Principles of Accounting

By
Title: Financial & Managerial Accounting
(THE BASIS FOR BUSINESS DECISIONS)

Author: Williams , Haka , Bettner , Carcello

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 Accounting
Accounting
Accounting is a language of business.
Its basic purpose is to serve as a means of
communication.
“It is a systematic process of recording,
classifying, summarizing the Business
Transactions & Events of Financial
Characters, and Interpreting the results
thereof.”

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 Business
Business
Any legal activity which is performed for
the sake of earning profit.
Example: Honda, Pepsi, etc.

Forms of Business:
1)Nature of Work
2)On the basis of Ownership

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 Forms
Forms of
of Business:
Business:
1) Nature of Work:
i. Manufacturing Organizations
ii. Merchandising/Trading Org.
iii. Service Org.
2) On the basis of Ownership
i. Sole Tradership / Proprietorship
ii. Partnership
iii. Corporations

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 Accounting
Accounting
Business Transactions:
The dealing between 2 or more persons is
called business transactions. It should be
related to business

Events of Financial Character:

Events which can be measured in terms of
Money. (Monetary Events)
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 Functions
Functions of
of Accounting
Accounting

 Recording:
It is a process in which transactions are
recorded in the books of original entries.
i.e: in Journal books

Journal books:
It is sub-divided into subsidiary books
according to the number of transactions of
particular category.
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 Functions
Functions of
of Accounting
Accounting
These subsidiary books are:
i. Cash Book
ii. Purchase Book
iii. Purchase Return Book
iv. Sales book
v. Sales Return Book
vi. Bills Receivable Book
vii. Bills Payable Book

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 Functions
Functions of
of Accounting
Accounting
Cash Book:
To record cash and bank transactions.
Cash book may be:
a) Single Column Cash Book
b) Two/Double Column Cash Book
c) Three Column Cash Book

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 Types
Types of
of Accounting
Accounting Information
Information

Financial Tax

Managerial

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 Accounting
Accounting Systems
Systems
An accounting system consists of the personnel,
procedures, technology, and records used by an
organization to develop accounting information
and to communicate this information to decision
makers.

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 Information
Information System
System

Information
Information Financial
Financial Decisions
Decisions
Users
Users Information
Information Supported
Supported

Investors
Investors Provided
Provided 
Performance
Performance

Creditors  evaluations
Creditors Profitability
Profitability evaluations

Managers  
Stock
Managers Financial
Financial Stock

Owners
Owners position investments
investments
position

Customers  
Tax
Taxstrategies
Customers Cash
Cashflows
flows strategies

Employees
Employees 
Labor
Laborrelations
relations

Regulators
Regulators 
Lending
Lending
-SECP
-SECP decisions
decisions

Borrowing
Borrowing

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 Basic
Basic Functions
Functions of
of an
an Accounting
Accounting
System
System

 Interpret  Classify
and record similar
business transactions
transactions. into useful  Summarize
reports. and
communicate
information to
decision
makers.

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 External
External Users
Users of
of Accounting
Accounting
Information
Information
•Owners
•Creditors
•Potential investors
•Labor unions
•Governmental agencies
•Suppliers
•Customers
•General public

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 (Specific)
Provide information about economic Objectives
resources, claims to resources, and
changes in resources and claims.
of
External
Financial
Provide information useful in
Reporting
assessing amount, timing and
uncertainty of future cash flows.

Provide information useful in making

investment and credit decisions.
(General)
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 Objectives
Objectives of
of External
External Financial
Financial
Reporting
Reporting

Balance Sheet

Income Statement
The primary
Statement of Cash Flows
financial
statements.

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 Characteristics
Characteristics of
of Externally
Externally
Reported
Reported Information
Information
AAMeans
Meanstoto
an
anEnd
End
Usefulness
Usefulness Broader
Broaderthan
than
Enhanced
Enhancedviavia Financial
Financial
Explanation
Explanation Statements
Statements

Based
Basedonon Historical
Historical in
in
General-Purpose
General-Purpose Nature
Nature
Assumption
Assumption

Results
Resultsfrom
fromInexact
Inexactand
and
Approximate
ApproximateMeasures
Measures
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 Learning
Learning Objective
Objective

To explain the importance

of financial accounting
information for internal
parties—primarily
management—in terms of
the objectives and the
characteristics of that
information.

LO4
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 Users
Users of
of Internal
Internal Accounting
Accounting
Information
Information

 Board of directors
 Chief executive officer
(CEO)
 Chief financial officer (CFO)
 Vice presidents
 Business unit managers
 Plant managers
 Store managers
 Line supervisors

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 Owners

Typical
Board of
Directors Simple
Organization
Chief Executive
Officer Chart
(CEO)

Business V.P. V.P. Chief

V.P
Unit Human Information Financial
Marketing
Managers Resources Services Officer (CFO)

Plant Plant
Managers Managers Controller Treasurer

Plant Plant
Accountants Accountants

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 Objectives
Objectives of
of Management
Management
Accounting
Accounting Information
Information

To
Tohelp
helpachieve
achieve
goals
goalsand
andmissions
missions

To
Tohelp
helpevaluate
evaluate
and
andreward
reward
decision
decisionmakers
makers

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 Characteristics
Characteristics of
of Management
Management
Accounting
Accounting Information
Information

Timeliness
Timeliness
Identify
Identify
AAMeans
Meanstoto Decision
Decision
an
anEnd
End Maker
Maker

Measures
Measuresof of Oriented
Oriented
Efficiency
Efficiencyand
and Toward
Toward
Effectiveness
Effectiveness Future
Future

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 Learning
Learning Objective
Objective

To discuss elements of
the system of external
and internal financial
reporting that create
integrity in the reported
information.

LO5
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 Integrity
Integrity of
of Accounting
Accounting Information
Information
Institutional Features
Generally Accepted Accounting Principles
(GAAP)
Financial Accounting Standards Board
International Accounting Standards Board
Securities and Exchange Commission
Public Company Accounting Oversight Board
Audits of Financial Statements
Legislation

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 Learning
Learning Objective
Objective

To identify and discuss

several professional
organizations that play
important roles in
preparing and
communicating
accounting information.

LO6
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 Integrity
Integrity of
of Accounting
Accounting Information
Information

Professional Organizations
American Institute of Certified Public
Accountants
Institute of Management Accountants
Institute of Internal Auditors
American Accounting Association
Committee of Sponsoring Organizations of the
Treadway Commission (COSO)

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 Learning
Learning Objective
Objective

To discuss the
importance of personal
competence,
professional judgment,
and ethical behavior on
the part of accounting
professionals.

LO7
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 Integrity
Integrity of
of Accounting
Accounting Information
Information

Competence, Judgment and Ethical Behavior

Certified Public Accountants (CPAs)
Certificate in Management Accounting (CMA)
Certificate in Internal Auditing (CIA)

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 Learning
Learning Objective
Objective

To discuss various
career opportunities in
accounting.

LO8
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 Careers
Careers in
in Accounting
Accounting

Public Accounting
Management Accounting
Governmental Accounting
Accounting Education

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 End
End of
of Chapter
Chapter 11

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008