chapter 1 (introduction to accounting and business)

8/12/2019 Chapter 1 (Introduction to Accounting and Business)

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PENGANTARAKUNTANSI 1


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1Introduction to

Accounting andBusiness


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2. Summarize the development of accounting

principles and relate them to practice.

3. State the accounting equation and define

each element of the equation.

After studying this chapter, you should be able to:

1. Describe the nature of a business and the

role of ethics and accounting in business.


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Describe the nature of a

business and the role of ethics

and accounting in business.

Objective 1

1-1


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ServiceBusiness Service

The Walt Disney Company Entertainment

Delta Air Lines TransportationMarriott International Hotels Hospitality and

lodging

Bank of America Corporation Financial services

XM Satellite Radio Satellite radio

1-1Types of Businesses


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Merchandising Business Product

Wal-Mart General merchandise

GameStop Corporation Video games andaccessories

Best Buy Consumer electronics

Gap Inc. Apparel

Amazon.com Internet books, music, video

Types of Businesses 1-1


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Manufacturing Business Product

General Motors Corp. Cars, trucks, vans

Samsung Cell phonesDell Inc. Personal computers

Nike Athletic shoes and apparel

The Coca-Cola Company BeveragesSony Corporation Stereos and televisions

Types of Businesses 1-1


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Proprietorship

Partnership Corporation

Limited liability company

Common Forms of Business Organizations1-1


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Comprises 70% of business

organizations in the United States. Requires low cost of organizing.

Is limited to financial resources of the

owner. Is used by small businesses.

Aproprietorshipis owned by one

individual and

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Comprises 10% of business

organizations in the United States.

Combines the skills and resources of

more than one person.

Apartnershipis similar to a

proprietorship except that it is owned

by two or more individuals and

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Generates 90% of the total dollars of

business receipts received.

Comprises 20% of the businesses.

A corporationis organized under state or

federal statues as a separate legal taxable

entity and

1-1

Continued


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Includes ownership divided into shares

of stock, sold to shareholders

(stockholders).

Is able to obtain large amounts ofresources by issuing stock.

Is used by large businesses.

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Is a popular alternative to a

partnership. Has tax and liability advantages to the

owners.

A limited liability company(LLC)combinesattributes of a partnership and a

corporation in that it is organized as a

corporation. However, a limited liability

corporation can elect to be taxed as a

partnership and

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A business stakeholderis a

person orentity having an

interest in the economicperformance and well-being

of a business.

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Capital market stakeholders

provide the major financing for the

business in order for the business to

begin and continue its operations.

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Product or service market

stakeholdersinclude customers

who purchase the businesssproducts or services as well as

the vendors who supply inputs

to the business.

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Government stakeholdershave an

interest in the economic

performance of a business. City,county, state, and federal

governments collect taxes from

businesses within theirjurisdiction.

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Internal stakeholdersinclude

individuals employed by the

business. Managers have anincentive to maximize the

economic value of the business.

Employees have an interestbecause their jobs depend on it.

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The moral principles thatguide the conduct of

individuals are called ethics.

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1. Individualcharacter

2. Firm culture3. Laws and

enforcement

The answer to

What went

wrong for these

companies?

(Exhibit 2)

involves three

factors.

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Accountingcan be defined as an

information system that

provides reports to stakeholders

about the economic activities

and condition of a business.

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The process by which accounting providesinformation to business stakeholders is as follows:

Identify stakeholders.

Assess stakeholders information needs.

Design the accounting information system to

meet stakeholders needs.

Record economic data about business

activities and events.

Prepare accounting reports for stakeholders.

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1-1


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Financial accountingis primarily concerned

with the recording and reporting of

economic data and activities for a business.

Managerial accountinguses both financial

accounting and estimated data to aid

management in running day-to-dayoperations and in planning future

operations.

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Accountants employed by a business firm or

a not-for-profit organization are said to be

employed inprivate accounting.

Accountants and their staff who provide

services on a fee basis are said to be

employed inpublic accounting.

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Summarize the development

of accounting principles and

relate them to practice.

Objective 2

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The business entity concept

limits the economic data in

the accounting system to

data related directly to the

activities of the business.

