Accounting Principles I

Textbook: Jerry, J. Weygandt et.al. , Accounting

Principles, John Willey & Sons inc., N.Y., 12th
Edition, 2016 .

By
Dr. Mohamed Abdelfattah
Professor of Accounting |& Auditing Dept.
Faculty of Business – Ain Shams University

2023

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CHAPTER 1
ACCOUNTING IN ACTION
Learning Objectives:
After studying this chapter, you should be
able to:
1. Explain what accounting is.
2. Identify the users and uses of
accounting.
3. Understand why ethics is a fundamental
business concept.
4. Explain the meaning of generally
accepted accounting principles (GAAP)
and the cost principle.
5. Explain the meaning of the monetary
unit assumption and the economic entity
assumption.
6. State the basic accounting equation and
explain the meaning of assets, liabilities,
and owner’s equity.
7. Analyze the effect of business
transactions on the basic accounting
equation.
8. Understand what the four financial
statements are and how they are
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 prepared.
WHAT IS ACCOUNTING?
Accounting is an information system
that (1) identifies, (2) records, and (3)
communicates the economic events of
an organization to interested users.
THE ACCOUNTING PROCESS:
- Identification of economic events that
occur during the accounting period and
which measured in monetary units.
- Recording, classifying, and summarizing
the financial transactions.
- Communicating the accounting
information through preparing financial
reporting.
- Analyze and interpret for users.
BOOKKEEPING DISTINGUISHED
FROM ACCOUNTING:
Accounting
- Includes bookkeeping.
- Also includes much more like financial
Analysis.
Bookkeeping
- Involves only the recording of economic
events.
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- Is just one part of accounting.
THE ACCOUNTING PROFESSION:

Public accountants (Auditors):

Offer expert service to the general public
through the services they perform.

Private accountants (employees):

Are employees of individual companies
and are involved in a number of activities
including cost and tax accounting,
systems, and internal auditing.

Not for Profit accounting:

Includes reporting and control for
government units, foundations, hospitals,
labor unions, colleges/universities, and
charities.

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THE BUILDING BLOCKS OF
ACCOUNTING:
⚫Ethics:
Standards of conduct by which one’s
actions are judged as right or wrong,
honest or dishonest.
⚫ Generally Accepted Accounting
Principles (GAAP):
Primarily established by the
Financial Accounting Standards
Board (FASB) and the Securities and
Exchange Commission (SEC).
⚫ Assumptions:
Monetary Unit
Only transaction data that can be
expressed in terms of money is
included in the accounting records.

Economic Entity
Includes any organization or unit in
society.

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TYPES OF BUSINESS ENTERPRISES:
Proprietorship:
A business owned by one person.

Partnership:
A business owned by two or more
persons associated as partners.

Corporation:
A business organized as a separate
legal entity under state corporation
law and having ownership divided
into transferable shares of stock.

BASIC ACCOUNTING EQUATION:

Assets = Liabilities + Owner’s Equity

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Assets :
Are resources owned by the business.
They are used in carrying out such
activities as production, consumption
and exchange.
Assets are divided into two categories:
(a) Current Assets:
Assets that can be transferred into
cash during the lower of one year or
normal cycle of operations.
Examples: Cash – Accounts
Receivable – Notes Receivable –
Supplies.
(b) Fixed Assets:
Assets acquired for use not for
resale.
Examples: Land – Buildings –
trucks – Furniture - Equipment
Liabilities:
Are claims against assets. They are
existing debts and obligations.

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Liabilities are divided into two
categories:
(a) Short –term liabilities:
Liabilities due within maximum
one year.
Examples:
Accounts Payable – Notes
Payable – Short- term loans.

(b) Long-term liabilities:

Liabilities due within more than
one year.
Examples:
Long- term Loans – Bonds –
Mortgage Loan.
Owner’s Equity
Is equal to total assets minus total
liabilities. Owner’s Equity represents
the ownership claim on total assets.

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Subdivisions of Owner’s Equity:
1- Capital or Investments by Owner
2- Drawings
3- Revenues
4- Expenses

Investments by Owner are the

assets the owner puts in the
business.
These investments increase owner’s
equity.
Drawings are withdrawals of cash
or other assets by the owner for
personal use.
Drawings decrease owner’s equity.

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Revenues are the gross increases
in owner’s equity resulting from
business activities entered into for
the purpose of earning income.
Revenues may result from sale of
merchandise, performance of
services, rental of property, or
lending of money.
Revenues usually result in an
increase in an asset.
Expenses are the decreases in
owner’s equity that result from
operating the business.
They are the cost of assets consumed
or services used in the process of
earning revenue.
Examples of expenses may be utility
expense, rent expense, supplies
expense, and tax expense.

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Transactions:
- They are the economic events of the
enterprise recorded. Transactions may
be identified as either external or
internal transactions.
- Each transaction must be analyzed in
terms of its effect on the components of
the basic accounting equation. The
analysis must also identify the specific
items affected and the amount of the
change in each item.
- Each transaction has a dual effect on the
equation. For example, if an individual
asset is increased, there must be a
corresponding:
a. Decrease in another asset, or
b. Increase in a specific liability, or
c. Increase in owner's equity.

