BITS College

Undergraduate Program

Course Number : SP 311

Course Title: Business Accounting
 Chapter One
Introduction to Business and
Accounting
Nature of a Business
Nature of a Business
A business is defined as an organization or entity involved in
commercial, industrial, or professional activities providing goods or
services to the public.

 Business is abroad term but is usually referred to as the profit-generating

activities which include the provision of goods or services wanted or
needed by people in exchange for a profit.

 What is a profit?
 Profit does not necessarily mean cash payments. It can also mean
other securities such as stocks or the classic barter system.
Nature of a Business
 The nature of a business describes the type of business it is and what its
overall goals are.
 It describes its legal structure, industry, products or services, and
everything a business does to reach its goals.
 It depicts the business’s problem and the main focus of the company’s
offerings.
 A company’s vision and mission statement also provide an insight into
its nature.
 A mission statement provides an overview of the overall purpose of an
organization. It is a short statement that describes what the company does,
who they do it for, and what its benefits are.
 The company vision describes what it aims to achieve in the future, to fulfil
its mission. It should provide guidance and inspiration to employees.
VISION and MISSION of BITS
 Vision
BITS aspires to grow in reputation as a model of academic excellence and
innovative student support in an environment strengthened by industry
partnerships and technology enablement.
 Mission
The Mission of BITS College is to educate, inspire and prepare each student for a
better life of service by:
providing quality higher education and research of relevance to sustainable development
of our society;
• offering a welcoming and rewarding work environment for students, faculty and staff;
• fostering innovative learning, entrepreneurship, community engagement, and industry
partnership;
• building capacity to unlock the potential of technology to provide education without
boundaries – accessible from anywhere;
• maintaining financing plans to sustain innovation and growth
What determine the nature of a business
 The following are often determine the nature of a business.
 Regular process
 Economic activity
 Utility creation
 Capital requirement
 Goods or services
 Risk
 Satisfaction of customers’ needs
 Social obligations
Types of Business Organizations
 Based on ownership:
 Public (government) owned
 Private owned:
 Sole-proprietorship
 Partnership
 Corporation

 Reading Assignment #1:

 Read on Advantages and Disadvantages of each form of business

 Based on activity or business engagement

 Service giving
 Merchandising
 Manufacturing
Types of Business Organizations
 In Ethiopia the following forms of business are possible:
 General Partnership
 Limited Partnership
 Limited Liability Partnership
 Joint Venture
 Share company
 Private limited Company Do have limited Liability
 One person Private Limited Company
 Liability
 in GP is joint and several and
 In LP some members have limited liability while other have unlimited
 LLP is established with the aim of providing professionally recognized skilled
based business activities. Liabilities of members is limited
The Role of Accounting in Business
Definition of Accounting
 Accounting is defined as an information system that identifies,
measures, processes, and communicates financial information about
an economic entity to permit informed judgements and decisions by
users of the information or interested parties.

 Essential characteristics:
 Identifies: economic activities affecting an entity [analytical]
 Measures: assigning monetary value to entity’s economic activities [skill]
 Processes: transforming data / information to a meaningful financial report
 Communicate: disseminate the financial report to users
 Users: internal and external stakeholders and decision makers
 Economic Entity: a unit that exists independently, such as a business,
hospital, college, hotel, or government body
Definition of Accounting
 The
accounting
process

Accounting “links”
Economic decision makers with Accounting
or Business economic activities
activities information
and with the results of
their decisions.

Actions Reports Results

(decisions) Decision of Actions
makers (decisions)
Importance of Accounting
 As a descriptive or analytical Discipline Accounting:
 defines the greatest mass of events and transactions that characterize
economic activity and
 through measurement, classification, and summarization, reduces those
data to relatively small, highly significant, and interrelated items that, when
properly assembled and reported, describe the financial condition, and
results of operation of a specific economic activity.
 As a service activity, Accounting:
 provides interested parties with quantitative information, primarily financial
in nature, about economic entities that is intended to be useful in making
economic decisions [decisions about the deployment and use of resources
in business and non-business entities and in the economy] and in making
reasoned choices among alternative courses of action.
Importance of Accounting
 As an information system Accounting:
 collects and communicates economic information about a business
enterprise or other entity to a wide variety of persons whose decision and
actions are related to the activity.
Importance of Accounting
 In general, accounting is plays significant role in organizations:
 To record what money has come into the organization and what has gone
out
 To help managers make decisions about how to run the organization
 To tell other people about the:
 Activitiesand consequent profit or loss of the organization during the past year,
or other period
 Present financial state of the organization

