1st year -1st sheet – Ch 1

Definitions
1 Accounting : The information system that identifies, records, and communicates the economic events
of an organization to interested users.
Users of accounting data:
1. Internal users such as Stockholders and management.
2. External users such as investors and creditors.
2 Book keeping : A part of accounting that involves only the recording of economic events.
3 Balance sheet : A financial statement that reports the assets, liabilities and owners equity at a specific
date.
4 Assets : Resources a business owns.
5 Liabilities : Creditor claims on total assets.
6 Income statement : A financial statement that presents the revenues and expenses and resulting net income
for a specific period of time.
7 Expenses : The cost of assets consumed.
8 Revenues : The increase in owner's equity resulting from business activities.
9 Net income (loss) : The amount by which revenues exceed (less than) expenses.
10 Drawings : Withdrawal of cash or other assets from business for the personal use of the owner.
11 Financial Accounting : A private organization that establishes Generally accepted Accounting principles
Standard Board (GAAP).
(FASB)
12 Generally accepted : (GAAP) Common standards that indicate how to report economic events.
Accounting principles
13 Account : A record of increases and decreases in specific asset, liability, or owner's equity items.
14 Journal : It is a book of original entry.
15 Ledger : Is a collection of the entire group of accounts.
16 Double entry system : A system that record transaction into Dr. and Cr.
17 Simple entry : A journal entry that involves only two accounts.
18 Compound entry : A journal entry that involves three or more accounts.
19 Trial balance : A list of accounts and their balances at a given time.
20 Service provided by : 1. Auditing.
public accountant 2. Taxation.
3. Management consulting. (do not include Budgeting)
21 Recording process : 1. Analyzing transactions.
2. Entering transaction into Journal.
3. Posting Transactions (ledger – T accounts)
22 Proprietorship : Business owned by one person.
23 Partnership : Business owned by two or more persons.
24 Corporation : Business in which capital is divided into stocks.

(1) Identify the four basic assumptions that underlie financial accounting structure?
1. Economic entity : The activity of the company can be kept separate from its owners.
2. Going concern : The Company will have a long life.
3. Monetary unit : Money is base of measurement and analysis.
4. Periodicity : The economic activities of a company can be divided into artificial time
periods.

(2) Identify the four basic principles of accounting to record transactions?

1. Historical cost Principle : GAAP requires that companies account for and report most assets
and liabilities on the basis of acquisition price.
2. Revenue Recognition : Companies generally recognize revenue when it is realizable or
principle earned.
3. Matching principles : A company recognizes expenses when the product actually makes
its contributed revenue.
4. Full disclosure principle : Companies generally provide information that is sufficient to an
informed user.

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 1st year -1st sheet – Ch 1

Example:
John Robinson opens her own law office on July 1, 2008. During the first month of operations,
the following transactions occurred.
1. Invested $10,000 in cash in the law practice.
2. Paid $800 for July rent on office space.
3. Purchased office equipment on account $3,000.
4. Provided legal services to clients for cash $1,500.
5. Borrowed $700 cash from a bank on a note payable.
6. Performed legal services for clients on account $2,000.
7. Paid monthly expenses: salaries $500, utilities $300, and telephone $100.
Instructions:
 Prepare a tabular summary of the transactions.
 Prepare journal entries.

Solution
No. Assets = Liabilities +
Accounts Notes Accounts John Robinson capital
Cash + + Equipment = + +
receivable payable payable
1 10,000 + + = + + 10,000
2 (800) + + = + + (800) rent expense
9,200 + + = + + 9,200
3 + + 3,000 = + 3,000 +
9,200 + + 3,000 = + 3,000 + 9,200
4 1,500 + + = + + 1,500 service revenue
10,700 + + 3,000 = + 3,000 + 10,700
5 700 + + = 700 + +
11,400 + + 3,000 = 700 + 3,000 + 10,700
6 + 2,000 + = + + 2,000 service revenue
11,400 + 2,000 + 3,000 = 700 + 3,000 + 12,700
(500) salaries expense
7 (900) + + = + + (300) utilities expense
(100) telephone expense
10,500 + 2,000 + 3,000 = 700 + 3,000 + 11,800

Point Explanation Dr. Cr.

