Objective 1: Define Accounting Vocabulary:

Accounting is the language of business.

Accounting is the information system that:
** measures business activity,
** processes the data into reports,
** communicates the results to decision makers, and
** Presents information in monetary terms.
A key product of accounting is a set of reports called
financial statements.

Objective 2: Define The Users of Financial
Information:
Accounting can be divided into two fields:
(A) Financial Accounting:
Financial accounting provides information for external
decision makers, such as:
** Investors.
** Creditors.
** Taxing Authorities.
** Customers.
** Suppliers.

(B) Managerial Accounting:
Managerial accounting provides information for internal
decision makers, such as:
** Managers.
** Business owners.

Objective 3: Identify the different Types of Business
Organizations:
A business organization can be organized as one
of the following:
(a) Proprietorship.
(b) Partnership.
(c) Corporation.
(d) Limited-liability partnership (LLP) and limited-
liability company (LLC).
(e) Not-for-profit.

(A) Proprietorships:
A proprietorship has a single owner, called a
proprietor, who often manages the business.





(B) Partnerships:
A partnership has two or more owners called partners.
(c) Corporations:
A corporation is a business owned by stockholders, or
shareholders.
Stock is a certificate representing ownership interest in a
corporation.

(D) Limited-Liability Partnerships (LLPs) and
Limited-Liability Companies (LLCs):
In a limited-liability partnership, each member/partner is
liable (obligated) only for his or her own actions and those
under his or her control.

In a limited-liability company, the business -and not the
member of the LLC- is liable for the companys debts.

(E) Not-for-Profits:
A not-for-profit has no owners.

- Comparison of Business Forms
Proprietorship
Partner-
ship
Corporation
LLP/LLC Not-for-
profit
1- Owners



2- Life of the
organization




- Personal
liability of
owners for
the
businesss
debts




*Proprietor:
only one
owner


Limited by
the owners
choice or
death


*Proprietor:
Owner is
personally
liable



Partners:
Two or more
owners


*Limited by
the owners
choice, or
death


Partners are
personally
liable


*Stockholders
generally
many owners


Indefinite





Stockholders
not
personally
liable
*members




Indefinite





* Members
are not
personally
liable





None.




Indefinite





* Fiduciary
liability of
board
members
Objective 4: Describe the Accounting Equation,
and define Assets, Liabilities, and Equity:
The basic tool of accounting is the accounting equation.
It measures the resources of a business and the claims to those
resources.
It takes the following form:

Assets = Liabilities + Equity
Assets:
Assets are economic resources that are expected to benefit the
business in the future. Assets are something the business owns
that has value.
Examples of assets include:
Cash.
Merchandise inventory.
Furniture.
Land.


Liabilities:
Liabilities are claims to economic resources (Assets).
Liabilities are debts payable to outsiders who are known as
creditors.
Liabilities are something the business owes.
Examples:
Accounts payable.
Notes payable.
Bank loans.
Salaries payable.
Equity:
The owners claims to the assets of the business are called equity.
Equity equals what is owned (assets) minus what is owed
(liabilities).
For a proprietorship, the accounting equation can be
written as:

Assets = Liabilities + Owners Equity
Assets = Liabilities + Capital
Capital is the net amount invested in the business by the
owner.
Capital contains the amount earned by income-producing
activities and kept (retained ) for use in the business.
Two types of events that affect capital are:
(1) Revenues:
Revenues are increases in capital.
Revenues earned by delivering goods or services to customers.
Types of revenue are the following:
Sales revenue.
Service revenue.
Interest revenue.
Dividends revenue.
(B) Expenses:
Expenses are the decreases in capital that result from operations.
Some common expenses are:
Rent expense.
Salary expense for employees.
Advertising expense.
Utilities expense for water, electricity, and gas.
Interest expense.
Property tax expense.

When revenues exceed expenses, the result is a profit or
net income.
When expenses exceed revenues, the result is a net loss.


* A third type of transaction that affects capital is the
distribution of cash or other assets to the owner.
Drawings are distributions of capital (usually of cash) to
owners.
Components of capital.







