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.
Accounting definitionAccounting definitionAccounting definition
Process:Process:Process:
Accounting definitionAccounting definitionAccounting definition
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
Accounting definitionAccounting definitionAccounting definition
Economic event: ExamplesEconomic event: ExamplesEconomic event: Examples
Event
Criteria Is the financial position (assets, liabilities, or owner’s equity) of the company changed?
Decision
Accounting definitionAccounting definitionAccounting definition
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
Accounting definitionAccounting definitionAccounting definition
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 definitionAccounting definitionAccounting definition
Accounting usersAccounting usersAccounting users
Internal Users
Accounting definitionAccounting definitionAccounting definition
Accounting users: Internal usersAccounting users: Internal usersAccounting users: Internal users
External Users
Accounting definitionAccounting definitionAccounting definition
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 definitionAccounting definitionAccounting definition
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 definitionAccounting definitionAccounting definition
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.
Accounting definitionAccounting definitionAccounting definition
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
Accounting definitionAccounting definitionAccounting definition
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.
Accounting definitionAccounting definitionAccounting definition
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.
Accounting definitionAccounting definitionAccounting definition
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 definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
AssetsAssetsAssets LiabilitiesLiabilitiesLiabilities Owner’s EquityOwnerOwner’’s s EquityEquity= +
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Assets
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
AssetsAssetsAssets LiabilitiesLiabilitiesLiabilities Owner’s EquityOwnerOwner’’s s EquityEquity= +
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
Liabilities
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
AssetsAssetsAssets LiabilitiesLiabilitiesLiabilities Owner’s EquityOwnerOwner’’s s EquityEquity= +
Ownership claim on total assets.
Referred to as residual equity.
Investment by owners and revenues (+)
Drawings and expenses (-).
Owner’s Equity
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
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.
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
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.
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
Transaction (2): Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash.
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
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.
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
Transaction (4): Softbyte receives $1,200 cash from customers for programming services it has provided.
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
Transaction (5): Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
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.
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
Transaction (7): Softbyte pays the following expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
Transaction (8): Softbyte pays its $250 Daily News bill in cash.
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
Transaction (9): Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
Transaction (10): Sergey withdraws $1,300 in cash from the business for his personal use.
Accounting definitionAccounting definitionAccounting definition
Accounting equation: Dual effectAccounting equation: Dual effectAccounting equation: Dual effect
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.
Accounting definitionAccounting definitionAccounting definition
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
Accounting definitionAccounting definitionAccounting definition
Financial StatementsFinancial StatementsFinancial Statements
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 definitionAccounting definitionAccounting definition
Financial StatementsFinancial StatementsFinancial Statements
Accounting Glossary
Accounting definitionAccounting definitionAccounting definition
Accounting Terminologies Accounting Terminologies Accounting Terminologies
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