University of 6th of October, Egypt Prepared by Dr.Hassan Sweillam University of 6th of October, Egypt

1 Accounting in Action Learning Objectives After studying this chapter, you should be able to: [1] Explain what accounting is. [2] Identify the users and uses of accounting. [3] Understand why ethics is a fundamental business concept. [4] Explain generally accepted accounting principles.

What is Accounting? Purpose of accounting is to: identify, record, and communicate the economic events of an organization to interested users. LO 1 Explain what accounting is.

What is Accounting? Three Activities The accounting process includes Illustration 1-1 Accounting process The accounting process includes the bookkeeping function. LO 1 Explain what accounting is.

Questions that internal users ask Who Uses Accounting Data Internal Users Illustration 1-2 Questions that internal users ask LO 2

Questions that external users ask Who Uses Accounting Data External Users Illustration 1-3 Questions that external users ask LO 2

The Building Blocks of Accounting Ethics In Financial Reporting United States regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting. Congress passed Sarbanes-Oxley Act of (SOX) 2002. Effective financial reporting depends on sound ethical behavior.

Ethics in Financial Reporting Question Ethics are the standards of conduct by which one's actions are judged as: right or wrong. honest or dishonest. fair or not fair. all of these options. LO 3 Understand why ethics is a fundamental business concept.

Generally Accepted Accounting Principles (GAAP) Financial Statements Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flows Note Disclosure Various users need financial information The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Generally Accepted Accounting Principles (GAAP) LO 4 Explain generally accepted accounting principles.

Generally Accepted Accounting Principles Generally Accepted Accounting Principles (GAAP) - A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes. Standard-setting bodies: Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) International Accounting Standards Board (IASB) LO 4 Explain generally accepted accounting principles.

Forms of Business Ownership Proprietorship Partnership Corporation Generally owned by one person. Often small service-type businesses Owner receives any profits, suffers any losses, and is personally liable for all debts. Owned by two or more persons. Often retail and service-type businesses Generally unlimited personal liability Partnership agreement Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods LO 5 Explain the monetary unit assumption and the economic entity assumption.

Question Forms of Business Ownership A business organized as a separate legal entity under state law having ownership divided into shares of stock is a proprietorship. partnership. corporation. sole proprietorship.

Major Types of Business Organizations Provides service for a price Example: Airline Company Advertising Agency Accounting Firm Service Business Buys merchandise for resale to customers. Department Stores Wholesalers Retailers Merchandising Business Acquires raw materials which are processed into finished products, then sold to customers Manufacturing Business

Users of Financial Accounting Information External Users Investors Creditors Suppliers Customers Governmental Agencies Regulators Internal Users Management of a company Marketing Manager Credit Department manager Finance Manager Investors and creditors are the primary users of Financial Accounting information.

Timing Issues Accountants divide the economic life of a business into artificial time periods (Time Period Assumption). . . . . . Jan. Feb. Mar. Apr. Dec. Generally a month, quarter, or year. Alternative Terminology The time period assumption is also called the periodicity assumption. LO 1 Explain the time period assumption.

Fiscal and Calendar Years Timing Issues Fiscal and Calendar Years Monthly and quarterly time periods are called interim periods. Public companies must prepare both quarterly and annual financial statements. Fiscal Year = Accounting time period that is one year in length. Calendar Year = January 1 to December 31. LO 1 Explain the time period assumption.

Accrual- versus Cash-Basis Accounting Accrual-Basis Accounting Timing Issues Accrual- versus Cash-Basis Accounting Accrual-Basis Accounting Transactions recorded in the periods in which the events occur. Companies recognize (record) revenues when they perform services (revenues when earned) (rather than when cash is received). Expenses are recognized when incurred (rather than when paid cash). LO 2 Explain the accrual basis of accounting.

Accrual- vs. Cash-Basis Accounting Cash-Basis Accounting Timing Issues Accrual- vs. Cash-Basis Accounting Cash-Basis Accounting Revenues recognized when cash is received. ( (regardless when the revenue is earned). Expenses recognized when cash is paid. ( regardless when the expense is incurred) Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP). LO 2 Explain the accrual basis of accounting.

Recognizing Revenues and Expenses under Accrual Basis Accounting Revenue Recognition Principle The revenue recognition principle dictates that companies recognize revenue in the accounting period in which it is earned. Service Business revenue is earned when services are performed (provided) Merchandising Business Manufacturing Business revenue is earned when goods are sold (delivered)

“Let expenses follow the revenues” Matching Principle EXPENSE RECOGNITION PRINCIPLE Accountants follow a simple rule in recognizing expenses which is “Let expenses follow the revenues” The matching principle dictates that efforts (expenses) should be matched with accomplishments (revenues)

Review Questions . Quiz True or False Questions 1- Purpose of accounting is to identify, record, and examine. Answer: False 2-Partnership generally owned by one person. Answer: True 3- There are four Major Types of Business Organizations

Review Questions 12. Quiz Multiple Choice Questions 1- The accounting process is correctly sequenced as identification, communication, recording. recording, communication, identification. identification, recording, communication. communication, recording, identification. Answer: ____

Multiple Choice Questions Review Questions Multiple Choice Questions 2- One of the following statements about the accrual basis of accounting is false? That statement is: Events that change a company’s financial statements are recorded in the periods in which the events occur. Revenue is recognized in the period in which the performance obligation is satisfied. The accrual basis of accounting is in accord with generally accepted accounting principles. Revenue is recorded only when cash is received, and expenses are recorded only when cash is paid.

DO IT! > A list of concepts is provided in the left column below, with a description of the concept in the right column below. There are more descriptions provided than concepts. Match the description of the concept to the concept. 1. ___ Accrual-basis accounting. 2. ___ Calendar year. 3. ___ Time period assumption. 4. ___ Expense recognition principle. f Monthly and quarterly time periods. Efforts (expenses) should be matched with results (revenues). Accountants divide the economic life of a business into artificial time periods. Companies record revenues when they receive cash and record expenses when they pay out cash. An accounting time period that starts on January 1 and ends on December 31. Companies record transactions in the period in which the events occur. e c b LO 2

12. Quiz Review Questions Brief explain Questions 1- Briefly explain the Forms of Business Ownership? 2- Briefly explain the Major Types of Business Organizations ? 3- Briefly explain the difference between Accrual- versus Cash-Basis Accounting ? Brief explain Questions