Accounting and Financial

Reporting
Master of Business Administration Program

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Lecture Week 1
Introduction to Accounting

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Learning Objectives

1 Identify the meaning of accounting.

2 Identify the activities and users associated with
accounting.
3 Explain the building rules of accounting systems.
4 State the accounting equation, and define its
components.

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What is Accounting
• Accounting is an information and measurement system that identifies,
records, and communicates relevant, reliable, and comparable
information about an organization’s business activities.
• Identifying business activities requires selecting transactions and events
relevant to an organization.
• Recording business activities requires keeping a chronological log of
transactions and events measured in different currencies and classified
and summarized in a useful format.
• Communicating business activities requires preparing accounting reports
such as financial statements. It also requires analyzing and interpreting
such reports.
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What is Accounting
• Accounting is an information and measurement system that
identifies, records, and communicates relevant, reliable, and
comparable information about an organization’s business activities.

• Relevant information: affects the decision of the users

• Reliable Information: is trusted by the users
• Comparable: is helpful in contrasting between companies.

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What is Accounting
Accounting

Inputs
(Transactions)

Processing
(Summarizing and Recording)

Outputs
(Financial Statements)

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Users of Accounting Information
Accountants prepare reports for both external and internal users

External Users Internal Users

•Creditors •External Auditors •Managers •Sales Staff

•Shareholders •Customers •Officers/Directors •Budget Officers
•Tax Agencies •Internal Auditors •Controllers

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Users of Accounting Information
External Users External users of accounting information are not directly involved
in running the organization. External users use accounting information to answer
questions that help them make decisions.
• Creditors: need to know information about the company to help them assess whether an
organization is likely to repay the loan or not.
• Shareholders: need to know information about the company to determine whether to buy,
hold or sell the company stock or whether to invest in the company or not. Furthermore, if
shareholders are not satisfied with the management performance they may decide to
change the management of the company.
• External Auditors: examine the financial statements and they collect other evidence to
ensure that the statements report fair information about the company.
• Government and Regulators: they require the company to submit such information to be
used in calculating the taxes.
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Users of Accounting Information
Internal Users are those directly involved in managing and operating an
organization. They use the information to help improve the efficiency and
effectiveness of an organization. Internal users use accounting
information to answer questions that help them undertake their tasks.
• Finance - Is cash sufficient to pay dividends to SAP shareholders?
• Marketing – What price should Nokia charge for a cell phone to maximize the
company's net income?
• Human Resources – Can Toyota afford to give its employees pay raises this
year?
• Management - Which PepsiCo product line is the most profitable? Should any
product lines be eliminated? 9
Main Branches of Accounting
For External Users For Internal Users

Financial accounting Managerial accounting

provides external users with financial uses financial statements and other inputs
statements. to provide information needs for internal
decision-makers.

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Financial Accounting Vs. Managerial
Accounting
Points of Comparison Financial Accounting Managerial Accounting

Users External Internal

Output Financial Statements Internal Reports
Time Period Yearly
Semi-Annually Whenever Needed
Quarterly
Orientation Backward Forward
Historical Data Future Data
Regulations GAAP/IFRS No GAAP/IFRS
Cost-Benefit Analysis

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Accounting Standards

• Generally Accepted Accounting Principles (GAAP)

• International Financial Reporting Standards (IFRS)

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Generally Accepted Accounting Principles
(GAAP)
• Financial accounting practice is governed by concepts, rules, and
assumptions known as GAAP. These rules are applied because financial
statements which are the main output of financial accounting are prepared
by accountants and they are used by external users. Thus, to ensure that
accountants report reliable, relevant and comparable information, there
must be a set of rules that the accountant should follow.
• In the US, the Financial Accounting Standard Board (FASB) is the legal body
responsible for setting the GAAP.
• The US GAAP has then be used as the basis upon which different countries
set their own GAAP. Here in Egypt we use the Egyptian GAAP issued by the
Ministry of Investment*.
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International Financial Reporting Standards
(IFRS)
• In today’s global economy, there is increased demand by external
users for comparability in accounting reports. This demand often
arises when companies wish to raise money from lenders and
investors in different countries.
• If standards are harmonized, one company can potentially use a single
set of financial statements in all financial markets.
• Therefore, the International Accounting Standards Board (IASB), an
independent group (consisting of 16 individuals from many countries),
issues International Financial Reporting Standards (IFRS) that identify
preferred harmonized accounting practices.

