Accounting lecture

1. Principles of Accounting
Lecture-2

2. GAAP (Generally accepted accounting
principles)
GAAP are the foundation and ground rules of accounting practice.GAAP are followed by accountants all over
the world. The accounting profession has developed a common set of standards is called generally accepted
accounting principles.
Most popular GAAP provided by FASB are as follows:
1. Dual Aspect Concept: According to this concept, each transaction has two sides. One side is debit and
another side is credit. Example: Invested 200000 by the owner in the business. Here debit is cash and credit
is owners capital.
2. Separate/economic entity: According to this assumption, a business has a separate legal entity. Example:
The economic activities of a business enterprise are kept separately from its owner and other business
units.
3. Going concern assumption: A business enterprise will continue forever. Example: Intel corporation is
continuing its businesses without considering shut down.
4. Monetary Unit Assumption: All economic activities of a business enterprise should measure by monetary
unit. Interl corporation should sold goods in the year 2002 for 50 billion.

3. GAAP (Generally accepted accounting
principles)
GAAP are the foundation and ground rules of accounting practice.GAAP are followed by accountants all over
the world. The accounting profession has developed a common set of standards is called generally accepted
accounting principles.
Most popular GAAP provided by FASB are as follows:
1. Dual Aspect Concept: According to this concept, each transaction has two sides. One side is debit and
another side is credit. Example: Invested 200000 by the owner in the business. Here debit is cash and credit
is owners capital.
2. Separate/economic entity: According to this assumption, a business has a separate legal entity. Example:
The economic activities of a business enterprise are kept separately from its owner and other business
units.
3. Going concern assumption: A business enterprise will continue forever. Example: Intel corporation is
continuing its businesses without considering shut down.
4. Monetary Unit Assumption: All economic activities of a business enterprise should measure by monetary
unit. Intel corporation should sold goods in the year 2002 for 50 billion.

4. GAAP (Generally accepted accounting
principles)
5. Periodicity Assumption: The economic activities of a business can be divided into artificial time periods.
Example: Intel corporation divides its economic activities yearly time periods.
6. Historical Cost Principle: Assists are liabilities are recorded on their acquisition process. Example: Intel
corporation bought a transaction ship costing 10 million in 1998. So this price should be kept over its economic
life.
7. Revenue recognition principle: Revenue is recognized when it is earned. Example: Intel corporation provided
services to NASA on account of 20 million. So this amount is to be recorded as a revenue for intel corporation.
8. Matching principle: expenses are to be matched with revenue to determine net income. Example: Intel
corporation earned 50 billion against 40 billion expenses. So after matching 10 billion is the net income.
9. Full disclosure principle: Accounting data and financial information are to be fully disclosed for complete
understanding. Example: Intel provides annual report every year to the interested users.
10. Cost-Benefit relationship constraint: Costs of the business activities should be lower than their benefits.
Example: Advertisement cost of intel should be lower than its net income.
11. Materiality Constraint: Information should be presented according to their relative importance.
12. Industry Practice Constraint: The peculiar nature of some industries and business concerns sometimes
require departure from basic accounting principles and qualities. Example: Some religious and charity
organizations need different accounting methods to produce realistic and useful financial reporting.

5. GAAP (Generally accepted accounting
principles)
13. Conservatism Constraint: Asset and net income should be stated at their respective lower values. Example:
Intel should not be overstate its assets and income.
14. Relevance Principle: Annual report of a business concern should include all necessary accounting data.
15. Timeliness Principle: Accounting information should be prepared and published just in time.
16. Verifiability Principle: Annual report of a business must be verified by a chartered accountant.
17. Consistency Principle: A company should use the same accounting principle and reporting practice through
time. Example: Life publishers uses straight line method for depreciation on its long term assets.
18. Stable monetary principle: Accounting data should be presented by a stable monetary unit.Example: Intel
uses all accounting data in US dollars.
19. Accrual basis principle: According to this principle, accounting practice includes accrual basis accounting.
Example: Accrual transactions must be adjusted to current accounting period.