 To provide basis for taxation

 To provide a basis for planning future activities
 Users and Uses of Accounting Information

Internal Users
Researchers
Management
Human Investors
Resources
There are two broad groups
Labor
of users of financial Unions
Finance information: internal users
and external users.
Creditors
Marketing
AABE
Customers External Users
Users and Uses of Accounting Information

Primary
Users
 Users of Accounting Information
User group Use
Managers [Internal] To help them to make decisions and plans for the business and to
help them to exercise control to try to ensure that plans come to
fruition
Employees (non- To assess the ability of the business to continue to provide
managerial/nonexecutives) employment and to reward employees for their labor. Bargain for
better wages.
Owners [Investors] To assess how effectively the managers are running the business
and to make judgments about likely levels of risk and return in
the future.
Creditors [Lenders] To assess the ability of the business to meet its obligations and to
pay interest and to repay the principal.
[Solvency/Creditworthiness].
Government To assess how much tax the business should pay, whether it
complies with agreed pricing polices [regulation], whether
financial support is needed etc.
Uses and Users of Accounting Information
Common Questions Asked User

1. Can we afford to give our

employees a pay raise?
Human Resources

2. Did the company earn a

satisfactory income?
Investors

3. Should any product lines be

eliminated?
Management
4. Is cash sufficient to pay dividends
to stockholders?
Finance

5. What price for our product will

maximize net income?
Marketing

6. Will the company be able to pay

its debts as they become due?
Trade Creditors
LO 2
Exercise
 What does the term ‘accounting’ mean?
a)The act of reporting
b)The act of collecting, organizing, and interpreting financial
data
c) The act of filing receipts from transactions
d)The act of recording financial data to be used later
e) The act of writing checks in a check register
Exercise
 Why is accounting important to business?
a)It lets a business owner know how much money s/he is
making
b)It lets a business owner know how much money s/he
spending.
c)It provides the information that a business needs to file
taxes with ERCA
d)It lets a business owner know what her/his assets are worth
e)All of the answers are correct
The Profession of Accountancy
The Profession of Accountancy
 There are three main areas of practicing accountancy profession:
 Public accounting
 Private accounting
 Government accounting
 Public Accounting:
 Renders professional accounting services to the wider public in areas of
 Auditing and attestation
 To provide opinion
 Taxation
 Preparation of annual income tax returns, determination of tax consequences
 Management advisory
 On matter of accounting, finance, business policies and strategies, etc
 Are not employees of a single entity
 Receive fees for their services
The Profession of Accountancy
 Private Accounting:
 Renders professional accounting services to management of an organization
in planning and controlling the entity’s operations
 Are employees of a single entity
 Receive salary for their services

 Government Accounting:
 Government Accounting encompasses the process of analyzing, recording,
classifying, summarizing, and communicating all transactions involving the receipt
and disposition of government funds and property, and interpreting the results
thereof.
 Government accounting, however, places greater emphasis on the following:
 Sources and utilization of government funds
 Responsibility, accountability, and liability of entities entrusted with government funds and
properties
The Profession of Accountancy
 Accountants may specialize in different accounting fields some of which
include the following:
 Financial Accounting
 Managerial Accounting
 Cost Accounting
 Tax Accounting
 Government Accounting
 Forensic Accounting
 Social Accounting
 Auditing and Assurance
The Profession of Accountancy
 Accountants may specialize in different accounting fields some of which
include the following:
 Financial Accounting
 Involves in serving external users
 Managerial Accounting
 Provides data and information about company’s operations to
management
 Cost Accounting
 Concerned with recording and analyzing manufacturing costs
 Tax Accounting
 Involves in planning for tax time and the preparation of tax returns
 Government Accounting
 Handles any regional and federal fund allocation and disbursement
The Profession of Accountancy
 Forensic Accounting
A type of accounting that investigates financial information for potential
evidence of crime
 Social Accounting
 Measures the environmental and social impact of an organization. It measures a
firm’s impact on stakeholders
 Auditing and Assurance
 Theseboth used to verify the information on the company’s accounting
standards and principles.
 Audit is a systematic review and assessment of information or documents.
 Assurance is a professional service with the aim of improving the quality and
transparency of information
International Financial Reporting Standards :
Overview
IFRS: Overview
 There are two sets of accounting reporting standards:
 Rule based standards and
 Principle based standards

