virtual university of pakistan

Introduction to Accounting I

Lecture Notes

Page 1 of 25

INTRODUCTION TO ACCOUNTING
ACNT 1303
Lecture Notes

GENERAL INFORMATION FOR COMPLETING THE CLASS

The following is a summary of the twelve chapters that you will be completing this
semester. Be sure that you are taking the time to read and STUDY each chapter. It is
important to go through each of the examples in the book and to complete the Review
Quiz. Spending time reading and understanding before you start the homework
assignment will help you to complete in the exercises and case problems with more
understanding. Please ask questions to clarify questions that you may have on any
assignment or concept. Be sure to check your answers in the notebooks before turning in
your assignments. There are PowerPoint slides on the I drive that you may want to review
before taking your exams or as reinforcement to your reading.

Chapter 1

The Nature of Accounting

Accounting is the process of recording, summarizing, analyzing, and interpreting
financial (money-related) activities to permit individuals and organizations to make
informed judgments and decisions.

By law all businesses must keep accounting records. Decisions are based on accounting

information for profit and non-profit companies alike.

There are different forms of business organizations:

o

Private business—object is to earn a profit

o

Sole Proprietorship—owned by one person

o

Partnership—co-owned by two or more persons

o

Corporation—owned by investors called stockholders (The business—not the

owners—are responsible for the company’s obligations.)

There are different types of business organizations:

•

Service business—doctors, lawyers, barber shop, etc.

•

Merchandising business—purchases goods for resale

•

Manufacturing business—produces a product to sell

THE ELEMENTS OF ACCOUNTING

ASSETS

Assets are items with money value that are owned by a business. Some examples are:
cash, accounts receivable (selling goods or services on credit), equipment (office, store,
delivery, etc.), and supplies (office, store, delivery, etc.).

Introduction to Accounting I

Lecture Notes

Page 2 of 25

LIABILITIES

Liabilities are debts owed by the business. Paying cash is often not possible or
convenient, so businesses purchase goods and services on credit. The name of the
account used is Accounts Payable.

Another type of liability is Notes Payable. This is a formal written promise to pay a

specific amount of money at a definite future date.

OWNER’S EQUITY

The difference between Assets and Liabilities is Owner’s Equity. The can also be called

capital, proprietorship, or net worth.

THE ACCOUNTING EQUATION (Study the examples in the book, p. 5)
Assets = Liabilities + Owner’s Equity
This equation must always balance!
BUSINESS TRANSACTIONS AND THE ACCOUNTING EQUATION

A transaction is any activity that changes the value of a firm’s assets, liabilities, or

owner’s equity.

Each transaction has a dual effect on the basic accounting elements. A transaction may

affect more than two accounts in a transaction. This is called a combined entry.

Withdrawal (Drawing) is the removal of business assets for personal use by the owner.

This transaction decreases the asset taken and the value of the business.

Each transaction increases or decreases (or both) the basic elements in the accounting

equation.

The effect of recording a business transaction must always leave the two sides of the

accounting equation in balance.

To understand how a transaction affects the accounting equation, go through each of theexamples in the textbook. Be sure to pay attention to the “Notes” and “Cautions” that aregiven.

FINANCIAL STATEMENTS

Summaries of financial activities are called financial statements which are prepared on a
regular basis at the end of an accounting period. The accounting period typically is one
year; however, it can be any length of time for which records are maintained. Usually the
minimum is one month and the maximum length of time is one year for financial
statements.

There are several financial statements. You are going to prepare the Income Statement,

Statement of Owner’s Equity,and Balance Sheet. These must be completed in that

order. Notice the page in your book that shows the three statements and how the
information goes from one source to another. It is very important to always check your
numbers since an incorrect number will affect more than one statement.

Introduction to Accounting I

Lecture Notes

Page 3 of 25

Income Statement. This is a summary of a business’s revenue and expenses for a

specific period of time. ItONLY shows revenue and expenses. These should be listed inorder from largest to smallest. (This should be done in this chapter because accounts arenot given account numbers.)

Net Income is realized when revenue exceeds expenses.

Net loss is realized when expenses exceed revenue.

Statement of Owner’s Equity. This is a summary of the changes that have occurred in

the owner’s equity during a specific period of time.

This statement will show either an increase or decrease in the capital account.

Balance Sheet. This statement is a listing of the firm’s assets, liabilities, and owner’s

equity at a specific point in time. Total Assets must equal the addition of Liabilities and

Owner’s Equity.

NOTE: Be sure that you are looking carefully at the examples given in the book when

completing your assignments. You must write legibly and use a ruler to draw the lines.Notice that there are double rules to show that items have balanced. Be sure to read andstudy the Summary and Key Terms at the end of each chapter.