Accounting and Financial

Reporting
Master of Business Administration Program

1
Lecture Week 1
Introduction to Accounting

2
Learning Objectives

1 Identify the meaning of accounting.

2 Identify the activities and users associated with
accounting.
3 Explain the building rules of accounting systems.
4 State the accounting equation, and define its
components.

3
What is Accounting?
Accounting

Inputs
(Transactions)

Processing
(Summarizing and Recording)

Outputs
(Financial Statements)

4
What is Accounting
• Accounting is an information and measurement system that identifies,
records, and communicates relevant, reliable, and comparable information
about an organization’s business activities.
• Identifying business activities requires selecting transactions and events
relevant to an organization.
• Recording business activities requires keeping a chronological log of
transactions and events measured in different currencies and classified and
summarized in a useful format.
• Communicating business activities requires preparing accounting reports
such as financial statements. It also requires analyzing and interpreting such
reports.
5
Users of Accounting Information
Accountants prepare reports for both external and internal users

External Users Internal Users

•Creditors •External Auditors •Managers •Sales Staff

•Shareholders •Customers •Officers/Directors •Budget Officers
•Tax Agencies •Internal Auditors •Controllers

6
Users of Accounting Information
Internal Users are those directly involved in managing and operating an
organization. They use the information to help improve the efficiency and
effectiveness of an organization. Internal users use accounting information
to answer questions that help them undertake their tasks.
• Finance - Is cash sufficient to pay dividends to SAP shareholders?
• Marketing – What price should Nokia charge for a cell phone to maximize the
company's net income?
• Human Resources – Can Toyota afford to give its employees pay raises this year?
• Management - Which PepsiCo product line is the most profitable? Should any
product lines be eliminated?
7
Users of Accounting Information
External Users External users of accounting information are not
directly involved in running the organization. External users use
accounting information to answer questions that help them make
decisions.
• Investors
▪ Is Lenovo earning satisfactory income?
▪ How does Disney compare in size and profitability with Time Warner?
• Creditors – Will Singapore Airlines be able to pay its debts as they come
due?
8
Main Branches of Accounting
For External Users For Internal Users

Financial accounting Managerial accounting

provides external users with financial uses financial statements and other inputs
statements. to provide information needs for internal
decision-makers.

9
Quick Test
Indicate whether each of the statements is true or false. indicate how to correct the statement.
1. The three main activities in the accounting system are identification, recording, and
communication.
(True)
2. Bookkeeping encompasses all steps in the accounting process.
(False)
3. Accountants prepare, but do not interpret, financial reports.
(False)
4. The two most common types of external users are investors and company officers.
(False)
5. Managerial accounting focuses on reports for internal users.
(True)
10
Accounting Standards

• Generally Accepted Accounting Principles (GAAP)

• International Financial Reporting Standards (IFRS)

11
Generally Accepted Accounting Principles
(GAAP)
• Financial accounting practice is governed by concepts and rules
known as generally accepted accounting principles (GAAP), which
identify three major characteristics of information.
• First, the information must be relevant, which means that accounting
information impacts the decision of the informed user.
• Second, the information must be reliable, or trusted by users.
• Finally, the information must be comparable, which helps users
evaluate financial information from one period with that of the next
period, and also helps in contrasting organizations.

12
International Financial Reporting Standards
(IFRS)
• In today’s global economy, there is increased demand by external
users for comparability in accounting reports. This demand often
arises when companies wish to raise money from lenders and
investors in different countries.
• If standards are harmonized, one company can potentially use a single
set of financial statements in all financial markets.
• Therefore, the International Accounting Standards Board (IASB), an
independent group (consisting of 16 individuals from many countries),
issues International Financial Reporting Standards (IFRS) that identify
preferred harmonized accounting practices.

13
GAAP Versus IFRS
• Differences between U.S. GAAP and IFRS are slowly fading as the FASB
and IASB pursue a convergence process aimed to achieve a single set
of accounting standards for global use.

14
Forms of Business Ownership

Sole Partnership Corporation

Proprietorship

15
Forms of Business Ownership
• A sole proprietorship is a business owned by just one individual. A court can order an owner to sell personal
belongings to pay a proprietorship’s debt. This unlimited liability of a proprietorship is a disadvantage.
• A partnership is owned by two or more individuals. Some partnerships have several thousand partners.
Partners can have limited or unlimited liability depending on the partnership agreement.
• A corporation is a business legally separate from its owners, meaning it is responsible for its own acts and its
own debts and its owners have limited liability.
✔ Separate legal status means that a corporation can conduct business with the rights, duties, and
responsibilities of a person.
✔ A corporation acts through its managers, who are its legal agents.
✔ A corporation is owned by individuals (called shareholders or stockholders) who normally are not active
in the day-to-day operations of that business. For example, you may become an owner of Vodafone
Egypt by purchasing shares of stock on the Egyptian Stock Exchange. While you are a part owner, you do
not necessarily work for Vodafone Egypt nor are active in the operations of the company.
16
 A Business Financial Position
The financial position of any business can be described through the following accouting equation

Accounting Equation

Assets = Liabilities + Equity

17
The Accounting Equation
• The basic accounting equation states that assets are equal to liabilities
plus equity of a company.
• The equation makes sense because in a general way it states that
assets must be equal to the claims against those assets.
• If you have an asset we can have two broad categories of claims
against that asset.
✔First, we may have claims by creditors (liabilities).
✔Second, after all creditor claims are satisfied, the residual owners
have a claim on those assets.

