chapter _ 1 accounting in business

8/13/2019 Chapter _ 1 Accounting in Business

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The McGraw-H il l Companies, Inc., 2005McGraw-Hill/Irwin

Accounting inBusinessChapter

1


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Identifies

Records

CommunicatesRelevant

Reliable

Comparable

Importance of Accounting

Accountingis a

system that

information

that is

to help users makebetter decisions.


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IdentifyingBusinessActivities

RecordingBusinessActivities

CommunicatingBusinessActivities

Accounting Activities


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Users of Accounting Information

External Users

Financial accountingprovidesexternal users with financial

statements.

Internal Users

Managerial accountingprovidesinformation needs for internal

decision makers.


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Opportunities in Accounting

Financial

PreparationAnalysisAuditingRegulatory

ConsultingPlanningCriminalinvestigation

Managerial

General accountingCost accountingBudgetingInternal auditing

ConsultingControllerTreasurerStrategy

Taxation

PreparationPlanningRegulatoryInvestigations

ConsultingEnforcementLegal servicesEstate planning

Accounting-related

Lenders

ConsultantsAnalystsTradersDirectorsUnderwritersPlannersAppraisers

FBI investigators

Market researchersSystems designersMerger servicesBusiness valuationHuman servicesLitigation supportEntrepreneurs


7/43 The McGraw-H il l Companies, Inc., 2005McGraw-Hill/Irwin

Beliefs thatdistinguish

right fromwrong

Acceptedstandards of

good and badbehavior

Ethics

EthicsA Key Concept



Identifyethical concerns

Analyzeoptions

Make ethicaldecision

Use personalethics to

recognize ethicalconcern.

Consider all goodand bad

consequences.

Choose bestoption afterweighing all

consequences.

Guidelines for Ethical Decision Making



Financial accounting practice is governed byconcepts and rules known as generally accepted

accounting principles (GAAP).

Generally Accepted AccountingPrinciples

RelevantInformation

Affects the decision ofits users.

Reliable Information Is trusted byusers.

ComparableInformation

Is helpful in contrastingorganizations.



The Securities and Exchange Commissionisthe government group that establishes

reporting requirements for companies thatissue stock to the public.

Setting Accounting Principles

Financial AccountingStandards Boardis the privategroup that sets both broad and

specific principles.



Principles of Accounting

Now Future

Going-Concern PrincipleReflects assumption that the

business will continue operating

instead of being closed or sold.

Cost Principle

Accounting information isbased on actual cost.

Objectivity Principle

Accounting information issupported by independent,

unbiased evidence.



Principles of Accounting

Revenue Recognition Principle

1. Recognize revenue when it is

earned.

2. Proceeds need not be in cash.

3. Measure revenue by cash

received plus cash value of items

received.

Monetary Unit Principle

Express transactions and events inmonetary, or money, units.

Business Entity Principle

A business is accounted for

separately from other business

entities, including its owner.



Business Entity Forms

Proprietorship Partnership Corporation



Characteristics Proprietorship Partnership Corporation

Business entity yes yes yes

Legal entity no no yesLimited liability no no yes

Unlimited life no no yes

Business taxed no no yes

One owner allowed yes no yes

*

* Proprietorships and partnerships that are set up as LLCs

provide limited liability.

Characteristics of Businesses

Exh.

1.8

*



Owners of a corporation are called

shareholders(or stockholders).

When a corporation issues onlyone class of stock, we call it

common stock (or capital stock).

Corporation


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AssetsLiabilities& Equity

Accounting Equation

Liabilities EquityAssets = +


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Land

Equipment

Buildings

Cash

Vehicles

StoreSupplies

NotesReceivable

AccountsReceivable

Resourcesowned orcontrolled

by a

company

Assets


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Ownersclaims

on

assets

Revenues

OwnerInvestments

OwnerWithdrawals

Expenses

Equity


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Liabilities EquityAssets = +

Expanded Accounting Equation

Revenues ExpensesOwner

Capital

Owner

Withdrawals_

+_


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The accounts involved are:(1) Cash (asset)

(2) Supplies (asset)

Transaction Analysis

Purchased supplies paying $1,000cash.


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The accounts involved are:(1) Cash (asset)

(2) Equipment (asset)


Purchased equipment for $15,000cash.


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Purchased equipment for $15,000cash.

Assets = Liabilities + Equity

Cash Supplies Equipment

Accounts

Payable

Notes

Payable

J. Scott,

Capital

(1) 20,000$ 20,000$

(2) (1,000) 1,000$

(3) (15,000) 15,000$

4,000$ 1,000$ 15,000$ -$ -$ 20,000$

20,000$ = 20,000$


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The accounts involved are:

(1) Supplies (asset)

(2) Equipment (asset)

(3) Accounts Payable (liability)


Purchased Supplies of $200 andEquipment of $1,000 on account.


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Purchased Supplies of $200 andEquipment of $1,000 on account.



