IBA Executive MBA

Session 1

Accounting in Action

​

By

Prof. Dr. Md. Mohiuddin

• Accounting is an information system that
• Identifies
• Records
• Communicates the economic events of an organization to interested users

WHAT IS ACCOUNTING?

​

THE ACCOUNTING

PROCESS

QUESTIONS ASKED BY INTERNAL USERS

QUESTIONS ASKED BY EXTERNAL USERS

-Monetary Unit

-Economic Entity

-Going Concern

​

-Periodicity

​

-Accrual

THE BUILDING BLOCKS OF ACCOUNTING: Assuptions

​

​

​

​

​

BASIC ACCOUNTING EQUATION

​

​

Assets

Liabilities

Owner’s Equity

=

+

ASSETS AS A BUILDING BLOCK

• Assets are resources owned by a business.

​

• They are used in carrying out such activities as production, consumption and exchange.

• Liabilities

​

• are creditor claims against assets

​

​

• are existing debts and obligations

LIABILITIES AS A BUILDING BLOCK

• Owner’s Equity = total assets minus total liabilities. (A - L = O.E.)
• Owner’s Equity represents the ownership claim to total assets.
• Subdivisions of Owner’s Equity:

1 Capital or Investments by Owner (+)

2 Drawing (-)

3 Revenues (+)

4 Expenses (-)

OWNER’S EQUITY AS A BUILDING BLOCK

• Investments

​

• are the assets the owner puts in the business

​

• increase owner’s equity

INVESTMENTS BY OWNERS AS A BUILDING BLOCK

• Drawings
• are withdrawals of cash or other assets by the owner for personal use

​

• decrease owner’s equity

DRAWINGS AS A BUILDING BLOCK

• Revenues

​

• gross increases in owner’s equity from business activities entered into for the purpose of earning income

​

• may result from sale of merchandise, services, rental of property, or lending money

​

• usually result in an increase in an asset

REVENUES AS A BUILDING BLOCK

Expenses

​

• decreases in owner’s equity that result from operating the business

​

• cost of assets consumed or services used in the process of earning revenue

​

• examples: utility expense, rent expense, supplies expense, and tax expense

EXPENSES AS A BUILDING BLOCK

• INCREASES DECREASES

INCREASES AND DECREASES IN OWNER’S EQUITY

Investments by Owner

Revenues

Owner’s Equity

Withdrawals by Owner

Expenses

• Ray Neal decides to open a computer programming service.
• On September 1, he invests $15,000 cash in the business, which he names Softbyte.

TRANSACTION ANALYSIS

TRANSACTION 1

Softbyte

TRANSACTION ANALYSIS�TRANSACTION 1 SOLUTION

• Assets = Liabilities + Owner’s Equity

Cash R. Neal, Capital

​

+ 15,000 Investment + 15,000

$15,000 = $15,000

​

​

​

There is an increase in the asset Cash, $15,000, and an equal increase in the owner’s equity, R. Neal, Capital, $15,000.

• Softbyte purchases computer equipment for $7,000 cash.

TRANSACTION ANALYSIS TRANSACTION 2

TRANSACTION ANALYSIS�TRANSACTION 2 SOLUTION

• Assets = Liabilities + Owner’s Equity
• Cash + Equipment = + R. Neal, Capital
• Old
• $15,000 = $15,000
• (2) - 7,000 + 7,000______________________________
• New
• $ 8,000 + $7,000 = $15,000

​

Cash is decreased by $7,000 and the asset Equipment is increased by $7,000.

• Softbyte purchases (on credit) supplies expected to last for several months for $1,600.

​

TRANSACTION ANALYSIS TRANSACTION 3

TRANSACTION ANALYSIS�TRANSACTION 3 SOLUTION

• Assets = Liabilities + Owner’s Equity
• Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old $8,000 + $7,000 = $15,000
• (3) _____ + $1,600 _______ + $1,600 ________
• New $8,000 + $1,600 + $7,000 = + $1,600 + $15,000
• $16,600 $16,600

The asset Supplies is increased by $1,600, and the liability Accounts Payable is increased by the same amount.

• Softbyte receives $1,200 cash from customers for programming services it has provided.

​

TRANSACTION ANALYSIS TRANSACTION 4

TRANSACTION ANALYSIS�TRANSACTION 4 SOLUTION

• Assets = Liabilities + Owner’s Equity
• Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old $8,000 + $1,600 + $7,000 = $1,600 + $15,000
• (4) + 1,200 _____ _____ _______________ + 1,200
• New $9,200 + $1,600 + $7,000 = $1,600 $16,200

​

• $17,800 $17,800

​

Cash is increased by $1,200 and R. Neal, Capital is increased by $1,200.

• Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment of the bill until a later date.

TRANSACTION ANALYSIS TRANSACTION 5

TRANSACTION ANALYSIS�TRANSACTION 5 SOLUTION

• Assets = Liabilities + Owner’s Equity
• Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old $9,200 + $1,600 + $7,000 = $1,600 + $16,200
• (5) ___Advertising Expense__ + 250 _- 250
• New $9,200 + $1,600 + $7,000 = $1,850 + $15,950

​

• $17,800 $17,800

Accounts Payable is increased by $250 and R. Neal, Capital is decreased by $250.

• Softbyte provides $3,500 of programming services for customers.
• Cash of $1,500 is received from customers, and the balance of $2,000 is billed on account.

