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Principles of Accounting (MGT109-1)
Module 1
INTRODUCTION TO ACCOUNTING

Accounting is the production and consumption of economic (financial) information
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Financial accounting is the field of accounting that provides economic and financial information for
investors, creditors, and other external users
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Management accounting is the process of identification, measurement, accumulation, analysis,
preparation, interpretation and communication of information used by management to plan, evaluate
and control within an entity and to assure appropriate use of and accountability for its resources
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Internal users include managers who plan, organize, and run a business
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2
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Types of Business Activities
1
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Providing services, instead of product, to its customers
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Merchandising business
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3
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Converting basic inputs into finished goods which are sold to customers
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2
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A sole proprietorship is a business owned by one person
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A corporation is a business organized as a separate legal entity under the corporation law with
ownership divided into transferable shares of stock
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The objective of most
organizations is to provide value to their customers
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Inbound logistics consists of receiving, storing and distributing the materials an organization uses to
create the services and products it sells
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Operations activities transform inputs into final products or services
3
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4
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5
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Four Categories of Support Activities in the Value Chain
1
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2
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Technology activities improve a product or service

Principles of Accounting (MGT109-1)
4
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The value chain
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The financial statements include the income statement, owner’s equity
statement, balance sheet, cash flow statement, and notes to financial statements
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Accounting Assumptions
1
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An important corollary is the added assumption that the
unit of measure remains relatively constant over time
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Economic entity assumption states that the activities of the entity be kept separate and distinct
from the activities of the owner and of all other economic entities
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Time period assumption states that the economic life of a business can be divided into artificial
time periods
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Going concern assumption assumes that the enterprise will continue in operation long enough to
carry out its existing objectives
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Accrual basis of accounting states that revenues are recognized on the income statement when
they are earned (rather than when the cash is received) and expenses are matched with revenues on
the income statement when they are incurred, rather than at the time when expenses are paid
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Revenues > Expenses, then Net Income
b
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Revenues = Expenses, then Breakeven

Principles of Accounting (MGT109-1)
Balance Sheet
The basic accounting equation (as expressed in the balance sheet) is:
Assets (A) = Liabilities (L) + Equity (E)
The key components of the basic accounting equation are:
1
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a
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b
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2
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It
represents the claims of the creditors
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Current liabilities include accounts payable, interest payable and current part of loan
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Non-current liabilities include debentures payable, mortgage payable, bonds payable, and
loans payable
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Equity is the residual interest in the assets of the entity after deduction of its liabilities
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Equity (or Capital) Statement
In sole proprietorships, the basic capital equation is:
Capital (C) = Investment (I) – Drawings (D) + Revenues (R) – Expenses (E)
There are four subdivisions of owner's equity:
1
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2
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3
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4
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[Cheat Code: A = L + C or A = L + I - D + NI or A = L + I - D + R - E]
Interrelationship between Financial Statements
The financial statements are interrelated because:
a
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b
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c
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