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Example:
Mr. Samy opened his law practice during the month
of September and provided you with the following
data:
1. Invested $8,000 in his business.
2. Purchased $500 of supplies for cash.
3. Purchased $4,000 of equipment on account.
4. Received $3,000 for services provided.
5. Paid salaries of $800.
6. Paid office rent for September of $200.
7. Paid $1,000 owed to a creditor.
8. Withdrew $1,500 from the business.
Instructions:
Prepare the tabular summary for the transactions
above.

Owner’
Transactions

Assets = liabilities +
s equity
Accounts Samy
cash + supplies + equipment = +
payable capital
(1) +8,000 +8,000
(2) -500 +500
(3) +4,000 +4,000
(4) +3,000 +3,000
(5) -800 -800
(6) -200 -200
(7) -1,000 -1,000
(8) -1500 -1,500
$7,000 + $500 + 4,000 = $3,000 + 8,500

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The Financial Statements:
Four financial statements are prepared from
the summarized accounting data:
a. The income statement:
Presents the revenues and expenses and
resulting net income (or net loss) of a
company for a specific period of time.
Amr Co.
Income Statement
For the Month Ended Dec. 31, 2021
Revenues
Service revenue $10,000
Less: Expenses
Salaries and wages expense $4,500
Rent expense 750
Utilities expense 400
Total expenses 5,650
Net income $ 4,350

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b. The owner's equity statement:
Summarizes the changes in owner's equity for a
specific period of time.
Amr CO.
Owner’s Equity Statement
For the Month Ended Dec. 31, 2021

Owner’s Capital, July 1 0

Add: Investments $15,000
Net income 4,350 19,350
Total 19,350
Less: Drawings (2,300)
Owner’s Capital, Dec. 31 $17,050

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c. The Statement of Financial Position:
Reports the assets, liabilities, and owner's
equity at a specific date.
Amr CO.
Balance Sheet
July 31, 2016
Assets
Cash $ 5,950
Accounts receivable 6,750
Supplies 750
Equipment 6,000
Total assets $19,450

Liabilities and Owner’s Equity

Liabilities
Accounts payable $ 2,400
Owner’s equity
Owner’s capital 17,050
Total liabilities and owner’s equity $19,450

d.The statement of Cash Flows:

Summarizes information concerning the cash
inflows (receipts) and outflows (payments) for a
specific period of time.

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The Relationship between the financial
statements:
The financial statements are interrelated because:
a) Net income (or net loss) shown on the income
statement is added (subtracted) to (from) the
beginning balance of owner's capital in the
owner's equity statement.
b) Owner's capital at the end of the period
shown on the owner's equity statement is
reported in the balance sheet.
c) The balance of cash shown on the balance
sheet is reported on the statement of cash
flows.
d) In the income statement, revenues are listed
first, followed by expenses. Then below
expenses is the resulting amount of net income
(or net loss).
e) The owner's equity statement shows the
owner's capital at the beginning of the period,
additional investments, net income (or net
loss) for the period, owner's drawings, and the
owner's capital at the end of the period.
f) In the balance sheet, assets are listed at the
top, followed by liabilities and owner's equity.
g) The statement of cash flows reports the
sources, uses, and net increase or decrease in
cash.

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EX:
The following information relates to Molly Mae Co.
for the year 2021.
Owner’s Capital, January 1, 2021 $ 64,000
Advertising expense 6,500
Drawings during 2021 5,700
Rent expense 8,500
Service revenue 58,500
Utilities expense 1,500
Salaries and wages expense 29,000
Instructions
After analyzing the data, prepare an income
statement and an owner’s equity statement for the
year ending December 31, 2021

Answer:
MOLLY MAE CO.
Income Statement
For the Year Ended December 31, 2021

Revenues
Service revenue $58,500
Less: Expenses
Salaries and wages expense $29,000
Rent expense 8,500
Advertising expense 6,500
Utilities expense 1,500
Total expenses 45,500
Net income $13,000

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 MOLLY MAE CO.
Owner’s Equity Statement
For the Year Ended December 31, 2021
Owner’s Capital, January 1 $64,000
Add: Net income 13,000
Total 77,000
Less: Drawings 5,700
Owner’s Capital, December 31 $71,300

EX:
Samira is the bookkeeper for Omar Company.
Samira has been trying to get the balance sheet of
Omar Company to balance. Omar’s balance sheet
is as follows.
Omar COMPANY
Balance Sheet
December 31, 2021
Assets Liabilities
Cash $ 9,400 Accounts payable $25,000
Supplies 7,100 Accounts receivable (19,500)
Equipment 45,000 Owner’s capital 65,200
Owner’s drawings 9,200 Total liabilities and
Total assets $70,700 owner’s equity $70,700
Instructions
Prepare a correct balance sheet.
Answer:

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