 Rule based standards:

 Often called GAAPs [generally accepted accounting principles]
 In this case, companies may have industry-specific rules and guidelines to
follow
 Principle based standards:
 In this case companies may use principles that require judgement and
interpretation to determine how they are to be applied in a given situation
IFRS: Overview
 International Financial Reporting Standards (IFRS)
◦ are principle based standards
◦ aimed global practices
◦ re results of a convergence of international viewpoints

 IFRS
◦ issued by IASB (international Accounting Standards Board)
◦ single-set of high quality standards
◦ globally accepted and enforced
◦ require
◦ high quality, transparent and comparable information in financial statements
 Recognition, Measurement, Presentation and Disclosure are its pillars
Applicability of IFRS
 IFRSaimed global practices and hence as of March 2019, globally there
were 166 countries that adopted IFRS
 The goal is to achieve a single set of high quality common accounting
standards
 Are required by publicly accountable entities (or PIE)
 IFRS are applicable to general purpose financial statements of all
commercial, industrial and business reporting entities, whether in the
public or the private sectors.
 General purpose financial statement:
 Directed towards the common information needs of a wide range of
users
 Prepared at least annually
IFRS Measurement Basis
IFRSframework lists four possibilities of measurement
basis:
Historical cost
Current cost
Realizable (settlement) value
Present value

Is there something missing?

IFRS Measurement Basis
 Not mentioned as a measurement basis in the Framework.

 “The amount for which an asset could be exchanged between

knowledgeable, willing parties in an arm’s length transaction” as defined
in several standards.

 Recognitionand measurement of fair value is crucial to

performance measurement under the system the IASB is developing
International Financial Reporting Standards in
Ethiopia
IFRS in Ethiopia

● In 2014 Ethiopia announced its adoption of the IFRS

through proc. 847/2014

● Following which the Council of Ministries issued its

Regulation No. 332/2014 to establish and determine the
procedure of the AABE (Accounting and Auditing Board
of Ethiopia)
Why IFRS for Ethiopia?

 Absence of local or national reporting standard

 Need for better and high quality reporting
standards
 It has paramount importance for
 Organizations (reporting entities),
professionals, regulators and the nation at
large
Reporting Entities under Proc. 847/2014

● Per the Proc. 847/2014

○ Large Profit making enterprises or PIEs
■ Banks, Insurance and MFIs, and SOE
○ Charities and Associations
○ SMEs
Who is Governing IFRS Reporting Entities in Ethiopia?

● It is AABE
○ Headed by the Director General
○ Which has 12 member Board of Directors
(from relevant government organs, HEIs, the
private sector, and from accounting and
auditing professional associations)
Vision and Mission of AABE

● VISION:
○ To be an internationally recognized independent
and effective regulatory body of the accountancy
profession in Ethiopia.
● MISSION
○ To support investment and protect the public interest
by promoting high quality financial reporting in
Ethiopia
Powers and Duties of AABE

● Establish, publish and review a code of professional

conduct and ethics for CPA and Certified auditors
● Issue directives related to professionals including for the
acceptance or rejection of application, suspension,
cancellation or renewal of certificate and registration.
● Issue its own examination and quality requirement
directives
● Cooperate with or become a member or an affiliate of,
any international body
● Etc
Business Transactions and the Accounting
Equation
Business Transactions
 Alsocalled accounting transactions
 Are economic events that affects the financial affairs of a business
 A business transaction:
 Can be external, i.e. dealings for an exchange of value (buying, selling,
borrowing and repayment of loans)
 Can also be internal, i.e. event that do not involve exchange (loss of
property by fire, flood, earth quake, theft, due to wear and tear
 Has a dual effect on the accounting equation and hence requires a record
 To be recorded, it must relate directly to a business entity
Business Transactions
Question: Are the following events recorded in the accounting
records?