Accounts

Payable

Notes

Payable

J. Scott,

Capital

(1) 20,000$ 20,000$

(2) (1,000) 1,000$

(3) (15,000) 15,000$

(4) 200 1,000 1,200$

4,000$ 1,200$ 16,000$ 1,200$ -$ 20,000$

21,200$ = 21,200$


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(1) Cash (asset)

(2) Notes payable (liability)


Borrowed $4,000 from 1st AmericanBank.


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Borrowed $4,000 from 1st AmericanBank.



Accounts

Payable

Notes

Payable

J. Scott,

Capital

(1) 20,000$ 20,000$

(2) (1,000) 1,000$

(3) (15,000) 15,000$

(4) 200 1,000 1,200$

(5) 4,000 4,000$

8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

25,200$ = 25,200$


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Accounts

Payable

Notes

Payable

J. Scott,

CapitalBal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

25,200$ = 25,200$


The balances so far appear below. Note that theBalance Sheet Equation is still in balance.

Now lets look at transactions involving

revenue, expenses and withdrawals.


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Assets = Liabilities +

Cash Supplies EquipmentAccountsPayable

NotesPayable

J. Scott,Capital Revenue

Bal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

(6) 3,000 3,000$

11,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ 3,000$

28,200$ = 28,200$

Equity


Rendered consulting servicesreceiving $3,000 cash.


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(1) Cash (asset)

(2) Salaries expense (equity)


Paid salaries of $800 to employees.

Remember that the balance in the salariesexpense account actually increases.

But, equity actually decreases because

expenses reduce equity.


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Accounts

Payable

Notes

Payable

J. Scott,

Capital Revenue ExpensesBal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

(6) 3,000 3,000$

(7) (800) (800)$

10,200$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ 3,000$ (800)$

27,400$ = 29,000$

Equity

Remember that expenses decreaseequity.

Paid salaries of $800 to employees.


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(1) Cash (asset)

(2) J. Scott, Withdrawals (equity)


J. Scott withdrew $500 from thebusiness for personal use.

Remember that the balance in the J. Scott,Withdrawals account actually increases.

But, equity actually decreases because

withdrawals reduce equity.


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Accounts

Payable

Notes

Payable

J. Scott,

Capital

J. Scott,

Withdrawal Revenue ExpensesBal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$

(6) 3,000 3,000$

(7) (800) (800)$

(8) (500) (500)$

9,700$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ (500)$ 3,000$ (800)$

26,900$ = 29,500$

Equity

Remember that withdrawals decreaseequity.

J. Scott withdrew $500 from thebusiness for personal use.


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Financial Statements

Lets prepare the Financial Statementsreflecting the transactions we have recorded.

1. Income Statement2. Statement of Owners Equity

3. Balance Sheet

4. Statement of Cash Flows

Scott Company


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Net incomeis thedifferencebetween

Revenues andExpenses.

Revenues:

Consulting revenue 3,000$Expenses:

Salaries expense 800

Net income 2,200$

Income Statement

For Month Ended December 31, 2004

The income statementdescribes acompanys revenues and expenses

along with the resulting net income orloss over a period of time due toearnings activities.

Scott Company


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The net incomeof $2,200increases

Scotts capital

by $2,200.

Revenues:

Consulting revenue 3,000$Expenses:

Salaries expense 800

Net income 2,200$

Income Statement


J. Scott, Capital, Dec. 1, 2004 -$

Plus: Investment by owner 20,000

Net income 2,200

Less: Withdrawals 500

J. Scott, Capital, Dec. 31, 2004 21,700$

Scott Company

Statement of Owner's Equity


The Statement ofOwners Equity

explains changes

in equity from net

income (or net

loss) and from

owner investments

and withdrawals for

a period of time.

Scott Company


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J. Scott, Capital, Dec. 1, 2004 -$

Plus: Investment by owner 20,000

Net income 2,200

Less: Withdrawals 500

J. Scott, Capital, Dec. 31, 2004 21,700$

Scott Company

Statement of Owner's Equity


Cash 9,700$ Accounts payable 1,200$Supplies 1,200 Notes payable 4,000

Equipment 16,000 Total liabilities 5,200

J. Scott, Capital 21,700

Total assets 26,900$ Total liabilities and equity 26,900$

Assets Liabilities & Equity

Scott Company

Balance Sheet

December 31, 2004

The Balance Sheetdescribes a

companysfinancial positionat a point in time.

Scott Company


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Cash flows from operating activities:

Cash received from clients 3,000$Purchase of supplies (1,000)

Cash paid to employees (800)

Net cash provided by operating activities 1,200$

Cash flows from investing activities:

Purchase of equipment (15,000)

Net cash used in investing activities (15,000)Cash flows from financing activities:

Investment by owner 20,000

Borrowed at bank 4,000

Withdrawal by owner (500)

Net cash provided by financing activities 23,500

Net increase in cash 9,700$Cash balance, December 1, 2004 -

Cash balance, December 31, 2004 9,700$

Statement of Cash Flows


The Statement of Cash Flowsidentifies cash

chapter _ 1 accounting in business

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