Accounting Principles and Functions

Course Information

• Course Title: Fundamentals of Accounting I
• Course Code: ACFN 2201
• Instructor: Dr. Hussein Jarso
• Textbook: Kieso et al., Financial Accounting, IFRS 2/3 Ed.
• Course Chapters: 1. Introduction to Accounting and Business, 2. The Accounting Cycle, 3. Accounting for a Merchandising Business, 4. Accounting Systems, 5. Cash & Receivables

Chapter 1: Introduction

• Learning Objectives:
  • Definition, Evolution & Importance of Accounting.
  • Characteristics of Accounting Information & Its Users.
  • The Profession of Accountancy.
  • The Distinction Between Bookkeeping & Accounting.
  • Business Transactions & the Accounting Equation.
  • Financial Statements.
  • Accounting Principles & Concepts (in brief)

Chapter 1: Definition, Evolution, & Importance of Accounting

• Definition: Accounting is an information system that measures, processes, and communicates financial information about a business or other economic entity to permit informed judgments and decisions by users of the information or interested parties
• Characteristics:
  • Measures business financial activities
  • Processes information into reports
  • Communicates information to decision-makers
  • A service activity; language of business
  • Link or bridge between business activities and decision-makers
• Economic Entity: A unit that exists independently, such as a business, hospital, or governmental body.
• Accounting as an Information System:
  • Input is economic activities
  • Process is accounting cycle
  • Output is financial information (Why of accounting)
  • Users are suppliers of capital
• Characteristics:
  • Financial
  • Monetary
  • Quantitative/Numerical
  • Efficient Use
  • Relevant
  • Important users include:
    • Individuals
    • Businesses
    • Government
    • Stakeholders

Chapter 1: Accounting as an Art

• Accounting is an art of recording, classifying, and summarizing in a significant manner and in terms of money transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.
• As a descriptive/analytical discipline, it defines the great mass of events and transactions that characterize economic activity and through measurement, classification, and summarization, reduces those data to relatively small, highly significant, and interrelated items that, when properly assembled and reported, describe the financial condition, and results of operation of a specific economic activity.

Chapter 1: Accounting as a service activity

• As a service activity its function is to provide interested parties with quantitative information, primarily financial in nature, about economic entities that is intended to be useful in decision-making.
• Accounting as an information system collects and communicates economic information about business entities to many persons who are interested in the business

Chapter 1: Accounting and Role in Capital Allocation

• Accounting assists in the efficient use of scare resources.
• Efficient use of resources often determines whether a business thrives.
• Financial reporting helps users make capital allocation decisions.
• Capital allocation is the process of determining how and at what cost money is allocated among competing interests.
  • Investors and creditors use financial reports for this.

Chapter 1: Users of Accounting Information

• Internal users: managers, supervisors.
• External users: creditors, investors.

Chapter 1: Forms of Business Organization

• Sole Proprietorship: owned by one person
  • The owner takes all profits or losses.
  • The owner is personally liable for all obligations.
• Partnership: owned by two or more
  • Partners share profits/losses according to a prearranged formula.
• Corporation: chartered by the state, legally separate from owners
  • Owners are called stockholders.
  • Stockholders enjoy limited liability.
  • Stockholders can sell shares without dissolving the company.
• Limited Liability Company (LLC):
  • Owners are called members.
  • Members have limited personal liability.
  • Similar to a corporation but has fewer regulations

Chapter 1: Evolution of Accounting

• Primitive (4000 BC): unsystematic, incomplete.
• Modern (1494): Double-entry accounting system (Luca Pacioli).

Chapter 1: Influencing Factors for Accounting

• Industrial revolution
  • England and the USA
  • Mid 18th to Mid 19th Century
  • Small scale (handicraft) to large scale (factory) production
  • Need for cost accounting
  • Product pricing
  • Planning future operations
  • Measuring efficiency
  • Solve management problems.

Chapter 1: Public accounting

• Large scale production
• Demand for large capital
• Corporate Enterprises
• Separation of Ownership and Management
• Demand for Credibility of Management Representations by Stakeholders
• Auditing (Public Accounting)

Chapter 1: Income Tax

• Need for accounting information for enactment and enforcement of income tax laws and regulations
• Requirement to maintain sufficient records for accurate tax returns

Chapter 1: Governmental Influence

• Increased intervention of government in economic and social matters = increased demand for accounting data.
• Regulate investment activities (e.g., protect rights of investors, encourage savings).
• Regulate price of goods and services (e.g., permit "fair return" on invested capital or control excessive charges—control inflation).
• Regulate financing activities (e.g., operations of financial institutions).

Chapter 1: Types of accounting

• Private accounting
• Public accounting

Chapter 1: Accounting principles

• Accounting principles include the monetary unit principle, the time period principle, the periodicity principle and the cost-benefit principle. Detailed information about each can be found within the textbook section on accounting principles.

Chapter 1: Bookkeeping vs Accounting

• Bookkeeping is the mechanical recording of transactions.
• Accounting is the art and science of recording, classifying, summarizing, interpreting and communicating financial information of a business.

Chapter 1: Business Transactions & Accounting Equation

• Business transactions are events that change the financial position of the business.
  • External transactions: exchanges of value between two or more parties.
  • Internal transactions: non-exchange events.
• The Accounting equation: Assets = Liabilities + Owner's Equity

Chapter 1: Components of Accounting Equation

• Assets: resources a business owns.
  • Cash
  • Inventory
  • Accounts Receivable
  • Buildings
  • Equipment
• Liabilities: amounts owed to creditors.
  • Accounts Payable
  • Salaries Payable
  • Taxes Payable
  • Bank Loans
• Owner's Equity: owners' claims on the assets.
  • Owner's Capital
  • Owner's Drawings
  • Revenues
  • Expenses
• Relationship between components: Assets = Liabilities + Owner's Equity

Chapter 1: Revenues

• Result from business activities meant to generate income.
• Common sources are sales, fees, commissions, interest, dividends, and rent.

Chapter 1: Expenses

• Cost of assets consumed or services used in earning revenue.
• Decrease in owner's equity.
• Common types: salaries, rent, utilities.

Chapter 1: Accounting Information Systems: Accounting Cycle

• Analyzing business transactions
• Journalizing transactions
• Posting to accounts
• Preparing financial statements

Chapter 1: Financial Statements

• Balance Sheet: a snapshot of a company's financial position at a specific point in time, Assets=Liabilities + Owner's Equity.
• Income Statement: summarizes revenues and expenses over a period of time to compute net income or net loss, Revenues - Expenses = Net Income.
• Owner's Equity Statement: details changes in owner's equity over a period of time to reflect the changes in the owner's claim on the assets.
• Statement of Cash Flows: tracks cash receipts and cash payments for a period of time to reveal the sources and uses of cash.