Ch1 Accounting in Action Dio Huang Slides only for Class 1 Learning Objectives LO1: Identify the activities and users associated with accounting. LO2: Explain the building blocks of accounting: ethics, principles, and assumptions. LO3: State the accounting equation, and define its components. LO4: Analyze the effects of business transactions on the accounting equation. LO5: Describe the five financial statements and how they are prepared. 2 1.1 Accounting Activities and Users LO1 Identify the activities and users associated with accounting. 3 LO1 • Accounting is the financial information system that provides these insights. • Accounting consists of three basic activities—it identifies, records, and communicates the economic events of an organization to interested users. 4 LO1 • Identifies the economic events relevant to its business. • Records those events in order to provide a history of its financial activities. Recording consists of keeping a systematic, chronological (按時間先後地) diary of events, measured in monetary units. • Communicates the collected information to interested users by means of accounting reports. 5 LO1 Who Uses Accounting Data • Internal Users and External Users • Internal Users: Managers who plan, organize, and run the business. • Marketing Managers à Pricing • Production Supervisors à Salvage Control • Finance Directors à Financing • Company Officers à Strategic Decision • Human Resources à Employee Hiring *Managerial Accounting (The class in your second year) will talk more. 6 LO1 Who Uses Accounting Data • External Users: Individuals and organizations outside a company who want financial information about the company • Investors (owners) à Decision of buy, hold, or sell shares. • Creditors (e.g. Supliers and Bankers) à Evaluate the risks of granting credit or lending money • Taxing Authorities à Comply with the tax laws? • Regulatory Agencies à Operating within prescribed rules? • Customers à Continue to honor product warranties? • Labor unions à Increased salaries? 7 LO1 Data Analytics • Accounting software systems collect vast amounts of data about a company’s economic events. • Data analytics involves analyzing data, often employing both software and statistics, to draw inferences. 8 1.2 The Building Blocks of Accounting LO2 Explain the building blocks of accounting: ethics, principles, and assumptions. 9 LO2 Ethics in Financial Reports • Accountant follows certain standards (e.g. IFRS, GAAP) in reporting financial information. • These standards are based on specific principles and assumptions. • However, a fundamental business concept must be present—ethical behavior. • You may check the below book for more information. Ethical Obligations and Decision-Making in Accounting: Text and Cases, 6th Edition ISBN10: 1264135947 | ISBN13: 9781264135943 https://www.mheducation.com/highered/ product/ethical-obligations-decisionmaking-accounting-text-cases-mintzmiller/M9781264135943.html#overview 10 LO2 Ethics in Financial Reports • Step1:了解一些有關道德的案例及所涉及的道德爭議。 • 用你個人的道德觀去辨認道德的情況和爭議，有些企業和專業的組織會 編製若干在面臨道德情況時有關道德的指導規範。 • Step2:辨認和分析一些在情況裡主要道德的因素。 • 了解一個團體中誰會是受害或受益的人，想一想這個問題，在一個團體 中是誰有責任和義務呢？ • Step3:了解股東不同的情況以及不同情況對股東的影響。 • 在考慮全面的情況後，選出最具有道德的方案。有的時候是可以選出一 個正確的答案。其他的情況包括多於一個正確的情況，這些情況需要逐 一的評估才能選出最好的方案。 11 LO2 Accouting Standards • To ensure high-quality financial reportingà2 primary accounting standard-setting bodies: • International Accounting Standards Board (IASB) • Determines International Financial Reporting Standards (IFRS) • More than 150 countries • Financial Accounting Standards Board (FASB) • Determines generally accepted accounting principles (GAAP) • Used by most companies in the U.S. 12 LO2 Accouting Standards 13 https://ifrs.sfb.gov.tw/ifrs/index.cfm LO2 Measurement Principles • IFRS generally uses one of two measurement bases: • Historical cost basis: • Dictates that companies record assets at their cost. This is true not only at the time the asset is purchased, but also over the time the asset is held. • Current value basis: • States that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). • Example: You buy a Mac cost $3,000 when you buy. You can use $3,000 to report it in its whole useful life. Or use current value (e.g. $1,000 in the next year). 14 LO2 Selecting Measurement Principles • Which principles? à Trade-offs between • Relevance: Financial information is capable of making a difference in a decision. • Faithful Representation: The numbers and descriptions match what really existed or happened—they are factual. • Most company use cost to record long-lived asstes, but for investment securities they use current value. 