Cash 10,000
1
Capital 10,000
Rent expense 800
2
Cash 800
Office equipment 3,000
3
Accounts payable 3,000
Cash 1,500
4
Legal service revenue 1,500
Cash 700
5
Notes payable 700
Accounts receivable 2,000
6
Legal service revenue 2,000
Salaries expense 500
Utilities expense 300
7
Telephone expense 100
Cash 900

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 1st year -1st sheet – Ch 1

Question (2):
An analysis of the transactions made by S. Moses & Co., a certified public accounting firm, for the month of August is
shown below. The expenses were $650 for rent, $4,900 for salaries, and $500 for utilities.

Instructions
(a) Describe each transaction that occurred for the month.
(b) Determine how much owner’s equity increased for the month.
(c) Compute the amount of net income for the month.

Question (3):
Brandon Computer Timeshare Company entered into the following transactions during May 2010.
1. Purchased computer terminals for $20,000 from Digital Equipment on account.
2. Paid $4,000 cash for May rent on storage space.
3. Received $15,000 cash from customers for contracts billed in April.
4. Provided computer services to Fisher Construction Company for $3,000 cash.
5. Paid Northern States Power Co. $11,000 cash for energy usage in May.
6. Brandon invested an additional $32,000 in the business.
7. Paid Digital Equipment for the terminals purchased in (1) above.
8. Incurred advertising expense for May of $1,200 on account.
Instructions:
Indicate with the appropriate letter whether each of the transactions above results in:
(a) An increase in assets and a decrease in assets.
(b) An increase in assets and an increase in owner’s equity.
(c) An increase in assets and an increase in liabilities.
(d) A decrease in assets and a decrease in owner’s equity.
(e) A decrease in assets and a decrease in liabilities.
(f) An increase in liabilities and a decrease in owner’s equity.
(g) An increase in owner’s equity and a decrease in liabilities.

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 1st year -1st sheet – Ch 1

MCQs
1. Which of the following is not a step in the accounting process?
a. Identification. b. Verification.
c. Recording. d. Communication.

2. Which of the following statements about users of accounting information is incorrect?

a. Management is an internal user. b. Taxing authorities are external users.
c. Present creditors are external users. d. Regulatory authorities are internal
users.

3. The cost principle states that:

a. Assets should be initially recorded at cost b. Activities of an entity are to be kept
and adjusted when the market value separate and distinct from its owner.
changes.
c. Assets should be recorded at their cost. d. Only transaction data capable of being
expressed in terms of money be included
in the accounting records.

4. Which of the following statements about basic assumptions is correct?

a. Basic assumptions are the same as b. The economic entity assumption states
accounting principles. that there should be a particular unit of
accountability.
c. The monetary unit assumption enables d. Partnerships are not economic entities.
accounting to measure employee morale.

5. Net income will result during a time period when:

a. Assets exceed liabilities. b. Assets exceed revenues.
c. Expenses exceed revenues. d. Revenues exceed expenses.

6. Performing services on account will have the following effects on the components
of the basic accounting equation:
a. Increase assets and decrease b. increase assets and increase
stockholders' equity. stockholders' equity.
c. Increase assets and increase liabilities. d. increase liabilities and increase
stockholders' equity.

7. Asof December 31, 2011, Stoneland Company has assets of $3,500 and
stockholders' equity of $2,000. What are the liabilities for Stoneland Company as of
December 31, 2011?
a. $1,500. b. $1,000.
c. $2,500. d. $2,000.

8. on thelast day of the period, Jim Otto Company buys a $900 machine on credit.
This transaction will affect the:
a. Income statement only. b. Balance sheet only.
c. Income statement and retained earnings d. Income statement, retained earnings
statement only. statement, and balance sheet.

9. the financial statement that reports assets, liabilities, and stockholders' equity is the:
a. Income statement. b. Retained earnings statement.
c. Balance sheet. d. Statement of cash flow.

10. Services provided by a public accountant include:

a. Auditing, taxation, and management b. Auditing, budgeting, and management
consulting. consulting.
c. Auditing, budgeting, and cost accounting. d. Internal auditing, budgeting, and
management consulting.

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 1st year -1st sheet – Ch 1

Solutions
Questions 1 2 3 4 5 6 7 8 9 10
Answers b d c b d b a b c a