6. The four financial statements
Companies prepare four financial statements from the summarized accounting data:
1. Income statement: An income statement presents the revenue and expenses and resulting net income or
loss for a specific period of time.
2. Owners equity statement: An owners equity summarizes the changes in owners equity for a specific time
period.
3. Balance sheet: A balance sheet reports the assets, liabilities and owners equity at a specific date.
4. Cash flow statement: A statement of cash flow summarizes information about the cash inflows (receipts)
and cash outflows (payments) for a specific time period.

7. Difference between Financial Accounting and
Managerial Accounting.
Subject Finalcial Accounting Managerial Accounting
Objective The primary objective of financial
accounting is to make periodical
reports to shareholders
Management accounting is to
provide information to the
management for planning and
controlling and decision making.
Time Focus Financial accounting emphasis on
past activities
Management accounting focus on
future activities
GAAP Financial accounting must follow
the rules of GAAP
Management accounting may not
follow the rules and principles of
GAAP.
Subject Matter Focuses on the whole
organization
Focuses on the segments of
organization
Audit Audit is mandatory Audit is not mandatory
Verifiability Emphasis on verifiability Emphasis on relevance for
planning and control.

8. Rules for doing math
Owners Equity =Owners Capital+ revenue-expense-drawing
Beginning asset= Beginning liabilities + beginning owners equity
Ending asset= Ending liabilities + ending owners equity
Ending Owners equity Formula: Ending Capital= Beginning capital + Additional investment+ revenues-
Expenses- Drawing.

9. Practice No-1
Joan Robinson opens her own law office on july-1, 2017. During the first month of operation the following
transaction occurred:
1. Joan invested $ 11000 in cash in the law practice.
2. Paid $800 for July rent on office space.
3. Purchased office equipment on account $3000
4. Provided legal services to clients for cash $1500
5. Borrowed 700 cash from a bank on note payable
6. Performed legal services for client on account of $2000
7. Paid monthly expenses: salaries and wages $500, utilities $300, advertising $100.
8. Joan withdraws $1000 cash for personal use.
a) Prepare a tabular summary
b) Prepare the income statement, owners equity statement, and balance sheet at July 31, 2017 for joan
robinson.

10. Practice No-2
Judi Salem opened a law office on july 1, 2017.On july 31, the balance sheet showed cash 5000, accounts
receivable 1500, supplies 500, equipment 6000, accounts payable 4200, owners capital 8800. During august
the following transactions occurred:
1. Collected 1200 of accounts receivable
2. Paid 2800 cash on accounts payable
3. Earned revenue of 7500 of which 3000 is collected in cash and the balance is due in September
4. Purchased additional office equipment for 2000 paying 400 in cash and the balance on account.
5. Paid salaries 2500, rent for august 900, and advertising expense 400
6. Withdraw 700 in cash for personal use
7. Received 2000 from bank-money borrowed on a note payable.
8. Incurred utility expense for month on account 270.
Instruction:
1. Prepare a tabular analysis
2. Prepare an income statement, owners equity statement and a balance sheet.

11. Practice No-3
Trixie maye started her own consulting firm on may 1, 2017.The following transactions occurred during the
month of May.
May 1- Carla invested 7000 cash in the business
May 2- Paid 900 for office rent for the month
May-3 Purchased 600 of supplies on account
May-5 Paid 125 to advertise in the county news.
May-9 Received 4000 cash for services provided.
May-12 Withdraw 1000 cash for personal use.
May-15 Performed 5400 of services on account.
May-17 Paid 2500 for employees salaries
May-20 Paid for the suppliers purchased on account on may 3
May-23 Received a cash payment of 4000 for services provided on account on may 15
May-26 Borrowed 5000 from the bank on a note payable
May-29 Purchased office equipment for 4200 on account.
May-30 Paid 275 for utilities.
Prepare: Tabular analysis, income statement and balance sheet.

12. Practice No-4
Alpha Company Beta Company PSI Company Omega Company
January 1, 2017
Assets 80000 90000 (g) 150000
Liabilities 41000 (d) 80000 (j)
Owners equity (a) 40000 49000 90000
December 31, 2017
Assets (b) 112000 170000 (k)
Liabilities 60000 72000 (h) 100000
Owners Equity 50000 (e) 820000 151000
Owners Equity changes in year
Additional Investment (c) 8000 10000 15000
Drawing 15000 (f) 12000 10000
Total revenue 350000 410000 (i) 500000
Total Expenses 333000 385000 350000 (L)
Determine the missing amount.