15 LO2 Assumptions • Assumptions provide a foundation for the accounting process. • Two main assumptions are: • Monetary Unit Assumption: Requires that companies include in the accounting records only transaction data that can be expressed in money terms. • Economic Entity Assumption: Requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. • If I own the small bakery, should I seperate activities too? à Yes. 16 LO2 Assumptions Proprietorship Ownership One person Liability Other Forms of Business Ownership Partnership Corporation Two or more people Divided into shares Unlimited liability Unlimited personal liability 1. Owner is often 1. Often retail and servicemanager/operator type businesses 2. Partnership agreement Limited liability Separate legal entity organized under corporation law 17 1.3 The Accounting Equation LO3 State the accounting equation, and define its components. 18 LO3 • The two basic elements of a business are what it owns and what it owes (you may consider this as 2 approach of financing for learning). • Assets: The resources that business own. The capacity to provide future services or benefits. • Liabilities: Claims of those to whom the company owes money (creditors). • Equity: Claims of owners. Also called Residual Equity, due to it’s the left over after creditors’ claims are satisfied. 19 LO3 • Relationship of assets, liabilities, and equity: Assets = Liabilities + Equity *The reason that Liabilities appear before equity in the basic accounting equation because they are paid first if a business is liquidated. 20 LO3 Equity • Equity generally include: • Share Capital—Ordinary: The amounts paid in by shareholders for the ordinary shares they purchase. • Retained Earnings: Accumulate of sum of Revenue, Expense, and Dividends. • Revenues: Gross increases in equity resulting from business activities entered into for the purpose of earning income. Revenues usually result in an increase in an asset. • Expenses: Cost of assets consumed or services used in the process of earning revenue. • Dividends: Distribution of cash or other assets to shareholders. They are not an expense. 21 LO3 Equity Increase Decrease Investments by Shareholders Dividends by Shareholders Equity Revenues Expense 22 1.4 Analyzing Business Transactions LO4 Analyze the effects of business transactions on the accounting equation. 23 LO4 • The steps companies follow each period to record transactions and eventually prepare financial statements: Ch1 Ch2 Ch3 Ch3 Ch4 Ch4 Ch4 PostAnalyze Adjusted Financial Closing Closing Adjusting Trial business Trial Journalize Post Statements Entries Trial Balance Entries transactions balance Balance Ch2 Ch2 24 LO4 Accounting Transactions PostAnalyze Adjusted Financial Closing Closing Trial Adjusting business Trial Journalize Post Trial Statements Entries Balance Entries transactions balance Balance • Each transaction must have a dual effect on the accounting equation. • For example, if an asset is increased, there must be a corresponding: • Decrease in another asset, or • Increase in a specific liability, or • Increase in equity. 25 LO4 Accounting Transactions • Transaction Identification Process Events Criterion Record or not Purchase computer Discuss product design with potential customer Pay rent Is the financial position (Assets, Liabilities, or Equity) of the company changed? YES NO YES 26 LO4 Transaction Analysis • Expanded Accounting Equation Assets = Liabilities + Equity Share Capital-Oridnary + Retained Earnings Revenues + Expense - Dividends 27 Transactions LO4 Transaction Analysis • The form you may see in test. • Rev. = Revenue, Exp. = Expense, Div. = Dividends • Make sure who you are going to bookkeeping for. Assets Cash Liabilities Share CapitalAccounts Accounts + + Supplies + Equipment = + Ordinary + Receivable Payable Equity Retained Earnings Rev. - Exp. - 28 Div. LO4 Transaction Analysis Transaction (1). Investment by Shareholders Ray and Barbara Neal decide to start a smartphone app development company that they incorporate as Softbyte SA. On September 1, 2025, they invest €15,000 cash in the business in exchange for €15,000 of ordinary shares. The ordinary shares indicates the ownership interest that the Neals have in Softbyte SA. Basic Analysis: assets Cash ↑ €15,000 & equity Share Capital-Ordinary ↑ €15,000 Assets Transactions Cash (1) + €15,000 Liabilities Equity Share CapitalAccounts Accounts + + Supplies + Equipment = + Ordinary + Receivable Payable Retained Earnings Rev. - Exp. - + €15,000 29 Div. LO4 Transaction Analysis Transaction (2). Purchase of Equipment for Cash Softbyte SA purchases computer equipment for €7,000 cash. Basic Analysis: assets Cash ↓ €7,000 & assets Equipment ↑ €7,000 Assets Transactions Cash Liabilities Share CapitalAccounts Accounts + + Supplies + Equipment = + Ordinary + Receivable Payable €15,000 (2) Equity Retained Earnings Rev. - Exp. - €15,000 - 7,000 + €7,000 € 8,000 + €7,000 = €15,000 €15,000 30 Div. LO4 Transaction