1. Topic 1
An Introduction to
Accounting

2. What is Accounting
• A measurement & communication
discipline
• Measures financial aspects of business
• Communicates this information to
decision makers

3. Why Non-accountants Study
Accounting
• Non-accountants make decisions
• Decisions are based on accounting
information
• Accounting information is prepared in
accordance to “rules”
• One must understand these rules if
information is to be properly used

4. The Accounting Equation (center of the
accountant’s universe)
Assets = Liabilities + Equity
• Asset: something of value
• Liability: something owed
• Equity: what remains

5. The Accounting Equation
Expanded
• There are two sources of equity
– equity “contributed” by owners
– equity “earned “ by operations
• Expanded accounting equation:
Contributed Retained
Assets = Liabilities + Capital + Earnings
• For corporations Contributed Capital is called
Common Stock

6. Four Financial Statements
• Balance Sheet
– Assets = Liabilities + Equity
• Income Statement
– Revenues - Expenses = Net income
• Statement of Changes in Equity
– Beginning equity + Contributions + Net
income - Distributions = Ending equity
• Statement of Cash Flows
– Cash inflow - Cash outflow = Net cash flow

7. Transaction Analysis
• What is a transaction?
– business event
• What is transaction analysis
– the determination of how a business event affects
the financial statements
• The statements are all related, so
– First, determine effects on accounting equation;
i.e., the balance sheet
– Next, determine effects on other statements

8. Transaction Analysis: ex. 1
The owners of “Our Co.” invested $3,000
cash in the business. in 20X1.
Assets = Liab. + C. Stock. + Ret. Earn.
• Income Statement:
• Statement of Changes in Equity:
• Statement of Cash Flows:

9. Transaction Analysis: ex. 2
Provided services to customers for $1,000,
cash.
Assets = Liab. + C. Stock. + Ret. Earn.
• Income Statement:
• Statement of Changes in Equity:
• Statement of Cash Flows:

10. Transaction Analysis: ex. 3
Incurred $700 of expenses; paid cash.
Assets = Liab. + C. Stock. + Ret. Earn.
• Income Statement:
• Statement of Changes in Equity:
• Statement of Cash Flows:

11. Transaction Analysis: ex. 4
Borrowed $2,000 cash from the bank by
issuing a Note Payable.
Assets = Liab. + C. Stock. + Ret. Earn.
• Income Statement:
• Statement of Changes in Equity:
• Statement of Cash Flows:

12. Transaction Analysis: ex. 5
Purchased land for $3,500 cash.
Assets = Liab. + C. Stock. + Ret. Earn.
• Income Statement:
• Statement of Changes in Equity:
• Statement of Cash Flows:

13. Transaction Analysis: ex. 6
Distributed $100 cash to the owners.
Assets = Liab. + C. Stock. + Ret. Earn.
• Income Statement:
• Statement of Changes in Equity:
• Statement of Cash Flows:

14. Transaction Analysis: Summary for 20X1
Assets = Liab. + C. Stock. + Ret. Earn.
+ 3,000 n/a + 3,000 n/a
+ 1,000 n/a n/a + 1,000
- 700 n/a n/a - 700
+ 2,000 + 2,000 n/a n/a
+ 3,500 (land) n/a n/a n/a
- 3,500 (cash) n/a n/a n/a
- 100 n/a n/a - 100
+ 5,200 = + 2,000 + 3,000 + 200

15. Income Statement
Revenues $1,000
- Expenses (700)
Net income $ 300

16. Statement of Changes in Equity
Beginning common stock $ 0
Plus: Investments 3,000
Ending common stock $3,000
Beginning retained earnings 0
Plus: Net income 300
Less: Dividends (100)
Ending retained earnings 200
Total equity $3,200

17. Balance Sheet
Assets:
Cash $1,700
Land 3,500
Total assets $5,200
Liabilities: Note payable $2,000
Equity:
Common stock $3,000
Retained earnings 200
Total equity 3,200
Total liabilities and equity $5,200

18. Statement of Cash Flows
Cash flows from operating activities:
Cash receipts from revenues $1,000
Cash payments for expenses (700)
Net cash flows from oper. activs. $ 300
Cash flows from investing activities:
Cash payment for land (3,500)
Cash flows from financing activities:
Cash receipts from investments 3,000
Cash receipts from bank loan 2,000
Cash payment for dividend (100)
Net cash flows from fin. activs. 4,900
Net increase in cash $1,700