Professional Documents
Culture Documents
FINANCIAL ACCOUNTING
LECTURE 1
Asst. Prof. zlem OLGU
Room: 202
Tel No: 0212 338 1457
E-Mail: oolgu@ku.edu.tr
1
ACCOUNTING AND THE
BUSINESS
ENVIRONMENT
Chapter 1
2
Chapter Objectives
1. Use accounting vocabulary
2. Apply accounting principles and concepts
3. Use the accounting equation
4. Analyse business transactions
5. Prepare financial statements
6. Evaluate business performance
7. Revision questions
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O1:Use accounting vocabulary
Accounting...
is an information system that...
measures business activities,
processes information, and...
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Users of Accounting Information
nvestors, Managers,
creditors, govt partnerts etc.
agencies 5
The Authority Underlying
Accounting
Public Sector
(SEC)
GAAP
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Standards of Professional
Conduct
Standards of
Ethical
AICPAs Code of
Conduct of the
Professional
Institute of
Conduct
Management
Accountants
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Types of Business Organizations
1. Proprietorships
2. Partnerships
3. Corporations
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1. Proprietorships: single owner
What are some advantages?
total undivided authority
no restrictions on type of business must
be legal
What are some disadvantages?
unlimited liability
limitation on size fund raising power
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2. Partnerships: more than 1 owner
What are some advantages?
- better credit standing possibly
more brain power, but consultation with
partners required
What are some disadvantages?
unlimited personal liability for general
partners
need for written partnership agreement
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3. Corporations: more than 2
owners or shareholders
What are some advantages?
separate legal existence
limited liability of stockholders
transferability of ownership relatively easy
What are some disadvantages?
taxes possible double taxation
extensive governmental regulation
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O 2: Apply Accounting Concepts
and Principles
1. GAAP
2. Entity concept
3. Reliability concept
4. Cost principle
5. Going concern principle
6. Stable monetary unit concept
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Generally Accepted
Accounting Principles (GAAP)
What is the primary objective of financial
reporting?
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The Entity Concept Example
Assume that John decides to open up a gas
station and coffee shop.
The gas station made $250,000 in profits,
while the coffee shop lost $50,000.
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The Entity Concept Example
How much money did John make?
At a first glance, we would assume that
John made $200,000.
However, by applying the entity concept we
realize that the gas station made $250,000
while the coffee shop lost $50,000.
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The Reliability (Objectivity)
Principle
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The Going Concern Concept
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Stable-Monetary-Unit Concept
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IMPORTNAT!!!
O 3: Use the Accounting Equation
Economic Claims to
Resources Economic
Resources
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What is an asset?
It is something a company owns which has
future economic value.
land
building
equipment
goodwill
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What is a liability?
It is something a company owes.
money
service legal retainers
product magazines
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What is owners equity?
It is whats left of the assets after liabilities
have been deducted.
the same as net assets
the owners claim on the entitys assets
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Transactions that Affect
Owners Equity
OWNERS
EQUITY OWNERS EQUITY
INCREASES DECREASES
Owners Equity
Revenues Expenses
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Revenues
What are revenues?
They are amounts received or to be received
from customers for sales of products or services.
sales
performance of services
rent
interest
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Expenses
What are expenses?
They are amounts that have been paid or will be
paid later for costs that have been incurred to
earn revenue.
salaries and wages
utilities
supplies used
advertising
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O 4: Analyze Business Transactions
What is a transaction?
It is any event that both affects the financial
position of the business and can be reliably
recorded.
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Accounting for Business
Transactions: Example
1 Gay Gillen invests $30,000 to begin Gay
Gillen eTravel.
2 Gillen purchases an office location, paying
$20,000 in cash.
3 She buys office supplies, agreeing to pay
$500 in 30 days.
4 She earns and collects $5,500 revenues.
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Example Continues...
5 Gillen performs services, and the client agrees
to pay $3,000 within one month.
6 During the month, she pays $3,300 for
expenses incurred.
7 Gillen pays $300 to the store from which she
purchased $500 worth of supplies.
What is the effect of these transactions on the
accounting equation?
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Accounting for Business Transactions
Owners
Assets = Liabilities + Equity
1) Cash + $30,000 + $30,000
2) Cash 20,000
Land + 20,000
3) Supplies + 500 + 500
4) Cash + 5,500 + 5,500
5) Receivable + 3,000 + 3,000
6) Cash 3,300 3,300
7) Cash 300 300
Totals + $35,400 + 200 + $35,20030
Important Points:
Notice that the equation always stays in
balance.
Each transaction affects at least two
accounts, sometimes more.
Some transactions affect only one side of
the equation; some affect both sides.
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O 5: Prepare Financial Statements
Financial Statements...
are the final
product of the
accounting process.
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O 6: Evaluate Business Performance
Income
Revenue:
Statement
Fees earned $8,500 Expenses:
Salary expense $1,200
Utilities and telephone expense 400
Equipment rental expense 600
Office rent expense 1,100 3,300
Net income $5,200
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Statement of Owners Equity
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Balance Sheet
Assets Liabilities
Cash $19,900 Accounts payable $ 200
Accounts receivable 2,000 Owners equity,
Supplies 500 G. Gillen, capital 33,200
Land 11,000 Total liabilities and
Total assets $ 33,400 owners equity $33,400
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Statement Of Cash Flows
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Statement Of Cash Flows
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Revision Questions:
QUESTION 1
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Answer: $0.
The stockholders of a corporation have limited
liability, which means that stockholders are not
responsible for the debts of the corporation.
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QUESTION 2
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QUESTION 3
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Answer: B
Assets = Liabilities + Owners Equity
Creditors Owners
claims to claims to
assets assets
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QUESTION 8
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Answer: A
When a company collects on an accounts
receivable, cash is increased. Accounts
receivable is decreased by the same amount since
customers owe the company less.
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QUESTION 9
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Answer: D
1. Assets decrease: Cash is paid and decreases.
2. Owners equity decreases: Costs incurred to
earn revenues decrease the owners interest
in the assets.
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QUESTION 10
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Answer: B
The balance sheet reports the amount of assets,
liabilities and owners equity on a specific date.
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QUESTION 11
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Answer: B
The income statement presents revenues and
expenses of a company for a specific period of time.
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QUESTION 12
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QUESTION 13
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QUESTION 14
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QUESTION 15
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