Chapter One: Accounting

in Action
Presented By:
Mohammed Sohail Mustafa, CFA
Associate Professor
Bangladesh Institute of Bank Management

Text Book
Accounting
Principles, 12th
Edition International
Student Version,
Jerry J. Weygandt,
Paul D. Kimmel,
Donald E. Kieso
ISBN: 978-1-11895974-9
Mohammed Sohail Mustafa
May 2015, 2015

What is Accounting?
Accounting

is
an
information
system
that
systematically identify, record, classify, summarize,
measure & interpret the financial/economic activities
of an organization & communicate those to the
stakeholders to take business/economic decisions.

Mohammed Sohail Mustafa

Identification: Transaction
An accounting transaction, also called a business

event, is any exchange of economic consideration

that can be reasonably measured and affects the
firms financial position. In other words, transactions
are events that change the accounting equation
during a period. If assets, liabilities, or equity are
changed or affected, chances are there is a
transaction of some kind. To define any event as
transaction; it must have the following characteristics:
Exchange between two parties.
Measured in monetary terms.
Impact in the financial statements of the firm.

Mohammed Sohail Mustafa

Recording: Journal
Journal is the book of original entry where

all
the
transactions
are
recorded
chronologically with supporting narration &
identifying/classifying the related parties.

Mohammed Sohail Mustafa

Classification: Ledger
A

ledger is an accounting book that

facilitates the transfer of all journal entries
in a chronological sequence to individual
accounts. The process of recording journal
entries into the ledger is called posting.

Mohammed Sohail Mustafa

Summarizing: Trial Balance

Trial Balance is a list of closing balances of

ledger accounts on a certain date and is the

first step towards the preparation of financial
statements. It is usually prepared at the end
of an accounting period to assist in the
drafting of financial statements

Mohammed Sohail Mustafa

Measurement: Financial Statements

Financial Statements represent a formal record of the

financial activities of an entity. These are written reports

that quantify the financial strength, performance and
liquidity of a company. Financial Statements reflect the
financial effects of business transactions and events on the
entity

Mohammed Sohail Mustafa

Interpretation: Financial
Ratios
Financial

statement analysis (or financial

analysis) is the process of reviewing and
analyzing a company's financial statements to
make better economic decisions. These
statements include the income statement,
balance sheet, statement of cash flows, and a
statement of retained earnings. The analysis
includes:
Horizontal or Time Series Analysis.
Vertical Analysis.
Ratio Analysis.
Mohammed Sohail Mustafa

Who Uses Accounting Data

INTERNA
L USERS

LO 1

Who Uses Accounting Data

EXTERNA
L USERS

LO 1

Mohammed Sohail Mustafa

12

Generally Accepted Accounting

Principles (GAAP)
The

phrase "generally accepted accounting

principles" (or "GAAP") consists of three important
sets of rules:
1. The basic accounting principles and guidelines,
2. The detailed rules and standards issued by
FASB and its predecessor the Accounting
Principles Board (APB), and
3. The generally accepted industry practices.

Mohammed Sohail Mustafa

13

Basic Accounting Principles and

Guidelines
1. Economic Entity
Assumption.
2. Monetary Unit
Assumption.
3. Time Period Assumption.
4. Historical Cost Principle.
5. Full Disclosure Principle.

Mohammed Sohail Mustafa

6. Going Concern
Principle.
7. Matching Principle.
8. Revenue
Recognition
Principle.
9. Materiality.
10. Conservatism.

14

Other Characteristics of
Accounting Information
1. We expect the accounting information to

be reliable, verifiable, and objective.

2. We
expect
consistency
in
the
accounting information.
3. We expect comparability in the
accounting information.

Mohammed Sohail Mustafa

15

Ethics in Accounting
Ethics in accounting are concerned with how

to make good and moral choices in regard to

the preparation, presentation and disclosure
of financial information. During the 1990s and
2000s, a series of financial reporting scandals
brought this issue into the forefront. Knowing
some of the issues presented in accounting
ethics can help you ensure that you are
considering some of the implications for the
actions that you take with your own business.

Mohammed Sohail Mustafa

16

Ethics in Financial Reporting

LO 2

Forms of Business Ownership

Proprietorship
Proprietorship

Owned by
by one
one
Owned
person
person

Owner is
is often
often
Owner
manager/operat
manager/operat
or
or

Owner receives
receives
Owner
any profits,
profits,
any
suffers any
any
suffers
losses, and
and is
is
losses,
personally liable
liable
personally
for all
all debts
debts
for

Partnership
Partnership

Corporation
Corporation

Owned by
by two
two
Owned
or more
more
or
persons
persons

Ownership
Ownership
divided into
into
divided
shares of
of stock
stock
shares

Often retail
retail and
and
Often
service-type
service-type
businesses
businesses

Generally
Generally
unlimited
unlimited
personal
personal
liability
liability

Separate legal
legal
Separate
entity
entity
organized
organized
under state
state
under
corporation law
law
corporation

Limited liability
liability
Limited

Partnership
Partnership
agreement
agreement

LO 2
2
LO

Accounting Equation

Mohammed Sohail Mustafa

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