introduction to accounting and business

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Introduction to

Introduction to

Accounting and

Accounting and

BusinessBusiness

Chapter 1Chapter 1Chapter 1Chapter 1

Learning ObjectivesLearning Objectives

1.1. Describe the nature of a business and the role of Describe the nature of a business and the role of accounting and ethics in business.accounting and ethics in business.

2.2. Summarize the development of accounting principles Summarize the development of accounting principles and relate them to practice.and relate them to practice.

3.3. State the accounting equation and define each State the accounting equation and define each element of the equation.element of the equation.

4.4. Describe and illustrate how business transactions Describe and illustrate how business transactions can be recorded in terms of the resulting change in can be recorded in terms of the resulting change in the elements of the accounting equation.the elements of the accounting equation.

5.5. Describe the financial statements of a proprietorship Describe the financial statements of a proprietorship and explain how they interrelate.and explain how they interrelate.

6.6. Describe and illustrate the use of the ratio of Describe and illustrate the use of the ratio of liabilities to owner’s equity in evaluating a liabilities to owner’s equity in evaluating a company’s financial condition.company’s financial condition.

c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Learning Objective

ObjectiveDescribe the nature of a

Describe the nature of a

business, the role of accounting,

business, the role of accounting,

and ethics in business.

and ethics in business.

11

Nature of Business and AccountingNature of Business and Accounting

o A A businessbusiness is an organization in which is an organization in which basic resources (inputs), such as basic resources (inputs), such as materials and labor, are assembled and materials and labor, are assembled and processed to provide goods or services processed to provide goods or services (outputs) to customers.(outputs) to customers.

Nature of Business and AccountingNature of Business and Accounting

o The objective of most businesses is to The objective of most businesses is to earn a earn a profitprofit..

o Profit is the difference between the Profit is the difference between the amounts received from customers for amounts received from customers for goods or services and the amounts paid goods or services and the amounts paid for the inputs used to provide the goods or for the inputs used to provide the goods or services.services.

Types of BusinessesTypes of Businesses

Service Businesses Service

Delta Air Lines Transportation services

The Walt Disney Company Entertainment services

Merchandising Businesses Product

WalMart General merchandise

Amazon.com Internet books, music, videos

Manufacturing Businesses Product

Ford Motor Company Cars, trucks, vans

Dell Inc. Personal computers

The Role of Accounting in BusinessThe Role of Accounting in Business

o AccountingAccounting can be defined as an can be defined as an information system that provides reports information system that provides reports to users about the economic activities and to users about the economic activities and condition of a business.condition of a business.

The Role of Accounting in BusinessThe Role of Accounting in Business

o The process by which accounting provides The process by which accounting provides information to users is as follows:information to users is as follows: Identify users.Identify users.

Assess users’ information needs.Assess users’ information needs.

Design the accounting information system to Design the accounting information system to meet users’ needs.meet users’ needs.

Record economic data about business activities Record economic data about business activities and events.and events.

Prepare accounting reports for users.Prepare accounting reports for users.

THE ROLE OF THE ROLE OF ACCOUNTING ACCOUNTING IN BUSINESSIN BUSINESS

Managerial AccountingManagerial Accounting

o The area of accounting that provides The area of accounting that provides internal users with information is called internal users with information is called managerial accounting managerial accounting oror management management accountingaccounting..

o Managerial accountants employed by a Managerial accountants employed by a business are employed in business are employed in private private accountingaccounting..

Financial AccountingFinancial Accounting

o The area of accounting that provides The area of accounting that provides external users with information is called external users with information is called financial accountingfinancial accounting..

o The objective of financial accounting is to The objective of financial accounting is to provide relevant and timely information provide relevant and timely information for the decision-making needs of users for the decision-making needs of users outside of the business.outside of the business.

o General-purpose financial statementsGeneral-purpose financial statements are are one type of financial accounting report one type of financial accounting report that is distributed to external users.that is distributed to external users.

Role of Ethics in Accounting and Role of Ethics in Accounting and BusinessBusinesso The objective of accounting is to provide The objective of accounting is to provide

relevant, timely information for user relevant, timely information for user decision making.decision making.

o Accountants must behave in an ethical Accountants must behave in an ethical manner so that the information they manner so that the information they provide users will be trustworthy and, provide users will be trustworthy and, thus, useful for decision making.thus, useful for decision making.

o Ethics are moral principles that guide the Ethics are moral principles that guide the conduct of individuals.conduct of individuals.

