Chapter 1-1

Tax Accounting

Chapter 1-2

Introduction to Accounting

Accounting Principles, Ninth Edition

Chapter 1-3

In this chapter we will discuss: What is accounting? Elements of financial statements. Financial statements.

Study ObjectivesStudy Objectives

Chapter 1-4

The purpose of accounting is to provide useful information to the business' interested users.

What is Accounting?What is Accounting?

Chapter 1-5

What is Accounting?What is Accounting?

SO 1 Explain what accounting is.

The purpose of accounting is to:

(1) identify, record, and communicate the economic events of an

(2) organization to

(3) interested users.

Chapter 1-6

Three Activities

What is Accounting?What is Accounting?

SO 1 Explain what accounting is.

Illustration 1-1Accounting process

Chapter 1-7

Who Uses Accounting Data?

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

A- INTERNAL USERS:Internal users of accounting information are those individuals inside a

company who plan, organize, and run the business. These include marketing managers, production supervisors, finance directors, and company officers.

B- EXTERNAL USERS:There are several types of external users of accounting information.

Investors (owners) use accounting information to make decisions to buy, hold, or sell stock. Creditors such as suppliers and bankers use accounting information to evaluate the risks lending money. Labor unions want to know whether the owners can pay increased wages and benefits. Tax authorities want to know whether the company complies with the tax laws.

Chapter 1-8

Financial statements

Financial statements are a set of report which includes financial information about the business and should be prepared by the financial accountant at the end of each accounting period (month/ quarter/ year). These statements are:

Income statement. Balance sheet.

Chapter 1-9

There are 3 basic elements of financial statements, as follow:

1- Assets

2- Liabilities

3-Owner’s Equity

2- The Elements of financial statements:

2- The Elements of financial statements:

Chapter 1-10

1- Assets: Assets are resources owned by the business,

expected to provide future benefits.

Types of assets:

a. Short term assets (Current assets).

b. Long term assets

Chapter 1-11

Current means that the asset will be turned into cash or consumed (used up) in the next year. Current assets

include: Cash Supplies Inventory: “Goods held for resale to customers” Accounts Receivable (AR): an asset created by selling products or services on credit. It

reflects amounts due from customer. Oral promise. Notes Receivable (NR): an asset created by selling products or services on credit

and gets note - written promise

A: Short term assets (Current assets):

Chapter 1-12

b. Long term assets (Fixed assets).

Long term assets are assets will be used over a long time period and will not be quickly turned into cash, like:

Land Building Equipment Cars, Trucks Furniture

Chapter 1-13

2- Liabilities:

Liabilities are debts or obligations of a business. They are rights of others against assets of the business.

Chapter 1-14

Types of liabilities:

a- Short term liabilities (Current liabilities)Short term liabilities are liabilities will be paid in the next

year, like: Accounts payable (AP): amounts owed to the suppliers

from the purchase of goods on account. Notes payable (NP): amounts owed to the suppliers or to

the bank that are represented by a formal agreement called a note.

Expenses payable (expenses not paid yet, like salaries payable, rent payable,…)

b- Long term liabilities, like: Bank loans

Chapter 1-15

3- Owner's Equity (O.E):

Owner's Equity is the right of Owners on the assets.

Owner's Equity includes:

A- Capital (resources the owner puts into the business)

B- Net profit (income) or loss = Revenues – Expenses Revenues are increases in O.E resulting from business

activities.

Revenues result from the sale of merchandise or performance of service.

Chapter 1-16

Expanses are decreases in O.E resulting from operating the business.

They are the cost of assets consumed or services used in the process of earning revenues. Such as:

- Rent expenses.

- Salaries expenses.

- Advertising expenses.

- Insurance expenses.

- Telephone expanses.

Chapter 1-17

A net income means that revenues >expenses.

A net loss means that revenues < expenses.

Chapter 1-18

C. Drawings: are withdrawals of cash or other assets from the business by the owner for his personal use.

Chapter 1-19

Exercise (1):

Classify each of these items as an asset (A), liability (L), or owner’s equity (OE).

_____ 1. Accounts receivable_____ 2. Accounts payable_____ 3. Nouran’s, Capital_____ 4. Office supplies_____ 5. Advertising expense_____ 6. Cash_____ 7. Note payable_____ 8. Land

Chapter 1-20

Exercise (2): Choose the correct answer

Chapter 1-21

3. Net income results when

a.Assets > Liabilities.

b.Revenues = Expenses.

c. Revenues > Expenses.

d.Revenues < Expenses.

Chapter 1-22

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

Balance Sheet

Income Statemen

t

Financial StatementsFinancial Statements

SO 8 Understand the four financial statements and how they are prepared.

Chapter 1-23

Financial StatementsFinancial Statements

SO 8 Understand the four financial statements and how they are prepared.

Income Statement

Reports the revenues and expenses for a specific period of time.Net income – revenues exceed expenses.Net loss – expenses exceed revenues.

Illustration 1-9Financial statements andtheir interrelationships

Chapter 1-24

Financial StatementsFinancial Statements

SO 8 Understand the four financial statements and how they are prepared.

Balance Sheet

Illustration 1-9Financial statements andtheir interrelationships

Chapter 1-25

Proprietorship

Partnership Corporation

Owned by two or more persons.

Often retail and service-type businesses

Ownership divided into shares of stock

Forms of Business OwnershipForms of Business Ownership

Generally owned by one person.

Often small service-type businesses