Purchase An employee is
Event Pay rent
computer hired

Criterion Is the financial position (assets, liabilities, or stockholders’

equity) of the company changed?

Record/ Don’t
Record

LO 1
The Accounting Equation
Financial Position and the Accounting Equation
 Financial position:
 refers to a company’s economic resources, such as cash, inventory,
and buildings, and the claims against those resources at a time.
 Claims are also called equities
 Economic Resources = Creditors’ Equities + Owners’ Equities

 Inaccounting, economic resources are called ASSETS, and creditors’

equities are called LIABILITIES

 ASSETS = LIABILITIES + OWNERS’ EQUITY

The 1.4
Accounting
The AccountingEquation
Equation

The Basic Accounting Equation (contracted)

Assets = Liabilities + Owner’s Equity

This is the same idea as

Investing = Financing
Resources = Sources of Resources
Resources = Claims on Resources

50
The Accounting Equation
 The accounting equation can also be expressed as:
 ASSETS – LIABILITIES = OWNERSHIP INTEREST

Assets Minus Liabilities Equals Ownership Interest (OI)

 The ownership interest is the residual claim after liabilities to third parties
have been satisfied.
 The equation expressed above emphasizes this aspect.
The Accounting Equation
 In
a corporate business or entity, the accounting equation can
be read as:
 ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
 Or
 ASSETS – LIABILITIES = SHAREHOLDERS’ EQUITY
 The shareholders’ equity has two parts:
 contributed capital and
 retained earnings
 Contributed capital:
 is the amount that shareholders invest in the business which is represented by
shares of capital stock
 Is divided between par value and additional paid in capital
The Accounting Equation
 Example:
 Ato Birru bought 10,000 shares of GENZEB S. Co at Br. 2500 each where the par
value of the share of the Company is Br. 1000 a share.
a. Compute the total investment made by Ato Birru
b. What is the value of the additional paid in capital (PIC)?
 Soln.
The Accounting Equation
 Example:
 Ato Birru bought 10,000 shares of GENZEB S. Co at Br. 2500 each where the par
value of the share of the Company is Br. 1000 a share.
a. Compute the total investment made by Ato Birru
b. What is the value of the additional paid in capital (PIC)?
 Soln.
a. Investment value Br. 2500/share x 10,000 shares = Br. 25,000,000
b. The value at par = Br. 1000/share x 10,000 shares = Br. 10,000,000. Then, the
additional Paid In Capital is Br. 15,000,000 i.e. Br. 25,000,000 – Br. 10,000,000.

 Retained Earnings:
 Represent shareholders’ equity that has been generated by the
business’s income producing activities and kept for use in the business.
Exercises
1. The assets of ABC Co. are Br. 240,000, and the liabilities are Br. 90,000.
What is the amount of the stockholders’ equity?

2. The liabilities of ORS Co. equal one-fifth of the total assets. The
stockholders’ equity is Br. 40,000. What is the amount of the liabilities?
Exercises
1. The assets of ABC Co. are Br. 240,000, and the liabilities are Br. 90,000.
What is the amount of the stockholders’ equity?

A= L + SE
Br. 240,000 = Br. 90,000 + SE
SE = Br. 240,000 – 90,000
SE = Br. 150,000

2. The liabilities of ORS Co. equal one-fifth of the total assets. The
stockholders’ equity is Br. 40,000. What is the amount of the liabilities?
A= L + SE
A = 1/5A + Br. 40,000
A – 1/5A = Br. 40,000
A = Br. 50,000, Hence, L = Br. 10,000
Exercises

3. At the beginning of the fiscal year of 2019, ENAT Bank S. Company’s

assets were Br. 6.5 Billion and its shareholders’ equity was Br. 1.2 Billion.
During the fiscal year, assets increased by Br. 2.7 Billion and liabilities
increased by Br. 2.4 Billion. What was the shareholders’ equity at the end
of the fiscal year 2019?