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The cost conceptis the

basis for entering the

exchange price, or cost

of an acquisition in the

accounting records.

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The objectivity concept

requires that the

accounting records and

reports be based upon

objective evidence.

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The unit of measure

conceptrequires thateconomic data be

recorded in dollars.

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Example Exercise 1-1

On August 25, Gallatin Repair Service extended an offer of

$125,000 for land that had been priced for sale at $150,000. On

September 3, Gallatin Repair Service accepted the sellers

counteroffer of $137,000. On October 20, the land was assessed

at a value of $98,000 for property tax purposes. On December 4,Gallatin Repair Service was offered $160,000 for the land by a

national retail chain. At what value should the land be recorded

in Gallatin Repair Services records?

Follow My Example 1-1

$137,000. Under the cost concept, the land should be recorded at

the cost to Gallatin Repair Service.31

1-2


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State the accountingequation and define each

element of the equation.

Objective 3

1-3


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Assets = Liabilities + Owners Equity

The resourcesowned by a

business

The Accounting Equation1-3


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The rights ofthe creditors,

which represent

debts of thebusiness




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The rights ofthe owners




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Describe and illustrate howbusiness transactions can be

recorded in terms of the resulting

change in the basic elements of theaccounting equation.

Objective 4

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A business transactionis an

economic event or condition

that directly changes an entitys

financial condition or directly

affects its results of operations.

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On November 1, 2007, ChrisClark begins a business that will

be known as NetSolutions.

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a. Chris Clark deposits $25,000 in a bank

account in the name of NetSolutions.

Chris Clark, Capital

25,000 Investmentby Chris Clark

Cash

25,000a.=

Assets Owners Equity=

40

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b. NetSolutions exchanged $20,000 for land.

Chris Clark, Capital

25,000

Cash + Land

25,000Bal.

Assets Owners Equity=

=b. 20,000 +20,000

Bal. 5,000 20,000 25,000

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Accounts Chris Clark,

Cash + Supplies + Land Payable Capital

Assets

c. During the month, NetSolutions purchasedsupplies for $1,350 and agreed to pay the

supplier in the near future (on account).

OwnersLiabilities + Equity=

5,000 20,000 25,000=

+1,350 +1,350c.

Bal.

5,000 1,350 20,000 1,350 25,000Bal.

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Beginning with entry (d) the

asset section will be shown

first, then the liabilities andowners equity will be shown in

the following slide.

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Cash + Supplies + Land

Assets

5,000 1,350 20,000

d. NetSolutions provided services tocustomers, earning fees of $7,500 and

received the amount in cash.

Bal.

12,500 1,350 20,000

+7,500d.

Bal.

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d. NetSolutions provided services to

customers, earning fees of $7,500 and

received the amount in cash.45

1-4

Liabilities + Owners Equity

Accounts Chris Clark, Fees

Payable Capital + Earned

1,350 25,000 Bal.

+7,500 d.

+

25,000 7,500 Bal.1,350


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1-4

The amounts used in earning revenue are

called expenses. Adding expenses to the

owners equity section results in a space

problem. To adjust for these addedheadings, the word Bal. has been

omitted from Slides 48, 50, 52, and 54.

The bottom row in these four slidesprovides the balances after each

transaction.

Expenses


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Assets

e. NetSolutions paid the following

expenses: wages, $2,125; rent, $800;utilities, $450; and miscellaneous, $275.

Bal. 12,500 1,350 20,000

Bal. 8,850 1,350 20,000

e. 3,650

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Accounts Chris Clark, Fees Wages Rent Utilities Misc.

Payable + Capital + Earned Expense Expense Expense Expense


1,350 25,000 7,5002,125 800 450 275 e.

1,350 25,000 7,500 2,125 800 450 275

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e. NetSolutions paid the following expenses:wages, $2,125; rent, $800; utilities, $450; and

miscellaneous, $275.

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f. NetSolutions paid $950 to

creditors during the month.


Assets

Bal. 8,850 1,350 20,000

Bal. 7,900 1,350 20,000

f. 950

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Accounts Chris Clark, Fees Wages Rent Utilities Misc.