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GAAP Versus IFRS
• The GAAP and IFRS provides us with a clear framework that can help
ensure the three characteristics of information which are: relevance,
reliability, comparability. Both share many similarities with respect to
their goals how they differ in their methodology and rules.
Specifically, IFRS is principle-based which means that it offers more
flexibility for businesses. IFRS provides guidelines and far less overall
details than GAAP. While GAAP is rule-based and thus it is stricter, and
this may lead to many exceptions to the rules.
• Differences between GAAP and IFRS are slowly fading as the FASB and
IASB pursue a convergence process aimed to achieve a single set of
accounting standards for global use.
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Quick Test
Indicate whether each of the statements is true or false. indicate how to correct the statement.
1. The three main activities in the accounting system are identification, recording, and
communication.
(True)
2. Bookkeeping encompasses all steps in the accounting process.
(False)
3. Accountants prepare, but do not analyze, financial reports.
(False)
4. The two most common types of external users are investors and company officers.
(False)
5. Managerial accounting focuses on reports for internal users.
(True)
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Forms of Business Ownership

Sole Partnership Corporation

Proprietorship

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 Forms of Business Ownership
Proprietorship Partnership Corporation
• Owned by one person • Owned by two or more • Owned by shareholders
persons*
• Owner is often • Management is separate:
manager/operator • Owner is often Board of directors
manager/operator
• Limited liability
• Owner receives any profits,
suffers any losses, and is • Generally unlimited
personally liable for all debts personal liability
(unlimited liability)

LO 2 Copyright ©2019 John Wiley & Son, Inc. 18

Forms of Business Ownership
A sole proprietorship is a business owned by just one individual. A court can
order an owner to sell personal belongings to pay a proprietorship’s debt.
This unlimited liability of a proprietorship is a disadvantage.
A partnership is owned by two or more individuals. Partners can have limited
or unlimited liability depending on the partnership agreement.
A corporation is a business legally separate from its owners, meaning it is
responsible for its own acts and its own debts and its owners have limited
liability.
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 A Business Financial Position
The financial position of any business can be described through the following accouting equation

Accounting Equation

Assets = Liabilities + Equity

Sources of
Finance

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The Accounting Equation
• The basic accounting equation states that assets are equal to liabilities
plus equity of a company.
• The equation makes sense because in a general way it states that
assets must be equal to the claims against those assets.
• If you have an asset we can have two broad categories of claims
against that asset.
First, we may have claims by creditors (liabilities).
Second, after all creditor claims are satisfied, the residual owners
have a claim on those assets.

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Assets
Cash
Accounts Notes
Receivable Receivable
Resources owned or
controlled by a
Vehicles company intended
to provide future Land
benefits

Store Buildings
Supplies
Equipment

The term receivable is used to refer to an asset that promises a future inflow of resources.
Liabilities
Accounts
Notes Payable
Payable

Creditors’ claims
on assets

Wages
Taxes Payable
Payable

The term payable refers to a liability that promises a future outflow of resources.
 Equity
Owner’s Claims on
Assets
(Owners’ rights)

A = L + OE (C - W + R - E)
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 The Expanded Accounting Equation
Equation Assets = Liabilities + Owner's Equity
Expanded Owner's Owner’s
Equation Assets = Liabilities + Capital - Withdrawals + Revenues - Expenses

Increase in Owner’s Equity

Investment by Owner: Assets the owner puts into
the business
Revenues: is the sale of business goods or services. It
is recorded or earned once the selling transaction
occurs regardless of when cash is received.
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 The Expanded Accounting Equation
Equation Assets = Liabilities + Owner's Equity
Expanded Owner's Owner’s
Equation Assets = Liabilities + Capital - Withdrawals + Revenues - Expenses

Decrease in Owner’s Equity

Withdrawals: A withdraw of cash or other assets for personal use
Expenses: are the costs necessary to earn revenues. Example
salaries of labors, advertising expense, utilities expense,
depreciation expense, rent expense, all of these are examples of
expenses that are incurred during the accounting period in
order to earn revenues.

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Quick Test
Classify the following items as investment by owner, owner’s
drawings, revenues, or expenses. Then indicate whether each
item increases or decreases owner’s equity.
Effect
Classification on Equity
1. Rent Expense Expense Decrease

2. Service Revenue Revenue Increase

Owner’s
3. Withdrawals Decrease
Drawings
4. Salaries and Wages Expense Expense Decrease
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 Analyzing Business Transactions
Transactions are a business’s economic events recorded by accountants.
a. May be external or internal
b. Not all activities represent transactions
c. Have a dual effect on the accounting equation
d. Analyzing business transactions is the first step of the accounting cycle.

