ACCOUNTING
PRINCIPLES
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CHAPTER (1) ACCOUNTING IN ACTION
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 Why Study Accounting?
 What is Accounting?
 Who uses Accounting Data?
 Brief History of Accounting.
 Distinguishing between bookkeeping and Accounting
 Accounting and You
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Why study Accounting?
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Accounting it is very important .good accounting is mean the
good sound business and investing decisions.
 Bad accounting can not be tolerated at the slightest
hint of a company accounting improprieties,
investors maybe sell their stock when the stock price
will increase after they sold.
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What is Accounting?
The purpose of accounting is to:
(1) identify, record, and communicate the
economic events of an
(2) organization to
(3) interested users.
LO 1 Explain what accounting is.
What is Accounting?
Three Activities
Illustration 1-1
Accounting process
The accounting process includes
the bookkeeping function.
LO 1 Explain what accounting is.
What is Accounting?
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Is an information system that
identifies records and
communicates the economic
events of an organization to
interested users.
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What is Accounting?
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Identifies economic events
involves selecting the economic
activities relevant to a particular
organization.
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What is Accounting?
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Records :one identifies
economic events are recorded to
provide a history of the
organization financial activities,
in recording economic events
are classified and summarized.
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What is Accounting?
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 Communicates: to use the
information to interested users
financial information is
communicated through accounting
reports the most common of which
are called financial statement.
 The accountants ability to analyze
and interpret the reported
information.
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Who Uses Accounting Data?
Internal Users
IRS
Management
Human Resources
Finance
Investors
There are two broad
groups of users of
financial information:
internal users and
external users.
Marketing
Labor Unions
Creditors
SEC
Customers
External
Users
LO 2 Identify the users and uses of accounting.
Who uses Accounting Data?
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 INTERNAL USERS:
Internal users of accounting information are managers
who (plan, organize and run a business) ,marketing
managers, production supervisors, finance directors
and company officers.
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INTERNAL USERS
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 In running a business managers must
answer many important questions like:
 Is cash sufficient to pay bills?
 What is the cost of manufacturing eash
unit of product?
 Can we afford to give employee pay raises
this year?
 Which product line is the most profitable?
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INTERNAL USERS
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 To answer these question users need detailed
information on a timely basis.
 To internal users accounting provides internal
reports as:
 Financial comparisons of operating to choosing .
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INTERNAL USERS
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 Projections of income from new
sales campaigns.
 Forecasts of cash needs for the next
year.
 Summarized financial information
is presented in the form of financial
statements.
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External users
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1-Investors:they are using accounting information to
make decisions to buy hold or sell stock.
2- Creditors : (suppliers, bankers) they are using
accounting information to evaluate the risks of
granting credit or lending money.
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External users:
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3- Taxing authorities : such as the (Internal
Revenue Service) and they want to know
whether the company complies with the tax
laws.
4- Regulatory agencies : (Securities and
Exchange Commission and Federal Trade
Commission) want to know whether the
company is operating with in prescribed
rules.
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External users
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 5- Customers: they are interested in whether a
company will continue to honour product warranties
and support its product lines.
 6-Labor unions: they want to know whether the
owners can pay increased wages and benefits.
 7-Economic planners: use accounting information to
forecast economic activity
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Brief History of Accounting.
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 In 1494 the accounting established started and it was
described a system to ensure that financial information was
recorded efficiently and accurately.
 In the nineteenth century the emergence of large
corporations a separation of the owners from the managers
of business took place.
 As a result the need to report the financial status of the
enterprise become more important to ensure that managers
acted in accord with owners wishes. Also transaction
between business become more complex, making necessary
improved approaches for reporting financial information.
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Distinguishing between bookkeeping and
Accounting
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 Some people think the bookkeeping and accounting
are same bit its not true.
 The accounting process includes the bookkeeping
function.
 Bookkeeping usually they are doing only the
recording of economic events its just one part of the
accounting process.
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 Accounting involves the entire process of identifying,
recording and communicating economic events.
 Accounting divided into:
1-Financial accounting : is the field of accounting that
provides economic and financial information for
external users.
2-Managerial accounting: is providing economic and
financial information for manager and other internal
users.
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Accounting and You
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 How will the study of accounting help you?
 It should help you because a working knowledge of
accounting is desirable for virtually every field of
endeavor.
 Some examples of how accounting help other
careers:
1-General management: to make a good business
decisions.
2- Marketing: to make sale profitable sale the
marketing people must have knowledge to know
the cost and benefits.
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3-Any job in finance field: it is difficult to
get job in finance function without 2 or
3 courses in accounting.
4-Other jobs: a working knowledge of
accounting is relevant
You will need to understand financial
reports in any enterprise you are
associated with.
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The Building Blocks of Accounting
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 Every profession develops a body of
theory consisting of principles
assumptions and standards.
 The fundamental business concept is
followed ethical behavior.
 For example if you trying to carry on
business or invest money if you could
not depend on the individuals you deal
with to be honest.
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 If managers , customers, investors and
creditors all consistently lied , effective
communication and economic activity
would be impossible.
 Most individuals in business are ethical,
their actions are both legal and
responsible and they consider the
organization interests in their decision
making.
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Basic Accounting Equation
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 The two basic elements of business are:
1- What it owns?
2-What it owes?
 Any thing the business owns are (Asset) and any thing
the business owes are (liabilities or owner equity)
 The basic accounting equation is
ASSET= LIABILITIES +OWNERS EQUITY
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ASSETS
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 The resources owned by a business
 They are used in caring out such activities as
production , consumption and exchange.
 The common characteristic possessed by all asset is
the capacity to provide future service or benefits.
 The examples of Assets:
Cash, Equipment, supplies Account receivable….
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LIABILITY
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 They are the right or claims against these resources.
 Claims of those to whom money is owed (creditors) .
 Liabilities are existing debts and obligations.
 For example in liability: most of companies usually
borrow money and purchase merchandise on credit.
This obligations are called (accounts payable)
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Owner equity
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 The ownership claim on total assets.
 It is equal to total assets minus total liability
ASSET – LIABILITY =OWNER EQUITY
 The asset of business are supplied or claimed by
either creditors or owners.
 To find out what belongs to owners we subtract the
creditors claims (the liabilities) from asset.
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 Since the claims of creditors must be paid
before ownership claims.
 The owner equities have two activities:
increase and decrease.
 The investments by owner and the
revenues are the way for increase the
owner equities.
 Investments: the owner puts cash into
business.
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 Revenues: are the gross increase in owner equity
resulting from business activities entered into for the
purpose of earning income.
 Generally, revenues result from the sale of
merchandise the performance of services the rental
of property and the lending of money.
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 However, the owner equities will decreases by drawings
and expenses.
 Drawings: owner may withdraw cash or other asset for
personal use.
 Expenses: the cost of asset consumed or services used
in the process of earning revenue. The example of
expenses( wags ,electric ,gas, water, rent, interest…).
 When the revenues bigger than expenses so the
company have profit in net income ,but if the expenses
are higher than revenues so the company have loss
income.
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