Download What is Accounting? - masif-emba-fais-s12

Financial Accounting & Information
System
Session Objectives:
Why Accounting
• Introduction
• Course Objective & Conduct
•Course Outline
• What’s Accounting, What it isn’t ?
• Accounting Foundations (Chapter_1)
• Recording Process (Chapter_2)
•
Accounting Information System with SAP:
By M Asif Jaffer
Chapter
1-1
1
Financial Accounting & Information
System
-Just
like there’s positive and negative motivation of a
any conduct, so is for study of accounting
-Unfortunately,
negative motivators are more common
for study of Accounting!
- Enron, WorldCom
- Some Local Cases
Accounting Information System with SAP:
By M Asif Jaffer
Chapter
1-2
2
Financial Accounting & Information
System
Course Objective
To enable students to understand financial
accounting concepts and techniques and apply
those concepts in financial decision making
….to enable you to study and understand annual
reports of….
Accounting Information System with SAP:
By M Asif Jaffer
Chapter
1-3
3
Financial Accounting & Information
System
Course Conduct
- Must be with the book, calculator and annual report
- Case Based Methodology, wherever possible
-120 minutes a week at home
- Collaborative learning
- Attendance norms
- Assignments
Accounting Information System with SAP:
By M Asif Jaffer
Chapter
1-4
4
Financial Accounting & Information
System
Instructor: Muhammad Asif Jaffer
- FCMA, ACCA, MA (Economics), B.Com
- 10+ years industry experience
- 4+ years teaching experience
- Credits: Gold Medal at ICMAP
-
-
Participants Introduction
Accounting Information System with SAP:
By M Asif Jaffer
Chapter
1-5
5
Financial Accounting & Information
System
-
Accounting Defined:
What
Identifying
Recording
Communicating
Of
Economic Events of an organization
To
Interested Users
Accounting Information System with SAP:
By M Asif Jaffer
Chapter
1-6
6
The rest of the slides are taken from the following
course website
Chapter
1-7
Accounting in
Action
Chapter
1-8
Accounting Principles, Ninth Edition
Chapter Study Objectives
Emba_s12_FAIS_iba
@yahoogroups.com
1.
Explain what accounting is.
2.
Identify the users and uses of accounting.
3.
Understand why ethics is a fundamental business concept.
4.
Explain generally accepted accounting principles and the cost
principle.
5.
Explain the monetary unit assumption and the economic entity
assumption.
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
1-9
Accounting in Action
What is
Accounting?
Three
activities
Who uses
accounting
data
The Building
Blocks of
Accounting
Ethics in
financial
reporting
Generally
accepted
accounting
principles
Assumptions
Chapter
1-10
Using the
Basic
Accounting
Equation
Financial
Statements
Liabilities
Transaction
analysis
Income
statement
Owner’s
equity
Summary of
transactions
Owner’s
equity
statement
The Basic
Accounting
Equation
Assets
Balance
sheet
Statement of
cash flows
What is Accounting?
The purpose of accounting is to:
(1) identify, record, and communicate the
economic events of an
(2) organization to
(3) interested users.
Chapter
1-11
SO 1 Explain what accounting is.
What is Accounting?
Three Activities
Illustration 1-1
Accounting process
The accounting process includes
the bookkeeping function.
Chapter
1-12
SO 1 Explain what accounting is.
Who Uses Accounting Data?
Internal Users
Human
Resources
Finance
Management
IRS
Investors
There are two broad
groups of users of
financial information:
internal users and
external users.
Marketing
Customers
Chapter
1-13
SEC
Labor
Unions
Creditors
External
Users
SO 2 Identify the users and uses of accounting.
Who Uses Accounting Data?
Common Questions Asked
1. Can we afford to give our
employees a pay raise?
User
Human Resources
2. Did the company earn a
satisfactory income?
Investors
3. Do we need to borrow in the
near future?
4. Is cash sufficient to pay
dividends to the stockholders?
Management
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
1-14
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
Chapter
1-15
SO 3 Understand why ethics is a fundamental business concept.
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.
Chapter
1-16
SO 3 Understand why ethics is a fundamental business concept.
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.
Chapter
1-17
SO 3 Understand why ethics is a fundamental business concept.
The Building Blocks of Accounting
Various users
need financial
information
The accounting profession
has attempted to develop
a set of standards that
are generally accepted
and universally practiced.
Chapter
1-18
Financial Statements
Balance Sheet
Income Statement
Statement of Owner’s Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting
Principles (GAAP)
US GAAP, UK GAAP
PK GAAP!
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 of
Pakistan (SECP)
International Accounting Standards Board
(IASB)
Institute of Chartered Accountants of
Pakistan (ICAP)
Chapter
1-19
SO 4 Explain generally accepted accounting principles and the cost principle.
