varies according to the requirement of user.
BUSINESS ENTERPRISES
A business owned by one person is generally a proprietorship (owner’s
equity).
A business owned by two or more persons associated as partners is a
partnership (partners’ equity).
A business organized as a separate legal entity under corporation law and
having ownership divided into transferable shares is called a corporation
(shareholders’ equity).
BASIC ACCOUNTING EQUATION

The Basic Accounting Equation

Assets = Liabilities + Owner’s Equity


ASSETS AS A BUILDING BLOCK

 Assets are resources owned by a business.


 They are things of value used in carrying out such
activities as production and exchange.
LIABILITIES AS A BUILDING BLOCK

Liabilities are claims against assets.


They are existing debts and obligations.
OWNER’S EQUITY

 Owner’s Equity is equal to total assets minus total liabilities.


 Owner’s Equity represents the ownership claim on total assets.
It is often referred to as residual equity.
 Subdivisions of Owner’s Equity:
1. Investments by Owner
2. Drawings
3. Revenues
4. Expenses
Increase in Owner’s Equity

Investments by owner are the assets put into


the business by the owner.
These investments in the business increase
owner’s equity.
Increase in Owner’s Equity

Revenues are the gross increases in owner’s equity resulting


from business activities entered into for the purpose of
earning income.
Revenues may result from sale of merchandise,
performance of services, rental of property, or lending of
money.
Revenues usually result in an increase in an asset.
Decrease in Owner’s Equity

Drawings are withdrawals of cash or other


assets by the owner for personal use.
Drawings decrease total owner’s equity.
Decrease in Owner’s Equity

Expenses are the decreases in owner’s equity that


result from operating the business.
Expenses are the cost of assets consumed or
services used in the process of earning revenue.
Examples of expenses include utility expense, rent
expense, and supplies expense.
INCREASES AND DECREASES IN
OWNER’S EQUITY

INCREASES DECREASES
Investments Withdrawals
by Owner by Owner
Owner’s
Equity
Revenues Expenses
Expanded accounting equation
TRANSACTION ANALYSIS

Marc Doucet decides to open a computer


programming service.

BANK

Softbyt
e
TRANSACTION ANALYSIS
TRANSACTION 1
TRANSACTION ANALYSIS
TRANSACTION 2
TRANSACTION ANALYSIS
TRANSACTION 3
TRANSACTION ANALYSIS
TRANSACTION 4
TRANSACTION ANALYSIS
TRANSACTION 5
TRANSACTION ANALYSIS
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.
TRANSACTION ANALYSIS
TRANSACTION 7

Softbyte pays the following expenses in cash for September: store rent $600, salaries
and wages of employees $900, and utilities $200. These payments result in an equal
decrease in assets and expenses. Cash decreases $1,700, and the specific expense
categories (Rent Expense, Salaries and Wages Expense, and Utilities Expense) decrease
owner’s equity by the same amount.
TRANSACTION ANALYSIS
TRANSACTION 8

Softbyte pays its $250 Daily News bill in cash. The company
previously [in Transaction (5)] recorded the bill as an increase in
Accounts Payable and a decrease in owner’s equity.
TRANSACTION ANALYSIS
TRANSACTION 9

Softbyte receives $600 in cash from customers who had been billed
for services [in Transaction (6)].
TRANSACTION ANALYSIS
TRANSACTION 10
Summary of Transaction
Numerical
Solution
FINANCIAL STATEMENTS

After transactions are identified, recorded, and summarized, four


financial statements are prepared from the summarized accounting
data:
1. An income statement presents the revenues and expenses and
resulting net income or net loss of a company for a specific period of
time.
2. A statement of owner’s equity summarizes the changes in owner’s
equity for a specific period of time.
FINANCIAL STATEMENTS
In addition to the income statement and statement of owner’s equity, two
additional statements are prepared:
3. A balance sheet reports the assets, liabilities, and owner’s equity of a
business enterprise at a specific date.
4. A cash flow statement summarizes information concerning the cash
inflows (receipts) and outflows (payments) for a specific period of time.

These statements provide relevant financial data for internal and external
users.
Numerical

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