Title: Principles of Accounting 1
Chapter One
Org Name: Admas University
Chapter 1: Introduction to
Accounting
Definition of Accounting
• Accounting is the process of
recording, classifying, summarising,
interpreting and communication
financial information for owners,
managers and other interested parties
Accounting as an information system
• Accounting called as the language of business, this
language viewed as information system to make an
information judgement and decision by the users of
the information.
• An Accounting System is designed to accumulate
about a firm’s financial affairs, classifying the data in a
meaningful way, and summarise it in periodic reports
called financial information.
Business Goals, Activities, and Performance Measures
• A business is an economic unit
that aims to sell goods and
services to customers at prices
that will provide an adequate
return to its owners.
The two major goals of all
businesses
1.Profitability
2.Liquidity.
Example
• For example, Toyota may meet the goal of
profitability by selling many cars at a price that earns
a profit, but if its customers do not pay for their cars
quickly enough to enable Toyota to pay its suppliers
and employees, the company may fail to meet the
goal of liquidity.
• If a company is to survive and be successful, it must
meet both goals.
Other Goals engaging by the
Business
All businesses, pursue their goals by
engaging in
• Operating,
• Investing, and
• Financing activities.
Users of accounting information
Management
• Management refers to the people who are responsible for operating
a business and meeting its goals of profitability and liquidity. In a
small business, management may consist solely of the owners.
• In a large business, managers must decide what to do, how to do it,
and whether the results match their original plans. Successful
manages consistently make the right decisions based on timely and
valid information.
Business Transactions
• Business transactions are economic events that affect a
business’s financial position. Businesses can have hundreds
or even thousands of transactions every day. These
transactions are the raw material of accounting reports.
Separate Entity
• For accounting purposes, a business is a separate entity,
distinct not only from its creditors and customers but also
from its owners. It should have its own set of financial
records, and its records and reports should refer only to its
own affairs.
Accounting Equation
Assets = Liabilities + Owner’s Equity
Financial statement
• Financial statements are the primary means of communicating
important accounting information about a business to those
who have an interest in the business. These statements are
models of the business enterprise in that they show the
business in financial terms.
• Four major financial statements are used to communicate
accounting information about a business: the income statement,
the statement of owner’s equity, the balance sheet, and the
statement of cash flows.
Income Statement
Statement of Owner’s Equity
The Balance Sheet
Statement of Cash Flows
