National Economics University

School of Accounting and Auditing

INTERNATIONAL
ACCOUNTING
 THE FINAL GRADE IS COMPUTED AS FOLLOWS:

On-going assessment:
- Attendance: 10%
- 01 mid-term test: 20%
- 01 group assignment 20%
- Final Exam: 50%

Completion Criteria: Final Result >=5

CHAPTER

ACCOUNTING IN BUSINESS
FUNDAMENTAL CONCEPTS
TRANSACTION IDENTIFICATION PROCESS

Purchase Answer Pay rent

computer telephone

Is
Is the
the financial
financial position
position (assets,
(assets, liabilities,
liabilities, and
and owner’s
owner’s
equity)
equity) of
of the
the company
company changed?
changed?

Yes No Yes

Record Don’t Record

Record
 THE LANGUAGE OF BUSINESS

• A means to communicate financial information.

• A way to convey information about a business to users.
 WHAT IS ACCOUNTING?

Accounting is a process of three activities:

1 Identifying

2 Recording

3 Communicating
 THE ACCOUNTING PROCESS

Communication
Accounting
Identification Recording Reports

Prepare accounting
reports

SOFTBYTE
Annual Report
Select economic events Input (Record),
(transactions) measure
& classify

Analyze and interpret

for users
Importance of Accounting
 MANAGEMENT
CONTINUE SELL THE Banks
PRODUCTS? The amount of credit to
extend to Coca-Cola

Suppliers Financial analysts

offer credit for Coca-Cola’s Recommend the purchase

of Coca-Cola’s stock

purchases of supplies & raw

materials
State & federal governments
a basis for assessing
taxes on Coca-Cola
 USERS OF ACCOUNTING INFORMATION

1 Internal Users 2 External Users

Invest in
which company?
 USERS OF ACCOUNTING INFORMATION

EXTERNAL USERS INTERNAL USERS

•Lenders •Managers
•Shareholders •Officers/Directors
•Governments •Internal Auditors
•Consumer Groups •Sales Staff
•External Auditors •Budget Officers
•Customers •Controllers
 ACCOUNTING SYSTEM

MANAGEMENT ACCOUNTING FINANCIAL ACCOUNTING

Managerial accounting provides Financial accounting provides

information needs for internal external users with financial
decision makers. statements.
 ACCOUNTING & BOOK-KEEPING

Dis-organised Organised
Information Record  Sort  Summarize information
(transactions) (financial
Statements)

ACCOUNTING goes beyond BOOK-KEEPING:

+ Analysing & interpretion of financial data
+ Setting up book-keeping system
+ Emphasizes analysis, while Book-keeping emphasizes recording
 ETHICS – A KEY CONCEPT

Accepted standards of good

Beliefs that distinguish right
and bad behavior
from wrong

 Identify ethical  Analyze options  Make ethical decision

concerns

Use personal ethics Choose best option

to recognize ethical Consider all good and bad after weighing all
concern. consequences. consequences.
 SARBANES-OXLEY (SOX)

Congress passed the Sarbanes-Oxley Act to help curb financial abuses at companies that
issue their stock to the public. Management must issue a report stating that internal
control are effective. Auditors must verify the effectiveness of internal controls.

Company Alleged Accounting Abuses

Enron Inflating income, hid debt, and bribed officials
WorldCom Understated expenses to inflate income and hid debt
Fannie Mae Inflated income
Adelphia Communications Understated expenses to inflate income and hid debt
AOL Time Warner Inflated revenues and income
Xerox Inflated income
Bristol-Myers Squibb Inflated revenues and income
Nortel Networds Understated expenses to inflate income
 GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

Financial accounting practice is governed by concepts and

rules known as generally accepted accounting principles
(GAAP).

Relevant Information Affects the

the decision
decision of its users.

Reliable Information Is trusted by

by users.

Is helpful in contrasting
Comparable Information
organizations.
 Principles and Assumptions of Accounting

Business Entity Assumption Going-Concern

A business is accounted for Assumption
separately from other business Reflects assumption that the
entities, including its owner business will continue operating
instead of being closed or sold.

Now Future
 Principles and Assumptions of Accounting

Time Period Assumption

Presumes that the life of a company
can be divided into time periods, such
as months and years.

Monetary Unit Assumption

Express transactions and events in
monetary, or money, units
 Principles and Assumptions of Accounting

Cost Principle
Accounting
information is based
on actual cost.
Actual cost is
considered objective.

Revenue Recognition
Principle
1. Recognize revenue when it is
earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash received
plus cash value of items received.
 Principles and Assumptions of Accounting

Matching Principle
A company must record its
expenses incurred to generate the
revenue reported

Full Disclosure Principle

A company is required to report the
details behind financial statements that
would impact users’ decisions
FORMS OF BUSINESS ENTITIES

Sole Proprietorship

Partnership
Corporation
ACCOUNTING EQUATION &
TRANSACTION ANALYSIS
 WHY YOU NEED ACCOUNTANTS?