Analyze
Trial Adjusting
business Journalize Post
Balance Entries
transactions
Accounting

Adjusted
Financial Closing Post-Closing
Cycle

Trial
Balance Statements Entries Trial Balance

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Analyzing Business Transactions
Illustration: Are the following events recorded in the
accounting records?
Discuss product
design with
Purchase potential
Event
computer customer Pay rent

Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?

Record/
Don’t Record Yes No Yes

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 Transactions Analysis
The accounting equation MUST remain in
balance after each transaction.

Assets = Liabilities + Equity

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Transaction 1: Investment by Owners
On December 1, C.Taylor invests $30,000 cash to start a
consulting business.
The accounts involved are:

(1) Cash (asset)

(2) Owner Capital (equity)

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Transaction 2: Purchase Supplies for Cash
C.Taylor’s company, FastForward purchases supplies paying
$2,500 cash.
The accounts involved are:

(1) Cash (asset)

(2) Supplies (asset)

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Transaction 3: Purchase Equipment for Cash
FastForward purchases equipment for $26,000 cash.

The accounts involved are:

(1) Cash (asset)

(2) Equipment (asset)

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 Transaction 4: Purchase Supplies on Credit
FastForward purchases Supplies of $7,100 on account.
The accounts involved are:

(1) Supplies (asset)

(2) Accounts Payable (liability)

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 Transaction 5: Provide Services for Cash
The company provides consulting services receiving
$4,200 cash.
The accounts involved are:

(1) Cash (asset)

(2) Revenues (equity)

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Transaction 6 and 7: Payment of Expenses in
Cash
The company pays $1,000 rent and $700 in salary to the
company’s only employee.
The accounts involved are:

(1) Cash (asset)

(2) Expenses (equity)

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 Summary of Transactions
Other transactions were executed during Dec. and the summary of all transactions is shown here:

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 Applications
Transaction 1. Ray Neal decides to start a smartphone app development
company which he names Softbyte. On September 1, 2020, he invests
€15,000 cash in the business. What is the effect of this transaction on the
company’s financial position?

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2
3

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 Transaction 2. Softbyte purchases computer equipment for €7,000 cash.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -€250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

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 Transaction 3. Softbyte Inc. purchases for €1,600 headsets and other
accessories expected to last several months. The supplier allows Softbyte
to pay this bill in October.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -€250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -$1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

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 Transaction 4. Softbyte receives €1,200 cash from customers for app
development services it has performed.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 Service Revenue +€1,200
5 +250 -€250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

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 Transaction 5. Softbyte Inc. receives a bill for €250 from the Daily News
for advertising on its online website but postpones payment until a later
date.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 Advertising Expense -€250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

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 Transaction 6. Softbyte performs €3,500 of services. The company
receives cash of €1,500 from customers, and it bills the balance of €2,000
on account.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -€250
6 +1,500 +€2,000 Service Revenue +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

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 Transaction 7. Softbyte pays the following expenses in cash for
September: office rent €600, salaries and wages of employees €900, and
utilities €200.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -€250
6 +1,500 +€2,000 +3,500
7 -600 Rent Expense -600
-900 Salaries and Wage Expense -900
-200 Utilities Expense -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

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 Transaction 8. Softbyte pays its €250 Daily News bill in cash. The
company previously (in Transaction 5) recorded the bill as an increase in
Accounts Payable.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -€250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

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 Transaction 9. Softbyte receives €600 in cash from customers who had
been billed for services (in Transaction 6).

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -€250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

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 Transaction 10. Ray Neal withdraws €1,300 in cash from the business for
his personal use.

Assets Liabilities Owner’s Equity

Accounts Accounts Owner's Owner's
No. Cash + Receivable + Supplies + Equipment = Payable + Capital - Drawings + Revenue - Expense
1 +€15,000 +€15,000
2 -7,000 +€7,000
3 +€1,600 +€1,600
4 +1,200 +€1,200
5 +250 -$250
6 +1,500 +€2,000 +3,500
7 -600 -600
-900 -900
-200 -200
8 -250 -250
9 +600 -600
10 -1,300 -€1,300
€ 8,050 + €1,400 + €1,600 + €7,000 = €1,600 + €15,000 - €1,300 + €4,700 - €1,950

€18,050 €18,050
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References
• Wild, J., Shaw, K., Chiappetta, B. and Samaha, K., 2017. Fundamental
Accounting Principles. 2nd ed. McGraw-Hill Education.
• Weygandt, J., Kimmel, P. and Kieso, D., 2019. Accounting Principles
IFRS Version. Global Edition. Wiley.

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