Beginning Capital
Owner Investments
(Plus) Net Income
(Or minus Net loss)
Equals Ending Capital
(Minus) Drawings
Objective 5: Use the Accounting Equation to Analyze
Transactions:
Transaction :
A transaction is an event that affects the financial position
of the business.
Can be measured reliably.
Every transaction impacts at least two items.
The accounting equation balances before and after each
transaction.
Transaction 1: Starting the Business:
Example:
Ahmed started a new business as a proprietorship named
El-Salam Company for Advertising Services. In Jan.1,
2013 Ahmed deposited L.E. 450,000 in ABC Bank by the
name of the business.
Required:
Analyze the proceeding transaction in terms of its effects
on the accounting equation.
Solution:
Owners Type of
Assets = Liabilities + Equity Transaction

Cash = Ahmed, Capital

(1) ( + ) 450,000 -0- (+) 450,000 Owner investment


Note the following:
(1) For each transaction , the amount on the left side of the equation
must equal the amount on the right side.
(2) This transaction increases both:
(a) The assets (cash).
(b) The owners equity ( Ahmed, Capital).







Transaction 2: Purchase of land:

Example:
In Jan.10, 2013 El-Salam Company purchased land for L.E.
150,000 paid in cash.
Required:
Analyze the proceeding transaction in terms of its
effects on the accounting equation.
Solution:
Owners
Assets = Liabilities + Equity

Cash + Land Ahmed, Capital

(1) 450,000 -0- = -0- 450,000
(2) ( - ) 150,000 (+ ) 150,000 _______
Bal. 300,000 150,000 450,000
------------------------------ ------------
450,000 450,000

Note the following:
The purchase of land:
(1) Increases one asset, (Land).
(2) Decreases another asset (Cash).
Transaction 3: Purchase of Office Supplies:
Example:
In Jan 15, El-Salam Company purchased office supplies for
L.E. 5,000 on account from Cairo Company. The Company
will use the supplies in the future.
Required:
Analyze the proceeding transaction in terms of its effect on the
accounting equation.



Solution:
Owners
Assets = Liabilities + Equity
Office Accounts Ahmed
Cash + Supplies + Land Payable + Capital

Bal. 300,000 -0- 150,000 = 450,000
(3) ____ (+) 5,000 _______ (+) 5,000 _______
Bal. 300,000 5,000 150,000 5,000 450,000
--------------------------------------------- -------------------------------
455,000 455,000

Note the following:
(1) Office supplies is an asset, not an expense, because the supplies
arent used up now, but will be in the future.
(2) The liability created by purchasing on account is an Accounts
Payable, which is a short-term liability that will paid in the future.




















Transaction 4: Earning of Service Revenue:

Example:
In Jan. 20, El-Salam Company, provided advertising
services to XYZ Company for L.E. 25,000 and
collected this amount in cash.
Required:
Analyze the proceeding transaction in terms of its effect on
the accounting equation.



Solution:
Owners Type of
_ Assets = Liabilities + Equity Transaction
Office Accounts Ahmed
Cash + Supplies + Land Payable + Capital

Bal. 300,000 5,000 150,000 = 5,000 450,000
(4) (+) 25,000 _____ ______ _____ (+) 25,000 Service Revenue
Bal. 325,000 5,000 150,000 5,000 475,000
______________________ __________________
480,000 480,000
Note the following:
This revenue transaction increases both:
(1) Assets (Cash).
(2) Owners equity (Ahmed, Capital).

Transaction 5: Earning of Service Revenue on
Account:

Example:
In Jan. 25, El-Salam Company, provided advertising services
to ABC Company for L.E. 50,000 on account.
Required:
Analyze the proceeding transaction in terms of its effect on
the accounting equation.

Solution:
Owners Type of
Assets = Liabilities Equity Transaction
Accounts Office Accounts Ahmed
Cash + Receivable + Supplies + Land Payable + Capital

Bal. 325,000 -0- 5,000 150,000 = 5,000 475,000
(5) _______ ( +) 50,000 _______ _______ _______ (+ ) 50,000 Service Revenue.

