Chapter 1

Accounting in Action
Instructor: Md. Jahirul Islam
Assistant Professor of Accounting
Department of Business Administration
Faculty of Business Studies
BGMEA University of Fashion and Technology (BUFT)
Chapter
1-1
 Study Objectives

1. Explain what accounting and transaction are.

2. Identify the users and uses of accounting.
3. Understand why ethics is a fundamental business concept.
4. Explain different assumptions
5. Explain different principles.
6. State the accounting equation, and define its components.
7. Analyze the effects of business transactions on the accounting
equation.
8. Understand the four financial statements and how they are
prepared.

Chapter
1-2
 Accounting in Action

The Building The Basic Using the

What is Basic Financial
Blocks of Accounting
Accounting? Accounting Statements
Accounting Equation Equation

Three Ethics in Assets Transaction Income

activities financial Liabilities analysis statement
Who uses reporting Summary of Owner’s
Owner’s
accounting Generally equity transactions equity
data accepted statement
accounting Balance
principles sheet
Assumptions Statement of
cash flows

Chapter
1-3
 What is Accounting?

Accounting is an information system that

identifies, records, and communicates the
economic events of an organization to the
interested users.

Chapter
1-4 SO 1 Explain what accounting and transaction are.
 What is Accounting?

More broadly, accounting is a systematic

process of identifying, recording, classifying,
and summarizing the economic events of an
organization and communicating that
financial information to the users.

Chapter
1-5 SO 1 Explain what accounting and transaction are.
 What is Accounting?

Three Activities
Illustration 1-1
Accounting process

The accounting process includes

the bookkeeping function.

Chapter
1-6 SO 1 Explain what accounting and transaction are.
 What is Transaction?

Transactions/ Economic Events:

Transactions are those economic events
which have effects on the accounting
equation. These economic events or
transactions are recorded by accountants.

Chapter
1-7 SO 1 Explain what accounting and transaction are.
 What is Transaction?

Features of transactions:
i. May be external or internal.
ii. Not all activities represent
transactions.
iii. Each transaction has a dual effect on
the accounting equation.

Chapter
1-8 SO 1 Explain what accounting and transaction are.
 What is Transaction?

Examples:
(i) Owners invested Tk. 90,000 in the
business;
(ii) Products were sold on account/for cash
Tk. 50,000;
(iii) Services were provided on account/for
cash Tk. 10,000;
(iv) Salaries were paid for Tk. 25,000; etc.
Chapter
1-9 SO 1 Explain what accounting and transaction are.
 What is Transaction?

Non-economic Events:
Non-economic events are those events
which have no impact on the financial
condition of an organization. These
non-economic events are not recorded
in accounting record.

Chapter
1-10 SO 1 Explain what accounting and transaction are.
 What is Transaction?

Examples:
(i) Two employees were appointed or recruited,
they didn’t work and advance salaries were not
paid;
(ii) A work order has been received but services
will be provided in future. No advance payment
was received;
(iii) An order has been received but products will
be delivered in future. No advance payment was
received; etc.
Chapter
1-11 SO 1 Explain what accounting and transaction are.
 Who Uses Accounting Data?

Internal Users
Management NBR
Human Investors
Resources
There are two broad
groups of users of Labor
financial information: Unions
Finance
internal users and
external users. Creditors
Marketing
SEC
Customers External
Users
Chapter
1-12 SO 2 Identify the users and uses of accounting.
 Who Uses Accounting Data?
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. Do we need to borrow in the
near future? Management
4. Is cash sufficient to pay
dividends to the stockholders? Finance
5. What price for our product
will maximize net income? Marketing
6. Will the company be able to
pay its short-term debts? Creditors
Chapter
1-13 SO 2 Identify the users and uses of accounting.
 Who Uses Accounting Data?

Discussion Question
Q1-1: “Accounting is ingrained in our society and it
is vital to our economic system.” Do you agree?
Explain.

See notes page for discussion

SO 3 Understand why ethics is a fundamental business concept.