The Building Blocks of Accounting
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, whereas market value is often
subjective.
Fair value information may be more useful.
Chapter
1-20
SO 4 Explain generally accepted accounting principles and the cost principle.
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.
Chapter
1-21
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
Forms of Business Ownership
Proprietorship
Chapter
1-22
Partnership
Corporation
Generally owned
by one person.
Owned by two or
more persons.
Often small
service-type
businesses
Often retail and
service-type
businesses
Ownership
divided into
shares of stock
Owner receives
any profits,
suffers any
losses, and is
personally liable
for all debts.
Generally
unlimited
personal liability
Separate legal
entity organized
under state
corporation law
Limited liability
Partnership
agreement
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
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
1-23
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
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
1-24
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
Double Entry Accounting Basics
Every economic event for a business has two
perspectives
Resources
=
Sources
This is exactly what Islam preaches that
nothing is yours own
‘ Sinkandar jab gaya dunya se dono haath khali the’
Chapter
1-25
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
The Basic Accounting Equation
Assets
=
Liabilities
+
Owner’s
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
1-26
SO 6 State the accounting equation, and define
its components.
The Basic Accounting Equation
Assets
=
Liabilities
+
Owner’s
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
1-27
SO 6 State the accounting equation, and define
its components.
The Basic Accounting Equation
Assets
=
Liabilities
+
Owner’s
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
1-28
SO 6 State the accounting equation, and define
its components.
The Basic Accounting Equation
Assets
=
Liabilities
+
Owner’s
Equity
Provides the underlying framework for recording and
summarizing economic events.
Owner’s Equity
Ownership claim on total assets.
Referred to as residual equity.
Chapter
1-29
Capital, Drawings, etc. (Proprietorship or
Partnership).
SO 6 State the accounting equation, and define
its components.
Chapter
1-30
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
1-31
SO 6 State the accounting equation, and define
its components.
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
1-32
SO 6 State the accounting equation, and define
its components.
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
1-33
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions (Question?)
Q1-15: Are the following events recorded in the
accounting records?
Owner
An employee
is hired.
withdraws
cash for
personal use.
Event
Supplies are
purchased
on account.
Criterion
Is the financial position (assets, liabilities, or
owner’s equity) of the company changed?
Record/
Don’t Record
Chapter
1-34
SO 7 Analyze the effects of business transactions
on the accounting equation.
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
1-35
SO 7 Analyze the effects of business transactions
on the accounting equation.
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
1-36
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions Analysis
Transaction (2). Purchase of Equipment for Cash.
Softbyte purchases computer equipment for $7,000 cash.
Chapter
1-37
SO 7 Analyze the effects of business transactions
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 expected to last several months.
Chapter
1-38
SO 7 Analyze the effects of business transactions
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.
Chapter
1-39
SO 7 Analyze the effects of business transactions
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.
Chapter
1-40
SO 7 Analyze the effects of business transactions
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.
Chapter
1-41
SO 7 Analyze the effects of business transactions
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.
Chapter
1-42
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions Analysis
Transaction (8). Payment of Accounts Payable. Softbyte
pays its $250 Daily News bill in cash.
Chapter
1-43
SO 7 Analyze the effects of business transactions
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)].
Chapter
1-44
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions Analysis
Transaction (10). Withdrawal of Cash by Owner. Ray Neal
withdraws $1,300 in cash from the business for his personal
use.
Chapter
1-45
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions Analysis
Summary of Transactions
Chapter
1-46
Illustration 1-8
Tabular summary of
Softbyte transactions
SO 7 Analyze the effects of business transactions
on the accounting equation.
Financial Statements
Companies prepare four financial statements from
the summarized accounting data:
Income
Statement
Chapter
1-47
Owner’s
Equity
Statement
Balance
Sheet
Statement
of Cash
Flows
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
1-48
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
Financial statements and
Net loss – expenses exceed revenues.
their interrelationships
Chapter
1-49
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
1-50
Financial Statements
Owner’s Equity Statement
Statement indicates the reasons
why owner’s equity has increased or
decreased during the period.
Chapter
1-51
Illustration 1-9
Financial statements and
their interrelationships
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
1-52
Financial Statements
Balance Sheet
Illustration 1-9
Financial statements and
their interrelationships
Chapter
1-53
SO 8 Understand the four financial statements and how they are prepared.
Financial
Statements
Illustration 1-9
Financial statements and
their interrelationships
Chapter
1-54
Financial Statements
Statement of Cash Flows
Illustration 1-9
Financial statements and
their interrelationships
Chapter
1-55
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
1-56
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
1-57
SO 9 Explain the career opportunities in accounting.
Copyright
Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
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and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.
Chapter
1-58