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This document provides an introduction to accounting. It defines accounting as a discipline that measures and communicates financial information about a business. It explains the accounting equation, the four core financial statements, and how to analyze business transactions by determining their impact on the accounting equation and each financial statement. Several examples of transaction analysis are provided and summarized.

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Topic 1 An Introduction to Accounting
What is Accounting A measurement & communication discipline Measures financial aspects of business Communicates this information to decision makers
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
The Accounting Equation (center of the accountants universe) Assets = Liabilities + Equity Asset: something of value Liability: something owed Equity: what remains
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
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
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
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:
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:
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:
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:
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:
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:
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
Income Statement Revenues $1,000 - Expenses (700) Net income $ 300
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
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
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

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  • 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 accountants 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