Chapter
1-14
 The Building Blocks of Accounting

Ethics In Financial Reporting

Standards of conduct by which one’s actions are
judged as right or wrong, honest or dishonest, fair or
not fair, are Ethics.

Recent financial scandals include: Enron,

WorldCom, HealthSouth, AIG, and others.

Congress passed Sarbanes-Oxley Act of 2002.

Effective financial reporting depends on sound

ethical behavior.

SO 3 Understand why ethics is a fundamental business concept.

Chapter
1-15
 Ethics

Review Question
Ethics are the standards of conduct by which one's
actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.

SO 3 Understand why ethics is a fundamental business concept.

Chapter
1-16
 The Building Blocks of Accounting

Financial Statements
Various users Income Statement
need financial Statement of Owner’s Equity
information Balance Sheet
Statement of Cash Flows
Note Disclosure

The accounting profession

has attempted to develop Generally Accepted
a set of standards that
Accounting
are generally accepted
and universally practiced.
Principles (GAAP)

Chapter
1-17 SO 4 Explain generally accepted accounting principles and the cost principle.
 The Building Blocks of Accounting

Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)

http://www.sec.gov/

Financial Accounting Standards Board (FASB)

http://www.fasb.org/

International Accounting Standards Board

(IASB)
http://www.iasb.org/

Chapter
1-18 SO 4 Explain generally accepted accounting principles and the cost principle.
 The Building Blocks of Accounting

Organizations Involved in Standard Setting:

Institute of Chartered Accountants of

Bangladesh (ICAB)
https://www.icab.org.bd/

Chapter
1-19 SO 4 Explain generally accepted accounting principles and the cost principle.
 The Building Blocks of Accounting

Assumptions – Provide a foundation for the

accounting process.

SO 4 Explain different assumptions

Chapter
1-20
 Assumptions

There are four assumptions:

 Monetary Unit Assumption

 Economic Entity Assumption/ Business Entity

Assumption

 Time Period Assumption/ Periodicity

Assumption

 Going Concern Assumption

Chapter SO 4 Explain different assumptions
1-21
 Monetary Unit Assumption

States that only transaction data that can

be expressed in terms of money be
included in the accounting records. If an
asset cannot be expressed in a dollar
amount or in any other currency, it
cannot be entered in accounting records.

SO 4 Explain different assumptions

Chapter
1-22
 Monetary Unit Assumption

For example, the management team of a very

successful corporation may be the corporation's
most valuable asset. However, the accountant
is not able to objectively convert those talented
people into a dollar amount or in any other
currency. Hence, the management team will
not be included on the balance sheet.

SO 4 Explain different assumptions

Chapter
1-23
 Monetary Unit Assumption

Another implication of this assumption is that

the currency of country does not lose its
purchasing power. For this reason, inflation or
deflation is to be ignored.

SO 4 Explain different assumptions

Chapter
1-24
 Economic Entity Assumption/ Business Entity
Assumption

States that the activities of the entity be

kept separate from the activities of the
owner and of all other economic entities.

SO 4 Explain different assumptions

Chapter
1-25
 Time Period Assumption/
Periodicity Assumption

States that the economic life of a

business can be divided into artificial
time periods for the purpose of
providing periodic reports on the
economic activities of the entity.
SO 4 Explain different assumptions
Chapter
1-26
 Going Concern Assumption

Going concern assumption is also

termed as a continuity assumption.

Assumes that an organization will

continue to exist for an unforeseeable
future.
SO 4 Explain different assumptions
Chapter
1-27
 Brief Exercise
Identify which basic assumption of accounting is best described in
each item below.
(a) The economic activities of KC Corporation are
divided into 12-month periods for the purpose of Periodicity
issuing annual reports.
(b) Solectron Corporation, Inc. does not adjust
Monetary
amounts in its financial statements for the effects
of inflation.
Unit

(c) Walgreen Co. reports current and noncurrent

classifications in its balance sheet. Going Concern

(d) The economic activities of General Electric and its

subsidiaries are merged for accounting and Economic
reporting purposes. Entity
SO 4 Explain different assumptions
 Assumptions

Review Question
Combining the activities of Kellogg and General
Mills would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.