4. In CK Corp. liabilities of Br. 50,000 and stockholders’ equity of Br. 96,000

was reported at the beginning of year II. In year II, if assets increased by Br.
40,000 and liabilities decreased by Br. 30,000, what was the stockholders’
equity at the end of year II?
Exercises
3. At the beginning of the fiscal year of 2019, ENAT Bank S. Company’s
assets were Br. 6.5 Billion and its shareholders’ equity was Br. 1.2 Billion.
During the fiscal year, assets increased by Br. 2.7 Billion and liabilities
increased by Br. 2.4 Billion. What was the shareholders’ equity at the end
of the fiscal year 2019?
A(Beg.) = L (Beg.) + SE (Beg.)
L (Beg.) = Br. 5.3 Billion
A (End ) = Br. 6.5 Bill. + Br. 2.7 Bill. = Br. 9.2 Bill.
L (End) = Br. 5.3 Bill + Br. 2.4 Bill. = Br. 7.7 Bill
SE (End.) = Br. 9.2 Bill. – 7.7 Bill = Br. 1.5 Bill

4. In CK Corp. liabilities of Br. 50,000 and stockholders’ equity of Br. 96,000

was reported at the beginning of year II. In year II, if assets increased by Br.
40,000 and liabilities decreased by Br. 30,000, what was the stockholders’
equity at the end of year II? SE (End.) = Br. 186,000 – 20,000
SE (End.) = Br. 166,000
Effects of Business Transactions on the accounting
equation

 Assume, Ato Ahmed started his own consulting business on Meskerem 1,

2014. Some of the transactions of the same month are indicated below.

 Mes. 3 He transferred Br. 1,500,000 cash to the business.

 Mes. 4 Paid rent for the month Br. 25,000 cash
 Mes. 6 Purchased office equipment Br. 200,000 cash
 Mes. 15 Received cash from customers Br. 150,000 cash
 Mes. 19 Purchased Office supplies Br. 52,000 on credit
 Mes. 20 Provided Br. 250,000 services to customers on account.
 Mes. 27 Paid salaries to employees Br. 120,000 cash
 Mes. 30 Received Br. 170,000 in partial collection from customers.
Tran. ASSETS = LIABILITIES + CAPITAL Explanation

Cash Off. Equ Off. Supp. A/Rec. A/pay. Ahmed cap

Mes. 3 1,500,000 1,500,000 Initial Investment

Mes. 4 - 25,000 - 25,000 Rent Expense
Bal . 1,475,000 1,475,000
Mes. 6 - 200,000 200,000 ---
Bal . 1,275,000 200,000 1,475,000
Mes. 15 +150,000 ----- +150,000 Service provided
Bal. 1,425,000 200,000 1,625,000
Mar. 19 ---- ---- 25,000 25,000 ----
Bal. 1,425,000 200,000 25,000 25,000 1,625,000
Mes. 20 250,000 +250,000 Service provided
Bal. 1,425,000 200,000 25,000 250,000 25,000 1,875,000
Mes. 27 -120,000 --- --- --- --- -120,000 Salaries Expense
Bal. 1,305,000 200,000 25,000 250,000 25,000 1,755,000
Mes. 30 +170,000 --- --- -170,000 --- ---
Financial Statements
 A financial statement is simply a declaration of what is believed to be true
about an entity, communicated in terms of a monetary unit.
 Financial statements provide information about
 The financial position,
 Operating results,
 Changes in financial position of an entity
 Financial statement:
 Largely portray the financial effects of past events
 Do not necessarily provide non-financial information
 Financial statements include:
 Income statement
 Balance sheet
 Owner’s Equity
 Cash flow statement
Objectives of Financial Statements

• To provide information about the financial position,

performance, and changes in financial position of an
entity that is useful to a wide range of users in making
economic decisions.
• Financial statements do not:
• provide all necessary information:
• Largely portray the financial effects of past events
• necessarily provide non-financial information
Income Statement
Ahmed Consulting Plc
Income Statement
For the Month Ended Meskerem 30, 2014

Consulting Revenue------------------------------ ------------------ Br. 400,000

Less: Operating Expenses:

Salaries Expense ---------------------------------- Br. 120,000

Rent Expense --------------------------------------- 25,000

Total expenses ------------------------------------- ------------------- 145,000

Net Income ---------------------------------------- ------------------- Br. 255,000

Balance Sheet
Ahmed Consulting Plc
Balance Sheet
Meskerem 30, 2014
ASSETS LIABILITIES
Cash 1,475,000 Accounts Payable 25,000
Accounts receivable 80,000
Office Supplies 25,000 Equity
Office Equipment 200,000 Ahmed Capital __1,755,000

Total Assets 1,780,000 Total Liabilities and equity 1,780,000

Exercises
 CLASS EXERCISE I
Presented below is selected information related to 3G Company at December 31, 2021. 3G
reports financial information monthly.