Role of Ethics in Accounting and BusinessRole of Ethics in Accounting and Business

The answer to … The answer to …

“What went wrong for “What went wrong for these companies?” …these companies?” …

involves one or both of involves one or both of these factors. (Exhibit these factors. (Exhibit 2)2)

Failure of individual Failure of individual charactercharacter

Firm culture of Firm culture of greed and ethical greed and ethical indifferenceindifference

Role of Ethics in Accounting and Role of Ethics in Accounting and BusinessBusiness

Role of Ethics in Accounting and Role of Ethics in Accounting and BusinessBusiness

Opportunities for AccountantsOpportunities for Accountants

o Accountants and their staff who provide Accountants and their staff who provide services on a fee basis are said to be services on a fee basis are said to be employed in employed in public accountingpublic accounting..

o Accountants employed by a business firm, Accountants employed by a business firm, government, or a not-for-profit organization government, or a not-for-profit organization are said to be employed in are said to be employed in private private accountingaccounting..

o Public accountants who have met a state’s Public accountants who have met a state’s education, experience, and examination education, experience, and examination requirements may become requirements may become Certified PublicCertified Public Accountants (CPAs)Accountants (CPAs)..

Opportunities for AccountantsOpportunities for Accountants

c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Learning Objective

Objective Summarize the development of

Summarize the development of

accounting principles and relate

accounting principles and relate them to practice.

them to practice.

22

Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles

o Financial accountants follow Financial accountants follow generally generally accepted accounting principles (GAAP)accepted accounting principles (GAAP) in in preparing reports.preparing reports.

o Within the U.S., the Within the U.S., the Financial Accounting Financial Accounting Standards Board (FASB)Standards Board (FASB) has the primary has the primary responsibility for developing accounting responsibility for developing accounting principles.principles.

Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles

o The The Securities and Exchange Commission Securities and Exchange Commission (SEC)(SEC), an agency of the U.S. government, , an agency of the U.S. government, has authority over the accounting and has authority over the accounting and financial disclosures for companies whose financial disclosures for companies whose shares of ownership (stock) are traded and shares of ownership (stock) are traded and sold to the public.sold to the public.

o Many countries outside the United States Many countries outside the United States use generally accepted accounting use generally accepted accounting principles adopted by the principles adopted by the International International Accounting Standards Board (IASB)Accounting Standards Board (IASB)..

Business Entity ConceptBusiness Entity Concept

o Under the Under the business entity conceptbusiness entity concept, the , the activities of a business are recorded activities of a business are recorded separately from the activities of its separately from the activities of its owners, creditors, or other businesses.owners, creditors, or other businesses.

PROPRIETORSHIPPROPRIETORSHIP

A A proprietorshipproprietorship is is owned by one owned by one individual.individual.

70% of business 70% of business entities in the U.S. entities in the U.S. are proprietorships.are proprietorships.

They are easy and They are easy and cheap to organize.cheap to organize.

Resources are Resources are limited to those of limited to those of the owner.the owner.

Used by small Used by small businesses.businesses.

PARTNERSHIPPARTNERSHIP

A A partnershippartnership is is similar to a similar to a proprietorship proprietorship except that it is except that it is owned by two or owned by two or more individuals.more individuals.

10% of business 10% of business organizations in organizations in the U.S. the U.S. (combined with (combined with limited liability limited liability companies) are companies) are partnerships.partnerships.

Combines the Combines the skills and skills and resources of more resources of more than one person.than one person.

CORPORATIONCORPORATION

A A corporationcorporation is is organized under organized under state or federal state or federal statutes as a statutes as a separate legal separate legal taxable entity.taxable entity.

Generates 90% of Generates 90% of business revenues.business revenues.

20% of the business 20% of the business organizations in the organizations in the U.S.U.S.

Ownership is divided Ownership is divided into shares, called into shares, called stock.stock.

Can obtain large Can obtain large amounts of resources amounts of resources by issuing stock.by issuing stock.

Used by large Used by large businesses.businesses.

