Chapter 1

ACCOUTING IN ACTION

Content In This Chapter :

1. What Is Accounting.

2. The Building Blocks Of Accounting

3. The Basic Accounting Equation

4. Using The Accounting Equation

5. Financial Statement.

TOPIC 1 What Is The Accounting?

What Is The Accounting?

An information system that measures, processes, and communicates financial information about an

identifiable economic entity.

What are the purposes of Accounting?

The purposes of accounting are to identify, record, and communicate economic events of an organization to

interested users. So accounting is important in our society and it is vital to our economic system as every

organization and person in our society use accounting information and not for profit organization must use

accounting information to operate efficiency.

What Is The Accounting Activities?

1- Identification: select economic events relevant to its business (transactions)

2- Recording “book-keeping”: means recording, classifying, and summarizing

3- Communication: put the financial information in the hand of the interested users by accounting reports.

Analyses: use of ratios, percentages & charts to highlight significant financial trends and relationships

Interpretations: involves the uses meaning and limitations of reported data

Who use Accounting Data?

TOPIC 2 Building blocks of accounting

What Are Ethics That Must Be In Financial Reporting?

What Is Generally Accepted Accounting Principles?

Generally Accepted Accounting Principles (GAAP) - A set of rules and practices, having substantial authoritative

support that the accounting profession recognizes as guide for financial reporting purposes.

Noted Some important abbreviations:

1- Financial Accounting Standard Board “FASB” : Primary Accounting Setting Body In The U.S.

2- International Financial Reporting Standards “IFRS”

3- International Accounting Standard Board “IASB”

4- Securities And Exchange Commission “SEC” :U.S. Government Agency That Oversees Financial Markets

5- Internal Revenue Service "IRS" مصلحه الضرائب

Note:

GAAP Are The Rules

The FASB Makes The Rules.

The SEC Enforces The Rules.

What Are Accounting Principles?

What Are Accounting Assumptions?

What Are Forms Of Business?

.

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

Generally owned

by one person.

Often small

service-type

businesses

Owner receives

any profits,

suffers any

losses, and is

personally liable

for all debts.

TOPIC 3 The Basic Accounting Equation

Assets = Liabilities + Owner's Equity

Assets :

o Resources A Business Owns.

o Provide Future Services Or Benefits.

o Cash, Supplies, Equipment, Account Receivable, Notes Receivable, Truck, Car, Building,

Equip, Furniture, Land And Inventory Etc.

Liabilities:

o Claims Against Assets (Debts And Obligations).

o Creditors - Party To Whom Money Is Owed.

o Accounts Payable, Notes Payable, Salaries Payable, Tax Payable Etc.

Owners' Equity :

o Ownership Claim on Total Assets.

o Referred To As Residual Equity.

o Investment By Owners And Revenues (+)

o Drawings and Expenses (-).

Revenues: Result From Business Activities Entered Into For The Purpose Of Earning Income.

Expenses: Are The Cost Of Assets Consumed Or Services Used In The Process Of Earning

Revenue.

Transactions Are A Business’s Economic Events Recorded By Accountants.

o May Be External Or Internal.

o Not All Activities Represent Transactions.

o Each Transaction Has A Dual Effect On The Accounting Equation.

TOPIC 4 Using The Accounting Equation

Comprehensive Example 1:

Mohamed Company Making The Following Transaction During The Month Of May:

1- The company sell land with $5000 cash

2- The company sell supplies for $6000 on account (on credit) (billing) (postpone)

3- The company receive the balance due on transaction 2

4- The company sell equipment with $7000 , that $3000 cash and the remaining on credit

5- The company receive the balance due on transaction 4

6- The company sell building with $4000 on notes receivable

7- The company receive the balance due on transaction 6

8- The company sell equipment with $7000 , that $3000 cash and the remaining on notes receivable

9- The company receive the balance due on transaction 8

10- The company purchase land with $8000 cash

11- The company purchase supplies for $9000 on account (on credit) (billing) (postpone)

12- The company paid the balance due on transaction 11

13- The company purchase equipment with $8000 , that $2000 cash and the remaining on credit

14- The company paid the balance due on transaction 13

15- The company purchase building with $5000 on notes payable

16- The company paid the balance due on transaction 15

17- The company purchase equipment with $8000 , that $2000 cash and the remaining on notes payable .

18- The company paid the balance due on transaction 17

19- The company provided repair service for client on $5000 cash

20- The company provided advertising service for $6000 on credit

21- The company receive the balance due on transaction 20

22- The company completed newspaper service for client $5000 on notes receivable

23- The company receive the balance due on transaction22

24- The company provided advertising service for client for $6000 that $2000 cash

25- The company receive the balance due on transaction24

26- The company receive cleaning service with $2000 cash

27- The company receive utility service for $5000 on credit

28- The company paid the balance due on transaction 27

29- The company receive maintenance service for $8000 , that $3000 cash and the remaining on credit

30- The company paid the balance due in transaction 29

31- The company receive advertising service for client for $6000 that $2000 cash and remaining notes

payable.