Bal. 325,000 50,000 5,000 150,000 5,000 525,000
----------------------------------------------------------------- --- -----------------------------
530,000 530,000
Note the following:
This revenue transaction increases both:
(1) Assets (Accounts receivable).
(2) Owners equity (Ahmed, Capital).


Transaction 6: Payment of Expenses:
Example:
In Jan. 30, El-Salam Company paid the following expenses
in cash:
Rent L.E. 2,000, Salaries L.E. 5,000, and Utilities L . E.
3,000
Required:
Analyze the proceeding transaction in terms of its effect on
the accounting equation.

Solution:
Owners Type
Assets = Liabilities + Equity Transaction

Accounts Office Accounts Ahmed
Cash + Receivable + Supplies + Land = Payable + Capital
Bal. 325,000 50,000 5,000 150,000 5,000 525,000
(6) ( -) 2,000 (-) 2,000 Rent Expense
(6) ( -) 5,000 = (-) 5,000 Salaries Exp.
(6) (-) 3,000 ______ _______ _______ ______ (-) 3,000 Utilities Exp.
Bal. 315,000 50,000 5,000 150,000 5,000 515,000
------------------------------------------------ --------------------
520,000 520,000
Note the following:
Cash expenses decreases:
(1) assets (Cash).
(2) Owners equity (Ahmed, Capital).
Transaction 7: Payment on Account:
Example:
In Feb. 5, El-Salam Company paid L.E. 3,000 to Cairo Company for
purchased office supplies in transaction (3).
Required:
Analyze the proceeding transaction in terms of its effect on the
accounting equation.

Owners
Assets _______ = Liabilities Equity

Accounts Office Accounts Ahmed,
Cash + Receivable Supplies + Land Payable + Capital

Bal 315,000 50,0000 5,000 150,000 = 5,000 515,000
(7) (-) 3,000 _______ _____ _______ (-) 3,000 _______
Bal. 312,000 50,000 5,000 150,000 2,000 515,000
-------------------------------------------------------- -------------------------------------
517,000 517,000
Note the following:
(1) The payment of cash on account has no effect on office supplies.
(2) It decreases assets (cash), and decreases liabilities (Accounts
Payable)



Transaction 8: Personal Transaction:
Example:
In Feb. 10, Ahmed purchased a new car at a cost of L.E. 150,000
for his personal use paid in cash from his personal funds.
Note the following:
(1) This event is not a transaction of El-Salam Company.
(2) It has no effect on El-Salam Company and, therefore, is not
recorded by the business.
Transaction 9: Collection on Account:
Example:
In Feb. 15, El-Salam Company collected L.E. 30,000 from
ABC Company for which it provided advertising services in
transaction (5).
Required:
Analyze the proceeding transaction in terms of its effect on
the accounting equation.

Solution:
Owners
Assets __________ = Liabilities + Equity
Accounts Office Accounts Ahmed
Cash + Receivable + Supplies + Land Payable + Capital
Bal. 312,000 50,000 5,000 150,000 = 2,000 515,000
(9) (+) 30,000 (-) 30,000 ______ ________ ________ _______
Bal. 342,000 20,000 5,000 150,000 2,000 515,000
-------------------------------------------------------- -----------------------------------
517,000 517,000
Note:
Total assets are unchanged from the preceding total, because El-
Salam Company exchanged one asset (Cash) for another
(Accounts receivable).

Transaction 10: Sale of Land:
In Feb. 25, El-Salam Company sold some of land. The sale price of
L.E. 40,000 is equal to the cost of the land, and received L.E.
40,000 cash.
Required:
Analyze the proceeding transaction in terms of its effect on the
accounting equation.

