Ch01 introduction to accounting and business

Chapter 1 –

Introduction to Accounting and Business
1.
2.
3.
4.

5.

After studying this chapter, you should be able to:
Describe the nature of a business and the role of
accounting in business.
Summarize the development of accounting
principles and relate them to practice.
State the accounting equation and define each
element of the equation.
Describe and illustrate how business transactions
can be recorded in terms of the resulting change in
the basic elements of the accounting equation.
Describe the financial statements of a proprietorship
1


Objective #1 - Describe the nature of a business and
the role of accounting in business.
1-1

Types of Businesses

Service

ServiceBusiness
Business
The
The Walt
Walt Disney
Disney Company
Company
Atlas
AtlasAir
Air
Marriott
Marriott International
International Hotels
Hotels

Service
Service
Entertainment
Entertainment
Transportation
Transportation
Hospitality
Hospitalityand
and
lodging
lodging
Bank
Bank of
of America
America Corporation

Corporation Financial
Financial services
services
XM
Satellite
XM Satellite
Satellite Radio
Radio
Satellite radio
radio

2


1-1

Types of Businesses

Merchandising
MerchandisingBusiness
Business
Wal-Mart
Wal-Mart
GameStop
GameStopCorporation
Corporation
Best
Best Buy
Buy
Gap

Gap Inc.
Inc.
Amazon.com
Amazon.com

Product
Product
General
General merchandise
merchandise
Video
Video games
gamesand
and accessories
accessories
Consumer
Consumer electronics
electronics
Apparel
Apparel
Internet
Internet books,
books, music,
music, video
video

3


1-1

Types of Businesses

Manufacturing
Manufacturing Business
Business
General
General Motors
Motors Corp.
Corp.
Samsung
Samsung
Dell
Dell Inc.
Inc.
Nike
Nike
Pepsico
Pepsico
Sony
Sony Corporation
Corporation

Product
Product
Cars,
Cars, trucks,
trucks, vans
vans
Cell

Cell phones
phones
Personal
Personal computers
computers
Athletic
Athletic shoes
shoesand
and apparel
apparel
Beverages
Beverages and
and Snacks
Snacks
Stereos
Stereos and
and televisions
televisions

4


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

1-1

Who are stakeholders? – anyone or any entity that has an interest in
the economic performance and well-being of a business

Bankers and other creditors – need to ensure that the business has the
ability to repay loans, and on a timely basis
Suppliers – need to ensure their customer (the business) will be around to
purchase their supplies and then be able to pay for them
Customers – are interested in the business to determine if they will always
be around to provide a constant flow of goods and services
Government – need to ensure that the business pays the correct amount of
taxes
Employees and Management– need to ensure that the business is doing
well so that they will have a job
5


Different types of Accounting

1-1

Financial accounting is primarily concerned with the recording &
reporting of economic data and activities for a business to external parties.
Managerial accounting uses both financial accounting and
estimated data to aid management in running day-to-day
operations and in planning future operations.
Accountants employed by a business firm or a not-for-profit
organization are said to be employed in private accounting.
E.g. CFO, Controller, or Financial Analyst of Pepsico

Accountants and their staff who provide services to the
public (i.e. individuals and corporations) on a fee basis are
said to be employed in public accounting. E.g.
PricewaterhouseCoopers, Ernst & Young, KPMG, 6Deloitte

Objective #2 - Summarize the development of
accounting principles and relate them to practice. 1-2
GAAP – Generally Accepted Accounting Principles. These are the
rules that govern how businesses record and report financial transactions

FASB – Financial Accounting Standards Board. This body is
the major one responsible for preparing US GAAP.

IASB – International Accounting Standards Board. This
body is the one responsible for preparing International GAAP, which
is also known as ‘International Financial Reporting Standards (IFRS)’

The business entity concept limits the economic data in the accounting
system to data related directly to the activities of the business. – i.e.
nothing personal unless it has been given/assigned to the business

The cost concept is the basis for entering the exchange price, or cost
of an acquisition in the accounting records. – e.g. what was paid for it.
7


1-1

Common Forms of Business Entities

 Proprietorship
 Partnership
 Corporation

 Limited liability company

8


A proprietorship is owned by one individual and—





1-1

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.

A partnership is similar to a proprietorship except that it is
owned by two or more individuals and—
 Comprises 10% of business organizations in the United States.
 Combines the skills and resources of more than one person.
9


1-1

A corporation is organized under state or federal statues as a
separate legal taxable entity and—
 Generates 90% of the total dollars of business receipts received.

