Lecture Notes - Accounting Principles 1 - PDF

Lecture Notes Accounting Principles 1 CHAPTER ONE Accounting and Users of Accounting Information (Lecture _1) Dr: Hamdy Habl Accounting Department - HU  1 Accounting and Users of Accounting Information Definition...

Lecture Notes Accounting Principles 1 CHAPTER ONE Accounting and Users of Accounting Information (Lecture _1) Dr: Hamdy Habl Accounting Department - HU  1 Accounting and Users of Accounting Information Definition Of Accounting Accounting Accounting Fields of Legal forms of accounting reports users objectives Accounting business organizations 1)Definition Of accounting: As a System As a Process To provide quantitative Of identifying, recording, information with financial nature, summarizing, and reporting about an economic entity to help economic information about an in making economic decisions. economic entity to decision makers. 1) quantitative information: accounting is a 1) Identifying: Analyzing transactions to language of number, so any other information will determine the financial and non-financial be excluded like location, management staff, information and events. hiring workers… etc. 2) Recording: Journalizing (record in journal) 2) Financial nature : accounting concern with the financial information and events in a set of only financial information which can be books or records. expressed in monetary units. 3) Summarizing: transferring and Classifying 3) Decision making : the main and final objective into ledger and making the trail balance. of accounting is to help in making economic 4) Reporting: preparing the general-purpose decisions. financial statements. 2 2)Accounting Reports: Internal reports External reports Which are prepared to be used by the Called general-purpose financial statements internal users (users inside the firm Set of accounting reports for external and like management) internal users but mainly for external. Such as : Such as: 1- budgets. 1- statement of financial position: to determine 2-Cost statements. and calculate the assets and obligations 3-Performance evaluation reports. (liabilities + owners' equity) of the firm. 4- Responsibility accounting reports. 2- income statement : to measure and calculate the result of the entity's activities which are profit (net income) or loss. 3- statement of owners' equity: to measure and calculate the company's obligations toward its owners (owners' equity). 4- statement of cash flow : to determine and calculate the cash in and cash out of the company. 3)Accounting Users: Internal Users External reports Needs detailed, financial & non- Needs total, historical, financial information financial, historical & estimated about the firm's activities and its results to know information to help them in making about : decisions related to 1-Profitability Planning, Coordinating, Directing, 2- resources & its uses Controlling The entity activities & To evaluate : taking corrective actions if its 1- the financial position of the entity. necessary. 2- the entity ability to grow, continue in Such as : business and pay its debts. Management, the entity workers. Such as : Investors, Creditors and Banks and Other users ( 6 groups). As follows: 3 1- Investors: Current : They need information about cash flows in and out that they can get from there Investments and the level of uncertainty associated with these cash flows to decide whether to continue investing in this organization or to get out and invest in another one. Potential or future : an investor having money and waiting to Invest inappropriate investment, they need the same Information as the current Investor but to compare between the alternatives to get the best opportunity. 2- Creditors and Banks need information about the financial positions of the firm to evaluate its ability to repay its loans and debts. Other Users Suppliers: needs Information to ensure that the company they depend on will continue active in business with the same ability to repay Its obligations Customers: needs information to make sure that the goods and services can still provide without any problems, like getting spare parts and maintenance and replacements. Manpower &workers unions: needs information to know their share in profits, to help them in the negotiations with the management on benefits and salaries, to evaluate the employment position. Competitors: needs Information to evaluate their competitive position and the possibility of growth and expansion. Governmental agencies &Controlling organizations: such as 1- tax authority 2- ministry of planning 3-ministry of Industry 4-stock exchange commission needs the information to help them in making the performance of the governmental activities and units better & to evaluate the entities contribution to national income and added value. Financial analyst &public: Financial analyst Needs information to evaluate the performance of the organizations to provide consultation to people, help them In the academic research. public: need information to know the services and products provided in the area they live in.  4 4)Accounting Objectives: Determining profits or Determining: Determining the company’s Determining : losses of the enterprise Assets:(rights /resources) 1-cashinflows:(Cash the rights of the owners (profit or loss = total Liabilities: obligations of collected/ cash in) of the firm (owner's revenues -total expenses) the enterprise Using a 2- cash outflows: (cash paid/ equity) Using a tool Using a tool which is tool which is (financial cash out) of the enterprise which is (statement of (income statement). position statement). Using a tool which is (cash owners’ equity). flows statement). Statement of