32- The company paid the balance due on transaction31

33- The owner invest $3000 cash in the company

34- The owner invest $4000 cash and equipment $5000 for the company

35- The owner withdraw $3000 cash for his personal use

Required:

Show Effects Of The Transactions On The Accounts Of The Accounting Equation By Recording

Increase And Decrease In The Appropriate Columns.

Note:

ANSWERS

Assets Liabilities Owner's equity

cash land Supplies A/R Equip Building N/R A/P N/P Capital drawing Reven

ue

Ex

1. + 5000 - 5000

2. - 6000 +6000

3. +6000 - 6000

4. +3000 +4000 -7000

5. +4000 -4000

6. -4000 +4000

7. +4000 -4000

8. +3000 -7000 +4000

9. +4000 -4000

10. -8000 +8000

11. +9000 +9000

12. -9000 -9000

13. -2000 +8000 +6000

14. -6000 -6000

15. +5000 +5000

16. -5000 -5000

17. -2000 +8000 +6000

18. -6000 -6000

19. +5000 +5000

20. +6000 +6000

21. +6000 -6000

22. +5000 +5000

23. +5000 -5000

24. +2000 +4000 +6000

Assets Liabilities Owner's equity

cash land Supplies A/R Equip Building N/R A/P N/P Capital drawing Reven

ue

Ex

25. +4000 -4000

26. -2000 -2000

27. +5000 -5000

28. -5000 -5000

29. -3000 +5000 -8000

30. -5000 -5000

31. -2000 +4000 -6000

32. -4000 -4000

33. +3000 +3000

34. +4000 +5000 +9000

35. -3000 -3000

Comprehensive Example 2:

Holden Graham Started The Graham CO; Anew Business That Began Operations On May 1,

The Graham Co, Completed The Following Transactions During Its First Month Of Operations.

May 1. H. Graham invested $43000 cash in the company

1. The company rented a furnished office and paid $2200 cash for May's rent

3 the company purchased $1940 of office equipment on credit

5 the company paid $750 cash for this month's cleaning services

8 the company provided consulting services for a client and immediately collected $5800 cash

12 the company provided $2800 of consulting service for a client on credit

15 the company paid $850 cash for an assistant's salary for the first half of this month

20 the company received $2800 cash payment for the service provided on May 12

22 the company provided $4000 of consulting service on credit

25 the company received $4000 cash payment for the service provided on May 22

26 the company paid $1940 cash for the office equipment purchased on May 3

27 the company purchased $85 of advertising in this month's local paper on credit, cash payment is

due June 1

28 the company paid $850 cash for an assistant's salary for the second half of this month

30 the company paid $400 cash for this month's telephone bill

30 the company paid $260 cash for this month's utilities

31 Graham withdraw $2000 cash from the company for personal use

Required:

1. Arrange The Following Assets ,Liability And Equity As Cash , Account Receivable , Office

Equipment , Account Payable , H Graham Capital And Withdraw , Revenue And Expenses

2. Show Effects Of The Transactions On The Accounts Of The Accounting Equation By Recording

Increase And Decrease In The Appropriate Columns.

Assets liabilities

Owner's equity

Cash + A /R + Office

Equip

= A/P +

Owner's

capital

- Withdraw + Revenue - expense

s

May1 +43000 +43000

1 -2200 -2200

3 +1940 +1940

5 -750 -750

8 +5800 +5800

12 +2800 +2800

15 -850 -850

20 +2800 -2800

22 +4000 +4000

25 +4000 -4000

26 -1940 -1940

27 +85 -85

28 -850 -850

30 -400 -400

30 -260 -260

31 -2000 -2000

Bal +46350 0 +1940 +85 +43000 -2000 +12600 -5395

Bal $48290 = $48290

Topic 5 Financial Statement

There Are 4 Financial Statements:

1. Income Statement : Presents Revenue And Expenses & Resulting Net Income And Net Loss For A

Specific Period Of Time

2. Owner's Equity Statement: Summarized The Changes In Owner's Equity For Specific Period Of

Time

3. Balance Sheet: Report Assets , Liabilities , Owner's Equity At A Specific Date

4. Statement Of Cash Flows: Summarizes Information About The Cash Inflows (Receipts) And

Outflows (Payments For A Specific Period Of Time

Example : Prepare Financial Statement For Example1

Answers

Income Statement

Revenue

Consulting Service (5800 +2800+4000) $12600

Less

Expenses

Rent Expenses $ 2200

Cleaning Service 750

Salary Expense (850+850) 1700

Advertising 85

Telephone Bill 400

Utilities 260

total expenses $5395

Owner's Equity Statement

Owner's Capital , 1 May 0

Add

Investment By Owner 43000

Net Income 7205

Less

Drawing 2000

Owner's Capital , 31 May 48205

Net Income $ 7205

Balance Sheet

ASSETS LIABILITIES

Cash $46350 Account Payable $85

Account Receivable 0 OWNER'S EQUITY

Equip 1940 HOLDEN GRHAM Capital 48205

Total Assets $48290 Total Liabilities And Equity $48290