 Comprises 20% of the businesses.
 Includes ownership divided into shares of stock, sold to
shareholders (stockholders).
 Is able to obtain large amounts of resources by issuing stock.
 Is used by large businesses.

10


1-1

A limited liability company (LLC) combines attributes
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—
 Is a popular alternative to a partnership.
 Has tax and liability advantages to the owners.

11


Objective #3 - State the accounting equation
and define each element of the equation.
The Accounting Equation

Assets = Liabilities + Owner’s Equity
The resources owned
The rights of the
by a business
owners

The rights of the
creditors, which
represent debts of the
business

12

1-3


Objective #4 - Describe and illustrate how business
transactions can be recorded in terms of the
1-4
resulting change in the basic elements of the
accounting equation.
A business transaction is an economic event or condition that directly
changes an entity’s financial condition or directly affects its results of
operations.

On November 1, 2007, Chris
Clark begins a business that will
be known as NetSolutions. This
business provides web design services,
and computer repair services etc.
13


1-4

Assets

a.

Cash
25,000

=
=

Owner’s Equity
Chris Clark, Capital
25,000 Investment
by Chris
Clark

a. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions.
14


1-4

Assets

=

Cash + Land
Bal. 25,000
=
b.
–20,000

+20,000
Bal.
5,000
20,000
25,000

Owner’s Equity
Chris Clark, Capital
25,000

b. NetSolutions purchased land for $20,000.
15


1-4
Assets
Cash + Supplies + Land
=
5,000
20,000
Bal.
25,000
c.
+1,350
1,350
20,000
+1,350 5,000
Bal.
25,000

Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital

1,350

c. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay the
supplier in the near future (on account).
Note – these supplies e.g. wires, cables etc, will be used up
later in the business
16


Revenue and expenses

1-4

A company earns revenues by
•selling products - Sales
•providing services - Fees Earned
•renting out premises - Rent Revenue
•lending money - Interest Revenue
The amounts used in earning revenue are called expenses.
Note:

Expenses that have paid for (or incurred) but not yet been used

up are referred to as prepaid expenses e.g. supplies.
When these prepaid expenses have been used up, they will
then become regular expenses e.g. supplies expenses
17


1-4
Assets

Liabilities +

Cash + Supplies + Land
Bal.
d.
Bal.

5,000
+7,500

1,350
12,500

20,000

=
1,350

Accounts
Payable
1,350

20,000
1,350

Owner’s Equity
Chris Clark,
Fees
+ Capital + Earned
25,000
+7,500
25,000

7,500

d. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
Note – If the customers did not pay immediately, but opted to pay
on account ( i.e. at a later date), then the asset that would have
been increased would have been accounts receivable 18


1-4

Note……….
1. Adding expenses to the owner’s equity section
results in a space problem. To adjust for
these added headings, the word “Bal.” has
been omitted from some slides. The bottom
row still provides the balances after each
transaction.

2. Beginning with entry (e) the asset section will
be shown first, then the liabilities and owner’s
equity will be shown in the following slide.

19


1-4
Assets
Cash
Bal.
20,000
e.
3,650Bal.
20,000

+ Supplies + Land
12,500
1,350
–
8,850

1,350

e. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
20

1-4
Liabilities +
Owner’s Equity
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
– e.
275 –2,125 –800
1,350
25,000
7,500
–450
–
275

e. NetSolutions paid the following expenses:
wages, $2,125; rent, $800; utilities, $450; and
miscellaneous, $275.
21

1-4
Assets
Cash
Bal.
20,000
f.
Bal.
20,000

+ Supplies + Land
8,850
1,350
–950
7,900

1,350

f. NetSolutions paid $950 to
creditors during the month.
22


1-4

Liabilities +
Owner’s Equity
Accounts
Chris Clark,

Fees
Wages
Rent
Utilities
Misc.
Payable + Capital + Earned Expense Expense Expense
Expense
–2,125 –800
–450
–
1,350
25,000
275
7,500
f.
–950
400

25,000

7,500

–2,125 –800

275

f. NetSolutions paid $950 to
creditors during the month.
23

–450

–


1-4
Assets
Cash + Supplies + Land
Bal.
7,900
1,350
20,000
g.
7,900
550
–800Bal.
20,000

g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies must have been
used up
24


1-4

Liabilities +

Owner’s Equity

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.
–800
400

25,000

7,500

–2,125 –800

–800

g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies must have been
used up

25

–450 –275