Chapter SO 4 Explain different assumptions

1-29
 Principles

Are specific rules that indicate how

economic events should be reported in
the accounting record.

Chapter SO 5 Explain different principles.

1-30
 Principles

There are four principles:

 Revenue Recognition Principle

 Matching Principle / Expense Recognition

Principle

 Full Disclosure Principle

 Cost Principle
Chapter SO 5 Explain different principles.
1-31
 Revenue Recognition Principle

Dictates that revenue should be

recognized in the accounting period in
which it is earned rather than when cash
is received.

Chapter SO 5 Explain different principles.

1-32
 Revenue Recognition Principle

It implies that cash receipt is not a

considerable issue to recognize and
record the revenue rather earning
revenue is only important consideration
to recognize and record the revenue.

Chapter SO 5 Explain different principles.

1-33
 Matching Principle/
Expense Recognition Principle

Dictates that expenses be matched with

revenues in the period in which
expenses are incurred rather than when
cash is paid.

Chapter SO 5 Explain different principles.

1-34
 Matching Principle/
Expense Recognition Principle

It implies that cash payment is not a

considerable issue to recognize and
record the expense rather incurrence of
expense is only important consideration
to recognize and record the expense.

Chapter SO 5 Explain different principles.

1-35
 Matching Principle/
Expense Recognition Principle

Expenses are incurred when the efforts

are made to generate revenues or when
any asset expires or is used up.

Chapter SO 5 Explain different principles.

1-36
 Full Disclosure Principle

Requires an organization to provide

sufficient information so that the users
of financial information are able to
make informed decisions regarding the
organization.

Chapter SO 5 Explain different principles.

1-37
 Cost Principle

Dictates that assets be recorded at their

cost. Further, the amount recorded will
not be increased for inflation or increase
in market value.

Chapter SO 5 Explain different principles.

1-38
 Cost Principle

An exception is the change in market

value of a short-term investment in the
capital stock of a corporation whose
shares of stock are actively traded on a
major stock exchange.

Chapter SO 5 Explain different principles.

1-39
 Brief Exercise
Identify which basic principle of accounting is best described in each item
below.
(a) KC Corporation reports revenue in its income statement Revenue
when it is earned instead of when the cash is collected. Recognition
(b) Yahoo, Inc. recognizes depreciation expense for a
machine over the 2-year period during which that machine Expense
helps the company earn revenue. Recognition
(c) Oracle Corporation reports information about pending Full
lawsuits in the notes to its financial statements. Disclosure
(d) Eastman Kodak Company reports land on its balance
sheet at the amount paid to acquire it, even though the Historical
estimated fair market value is greater. Cost

SO 5 Explain different principles.

 Forms of Business Ownership

Proprietorship Partnership Corporation

Generally owned Owned by two or Ownership

by one person. more persons. divided into
Often small shares of stock
Often retail and
service-type service-type Separate legal
businesses businesses entity organized
Owner receives under state
Generally
any profits, corporation law
unlimited
suffers any personal liability Limited liability
losses, and is
Partnership
personally liable
agreement
for all debts.
Chapter SO 4 Explain different assumptions
1-41
 Forms of Business Ownership

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

Chapter SO 4 Explain different assumptions

1-42
 The Basic Accounting Equation

Owner’s
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership

claims.

Chapter SO 6 State the accounting equation, and define

its components.
1-43
 The Basic Accounting Equation

Owner’s
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Assets

Resources a business owns.

Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Chapter SO 6 State the accounting equation, and define
its components.
1-44
 The Basic Accounting Equation

Owner’s
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.
Chapter SO 6 State the accounting equation, and define
its components.
1-45
 The Basic Accounting Equation

Owner’s
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Owner’s Equity

Ownership claim on total assets.

Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or
Partnership).
Chapter SO 6 State the accounting equation, and define
its components.
1-46
 Owners’ Equity

Illustration 1-6

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.