TRANSACTION ANALYSIS TRANSACTION 6

TRANSACTION ANALYSIS�TRANSACTION 6 SOLUTION

• Assets = Liabilities + Owner’s Equity
• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old
• $ 9,200 + $1,600 + $7,000 = $1,850 + $15,950
• (6)
• + 1,500 + 2,000 + 3,500
• New
• $10,700 + $2,000 + $1,600 + $7,000 = $1,850 + $19,450

​

• $21,300 $21,300

​

Cash is increased by $1,500; Accounts Receivable is increased by $2,000, and R. Neal, Capital is increased by $3,500.

• Expenses paid in cash for September are store rent, $600; employees’ salaries, $900; and utilities, $200.

TRANSACTION ANALYSIS TRANSACTION 7

TRANSACTION ANALYSIS�TRANSACTION 7 SOLUTION

• Assets = Liabilities + Owner’s Equity
• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old
• $10,700 + $2,000 + $1,600 + $7,000 = $1,850 + $19,450
• (7)
• - 1,700 Rent Expense - 600
• Salaries Expense - 900
• Utilities Expense - 200
• New
• $ 9,000 + $2,000 + $1,600 + $7,000 = $1,850 + $17,750

​

• $19,600 $19,600

Cash is decreased by $1,700 and R. Neal, Capital is decreased by the same amount.

• Softbyte pays its $250 Daily News advertising bill in cash.

TRANSACTION ANALYSIS TRANSACTION 8

TRANSACTION ANALYSIS�TRANSACTION 8 SOLUTION

• Assets = Liabilities + Owner’s Equity
• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old
• $9,000 + $2,000 + $1,600 + $7,000 = $1,850 + $17,750
• (8)- 250 - 250 .
• New
• $8,750 + $2,000 + $1,600 + $7,000 = $1,600 + $17,750

​

• $19,350 $19,350

Both Cash and Accounts Payable are decreased by $250. Since the expense was previously recorded, it is not recorded now.

• The sum of $600 in cash is received from customers who have previously been billed for services (in Transaction 6).

TRANSACTION ANALYSIS

TRANSACTION 9

TRANSACTION ANALYSIS�TRANSACTION 9 SOLUTION

• Assets = Liabilities + Owner’s Equity
• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old
• $8,750 + $2,000 + $1,600 + $7,000 = $1,600 + $17,750
• (9) + 600 - 600 .
• New
• $9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $17,750

​

• $19,350 $19,350

Cash is increased by $600 and Accounts Receivable is decreased by the same amount. R. Neal, Capital is not increased because the revenue was already recorded.

• Ray Neal withdraws $1,300 in cash from the business for his personal use.

TRANSACTION ANALYSIS TRANSACTION 10

TRANSACTION ANALYSIS�TRANSACTION 10 SOLUTION

• Assets = Liabilities + Owner’s Equity
• Cash + Accts. Rec. + Supplies + Equip = Accts. Pay. + R. Neal, Capital
• Old
• $9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $17,750
• (10)
• - 1,300 Drawing - 1,300
• New
• $8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $16,450

​

• $18,050 $18,050

Cash is decreased by $1,300 and R. Neal, Capital is decreased by the same amount. This is not an expense, but rather a withdrawal of owner’s equity.

• Four financial statements are prepared from the summarized accounting data:

​

• Income Statement� revenues and expenses and resulting net income or net loss for a specific period of time

​

• Owner’s Equity Statement� changes in owner’s equity for a specific period of time

​

• Balance Sheet� assets, liabilities, and owner’s equity at a specific date

​

• Statement of Cash Flows� cash inflows (receipts) and outflows (payments) for a specific period of time

FINANCIAL STATEMENTS

$ 2,750

FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

Net income of $2,750 shown on the income statement is added to the beginning balance of owner’s capital in the owner’s equity statement.

SOFTBYTE, INC.

Income Statement

For the Month Ended September 30, 2023

Revenues

Service revenue

$ 4,700

Expenses

Salaries expense

$ 900

Rent expense

600

Advertising expense

250

Utilities expense

200

Total expenses

1,950

Net income

$16,450

FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE, INC.

Owner’s Equity Statement

For the Month Ended September 30, 2023

Retained earnings, September 1, 2022

$ -0-

Add: Investments

$ 15,000

Net income

2,750

Less: Drawings

(1,300)

Retained earnings, September 30, 2022

Net income of $2,750 carried forward from the income statement to the owner’s equity statement. The owner’s capital of $16,450 at the end of the reporting period is shown as the final total of the owner’s equity column of the Summary of Transactions (Illustration 1-8).

16,450

FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

Owner’s capital of $16,450 at the end of the reporting period shown in the owner’s equity statement is shown on the balance sheet.

SOFTBYTE, INC.

Balance Sheet

September 30, 2023

Assets

Cash

$ 8,050

Accounts receivable

1,400

Supplies

1,600

Equipment

7,000

Total assets

$ 18,050

Liabilities and Owner’s Equity

Liabilities

Accounts payable

$ 1,600

Owner’s equity

R. Neal, capital

Total liabilities and owner’s equity

$ 18,050

$ 8,050

FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

Cash of $8,050 on the balance sheet is reported on the statement of cash flows.

SOFTBYTE, INC.

Balance Sheet

September 30, 2023

Assets

Cash

Accounts receivable

1,400

Supplies

1,600

Equipment

7,000

Total assets

$ 18,050

Liabilities and Owner’s Equity

Liabilities

Accounts payable

$ 1,600

Owner’s equity

R. Neal, capital

16,450

Total liabilities and owner’s equity

$ 18,050