BUS 505 – Principles of Accounting

Lecture 1

Dr. Mohammad Tareq

Slide
1-1
 What is Accounting?

The purpose of accounting:

(1) to identify, record, and communicate the economic
events of an

(2) organization to

(3) interested users.

Slide
1-2 SO 1 Explain what accounting is.
 The Accounting Process

Slide 33
1-3 School of Business
 Difference between Financial and
Management Accounting
Financial Accounting Management Accounting

Use of GAAP (i.e ICAB Yes No

and other related laws:
SEC laws and
notifications )
Users All stakeholders of a Only managers
business: shareholders,
banks, ATO and so on

Timeliness Mostly outdated Both historical or

forecasted information

Level of detail Mostly quantitative in Much detail information

nature and less detail

Slide
1-4
 What is Accounting?

Who Uses Accounting Data

External
Internal Users
Human Taxing
Users
Resources Authorities
Labor
Unions
Finance
Management Customers

Creditors

Marketing Regulatory
Agencies
Investors

Slide
1-5 SO 2 Identify the users and uses of accounting.
 Users of Accounting
Common Questions Asked User
1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income? Investors
3. Should any product lines be
eliminated? Management
4. Is cash sufficient to pay
dividends to shareholders? Finance
5. What price for our product will
maximize net income? Marketing
6. Will the company be able to
pay its debts? Creditors
Slide
1-6 SO 2 Identify the users and uses of accounting.
 The Building Blocks of Accounting

Accounting Standards

International Accounting Standards Board (IASB)

http://www.iasb.org/

International Financial Reporting Standards (IFRS)

Financial Accounting Standards Board (FASB)

http://www.fasb.org/

Generally Accepted Accounting Principles (GAAP)

Slide
1-7 SO 4 Explain accounting standards and the measurement principles.
 The Building Blocks of Accounting

Measurement Principles
Cost Principle (Historical) – dictates that companies record
assets at their cost.

Issues:
• Reported at cost when purchased and also over the time the
asset is held.

• Cost easily verified, market value is often subjective.

• Fair value information may be more useful.

Slide
1-8 SO 4 Explain accounting standards and the measurement principles.
 The Building Blocks of Accounting

Measurement Principles
Fair Value Principle – indicates that assets and liabilities should
be reported at fair value.

• In determining which measurement principle to use, companies

weigh the factual nature of cost figures versus the relevance of
fair value.

• Only in situations where assets are actively traded, such as

investment securities, is the fair value principle applied.

Slide
1-9 SO 4 Explain accounting standards and the measurement principles.
 The Building Blocks of Accounting

Assumptions
Monetary Unit Assumption – 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. Forms of Business
Ownership
• Corporation.

Slide
1-10 SO 5 Explain the monetary unit assumption and the economic entity assumption.
 The Building Blocks of Accounting

Proprietorship Partnership Corporation

• Generally owned • Owned by two or • Ownership divided

by one person. more persons. into shares
• Often small • Often retail and • Separate legal
service-type service-type entity organized
businesses businesses under state
• Owner receives any • Generally unlimited corporation law
profits, suffers any personal liability • Limited liability
losses, and is
• Partnership
personally liable for
agreement
all debts.

Slide
1-11 SO 5 Explain the monetary unit assumption and the economic entity assumption.
 The Building Blocks of Accounting

Review Question
A business organized as a separate legal entity under
state law having ownership divided into shares is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.

Solution on SO 5 Explain the monetary unit assumption

Slide
notes page
1-12 and the economic entity assumption.
 The Building Blocks of Accounting
Indicate whether each of the following
statements presented below is true or false.

1. The three steps in the accounting process are

identification, recording, and communication. True

2. The two most common types of external users

are investors and company officers. False

3. Shareholders in a corporation enjoy limited legal

liability as compared to partners in a partnership. True

Solution on SO 5 Explain the monetary unit assumption

Slide
notes page
1-13 and the economic entity assumption.
 The Building Blocks of Accounting
Indicate whether each of the following
statements presented below is true or false.

4. The primary accounting standard-setting body

outside the United States is the International True
Accounting Standards Board (IASB).

5. The cost principle dictates that companies record

assets at their cost. In later periods, however,
False
the fair value of the asset must be used if fair
value is higher than its cost.

Solution on SO 5 Explain the monetary unit assumption

Slide
notes page
1-14 and the economic entity assumption.
 The Basic Accounting Equation

Assets Liabilities Equity

= +

Provides the underlying framework for recording and

summarizing economic events.

Applies to all economic entities regardless of size.

Slide
1-15 SO 6 State the accounting equation, and define its components.
 The Basic Accounting Equation

Assets Liabilities Equity

= +

Provides the underlying framework for recording and

summarizing economic events.

Assets
• Resources a business owns.
• Provide future services or benefits.
• Cash, Inventory, Equipment, etc.

Slide
1-16 SO 6 State the accounting equation, and define its components.
 The Basic Accounting Equation

Assets Liabilities Equity

= +

Provides the underlying framework for recording and

summarizing economic events.

