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Accounting Definition

MINSK

MINSK INNOVATION UNIVERSITY

Oct, 2015

After this lecture, you should be able to:

1. Define accounting.

2. Describe the primary forms of business organization.

3. Identify the users and uses of accounting information.

4. Explain the three principal types of business activity.

5. Explain the basic accounting equation.

6. Identify the financial statements and describe its purpose

7. Explain the meaning of basic accounting terminologies.

Learning ObjectivesLearning ObjectivesLearning Objectives

Preview of lecturePreview of lecturePreview of lecture

Accounting definitionAccounting definitionAccounting definition

Accounting is the process of

identifying, recording, and communicating

the economic events

of an organization

to interested users.

The accounting process includesthe bookkeeping function.


Process:Process:Process:


Economic event:Economic event:Economic event:

Economic Event is a transaction that change the financial position of the business.

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the accounting equation.

Event

Criteria Is the financial position (assets, liabilities, or owner’s equity) of the company changed?

Decision


Economic event: ExamplesEconomic event: ExamplesEconomic event: Examples

Event

Criteria Is the financial position (assets, liabilities, or owner’s equity) of the company changed?

Decision


Economic event: IllustrationEconomic event: Economic event: IllustrationIllustration

Proprietorship Partnership Corporation

Owned by two or more persons.

Often retail and service-type businesses

Generally unlimited personal liability

Partnership agreement

Tax advantages

Ownership divided into shares of stock

Separate legal entity organized under state corporation law

Limited liability

Multi-Tax

Owned by one person.

Often small service-type businesses

Owner receives any profits, suffers any losses, and is personally liable for all debts.

Tax advantages


Forms of business organizationForms of business organizationForms of business organization

In choosing the organizational form for your outdoor guide service, you should consider the pros and cons of each. Identify each of the following organizational characteristics with the organizational form or forms with which it is associated.1. Easier to raise funds.2. Simple to establish.3. No personal legal liability.4. Tax advantages.5. Easier to transfer ownership.

1. Corporation.2. Sole proprietorship and partnership.3. Corporation.4. Sole proprietorship and partnership.5. Corporation.

Solution

Management

There are two broad groups of users of

financial information: internal users and

external users.

Human Resources

Government

Labor Unions

SECMarketing

Finance

Investors

Creditors

Customers

Internal Users

External Users


Accounting usersAccounting usersAccounting users

Internal Users


Accounting users: Internal usersAccounting users: Internal usersAccounting users: Internal users

External Users


Accounting users: External usersAccounting users: External usersAccounting users: External users

Common Questions Asked User

1. Can we afford to give our employees a pay raise? Human Resources

2. Did the company earn a satisfactory income?

3. Do we need to borrow in the near future?

4. Is cash sufficient to pay dividends to the stockholders?

5. What price for our product will maximize net income?

6. Will the company be able to pay its short-term debts?

Investors

Management

Finance

Marketing

Creditors


Accounting users: IllustrationAccounting users: Accounting users: IllustrationIllustrationAccounting definitionAccounting definitionAccounting definition

Accounting users: IllustrationAccounting users: Accounting users: IllustrationIllustration

User Usage

1. Government Tax declaration accuracy

2. Customers

3. Labor unions

4. SEC

Stability, Support, Innovation

Compensation Funds safety

Financial statements compatibility


Accounting users: IllustrationAccounting users: Accounting users: IllustrationIllustration

All businesses are involved in three types of activity:

Financing,

Investing,

Operating.

The accounting information system keeps track of the results of each of these business activities.


Business activitiesBusiness activitiesBusiness activities

Two primary sources of outside funds are:

1. Borrowed money (debt financing)

Borrowing money from creditors

Amounts owed are called liabilities.

2. Owner equity

Issuing (selling) shares of stock for shareholders.

Payments to stockholders are called dividends.

Financing Activities


Business activities: FinancingBusiness activities: FinancingBusiness activities: Financing

Investing ActivitiesPurchase of resources a company needs to generate revenues.

Computers, delivery trucks, furniture, buildings, etc. (property, plant, and equipment).

Resources owned by a business are called assets.

Investments are another example of an investing activity.


Business activities: InvestingBusiness activities: InvestingBusiness activities: Investing

Operating ActivitiesOnce a business has the assets it needs, it can begin its operations.

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.

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.


Business activities: OperatingBusiness activities: OperatingBusiness activities: Operating

1. Cost of renting property.

2. Truck purchased.

3. Notes payable.

4. Issuance of ownership shares.

5. Amount earned from providing service.

6. Amounts owed to suppliers.

1. Expense.

2. Asset.

3. Liabilities.

4. Common stock.

5. Revenue.

6. Liabilities.

Solution

Classify each item as an asset, liability, common stock,

revenue, or expense.

Accounting equation provides the underlying framework

for recording and summarizing economic events.

AssetsAssetsAssets LiabilitiesLiabilitiesLiabilities Owner’s EquityOwnerOwner’’s s EquityEquity= +


Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect


Resources a business owns.

Provide future services or benefits.

Cash, Supplies, Equipment, etc.

Assets




Claims against assets (debts and obligations).

Creditors - party to whom money is owed.

Accounts payable, Notes payable, etc.

Liabilities




Ownership claim on total assets.

Referred to as residual equity.

Investment by owners and revenues (+)

Drawings and expenses (-).

Owner’s Equity



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.

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.



Transaction (1): Sergey decides to open a computer programming service which he names Softbyte. On September 1, 2012, Sergey invests $15,000 cash in the business.



Transaction (2): Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash.



Transaction (3): Softbyte purchases for $1,600 from Olga Supply Company computer paper and other supplies expected to last several months. The purchase is made on account.



Transaction (4): Softbyte receives $1,200 cash from customers for programming services it has provided.



Transaction (5): Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.



Transaction (6): 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.



Transaction (7): Softbyte pays the following expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.



Transaction (8): Softbyte pays its $250 Daily News bill in cash.



Transaction (9): Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].



Transaction (10): Sergey withdraws $1,300 in cash from the business for his personal use.



Income Statement

Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:

Cash Flow Statement

Owner Equity

Statement

Balance Sheet

Note The primary types of financial statements required by International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (GAAP) are the same.


Financial StatementsFinancial StatementsFinancial Statements

Net income is needed to determine the ending balance in owner’s equity.Financial Statements

The ending balance in owner’s equity is needed in preparing the balance sheetFinancial Statements

The balance sheet and income statement are needed to prepare statement of cash flows.Financial Statements

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.

Review Question



Which of the following financial statements is prepared as of a specific date?

a. Balance sheet.

b. Income statement.

c. Owner's equity statement.

d. Statement of cash flows.

Question



Accounting Glossary


Accounting Terminologies Accounting Terminologies Accounting Terminologies

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