Chapter SO 6 State the accounting equation, and define

its components.
1-47
 Owners’ Equity

Illustration 1-6

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.

Chapter SO 6 State the accounting equation, and define

its components.
1-48
 Using The Basic Accounting Equation

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.

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-49
 Transactions (Question?)

Q1-15: Are the following events recorded in the

accounting records? Owner
Supplies are An employee withdraws
Event purchased is hired. cash for
on account. personal use.

Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?

Record/
Don’t Record

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-50
 Transactions

Discussion Question
Q1-18: In February 2010, Paula King invested
an additional $10,000 in her business, King’s
Pharmacy, which is organized as a proprietorship.
King’s accountant, Lance Jones, recorded this
receipt as an increase in cash and revenues. Is
this treatment appropriate? Why or why not?

See notes page for discussion

Chapter SO 7 Analyze the effects of business transactions
on the accounting equation.
1-51
 Transactions Analysis

Transaction (1). Investment By Owner. Ray Neal decides

to open a computer programming service which he names
Softbyte. On September 1, 2010, he invests $15,000 cash in
the. The effect of this transaction on the basic equation is:

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-52
 Transactions Analysis

Transaction (2). Purchase of Equipment for Cash.

Softbyte purchases computer equipment for $7,000 cash.

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-53
 Transactions Analysis

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

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

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-54
 Transactions Analysis

Transaction (4). Services Provided for Cash. Softbyte

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

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-55
 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.

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-56
 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.

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-57
 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.

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-58
 Transactions Analysis

Transaction (8). Payment of Accounts Payable. Softbyte

pays its $250 Daily News bill in cash.

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-59
 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)].

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-60
 Transactions Analysis

Transaction (10). Withdrawal of Cash by Owner. Ray Neal

withdraws $1,300 in cash from the business for his personal
use.

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-61
 Transactions Analysis
Illustration 1-8
Summary of Transactions Tabular summary of
Softbyte transactions

Chapter SO 7 Analyze the effects of business transactions

on the accounting equation.
1-62
 Financial Statements

Companies prepare four financial statements from

the summarized accounting data:

Owner’s Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows

Chapter
1-63 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.

Chapter
1-64 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 1-9
Net loss – expenses exceed revenues. Financial statements and
their interrelationships

Chapter
1-65 SO 8 Understand the four financial statements and how they are prepared.
 Financial Statements Net income is needed to determine the
ending balance in owner’s equity.

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-66
 Financial Statements Owner’s Equity Statement

Statement indicates the reasons Illustration 1-9

Financial statements and
why owner’s equity has increased or their interrelationships

decreased during the period.

Chapter
1-67 SO 8 Understand the four financial statements and how they are prepared.
 Financial
Statements

The ending
balance in
owner’s equity
is needed in
preparing the
balance sheet

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-68
 Financial Statements Balance Sheet

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-69 SO 8 Understand the four financial statements and how they are prepared.
 Financial
Statements

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-70
 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?

Chapter
1-71 SO 8 Understand the four financial statements and how they are prepared.
 Financial Statements Statement of Cash Flows

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-72 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. Owner's equity statement.
d. Statement of cash flows.

Chapter
1-73 SO 8 Understand the four financial statements and how they are prepared.
 Financial Statements

Discussion Question
Q1-19: “A company’s net income appears directly on
the income statement and the owner’s equity
statement, and it is included indirectly in the
company’s balance sheet.” Do you agree? Explain.

See notes page for discussion

Chapter
1-74 SO 8 Understand the four financial statements and how they are prepared.
 Accounting Career Opportunities

Public Accounting
Careers in auditing and taxation serving the general public.

Private Accounting
Careers in industry working in cost accounting, budgeting,
accounting information systems, and taxation.

Opportunities in Government
Careers with the IRS, the FBI, the SEC, and in public
colleges and universities.

Forensic Accounting
Careers with insurance companies and law offices to conduct
investigations into theft and fraud.
Chapter
1-75 SO 9 Explain the career opportunities in accounting.
 Thank You

Chapter
1-76