LIMITED LIABILITY COMPANY LIMITED LIABILITY COMPANY (LLC)(LLC)

A A limited liability limited liability company (LLC)company (LLC) combines the combines the attributes of a attributes of a partnership and a partnership and a corporation.corporation.

10% of business 10% of business organizations in the organizations in the U.S. (combined U.S. (combined with partnerships).with partnerships).

Often used as an Often used as an alternative to a alternative to a partnership.partnership.

Has tax and legal Has tax and legal liability advantages liability advantages for owners.for owners.

Cost ConceptCost Concept

o Under the Under the cost conceptcost concept, amounts are , amounts are initially recorded in the accounting records initially recorded in the accounting records at their cost or purchase price.at their cost or purchase price.

Cost ConceptCost Concept

o Aaron Publishers purchased a building on Aaron Publishers purchased a building on February 20, 2012, for $150,000. Other February 20, 2012, for $150,000. Other amounts related to this purchased are amounts related to this purchased are shown on the next slide.shown on the next slide.

Cost ConceptCost Concept

Price listed by seller on Jan. 1, 2012$160,000

Aaron Publishers’ initial offer to buy on Jan. 31, 2012140,000

Purchase price on Feb. 20, 2012150,000

Estimated selling price on Dec. 31, 2014220,000

Assessed value for property taxes, Dec. 31, 2014190,000

Under the cost concept, Aaron Publishers records the purchase of the building on February 20,

2012, at the purchase price of

$150,000.

The other amounts listed above have no effect on the accounting records.

Objectivity ConceptObjectivity Concept

o The The objectivity conceptobjectivity concept requires that the requires that the amounts recorded in the accounting amounts recorded in the accounting records be based on objective evidence.records be based on objective evidence.

o Only the final agreed-upon amount is Only the final agreed-upon amount is objective enough to be recorded in the objective enough to be recorded in the accounting records.accounting records.

Unit of Measure ConceptUnit of Measure Concept

o The The unit of measure conceptunit of measure concept requires that requires that economic data be recorded in dollars.economic data be recorded in dollars.

c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Learning Objective

ObjectiveState the accounting equation

State the accounting equation

and define each element of the

and define each element of the equationequation

33

The Accounting EquationThe Accounting Equation

o The resources owned by a business are its The resources owned by a business are its assetsassets..

o The rights of creditors are the debts of the The rights of creditors are the debts of the business and are called business and are called liabilitiesliabilities..

o The rights of the owners are called The rights of the owners are called owner’s equityowner’s equity..

o The equation The equation Assets = Liabilities + Assets = Liabilities + Owner’s EquityOwner’s Equity is called the is called the accounting accounting equationequation..

The resources owned by a

business

Assets = Liabilities + Owner’s Equity

THE THE ACCOUNTING ACCOUNTING

EQUATIONEQUATION

Assets = Liabilities + Owner’s Equity

THE THE ACCOUNTING ACCOUNTING

EQUATIONEQUATION

The rights of creditors are the

debts of the business

The rights of the owners

Assets = Liabilities + Owner’s Equity

THE THE ACCOUNTING ACCOUNTING

EQUATIONEQUATION

c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Learning Objective

ObjectiveDescribe and illustrate how business

Describe and illustrate how business

transactions can be recorded in

transactions can be recorded in

terms of the resulting change in the

terms of the resulting change in the

elements of the accounting equation

elements of the accounting equation

44

Business TransactionBusiness Transaction

o A A business transactionbusiness transaction is an economic is an economic event or condition that directly changes event or condition that directly changes an entity’s financial condition or its results an entity’s financial condition or its results of operations.of operations.

On November 1, 2013, Chris Clark deposited $25,000 in a bank account in the name of NetSolutions.

TRANSACTION TRANSACTION AA

On November 5, 2013, NetSolutions paid $20,000 for the purchase of land as a future building site.

TRANSACTION TRANSACTION BB

On November 10, 2013, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future.

TRANSACTION TRANSACTION CC

Transaction CTransaction C

o The liability created by a purchase on The liability created by a purchase on account is called an account is called an account payableaccount payable..

o Items such as supplies that will be used in Items such as supplies that will be used in the business in the future are called the business in the future are called prepaid expensesprepaid expenses, which are assets., which are assets.

TRANSACTION TRANSACTION DD

On November 18, 2013, NetSolutions received cash of $7,500 for providing services to customers. A business earns money by selling goods or services to its customers. This amount is called revenue.

