12-Jul-19 Chapter Introduction to Accounting and Business Objectives Describe the nature of a business Describe the role of accounting in business Describe the profession of accounting Summarise the development of accounting principles and relate them to practice • State the accounting equation and define each element of the equation • Describe the financial statements of a sole proprietorship and explain how they interrelate • • • • Content • • • • • • Nature of a business • In general, a business is an organisation in which basic resources (inputs) are assembled and processed to provide goods or services (outputs) to customers • Each business has its own objective!!! Nature of a business • Types of businesses: Manufacturing Trading Service Manufacturing Nature of a business What is accounting? Profession of accounting GAAP Accounting equation Financial statement 12-Jul-19 Trading What is accounting? • Accounting provides information for stakeholders • Accounting = Gathering, Processing and Communicating Service Providing Information to Stakeholders Identify stakeholders Internal/External Stakeholders Assess their information needs Record economic data about business activities Types of Business Organisation • Sole proprietorship • Partnership • Company Accounting Information System Design the AIS Stakeholder • Internal: – Manager – Employee • External: – Bank – Tax authority 12-Jul-19 Stakeholders’ information needs • • • • Managers? Investors? Creditors (such as Bank)? Government? Accounting concepts developed from GAAP Profession of accounting Accountant Private accountant GAAP Public accountant Business Entity Concept Historical Cost Accounting Period Going Concern Consistency Business entity • Means that the owner and the business are treated as separate entities An entity is an organisation or a system Accounting Fields Financial Accounting Managerial Accounting GAAP GAAP (Generally Accepted Accounting Principles) US GAAP UK GAAP Historical cost • Means that transactions are recorded using the cost at the point of transaction This cost is called the historical cost or original cost * Accountants follow GAAP in preparing reports By this, these reports could be compared from one business to another 12-Jul-19 Accounting equation Accounting Period • Means that financial statements of the business are prepared for a period of time, either a month or a year Assets = Liabilities + Owner’s Equity * All business transactions can be stated in terms of changes in the elements of the accounting equation Going concern • Means when we record the transactions of a business, we assume that the business will continue to operate for the foreseeable future Assets • Resources controlled by the business Consistency • Means that accountant tries to prepare the financial statement of the business on the same basis every year Assets • • • • • • Cash Property, Plant and Equipment Stock (Inventory) Patent right Land usage right Money in bank account 12-Jul-19 Liabilities • Debts owed to outsiders (creditors) • Contributed capital investment • Reserves • Retained earnings Business Transactions and the Accounting Equation • • • • • Loans Advance payment from customer Bank overdraft Payable to supplier Tax payable • Deposit in bank account for initial capital investment ($1,000) • Purchase a machine by cash ($300) • Borrow money from your family ($400) • Sell goods to customer and receive cash ($200) Owner’s Equity • Owner’s right to the asset of the business Financial statement • • • • • Profit and loss statement Statement of owner’s equity Balance sheet Statement of cash flows Notes of FS 12-Jul-19 Profit and loss statement Statement of cash flows Revenues A summary of the cash receipts and cash payment Expenses Statement of owner’s equity Notes of FS • List of note to accommodate user of FS with additional information Summary of the changes in the owner’s equity Balance sheet How they linked together? Profit and loss statement A list of assets, liabilities and owner’s equity Accounting policies Detailed information Contingency liabilities Events after reporting date Transactions with related parties Statement of owner’s equity Notes of FS Balance sheet Statement of cash flows