Payable + Capital + Earned Expense Expense Expense Expense


1,350 25,000 7,500 2,125 800 450 275

400 25,000 7,500 2,125 800 450 275

f. NetSolutions paid $950 to

creditors during the month.

f.950

50

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g. At the end of the month, the costof supplies on hand is $550, so

$800 of supplies were used.


Assets

Bal. 7,900 1,350 20,000

Bal. 7,900 550 20,000

g. 800

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Accounts Chris Clark, Fees Wages Rent Supplies Util. Misc.

Payable + Capital + Earned Exp. Exp. Exp. Exp. Exp.


400 25,000 7,500 2,125 800 450 275

g. At the end of the month, the costof supplies on hand is $550, so

$800 of supplies were used.

g.800

400 25,000 7,500 2,125 800 800 450 275

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Assets

Bal. 7,900 550 20,000

Bal. 5,900 550 20,000

h. 2,000

h. At the end of the month, Chriswithdrew $2,000 in cash from

the business for personal use.53

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Accounts Chris Clark, Chris Clark Fees Wages Rent Supplies Util. Misc.

Payable + Capital + Drawing Earned Exp. Exp. Exp. Exp. Exp.

Liabilities+ Owners Equity

400 25,000 7,500 2,125 800 800 450 275h.2,000

h. At the end of the month, Chriswithdrew $2,000 in cash from

the business for personal use.

400 25,000 2,000 7,500 2,125 800 800 450 275

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Salvo Delivery Service is owned and operated by Joel Salvo. The following

selected transactions were completed by Salvo Delivery Service during

February:

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1. Received cash from owner as additional investment, $35,000.

2. Paid creditors on account, $1,800.

3. Billed customers for delivery services on account, $11,250.

4. Received cash from customers on account, $6,740.

5. Paid cash to owners for personal use, $1,000.

1-4

Continued

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Indicate the effect of each transaction on the accounting equation elements

(Assets, Liabilities, Owners Equity, Drawing, Revenue, and Expense) by listing

the numbers identifying the transactions, (1) through (5). Also, indicate the

specific item within the accounting equation element that is affected. To

illustrate, the answer to (1) is shown below.

(1) Asset (Cash) increases by $35,000; Owners Equity (Joel Salvo, Capital)increases by $35,000.

1-4


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Describe the financialstatements of a

proprietorship and explain

how they interrelate.

Objective 5

1-5


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Accounting reports, called

financial statements,provide summarized

information to the owner.

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The incomestatementisa summary of the

revenue and expensesfora specific period of time,

such as a month or a

year.

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Net income is

carried to the

statement of

owners equity

Income Statement


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1-5

From the income statement

To the balance sheet

Statement of Owners Equity


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A balance sheetis a list of

the assets, liabilities, andowners equity as of aspecific date.

1-5


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A statement of cash flows

is a summary of the cash

receipts and payments

for a specific period of

time.

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This amount should match Cashon the

balance sheet.

Statement of Cash Flows 1-5


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The income statement reports the

revenues and expenses for a period of

time based on the matching concept.This concept is applied by matching the

expenses with the revenue generated

during a period by those expenses.

1-5Income Statement


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The excess of revenue over

the expenses is called net

incomeor net profit. If theexpenses exceed the revenue,

the excess is anet loss.

1-5

1-5


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The assets and liabilities of Chickadee Travel Service at April 30,

2008, the end of the current year, and its revenue and expenses

for the year are listed below. The capital of the owner, Adam

Cellini, was $80,000 at May 1, 2007, the beginning of the current

year.

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Accounts payable $ 12,200 Miscellaneous expense $ 12,950

Accounts receivable 31,350 Office expense 63,000

Cash 53,050 Supplies 3,350

Fees earned 263,200 Wages expense 131,700

Land 80,000Prepare an income statement for the current year ended April

30, 2008.