Liabilities
• Claims against assets (debts and obligations).
• Creditors - party to whom money is owed.
• Accounts payable, Notes payable, etc.

Slide
1-17 SO 6 State the accounting equation, and define its components.
 The Basic Accounting Equation

Assets Liabilities Equity

= +

Provides the underlying framework for recording and

summarizing economic events.

Equity
• Ownership claim on total assets.
• Referred to as residual equity.
• Share capital and retained earnings.

Slide
1-18 SO 6 State the accounting equation, and define its components.
 The Basic Accounting Equation
Illustration 1-7

Revenues result from business activities entered into for the purpose
of earning income.
Generally results from selling merchandise, performing services,
renting property, and lending money.

Slide
1-19 SO 6 State the accounting equation, and define its components.
 The Basic Accounting Equation
Illustration 1-7

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.

Slide
1-20 SO 6 State the accounting equation, and define its components.
 The Basic Accounting Equation
Illustration 1-7

Dividends are the distribution of cash or other assets to shareholders.

Reduce retained earnings
Not an expense

Slide
1-21 SO 6 State the accounting equation, and define its components.
 Using The Accounting Equation

Transaction Analysis

Slide
1-22 SO 7 Analyze the effects of business transactions on the accounting equation.
 The Basic Accounting Equation
Classify the following items as issuance of
shares, dividends, revenues, or expenses.
Then indicate whether each item increases or decreases equity.

Classification Effect on Equity

1. Rent expense Expense Decrease

2. Service revenue Revenue Increase

3. Dividends Dividends Decrease
4. Salaries expense Expense Decrease

Solution on
Slide
1-23
notes page SO 6 State the accounting equation, and define its components.
Slide
1-24
Slide
1-25
 Business Transaction
● What is Business Transaction?
● An economic event that affects assets, liabilities
or owners’ equity
and can be measured in monetary terms
ASSET = Liability +Owner’s Equity
Event

Transaction

Slide
1-26
 Using The Accounting Equation

• Each transaction has at least a dual effect on the

accounting equation.

Slide
1-27 SO 7 Analyze the effects of business transactions on the accounting equation.
 Are these events business
transactions?
● Withdrawal of $5000 by owner ?
● Yes

● NSU purchased $1 million books for its library?

● Yes

● Walton recently announced that it won a $5 million export contract in

China
● No

● Biman appoints a new GM for its marketing division who will be paid
Tk. 300,000/month.
- No
● One of the directors of Regent Air buys a flat at Bashundhara area

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1-28
 Transactions Analysis

Transaction (1). Investment by Shareholders. Ray and

Barbara Neal decide to open a computer programming service
which they name Softbyte. On September 1, 2011, they invest
$15,000 cash in exchange for capital shares. The effect of this
transaction on the basic equation is:

Solution on SO 7 Analyze the effects of business transactions

Slide
notes page
1-29 on the accounting equation.
 Transactions Analysis

Transaction (2). Purchase of Equipment for Cash. Softbyte

purchases computer equipment for $7,000 cash.

Solution on SO 7 Analyze the effects of business transactions

Slide
notes page
1-30 on the accounting equation.
 Transactions Analysis

Transaction (3). Purchase of Supplies on Credit. Softbyte

purchases for $1,600 from Acme Supply Company computer
paper and other supplies on credit which they expected to last
several months.

Solution on SO 7 Analyze the effects of business transactions

Slide
notes page
1-31 on the accounting equation.
 Transactions Analysis

Transaction (4). Services Provided for Cash. Softbyte

receives $1,200 cash from customers for programming services
it has provided.

Solution on SO 7 Analyze the effects of business transactions

Slide
notes page
1-32 on the accounting equation.
 Transactions Analysis

Transaction (5). Purchase of Advertising on Credit. Softbyte

receives a bill for $250 from the Daily News for advertising but
postpones payment until a later date.

Solution on SO 7 Analyze the effects of business transactions

Slide
notes page
1-33 on the accounting equation.
 Transactions Analysis

Transaction (6). Services Provided for Cash and Credit.

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.

Solution on SO 7 Analyze the effects of business transactions

Slide
notes page
1-34 on the accounting equation.
 Transactions Analysis

Transaction (7). Payment of Expenses. Softbyte pays the

following Expenses in cash for September: store rent $600,
salaries of employees $900, and utilities $200.

Solution on SO 7 Analyze the effects of business transactions

Slide
notes page
1-35 on the accounting equation.
 Transactions Analysis

Transaction (8). Payment of Accounts Payable. Softbyte

pays its $250 Daily News bill in cash.

Solution on SO 7 Analyze the effects of business transactions

Slide
notes page
1-36 on the accounting equation.
 Transactions Analysis

Transaction (9). Receipt of Cash on Account. Softbyte

receives $600 in cash from customers who had been billed for
services [in Transaction (6)].

Solution on SO 7 Analyze the effects of business transactions

Slide
notes page
1-37 on the accounting equation.
 Transactions Analysis

Transaction (10). Dividends. The corporation pays a dividend

of $1,300 in cash.