TO KEEP TRACK OF YOUR MONEY???

Pouring money into business Forming Assets

WHERE DOES YOUR MONEY GO?

WHERE’S YOUR MONEY COME FROM?
 OBJECTIVES OF ACCOUTING
(Accounting FOCUS ON what?)

CASH ON HAND BUILDING

CASH AT BANK MACHINE

INVENTORY CAR………….
 OBJECTIVES OF ACCOUNTING

ASSETS B SUPPORTING RESOURCES

U
S
I
N
E Banks
Current Assets S
S Suppliers
A
C Labors
T
V
I
T
I
E Owner’s
S Equity
Non-current Assets
 BASIC ACCOUNTING EQUATION

ASSETS = LIABILITY + Owner’s EQUITY

Assets are Owner’s Equity

resources owned represents the
or controlled by a ownership claim on
company total assets.
Liabilities
are claims against assets
(debts & obligations)
Subdivisions of Owner’s Equity:

1 Capital
2 Drawing
3 Revenues
4 Expenses

Investments Withdrawals
by Owner by Owner
Owner’s
Equity
Revenues Expenses

INCREASE DECREASE
 EXPANDED ACCOUNTING EQUATION

Assets = Liabilities + Owner’s Equity

Owner _ Owner _
Capital Withdrawals + Revenues Expenses

Owner's Equity
 CLASSIFICATION
Owner
Investments
Notes
Accounts
Payable Receivable
Notes
Payable
Vehicles
Buildings Land
Wages
Payable

Cash

Accounts
Receivable Store
Equipment Taxes Supplies
Payable
Current Assets Non-current Assets

The equation always stays in

balance

Liability Owner’s Equity

 TRANSACTION ANALYSIS

Transactions are the economic events of the enterprise.

1 External transactions
2 Internal transactions

The accounting equation MUST remain in balance

after each transaction.
 TRANSACTION ANALYSIS

1. Chuck Taylor invests $30,000 cash to start a consulting business.

The accounts involved are:
(1) Cash (asset)
(2) Owner Capital (equity)

Assets = Liabilities + Equity

Accounts
Cash Supplies Equipment Payable Notes Payable C. Taylor Capital
(1) $ 30,000 $ 30,000

$ 30,000 $ - $ - $ - $ - $ 30,000

$ 30,000 = $ 30,000
 TRANSACTION ANALYSIS

2. Purchased supplies paying $2,500 cash.

The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Assets = Liabilities + Equity
Accounts
Cash Supplies Equipment Payable Notes Payable C. Taylor Capital
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500

$ 27,500 $ 2,500 $ - $ - $ - $ 30,000

$ 30,000 = $ 30,000
 TRANSACTION ANALYSIS

3. Purchased equipment for $26,000 cash.

The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)

Assets = Liabilities + Equity

Accounts
Cash Supplies Equipment Payable Notes Payable C. Taylor Capital
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
(3) (26,000) $ 26,000

$ 1,500 $ 2,500 $ 26,000 $ - $ - $ 30,000

$30,000 = $30,000
 TRANSACTION ANALYSIS

4. Purchased Supplies of $7,100 and on account.

The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
Assets = Liabilities + Equity
Accounts C. Taylor
Cash Supplies Equipment Payable Notes Payable Capital
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
(3) (26,000) $ 26,000
(4) 7,100 $ 7,100

$ 1,500 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000

$ 37,100 = $ 37,100
 TRANSACTION ANALYSIS

5. Provided consulting services receiving $4,200 cash.

The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Assets = Liabilities + Equity
Equipmen Accounts Notes C. Taylor
Cash Supplies t Payable Payable Capital Revenue
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
(3) (26,000) $ 26,000
(4) 7,100 $ 7,100
(5) 4,200 $ 4,200
$ 5,700 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000 $ 4,200

$ 41,300 = $ 41,300
 TRANSACTION ANALYSIS

6,7. Payment for rent $1,000 of cash, biweekly salary $ 700

The accounts involved are:
(1) Cash (asset)
(2) Expense (equity)
Assets = Liabilities + Equity
Accounts Notes C. Taylor
Cash Supplies Equipt Payable Payable Capital Revenue Expense
5,700 9,600 26,000 7,100 - 30,000 4,200
(6) (1,000) (1,000)
4,700 9,600 26,000 7,100 30,000 4,200 (1,000)
(7) 700 (700)
4,000 9,600 26,000 7,100 30,000 4,200 (1,700)
39,600 = 39,600
 TRANSACTION ANALYSIS

8. Provide services $ 1,600 and facilities $ 300 for credit

The accounts involved are:
(1) Account Receivable (asset)
(2) Revenues (equity)
Assets = Liabilities + Equity
Accounts Notes C. Taylor
Cash Supplies Equipt Acc Rev Payable Payable Capital Revenue Expense
5,700 9,600 26,000 7,100 - 30,000 4,200
(6) (1,000) (1,000)
(7) (700) (700)
(8) 1,600 1,600
(8) 300 300