Analysis Transaction (3). Purchase of Supplies on Credit Softbyte SA purchases headsets (and other computer accessories expected to last several months) for €1,600 from Mobile Solutions. Mobile Solutions agrees to allow Softbyte to pay this bill in October. This transaction is a purchase on account (a credit purchase). Basic Analysis: assets Supplies ↑ €1,600 & liabilities Accounts Payable ↑ €7,000 Assets Transactions Cash Liabilities Equity Share CapitalAccounts Accounts + + Supplies + Equipment = + Ordinary + Receivable Payable €8,000 (3) €7,000 + €1,600 €8,000 + €1,600 + €16,600 Retained Earnings Rev. - Exp. - €15,000 + €1,600 €7,000 = €1,600 + €16,600 €15,000 31 Div. LO4 Transaction Analysis Transaction (4). Services Performed for Cash Softbyte SA receives €1,200 cash from customers for app development services it has performed. This transaction represents Softbyte’s principal revenue-producing activity. Recall that revenue increases equity. Basic Analysis: assets Cash ↑ €1,200 & equity Service Revenue ↑ €1,200 Assets Transactions Cash Equity Share CapitalAccounts Accounts + + Supplies + Equipment = + Ordinary + Receivable Payable €8,000 (4) Liabilities €1,600 €7,000 €1,600 Retained Earnings Rev. - Exp. - €15,000 + 1,200 + €1,200 €9,200 + €1,600 + €17,800 €7,000 = €1,600 + €15,000 + €17,800 €1,200 32 Div. LO4 Transaction Analysis Transaction (5). Purchase of Advertising on Credit Softbyte SA receives a bill for €250 from Programming News for advertising on its website but postpones payment until a later date. Basic Analysis: liabilities Accounts Payable ↑ €250 & equity Advertising Expense ↑ €250 Assets Transactions Cash Liabilities Equity Retained Earnings Share CapitalAccounts Accounts + + Supplies + Equipment = + Ordinary + Rev. - Exp. - Div. Receivable Payable €9,200 €1,600 €7,000 (5) €1,600 €15,000 €1,200 + 250 €9,200 + €1,600 + €17,800 €7,000 = €1,850 + - €250 €15,000 + €1,200 €17,800 €250 33 LO4 Transaction Analysis Transaction (6). Services Performed for Cash & Credit Softbyte SA performs €3,500 of app development services for customers. The company receives cash of €1,500 from customers, and it bills the balance of €2,000 on account. Basic Analysis: assets Cash ↑ €1,500 & assets Accounts Receivable ↑ €2,000 & equity Service Revenue ↑ €3,500 Assets Transactions Cash Equity Share CapitalAccounts Accounts + + Supplies + Equipment = + Ordinary + Receivable Payable € 9,200 (6) Liabilities + 1,500 €10,700 + €1,600 €7,000 €1,850 €15,000 + €2,000 €2,000 + €21,300 Retained Earnings Rev. - €1,200 Exp. - Div. €250 + 3,500 €1,600 + €7,000 = €1,850 + €15,000 + €21,300 €4,700 - €250 34 LO4 Transaction Analysis Transaction (7). Payment of Expenses Softbyte SA pays the following expenses in cash for September: office rent €600, salaries and wages of employees €900, and utilities €200. Basic Analysis: assets Cash ↓ €1,700 & equity Rent Expense, Salaries and Wages Expense, and Utilities Expense ↑ €1,700 (Be careful the sign) Assets Transactions Cash Equity Share CapitalAccounts Accounts + + Supplies + Equipment = + Ordinary + Receivable Payable €10,700 (7) Liabilities €2,000 €1,600 €7,000 €1,850 €15,000 Retained Earnings Rev. - €4,700 - 1,700 Exp. - Div. €250 - 600 - 900 - 200 €9,000 + €2,000 + €19,600 €1,600 + €7,000 = €1,850 + €15,000 + €19,600 €4,700 - €1,950 35 LO4 Transaction Analysis Transaction (8). Payment of Accounts Payable Softbyte SA pays its €250 Programming News bill in cash. The company previously [in Transaction (5)] recorded the bill as an increase in Accounts Payable and a decrease in equity. Basic Analysis: assets Cash ↓ €250 & liabilities Accounts Payable ↓ €250 Assets Transactions Cash Equity Share CapitalAccounts Accounts + + Supplies + Equipment = + Ordinary + Receivable Payable €9,000 (8) Liabilities €2,000 €1,600 €7,000 - 250 €8,750 + €1,850 Retained Earnings Rev. - Exp. - Div. €15,000 €4,700 €1,950 €15,000 + €4,700 - €1,950 - 250 €2,000 + €19,350 €1,600 + €7,000 = €1,600 + €19,350 36 LO4 Transaction Analysis Transaction (9). Receipt of Cash on Account Softbyte SA receives €600 in cash from customers who had been billed for services [in Transaction (6)]. Basic Analysis: assets Cash ↑ €600 & assets Accounts Receivable ↓ €600 Assets Transactions (9) Cash Liabilities Equity Share CapitalAccounts Accounts + + Supplies + Equipment = + Ordinary + Receivable Payable €8,750 €2,000 + 600 - 600 €9,350 + €1,400 + €19,350 Retained Earnings Rev. - Exp. - Div. €1,600 €7,000 €1,600 €15,000 €4,700 €1,950 €1,600 + €7,000 = €1,600 + €15,000 + €4,700 - €1,950 €19,350 37 LO4 Transaction Analysis Transaction (10). Dividends The company pays a dividend of €1,300 in cash to Ray and Barbara Neal, the shareholders of Softbyte SA. This transaction results in an equal decrease in assets and equity. Basic Analysis: assets Cash ↓ €1,300 & equity Dividends ↓ €1,300 (Be careful the sign) Assets Transactions Equity Retained Earnings Share CapitalAccounts Accounts Cash + + Supplies + Equipment = + Ordinary + Rev. - Exp. - Div. Receivable Payable €9,350 (10) Liabilities €1,400 €1,600 €7,000 €1,600 €15,000 €4,700 €1,950 - 1,300 €8,050 + - €1,300 €1,400 + €18,050 €1,600 + €7,000 = €1,600 + €15,000 + €4,700 - €1,950 €18,050 38 €1,300 LO4 Summary of Transactions (Format same as mine and you won’t loss points) Assets Transactions Cash (1) + €15,000 (2) - 7,000 Equity Share CapitalAccounts Accounts + + Supplies + Equipment = + Ordinary + Receivable Payable Retained Earnings Rev. - Exp. - + €7,000 + €1,600 + €1,600 + 1,200 + €1,200 (5) + 250 (6) + 1,500 (7) - 1,700 Div. + €15,000 (3) (4) Liabilities - €250 + 2,000 + 3,500 - 600 - 900 - 200 (8) - 250 (9) + 600 (10) - 1,300 €8,050 + - 250 - 600 - €1,300 €1,400 + €18,050 €1,600 + €7,000 = €1,600 + €15,000 + €18,050 €4,700 - €1,950 39 €1,300 1.5 Financial Statements LO5 Describe the five financial statements and how they are prepared. 40 LO5 Companies prepare five financial statements from the summarized accounting data. • Income statement: presents the revenues and expenses and resulting net income or net loss for a specific period of time. • Retained earnings statement: summarizes the changes in retained earnings for a specific period of time. • Statement of financial position: reports the assets, liabilities, and equity of a company at a specific date. (Sometimes referred to as a balance sheet.) • Statement of cash flows: summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. • Comprehensive income statement: presents other comprehensive income items that are not included in the determination of net income in Chapter 1. 41 LO5 • Be careful the format of those financial statements, if you don’t want to loss points. • Be careful the relationship between those financial statements. • Financial statements not only include those 4 statements, but also include explanatory notes and supporting schedules. 42 Company Name Type of Statement Time period covered by the statement Net income is computed first and is needed to determine the ending balance in retained earnings. 43 A specific date The ending balance in retained earnings is needed in preparing the statement of financial position. 44 Help for learning relationship between statements. Assets = Liabilities + Equity Share Capital-Oridnary + Retained Earnings Revenues + Expense - Dividends 45 The cash shown on the statement of financial position is needed in preparing the statement of cash flows. 46 LO5 Income Statement • The income statement lists revenues first, followed by expenses. • Then, the statement shows net income (or net loss). • When revenues > expenses à net income. • When expenses > revenues à net loss. • The income statement does not include investment and dividend transactions between the shareholders and the business in measuring net income. 47 48 3, 4 loss ( ) 49 LO5 Retained Earnings Statement • The information provided by this statement indicates the reasons why retained earnings increased or decreased during the period. If there is a net loss, it is deducted with dividends in the retained earnings statement. • The first line of the statement shows the beginning retained earnings amount. • Then add net income (or subtract net loss) and subtract dividends. • The retained earnings ending balance is the final amount on the statement. 50 51 Net loss 250 (1,550) € (1,550) 52 LO5 Statement of Financial Position • The statement of financial position is like a snapshot of the company’s financial condition at a specific moment in time (usually the monthend or year-end). • Lists assets at the top, followed by equity and then liabilities. • Total assets must equal total equity and liabilities. 53 54 LO5 Statement of Cash Flows • The statement of cash flows provides information on the cash receipts and payments for a specific period of time. • The statement of cash flows reports the cash effects of a company’s operations during a period, • • • • its investing activities, its financing activities, the net increase or decrease in cash during the period, and the cash amount at the end of the period. 55 56 LO5 Comprehensive Income Statement • Other comprehensive income items are not part of net income but are considered important enough to be reported separately. This statement immediately follows the income statement. • IFRS Alternative: IFRS allows an alternative statement format in which the information contained in the income statement and the comprehensive income statement are combined in a single statement, referred to as a statement of comprehensive income. 57 58 59 Sample of Financial Statements • https://mops.twse.com.tw/mops/web/index 60 END 61