Solution on SO 7 Analyze the effects of business transactions

Slide
notes page
1-38 on the accounting equation.
 Transactions Analysis
Illustration 1-10
Summary of Transactions Tabular summary of
Softbyte transactions

Slide
1-39 SO 7 Analyze the effects of business transactions on the accounting equation.
 Financial Statements

Companies prepare four financial statements from the

summarized accounting data:

Retained Statement Statement

Income
Earnings of Financial of Cash
Statement
Statement Position Flows

Slide
1-40 SO 8 Understand the four financial statements and how they are prepared.
 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.

Solution on
notes page

Slide
1-41 SO 8 Understand the four financial statements and how they are prepared.
 Financial Statements Income Statement

• Reports the revenues and expenses for a specific period of time.

• Net income – revenues exceed expenses.
Illustration 1-11
• Net loss – expenses exceed revenues. Financial statements and
their interrelationships

Slide
1-42 SO 8 Understand the four financial statements and how they are prepared.
 Net income is needed to determine the
Financial Statements ending balance in retained earnings.

Illustration 1-11
Financial statements and
their interrelationships

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1-43 SO 8
 Retained Earnings
Financial Statements Statement

• Statement indicates the reasons why Illustration 1-11

retained earnings has increased or Financial statements and
their interrelationships
decreased during the period.

Slide
1-44 SO 8 Understand the four financial statements and how they are prepared.
 Financial
Statements

The ending
balance in
retained
earnings is
needed in
preparing the
statement of
financial position

Illustration 1-11
Financial statements and
their interrelationships

Slide
1-45 SO 8 Understand the four financial statements and how they are prepared.
 Financial Statements Balance Sheet

Illustration 1-11
Financial statements and
their interrelationships

Slide
1-46 SO 8 Understand the four financial statements and how they are prepared.
 Financial
Statements

Illustration 1-11
Financial statements and
their interrelationships

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1-47
 Financial Statements

Statement of Cash Flows

• Information for a specific period of time.
• Answers the following:

1. Where did cash come from?

2. What was cash used for?
3. What was the change in the cash balance?

Slide
1-48 SO 8 Understand the four financial statements and how they are prepared.
 Financial Statements Statement of Cash Flows

Illustration 1-11
Financial statements and
their interrelationships

Slide
1-49 SO 8 Understand the four financial statements and how they are prepared.
 Answer on
notes page
Slide
1-50 SO 8 Understand the four financial statements and how they are prepared.
 Financial Statements

Review Question
Which of the following financial statements is prepared
as of a specific date?
a. Balance sheet.
b. Income statement.
c. Retained earnings statement.
d. Statement of cash flows.

Solution on
notes page.

Slide
1-51 SO 8 Understand the four financial statements and how they are prepared.
 Understanding U.S. GAAP

Key Differences Accounting in Action

• In 2002, the U.S. Congress issued the Sarbanes-Oxley Act (SOX),
which mandated certain internal controls for large public
companies listed on U.S. exchanges. Debate about international
companies (non-U.S.) adopting SOX-type standards centers on
whether the benefits exceed the costs. The concern is that the
higher costs of SOX compliance are making the U.S. securities
markets less competitive.
• Financial frauds have occurred at companies such as Satyam
Computer Services (IND), Parmalat (ITA), and Royal Ahold (NLD).
They have also occurred at large U.S. companies such as Enron,
WorldCom, and AIG.

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1-52
 Understanding U.S. GAAP

Key Differences Accounting in Action

• IFRS tends to be less detailed in its accounting and disclosure
requirements than GAAP. This difference in approach has resulted
in a debate about the merits of “principles-based” (IFRS) versus
“rules-based” (GAAP) standards.
• U.S. regulators have recently eliminated the need for foreign
companies that trade shares in U.S. markets to reconcile their
accounting with GAAP.
• GAAP is based on a conceptual framework that is similar to that
used to develop IFRS.

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1-53
 Understanding U.S. GAAP

Key Differences Accounting in Action

• The three common forms of business organization that are
presented in the chapter, proprietorships, partnerships, and
corporations, are also found in the United States. Because the
choice of business organization is influenced by factors such as
legal environment, tax rates and regulations, and degree of
entrepreneurism, the relative use of each form will vary across
countries.
• Transaction analysis is basically the same under IFRS and GAAP
but, as you will see in later chapters, the different standards may
impact how transactions are recorded.

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1-54
 Understanding U.S. GAAP

Looking to the Future Accounting in Action

• Both the IASB and the FASB are hard at work developing
standards that will lead to the elimination of major differences in
the way certain transactions are accounted for and reported.
Consider, for example, that as a result of a joint project on the
conceptual framework, the definitions of the most fundamental
elements (assets, liabilities, equity, revenues, and expenses) may
actually change. However, whether the IASB adopts internal
control provisions similar to those in SOX remains to be seen.

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1-55
 Career Opportunities APPENDIX

• Public accounting • Government

• Private accounting • Forensic accounting

“Show me
the Money”

Slide
1-56 SO 9 Explain the career opportunities in accounting.
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1-57
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