18
 Assets

Cars Resources owned Land

or controlled by a
company
intended to
provide future
benefits

Equipment Buildings

Cash

19
 Liabilities

Accounts Notes
Payable Payable

Creditors’ claims on
assets
(Creditors’ rights)

Taxes Wages
Payable Payable

20
 Equity
Owner’s Claims on
Assets
(Owners’ rights)

A = L + OE (C - W + R - E)
21
 The Expanded Accounting Equation
Equation Assets = Liabilities + Owner's Equity
Expanded Assets = Liabilities + Owner's - Owner’s + Revenues - Expenses
Equation Capital Withdrawals

Increase in Owner’s Equity

• Investment by Owner. Assets the owner puts into
the business
• Revenues. Increases in assets or decreases in
liabilities resulting from sale of goods or
performance of services in normal course of business
22
 The Expanded Accounting Equation
Equation Assets = Liabilities + Owner's Equity
Expanded Assets = Liabilities + Owner's - Owner’s + Revenues - Expenses
Equation Capital Withdrawals

Decrease in Owner’s Equity

• Withdrawals. A withdraw of cash or other assets
for personal use
• Expenses. Cost of assets consumed or services
used in the process of earning revenue

23
Quick Test
Classify the following items as investment by owner, owner’s
drawings, revenues, or expenses. Then indicate whether each
item increases or decreases owner’s equity.
Effect
Classification on Equity
1. Rent Expense Expense Decrease

2. Service Revenue Revenue Increase

Owner’s
3. Withdrawals Drawings Decrease

4. Salaries and Wages Expense Decrease

Expense
24
 Analyzing Business Transactions
Transactions are a business’s economic events recorded by accountants.
• May be external or internal
• Not all activities represent transactions
• Have a dual effect on the accounting equation
• Analyzing business transactions is the firs step of the accounting cycle.

Analyze
Trial Adjusting
business Journalize Post
Balance Entries
transactions
Accounting

Adjusted
Financial Closing Post-Closing
Cycle

Trial
Balance Statements Entries Trial Balance

25
Analyzing Business Transactions
Illustration: Are the following events recorded in the
accounting records?
Discuss product
design with
Purchase potential
Event
computer customer Pay rent

Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?

Record/
Don’t Record Yes No Yes

26
 Transactions Analysis
The accounting equation MUST remain in
balance after each transaction.

Assets = Liabilities + Equity

27
Transaction 1: Investment by Owners
On December 1, C.Taylor invests $30,000 cash to start a
consulting business.
The accounts involved are:

(1) Cash (asset)

(2) Owner Capital (equity)

28
Transaction 2: Purchase Supplies for Cash
C.Taylor’s company, FastForward purchases supplies paying
$2,500 cash.
The accounts involved are:

(1) Cash (asset)

(2) Supplies (asset)

29
Transaction 3: Purchase Equipment for Cash
FastForward purchases equipment for $26,000 cash.

The accounts involved are:

(1) Cash (asset)

(2) Equipment (asset)

30
 Transaction 4: Purchase Supplies on Credit
FastForward purchases Supplies of $7,100 on account.
The accounts involved are:

(1) Supplies (asset)

(2) Accounts Payable (liability)

31
 Transaction 5: Provide Services for Cash
The company provides consulting services receiving
$4,200 cash.
The accounts involved are:

(1) Cash (asset)

(2) Revenues (equity)

32
Transaction 6 and 7: Payment of Expenses in
Cash
The company pays $1,000 rent and $700 in salary to the
company’s only employee.
The accounts involved are:

(1) Cash (asset)

(2) Expenses (equity)

33
 Summary of Transactions
Other transactions were executed during Dec. and the summary of all transactions is shown here:

34
 Applications
Transaction 1. Ray Neal decides to start a smartphone app development
company which he names Softbyte. On September 1, 2020, he invests
€15,000 cash in the business. What is the effect of this transaction on the
company’s financial position?

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2
3

35
 Transaction 2. Softbyte purchases computer equipment for €7,000 cash.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -€250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

36
 Transaction 3. Softbyte Inc. purchases for €1,600 headsets and other
accessories expected to last several months. The supplier allows Softbyte
to pay this bill in October.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -€250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -$1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

37
 Transaction 4. Softbyte receives €1,200 cash from customers for app
development services it has performed.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 Service Revenue +€1,200
5 +250 -€250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

38
 Transaction 5. Softbyte Inc. receives a bill for €250 from the Daily News
for advertising on its online website but postpones payment until a later
date.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 Advertising Expense -€250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

39
 Transaction 6. Softbyte performs €3,500 of services. The company
receives cash of €1,500 from customers, and it bills the balance of €2,000
on account.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -€250
6 +1,500 +€2,000 Service Revenue +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

40
 Transaction 7. Softbyte pays the following expenses in cash for
September: office rent €600, salaries and wages of employees €900, and
utilities €200.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -€250
6 +1,500 +€2,000 +3,500
7 -600 Rent Expense -600
-900 Salaries and Wage Expense -900
-200 Utilities Expense -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

41
 Transaction 8. Softbyte pays its €250 Daily News bill in cash. The
company previously (in Transaction 5) recorded the bill as an increase in
Accounts Payable.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -€250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

42
 Transaction 9. Softbyte receives €600 in cash from customers who had
been billed for services (in Transaction 6).

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -€250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

43
 Transaction 10. Ray Neal withdraws €1,300 in cash from the business for
his personal use.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -$250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

€18,050 €18,050
44
 EN
D
O
F
LE
CT
U RE
W
EE

u
K
Yo 1
nk
a
Th

45
References
• Wild, J., Shaw, K., Chiappetta, B. and Samaha, K., 2017. Fundamental
Accounting Principles. 2nd ed. McGraw-Hill Education.
• Weygandt, J., Kimmel, P. and Kieso, D., 2019. Accounting Principles
IFRS Version. Global Edition. Wiley.

46