financial Position Income statement Assets Owner’s equity Expenses Revenues Land Capital Insurance Exp. Sales revenue Building + Net profit Rent Exp. Interest revenue Equipment (-)Drawings Electricity Services revenue Furniture Salaries Exp. Cash(Box-Bank) Liabilities Inventory Accounts payable Office Supplies Notes payable Accounts receivable Expenses payable Notes receivable Unearned revenues Prepaid Expenses loans Accrued Revenues Statement of financial Position it's a statement contains three accounts called permanent or real accounts which prepared to reflect the financial position of an entity Assets are expected economic benefits controlled by the entity as a result of past transactions. Liabilities are future economic sacrifices of benefits resulting from current obligations to transfer or render service to other entities in the future as a result of past transactions or events. 5 Owner’s equity or capital is the remaining of assets after subtracting all liabilities. Income statement It’s a report prepared by the company accountant at the end of each accounting period(usually a year) to show the result of the company's activities (Profit or loss), includes two accounts( temporary or nominal accounts) which are revenues and expenses. Revenue is the price for selling products or goods to customers. The price for rendering service to them regardless of collecting these prices from customers or not during the period. Expenses are the cost of grooving resources and facilities necessary to perform service or reduce and sell products. Profit (net income) (increasing in equity) the remaining revenues after subtracting all expenses, achieved when revenues exceeds expenses ( profit = revenues – expenses = +) Losses as an Item not a result In the income statement represents an expense (decreasing in equity) incurred from the central or repeatable activities of the firm with no benefits in return, as a result In the income statement achieved when revenues succeeds expenses (Losses = revenues – expenses = ‫) ــ‬ Gains (Increasing in equity) It's an inflow generated or produced from the non-central or non-repeatable activities of the firm. 6 5)Fields of Accounting Financial - Providing information for external users through analyzing, recording, classifying, summarizing and reporting financial events. Managerial - Providing information for internal users to help in planning and controlling the activities using tools like budgets, responsibility accounting and cost accounting. Cost - Providing information for internal users. - It records, measure and report cost information To help in 1- Costing products and services. 2- controlling cost. Using Actual cost system or predetermined cost system If the second system is used the firm must measure the actual cost and compare it with the predetermined cost to get any variances and know its reasons to take corrective action about it. Budgeting System of 1-Planning: translating the company’s goals into numerical expression in form of certified plan. 2-controlling: comparing the actual result with the planned one to evaluate performance and take any required corrective actions. Governmental Deals with governmental activities and units at all levels Through 1- Preparing the public budget and final accounts to know the financial positions. 2- Doing the financial control before and after spending Tax Needed for helping in determine taxable income, the amount of taxes to be paid and helping in tax planning which means trying to reduce the amount of taxes to the minimum or the maximum utilization of exemption or tax credits. 7 National Providing information for the state (government). Accounting for all sectors of the national economy by: 1- measuring the national income and the contribution of each sector in it. 2- preparing the national budget, national income accounts and input and output tables. International Deals with: 1- the accounting issues(problems) of foreign currencies and exchange rate. 2- preparing financial statement for multinational companies. 3- translation of financial statements of the foreign branches and companies. 4- harmonizing local and international accounting standards. 5- reducing differences in practices between nations to keep comparability between different companies. Auditing Examining the whole company By 1- Examine and evaluate internal control system. 2- Review documents, records and financial statements. To Collect evidence from inside and outside the company. So, the auditor can give his professional opinion regarding the fairness of the financial statements and becomes responsible for any negligence in his audit. Responsibility - Providing information for internal users (management). - Means dividing the company into units called Responsibility centers. - Every center has a manager, and that manager is responsible for all revenues and expenses under his control and authority only. - A manager’s performance is evaluated by any variances as a result of their decisions. 8 6)Legal forms of business organizations 1- proprietorships: 2- partnerships: - Have one owner who gets profit or loss. - Have more than one owner (partner) - The owner is the manager of the firm. till 20 partners. - Each unlimited partner considered as a manager. 3- corporations: Have unlimited number of owners (shareholder or stockholder) and huge capital. Each owner has limited liability based on number of shares he owns. legally is a separate entity from its owners which means that the corporations itself has a liability of its own. Characteristics of any corporation: 1- unlimited ability to raise funds 2- flexibility of capital transfer. 3- continuity. 4- separate legal entity.