Solution:
Owners
Assets ___________ = Liabilities + Equity
Accounts Office Accounts Ahmed
Cash + Receivable + Supplies + Land = Payable + Capital
Bal. 342,000 20,000 5,000 150,000 2,000 515,000
(10) (+) 40,000 _______ _______ ( -) 40,000 ________ _________
Bal. 382,000 20,000 5,000 110,000 2,000 515,000
----------------------------------------------------- ------------------------------------
517,000 517,000
Transaction 11: Owner Drawing of Cash:
Example:
In March 5, Ahmed withdrew L.E. 25,000 to purchase new
furniture for personal use.
Required:
Analyze the proceeding transaction in terms of its effect on
the accounting equation.

Solution:
Owners Type of
Assets ____________ = Liabilities + Equity Transaction
Accounts Office Ahmed,
Cash + Receivable + supplies + Land Capital
Bal. 382,000 20,000 5,000 110,000 = 2,000 515,000
(11) (- ) 25,000 ______ ____ _____ _____ (- ) 25,000 Owner withd.
Bal. 357,000 20,000 5,000 110,000 2,000 490,000
------------------------------------------------------- ------------------------
492,000 492,000
Note the following:
(1) Drawings do not represent an expense because they are not
relating to the earning of revenue.
(2) Drawings do not affect the businesss net income or net loss.
Objective 6: Preparing the Financial Statements:
The financial statements summarize the transaction data into a
form that is useful for decision making.
The basic types of financial statements are:
(1) Income statement.
(2) Statement of owners equity.
(3) balance sheet, and
(4) Statement of cash flows.
(1) Income Statement:
The income statement (also called statement of earnings or
statement of operations) presents a summary of a business
entitys revenues and expenses for a period of time.


The income statement tells us whether the business enjoyed net
income or suffered a net loss.
(2) Statement of Owners Equity:
The statement of owners equity shows the changes in capital for a
business entity during a period of time such as month, quarter, or
year.
Capital increases when the business has:
** owner contribution of capital, or
** a net income (revenues exceed expenses).
Capital decreases when the business has:

** a net loss (expenses exceed revenues), or
** owner withdrawals of cash or other assets.
(3) Balance Sheet:
The balance sheet lists a business entitys assets,
liabilities, and owners equity as of a specific date
usually the end of a month, quarter, or year.


Notes:
Each financial statement has a heading that provides three
pieces of data:
(1) Name of the business.
(2) Name of the financial statement.
(3) Date or time period covered by the statement.


Comprehensive Example:
In. Jan.1, 2013 Ali started a new business as a proprietorship
named El-Nasr Company for Cleaning Services, and deposited
L.E.500,000 in XYZ Bank by the name of the business.
During January month the following transactions occurred by El-
Nasr Company:
1- In Jan. 5, 2013 Ali purchased a building for L.E. 200,000 paid
L.E. 150,000 cash.
2- In Jan. 10, El-Nasr Company purchased office supplies from
Alex. Company for L.E. 8,000 on account.
3- In Jan. 12, El-Salam Company, performed cleaning services to
ABC Company for L.E. 20,000 on account.

4- In Jan. 16, El-Nasr Company, performed cleaning services
to clients for L.E. 75,000, and collected L.E. 50,000 cash.
5- In Jan. 20, El-Nasr Company paid L.E. 5,000 to Alex.
Company for purchased office supplies in transaction (2).
6- In Jan. 22, Ali purchased a new car for L.E. 100,000 for the
use in business at cost of L.E. 100,000 paid in cash from his
personal funds.
7- In Jan. 25, El-Nasr Company collected L.E. 20,000 from
ABC Company for which it provided cleaning services in
transaction (3).
8- In Jan. 27, El-Nasr Company, provided cleaning
services to XYZ Company for L.E. 30,000 and
collected this amount in cash.
9- In Jan. 28, El-Nasr Company paid the following
expenses in cash: Rent L.E. 3,000, Salaries L.E.
8,000, and Utilities L . E. 4,000.
10- In Jan 5, Ali withdrew L.E. 10,000 personal use.
Required:
(1) Analyze the proceeding transactions in terms of its
effects on the accounting equation.
(2) Prepare the financial statements.