4,000 9,600 26,000 1,900 7,100 30,000 6,100 (1,700)

41,500 = 41,500
 TRANSACTION ANALYSIS

9. Receive cash from Account receivable $ 1,900

The accounts involved are:
(1) Cash (asset)
(2) Account Receivable (asset)

Assets = Liabilities + Equity

Accounts Notes C. Taylor
Cash Supplies Equipt Acc Rev Payable Payable Capital Revenue Expense
5,700 9,600 26,000 7,100 - 30,000 4,200
(6) (1,000) (1,000)
(7) (700) (700)
(8) 1,900 1,900
(9) 1,900 (1,900)

5,900 9,600 26,000 7,100 30,000 6,100 (1,700)

41,500 = 41,500
 TRANSACTION ANALYSIS

10. Partial payment for Acc Payable $ 900

The accounts involved are:
(1) Cash (asset)
(2) Account Payable (liability)
Assets = Liabilities + Equity
Acc Accounts Notes C. Taylor
Cash Supplies Equipt Rev Payable Payable Capital Revenue Expense
5,700 9,600 26,000 7,100 - 30,000 4,200
(6) (1,000) (1,000)
(7) (700) (700)
(8) 1,900 1,900
(9) 1,900 (1,900)
(10) (900) (900)

5,000 9,600 26,000 6,200 30,000 6,100 (1,700)

40,600 = 40,600
 TRANSACTION ANALYSIS

11. Withdrawal by owner of $ 200 cash

The accounts involved are:
(1) Cash (asset)
(2) Owner’s Equity
Assets = Liabilities + Equity
Acc Accounts Notes C. Taylor
Cash Supplies Equipt Rev Payable Payable Capital Revenue Expense
5,700 9,600 26,000 7,100 - 30,000 4,200
(6) (1,000) (1,000)
(7) (700) (700)
(8) 1,900 1,900
(9) 1,900 (1,900)
(10) (900) (900)

(11) (200) (200)

  4,800 9,600  26,000   6,200      28,000  6,100 (1,700)

40,400 = 40,400
 FINANCIAL STATEMENTS

Let’s prepare the Financial Statements reflecting

the transactions we have recorded.

1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
 FINANCIAL STATEMENTS
Summarizing what business has done in a period
 FINANCIAL STATEMENTS
Summarizing what business has done in a period

EXAMPLE
Our approach
- Be given several transactions and events
- Process them one at a time
- Carrying them all the way to the financial statements.
 TRANSACTION ANALYSIS

Assets = Liabilities + Equity

Acc Accounts Notes C. Taylor
Cash Supplies Equipt Rev Payable Payable Capital Revenue Expense
5,700 9,600 26,000 7,100 - 30,000 4,200
(6) (1,000) (1,000)
(7) (700) (700)
(8) 1,900 1,900
(9) 1,900 (1,900)
(10) (900) (900)

(11) (200) (200)

  4,800 9,600  26,000   6,200      28,000  6,100 (1,700)

40,400 = 40,400
 INCOME STATEMENT

Net income is the difference between Revenues and Expenses.

The income statement describes a company’s revenues and expenses along with the
resulting net income or loss over a period of time due to earnings activities.
 STATEMENT OF OWNER’S EQUITY

The net income of $4,400 increases

Owner's Equity by $4,400.

FastForward
Statement of Owner's Equity
For Month Ended December 31, 2009
C, Taylor, Capital December 1, 2009 $ -
Plus: Investment by ower $ 30,000
Net income 4,400
34,400
Less: Withdrawals by owner 200
C. Taylor, Capital, December 31, 2009 $ 34,200

STATEMENT OF explains changes in equity from net income (or loss) and from
OWNER’S EQUITY any owner investments and withdrawals over a period of time.
 BALANCE SHEET

The Balance Sheet describes a company’s

financial position at a point in time.
 STATEMENT OF CASH FLOWS
identifies cash inflows (receipts) and cash outflows (payments) over a period of time.
 1A - RETURN AND RISK ANALYSIS

Return on assets (ROA) is stated in

ratio form as income divided by
assets invested.

Return on Assets
30 Year Bonds
Risk is the uncertainty
about the return we will
earn.
 1B - BUSINESS ACTIVITIES AND THE
ACCOUNTING EQUATION

There are three major types of activities in any organization:

1.Financing Activities – Provide the means organizations use to pay for resources such as land,
buildings, and equipment to carry out plans.
2.Investing Activities - Are the acquiring and disposing of resources (assets) that an organization
uses to acquire and sell its products or services.
3.Operating Activities – Involve using resources to research, develop, and purchase, produce,
distribute, and market products and services.
THE END