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ACCOUNTING PRINCIPLES

CHAPTER (1) ACCOUNTING IN ACTION

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Why Study Accounting?What is Accounting?Who uses Accounting Data?Brief History of Accounting.Distinguishing between bookkeeping and

AccountingAccounting and You

Why study Accounting?

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Accounting it is very important .good accounting is mean the good sound business and investing decisions.

Bad accounting can not be tolerated at the slightest hint of a company accounting improprieties, investors maybe sell their stock when the stock price will increase after they sold.

What is AccountingWhat is Accounting??What is AccountingWhat is Accounting??

LO 1 Explain what accounting is.LO 1 Explain what accounting is.

The purpose of accounting is to:

(1)(1) identifyidentify, recordrecord, and communicatecommunicate the economic events of an

(2) organization to

(3) interested users.

Three Activities

What is AccountingWhat is Accounting??What is AccountingWhat is Accounting??

LO 1 Explain what accounting is.LO 1 Explain what accounting is.

Illustration 1-1Accounting process

The accounting process includes the bookkeeping function.

What is Accounting?

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Is an information system that identifies records and communicates the economic events of an organization to interested users.

What is Accounting?

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Identifies economic events involves selecting the economic activities relevant to a particular organization.

What is Accounting?

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Records :one identifies economic events are recorded to provide a history of the organization financial activities, in recording economic events are classified and summarized.

What is Accounting?

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Communicates: to use the information to interested users financial information is communicated through accounting reports the most common of which are called financial statement.

The accountants ability to analyze and interpret the reported information.

Management

There are two broad groups of users of financial information: internal users and external users.

Human Resources

IRS

Labor Unions

SECMarketing

Finance

Investors

Creditors

Who Uses Accounting DataWho Uses Accounting Data??Who Uses Accounting DataWho Uses Accounting Data??

LO 2 Identify the users and uses of accounting.LO 2 Identify the users and uses of accounting.

Customers

Internal Users

External Users

Who uses Accounting Data?

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INTERNAL USERS:Internal users of accounting information are

managers who (plan, organize and run a business) ,marketing managers, production supervisors, finance directors and company officers.

INTERNAL USERS

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In running a business managers must answer many important questions like:

Is cash sufficient to pay bills?What is the cost of manufacturing eash unit of product?

Can we afford to give employee pay raises this year?

Which product line is the most profitable?

INTERNAL USERS

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To answer these question users need detailed information on a timely basis.

To internal users accounting provides internal reports as:

Financial comparisons of operating to choosing .

INTERNAL USERS

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Projections of income from new sales campaigns.

Forecasts of cash needs for the next year.

Summarized financial information is presented in the form of financial statements.

External users

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1-Investors:they are using accounting information to make decisions to buy hold or sell stock.

2- Creditors : (suppliers, bankers) they are using accounting information to evaluate the risks of granting credit or lending money.

External users:

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3- Taxing authorities : such as the (Internal Revenue Service) and they want to know whether the company complies with the tax laws.

4- Regulatory agencies : (Securities and Exchange Commission and Federal Trade Commission) want to know whether the company is operating with in prescribed rules.

External users

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5- Customers: they are interested in whether a company will continue to honour product warranties and support its product lines.

6-Labor unions: they want to know whether the owners can pay increased wages and benefits.

7-Economic planners: use accounting information to forecast economic activity

Brief History of Accounting.

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In 1494 the accounting established started and it was described a system to ensure that financial information was recorded efficiently and accurately.

In the nineteenth century the emergence of large corporations a separation of the owners from the managers of business took place.

As a result the need to report the financial status of the enterprise become more important to ensure that managers acted in accord with owners wishes. Also transaction between business become more complex, making necessary improved approaches for reporting financial information.

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Some people think the bookkeeping and accounting are same bit its not true.

The accounting process includes the bookkeeping function.

Bookkeeping usually they are doing only the recording of economic events its just one part of the accounting process.

Distinguishing between bookkeeping and Accounting

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Accounting involves the entire process of identifying, recording and communicating economic events.

Accounting divided into:1-Financial accounting : is the field of

accounting that provides economic and financial information for external users.

2-Managerial accounting: is providing economic and financial information for manager and other internal users.

Accounting and You

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How will the study of accounting help you?It should help you because a working

knowledge of accounting is desirable for virtually every field of endeavor.

Some examples of how accounting help other careers:

1-General management: to make a good business decisions.

2- Marketing: to make sale profitable sale the marketing people must have knowledge to know the cost and benefits.

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3-Any job in finance field: it is difficult to get job in finance function without 2 or 3 courses in accounting.

4-Other jobs: a working knowledge of accounting is relevant

You will need to understand financial reports in any enterprise you are associated with.

The Building Blocks of Accounting

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Every profession develops a body of theory consisting of principles assumptions and standards.

The fundamental business concept is followed ethical behavior.

For example if you trying to carry on business or invest money if you could not depend on the individuals you deal with to be honest.

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If managers , customers, investors and creditors all consistently lied , effective communication and economic activity would be impossible.

Most individuals in business are ethical, their actions are both legal and responsible and they consider the organization interests in their decision making.

Basic Accounting Equation

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The two basic elements of business are:1- What it owns?2-What it owes?Any thing the business owns are (Asset) and

any thing the business owes are (liabilities or owner equity)

The basic accounting equation is

ASSET= LIABILITIES +OWNERS EQUITY

ASSETS

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The resources owned by a businessThey are used in caring out such activities as

production , consumption and exchange.The common characteristic possessed by all

asset is the capacity to provide future service or benefits.

The examples of Assets:Cash, Equipment, supplies Account

receivable….

LIABILITY

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They are the right or claims against these resources.

Claims of those to whom money is owed (creditors) .

Liabilities are existing debts and obligations.For example in liability: most of companies

usually borrow money and purchase merchandise on credit. This obligations are called (accounts payable)

Owner equity

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The ownership claim on total assets.It is equal to total assets minus total liabilityASSET – LIABILITY =OWNER EQUITYThe asset of business are supplied or claimed

by either creditors or owners.To find out what belongs to owners we

subtract the creditors claims (the liabilities) from asset.

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Since the claims of creditors must be paid before ownership claims.

The owner equities have two activities: increase and decrease.

The investments by owner and the revenues are the way for increase the owner equities.

Investments: the owner puts cash into business.

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Revenues: are the gross increase in owner equity resulting from business activities entered into for the purpose of earning income.

Generally, revenues result from the sale of merchandise the performance of services the rental of property and the lending of money.

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However, the owner equities will decreases by drawings and expenses.

Drawings: owner may withdraw cash or other asset for personal use.

Expenses: the cost of asset consumed or services used in the process of earning revenue. The example of expenses( wags ,electric ,gas, water, rent, interest…).

When the revenues bigger than expenses so the company have profit in net income ,but if the expenses are higher than revenues so the company have loss income.