Transaction DTransaction D

o Revenue from providing services is Revenue from providing services is recorded as fees earned.recorded as fees earned.

o Revenue from the sale of merchandise is Revenue from the sale of merchandise is recorded as sales.recorded as sales.

o Other examples of revenue include rent, Other examples of revenue include rent, which is recorded as rent revenue, and which is recorded as rent revenue, and interest, which is recorded as interest interest, which is recorded as interest revenue.revenue.

o An account receivable is a claim against a An account receivable is a claim against a customer, which is an asset.customer, which is an asset.

TRANSACTION TRANSACTION EE

During the month, NetSolutions spent cash or used up other assets in earning revenue. Assets used in this process of earning revenue are called expenses.

On November 30, 2013, NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

TRANSACTION TRANSACTION EE

On November 30, 2013, NetSolutions paid creditors on account, $950.

TRANSACTION TRANSACTION FF

On November 30, 2013, Chris Clark determined that the cost of supplies on hand at the end of the period was $550.

TRANSACTION TRANSACTION GG

On November 30, 2013, Chris Clark withdrew $2,000 from NetSolutions for personal use.

TRANSACTION TRANSACTION HH

SUMMARYSUMMARY

Types of Transactions Affecting Owner’s EquityTypes of Transactions Affecting Owner’s Equity

c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Learning Objective

ObjectiveDescribe the financial

Describe the financial

statements of a proprietorship

statements of a proprietorship

and explain how they interrelate.

and explain how they interrelate.

55

Financial StatementsFinancial Statements

o After transactions have been recorded After transactions have been recorded and summarized, reports are prepared for and summarized, reports are prepared for users. The accounting reports providing users. The accounting reports providing this information are called this information are called financial financial statementsstatements..

FINANCIAL FINANCIAL STATEMENTSSTATEMENTS

Income StatementIncome Statement

o The The income statementincome statement reports the revenues reports the revenues and expenses for a period of time, based on and expenses for a period of time, based on the the matching conceptmatching concept..

o The matching concept is applied by The matching concept is applied by “matching” the expenses incurred during a “matching” the expenses incurred during a period with the revenue that those expenses period with the revenue that those expenses generated.generated.

o The excess of the revenue over the expenses The excess of the revenue over the expenses is called is called net incomenet income, net profit, or , net profit, or earningsearnings. If . If expenses exceed revenue, the excess is a expenses exceed revenue, the excess is a net net lossloss. .

Statement of Owner’s EquityStatement of Owner’s Equity

o The The statement of owner’s equitystatement of owner’s equity reports reports the changes in the owner’s equity for a the changes in the owner’s equity for a period of time.period of time.

o It is prepared It is prepared afterafter the income statement the income statement because the net income or net loss for the because the net income or net loss for the period must be reported in this statement.period must be reported in this statement.

Financial Statements – Income StatementFinancial Statements – Income Statement

Net income is carried to the statement of owner’s equity.

From the income statement

To the balance sheet

Financial Statements – Statement of Owner’s EquityFinancial Statements – Statement of Owner’s Equity

(continued)

Balance SheetBalance Sheet

o A A balance sheetbalance sheet is a list of the assets, is a list of the assets, liabilities, and owner’s equity as of a liabilities, and owner’s equity as of a specific date.specific date.

Account FormAccount Form

o The The account formaccount form of a balance sheet lists of a balance sheet lists the assets on the left and the liabilities the assets on the left and the liabilities and owner’s equity on the right. It and owner’s equity on the right. It resembles the basic format of the resembles the basic format of the accounting equation.accounting equation.

This amount is compared to the net cash flow on the statement of

cash flows.

From the statement of owner’s equity

Financial Statements – Balance SheetFinancial Statements – Balance Sheet

(continued)

Statement of Cash FlowsStatement of Cash Flows

o A A statement of cash flowsstatement of cash flows is a summary of is a summary of the cash receipts and cash payments for a the cash receipts and cash payments for a specific period of time.specific period of time. It consists of three sections: It consists of three sections:

(1) operating activities(1) operating activities(2) investing activities(2) investing activities(3) financing activities(3) financing activities

This amount should match Cash on the balance sheet

Financial Statements – Statement of Cash FlowsFinancial Statements – Statement of Cash Flows

(concluded)

Cash Flows from Operating ActivitiesCash Flows from Operating Activities

o The The cash flows from operating activitiescash flows from operating activities section reports a summary of cash section reports a summary of cash receipts and cash payments from receipts and cash payments from operations.operations.