Equipment $10,000 Utilities Expense $ 4,000

Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000

(a) Determine the total assets of at December 31, 2021.

(b)Determine the owner’s equity at December 31, 2021.
(c)Determine the net income reported for December 2021.
Solution
 Total Assets = Cash + Accounts receivables + Equipment
 Total Assets = Br. 8,000 + Br. 9,000 + Br. 10,000
 Total Assets = Br. 27,000

 Owner’s Equity = Total Assets – Total Liabilities (Notes Payable + Accounts Payable)
 OE = Br. 27,000 – (Br. 16,500 + Br. 2,000)
 OE = Br. 27,000 – 18,500
 OE = Br. 8,500
 Net Income/loss = Revenue – Expenses
 NI/NL = Service Revenue – Rent Exp. – Sal. & Wages Exp. – Utilities Exp.
 NI/NL = Br. 36,000 – Br. 11,000 - Br. 7,000 - Br. 4,000
 NI/NL = Br. 36,000 – Br. 22,000
 NI/NL = Br. 14,000
Capital Statement
Ahmed Consulting Plc
Capital Statement (Statement of Owner’s Equity)
For the Month Ended Meskerem 30, 2014

Beg. Capital Mesk. 01, 2014………………………………………………………………………… 1,500,000

Add: Net Income …………………………………………………………………………………….. 255,000
End. Capital, Mesk. 30, 2014 ……………………………………………………………………….. 1,755,000
 CLASS EXERCISE II
After several months of planning, David started a haircutting business called Express. The
following events occurred during its first month of business.
a)Aug. 1 David invested Br. 3,000 cash and Br. 15,000 of equipment in Express..
b)Express paid Br. 600 cash for furniture purchased for the shop.
c)Express paid Br. 500 cash to rent space in a mall for August.
d)Purchased Br. 1,200 of equipment on credit for the shop (recorded as accounts payable).
e)Express opened for business on August 5. Cash received from haircutting services in the first
week and a half of business (ended August 15) was Br. 825.
f)Express provided Br. 100 of haircutting services on credit.
g)Express received a Br. 100 check for services previously rendered on credit.
h)Express paid Br. 125 cash to an assistant for hours worked for the grand opening.
i)Cash received from services provided during the second half of August was Br. 930.
j)Express paid Br. 400 cash toward the accounts payable entered into on August 4.
k)David made a Br. 900 cash withdrawal from Express for personal use.
Required
 Show the effects of each transaction using the accounting equation.
 Prepare:
 Income statement for August
 Statement of owner’s equity for August
 Balance sheet as of August 31
Tran. ASSETS = LIABILITIES + CAPITAL Explanation

Cash Sores Equ Furniture A/Rec. A/pay. David cap

A 3,000 15,000 18,000 Investment
B -600 --- +600 --
Bal. 2,400 15,000 600 18,000
C -500 --- --- -500 Rent Expense
Bal. 1,900 15,000 600 17,500
D --- +1,200 --- +1,200 ---
Bal 1,900 16,200 600 1,200 17,500
E +825 +825 Service Revenue
Bal. 2,725 16,200 600 1,200 18,325
F +100 +100 Service Revenue
Bal 2,725 16,200 600 100 1,200 18,425
G +100 -100
Bal. 2,825 16,200 600 0 1,200 18,425
H -125 -125 Wages Expense
Bal. 2,700 16,200 600 0 1,200 18,300
I +930 --- --- --- --- +930
Bal. 3,630 16,200 600 0 1,200 19,230

J -400 --- --- --- -400 ---

Bal. 3,230 16,200 600 0 800 19,230

K -900 --- ---- --- --- 900 Withdrawal

Bal. 2,330 16,200 600 0 800 18,330

End of Chapter One