1 5

1-5


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CHICKADEE TRAVEL SERVICE

INCOME STATEMENTFor the Year Ended April 30, 2008

Fees earned $263,200

Expenses:

Wages expense $131,700Office expense 63,000

Miscellaneous expense 12,950

Total expenses 207,650

Net income $ 55,550

For practice: PE 1-4A, PE 1-4B

1 5


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The statement of owners

equity reports the changes in

the owners equity for a periodof time. It is prepared after

the income statement.

1-5Statement of Owners Equity

1 5


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Using the data for Chickadee Travel Service shown

in Example Exercise 1-4, prepare a statement of

owners equity for the current year ended April 30,

2008. Adam Cellini invested an additional $50,000in the business during the year and withdrew cash

of $30,000 for personal use.

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1-5

1 5


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STATEMENT OF OWNERS EQUITY

For the Year Ended April 30, 2008

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Adam Cellini, capital, May 1, 2007 $ 80,000

Additional investment by owner during year $ 50,000Net income for the year 55,550

$105,550

Less withdrawals 30,000

Increase in owners equity 75,550

Adam Cellini, capital, April 30, 2008 $155,550

For Practice: PE 1-5A, PE 1-5B

1-5


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Thebalance sheetreports

the amounts of a firms

assets, liabilities, andowners equity at the end

of a specific period.

1-5Balance Sheet


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The report formof balance

sheet presents the liabilitiesand owners equity sections

below the assets section.

1-5

1-5


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Using the data for Chickadee Travel Service shown in ExampleExercise 1-4 and 1-5, prepare the balance sheet as of April 30, 2008.

79For Practice: PE 1-6A, PE 1-6B


1 5


BALANCE SHEET

April 30, 2008Assets Liabilities

Cash $ 53,050 Accounts payable $12,200

Accounts receivable 31,350

Supplies 3,350 Owners EquityLand 80,000 Adam Cellini, capital 155,550

Total assets $167,750 Total liab. & owners eq. $167,750


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The statement of cash flows

consists of three sections:

1-5

(1) Operating activities(2) Investing activities

(3) Financing activities

Statement of Cash Flows


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The cash flows from

operating activitiessection

reports a summary of cashreceipts and cash payments

from operations.

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The cash flows from investing

activitiessection reports the cash

transactions for the acquisition and

sale of relatively permanent assets.

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The cash flows from financing

activitiessection reports the

cash transactions related tocash investments by the owner,

borrowings, and cash

withdrawals by the owner.

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A summary of cash flows for Chickadee Travel Service for the year ended April 30,

2008, is shown below.

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Cash receipts:

Cash received from customers $251,000

Cash received from additional

investment of owner 50,000

Cash payments:

Cash paid for expenses 210,000

Cash paid for land 80,000

Cash paid to owner for personal use 30,000

The cash balance as of May 1, 2007, was $72,050.

Prepare a statement of cash flows for Chickadee Travel Service for

the year ended April 30. 2008.

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For Practice: PE 1-7A, PE 1-7B


STATEMENT OF CASH FLOWSFor the Year Ended April 30, 2008

Cash flows from operating activities:Cash received from customers $251,000Deduct cash payments for expenses 210,000Net cash flows from operating activities $ 41,000

Cash flows from investing activities:Cash payments for purchase of land (80,000)

Cash flows from financing activities:Cash received from owner as investment $ 50,000Deduct cash withdrawals by owner 30,000Net cash flows from financing activities 20,000

Net decrease in cash during year $(19,000)Cash as of May 1, 2007 72,050Cash as of April 30, 2008 $ 53,050

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The income statement and the statement

of owners equity are interrelated.

Net income or net loss

appears on both statements.

1-5Interrelationships Among Financial Statements


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The statement of owners equity

and the balance sheet are

interrelated.The owners capital at the end of

the period on the statement of

owners equity also appears on the

balance sheet as owners capital.

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The balance sheet and the statement

of cash flows are interrelated.

The cash on the balance sheet also

appears as the end-of-period cash on

the statement of cash flows.

1-5

Bullet Point Slide


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Bullet Point Slide

Bullet Point 1

Bullet Point 1

Bullet Point 1

Example Chart


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Example Chart

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1

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Category 1 Category 2 Category 3 Category 4

Series 1

Series 2

Series 3

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chapter 1 (introduction to accounting and business)

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