Cash Flows from Investing ActivitiesCash Flows from Investing Activities

o The The cash flows from investing activitiescash flows from investing activities section reports the cash transactions for section reports the cash transactions for the acquisition and sale of relatively the acquisition and sale of relatively permanent assets.permanent assets.

Cash Flows from Financing ActivitiesCash Flows from Financing Activities

o The The cash flows from financing activitiescash flows from financing activities section reports the cash transactions section reports the cash transactions related to cash investments by the owner, related to cash investments by the owner, borrowings, and withdrawals by the borrowings, and withdrawals by the owner.owner.

INTERRELATIONSHIPS INTERRELATIONSHIPS AMONG FINANCIAL AMONG FINANCIAL STATEMENTSSTATEMENTSIncome Statement Income Statement

andand Statement of Statement of Owner’s EquityOwner’s Equity

Net income or net Net income or net loss reported on loss reported on the income the income statement is also statement is also reported on the reported on the statement of statement of owner’s equity owner’s equity and any additional and any additional investments by investments by the owner during the owner during the year.the year.

Interrelationships Among Financial Interrelationships Among Financial StatementsStatements

o In Exhibit 6, NetSolutions’ net income of In Exhibit 6, NetSolutions’ net income of $3,050 for November is added to Chris $3,050 for November is added to Chris Clark’s investment of $25,000 in the Clark’s investment of $25,000 in the statement of owner’s equity.statement of owner’s equity.

INTERRELATIONSHIPS INTERRELATIONSHIPS AMONG FINANCIAL AMONG FINANCIAL STATEMENTSSTATEMENTSStatement of Owner’s Statement of Owner’s

Equity Equity andand Balance SheetBalance Sheet

The owner’s The owner’s capital at the capital at the end of the period end of the period is reported on is reported on the statement of the statement of owner’s equity owner’s equity and is also and is also reported on the reported on the balance sheet as balance sheet as owner’s capital.owner’s capital.

Interrelationships Among Financial Interrelationships Among Financial StatementsStatements

o In Exhibit 6, Chris Clark, Capital of $26,050 as of In Exhibit 6, Chris Clark, Capital of $26,050 as of November 30, 2013, on the statement of owner’s November 30, 2013, on the statement of owner’s equity also appears on the November 30, 2013, equity also appears on the November 30, 2013, balance sheet as Chris Clark, Capital.balance sheet as Chris Clark, Capital.

INTERRELATIONSHIPS INTERRELATIONSHIPS AMONG FINANCIAL AMONG FINANCIAL STATEMENTSSTATEMENTSBalance Sheet Balance Sheet andand

Statement of Cash Statement of Cash FlowsFlows

The cash The cash reported on the reported on the balance sheet is balance sheet is also reported as also reported as the end-of-the end-of-period cash on period cash on the statement the statement of cash flows.of cash flows.

Interrelationships Among Financial Interrelationships Among Financial StatementsStatements

o In Exhibit 6, cash of $5,900 reported on In Exhibit 6, cash of $5,900 reported on the balance sheet as of November 30, the balance sheet as of November 30, 2013, is also reported on the November 2013, is also reported on the November statement of cash flows as the end-of-statement of cash flows as the end-of-period cash.period cash.

c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Learning Objective

ObjectiveDescribe and illustrate the use of

Describe and illustrate the use of

the ratio of liabilities to owner’s

the ratio of liabilities to owner’s

equity in evaluating a

equity in evaluating a

company’s financial condition.

company’s financial condition.

66

RATIO OF RATIO OF LIABILITIES TO LIABILITIES TO

OWNER’S OWNER’S EQUITYEQUITYRatio of Liabilities

to Owner’s Equity=

Total Liabilities

Total Owner’s Equity (or Total Stockholders’ Equity)

Ratio of Liabilities to Owner’s Equity

=$400

$26,050= 0.015

c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Introduction to

Introduction to

Accounting and

Accounting and

BusinessBusiness

The EndThe EndThe EndThe End