chapter 1 business decisions business decisions and financial accounting

CHAPTER 1BUSINESS DECISIONS And FINANCIAL ACCOUNTING ..

OBJECTIVES:

1. ACCOUNTING FOR BUSINESS DECISIONS

2. Users of accounting.

3. Generally Accepted Accounting Principles (GAAP).

4. THE BASIC ACCOUNTING EQUATION

5. FINANCIAL STATEMENTS

ACCOUNTING FOR BUSINESS DECISIONS

Accounting : A system of (analyze, record,

and summarize) the results of a business’s

activities and then reporting the results to

decision makers.

Users of accounting can be divided

into two groups:

Internal Users

external users

This information can be presented in two kinds of

reports.

Managerial accounting reports.

Include detailed financial plans and continually updated

reports about the operating performance of the

company. These reports are made available only to the

company’s employees (internal users).

1-

Financial accounting reports, called financial statements.2-

Which are prepared periodically to provide information

to people not employed by the business. These

external financial statement users aren’t given

access to detailed internal records of the company.

Creditors and investors are the two primary external

user.

Generally Accepted Accounting Principles

GAAP

accounting concept Principles

1 -cost 2 -Revenues recognition

3 -Matching 4 -Full Disclosure

Assumptions 1 -unit of measure 2 -separate Entity 3 -Going Concern

4 -time period

Some of Accounting Concepts GAAP

Assets

An assets is an economic resource presently

controlled by the company. It has measurable value

and is expected to benefit the company by producing

cash inflows or reducing cash outflows in the future.

LandLand

EquipmentEquipment

BuildingsBuildings

CashCash

Store SuppliesStore

Supplies

Notes Receivable

Notes Receivable

Accounts ReceivableAccounts

Receivable

Resources owned or

controlled by a company

Resources owned or

controlled by a company

ASSETSA1

1-13

LiabilitiesLiabilities are measurable amounts that the company owes to

creditors. If Almarai borrows from bank, it would owe a liability

called a Note Payable. when a company buys a goods from

another company, it usually does so on credit by promising to

pay for them at a later date. The amount owed is called am

Account Payable. “Liabilities must be paid before any

amounts are paid to stockholders” .

Taxes PayableTaxes

PayableWages PayableWages Payable

Notes PayableNotes

PayableAccounts Payable

Accounts Payable

Creditors’ claims on

assets

Creditors’ claims on

assets

LIABILITIESA1

1-15

owner’s Equity

It represent the owner’s claims on the

business.

THE BASIC ACCOUNTING EQUATION

Assets=Liabilities + Owner’s Equity

Credit Accounts

If Credit, and if Debit

Debit Accounts

If Debit, and if Credit

AssetsLiabilities +

Equity

ACCOUNTING EQUATION

LiabilitiesLiabilities EquityEquityAssetsAssets = +

A1

1-18

FINANCIAL STATEMENTS

Order Prepare

d

Financial Statemen

t

Description of Statements

1 Income Statement

A summary of the revenue and expenses for a specific period of time, such as a month or a year.

2 Statement of Owner's

Equity

A summary of the changes in the owner's equity that have occurred during a specific period of time, such as a

month or a year.

3 Balance Sheet

A list of the assets, liabilities, and owner's equity as of a specific date, usually at the close of the last day of a

month or a year.

4 Statement of Cash

flows

A summary of cash receipts and cash payments for a specific period of time, such as a month or a year.

NetSolutionsIncome statement

For the Month Ended November 30, 2011

Fees earned.………………………………………………………………………………

  $7,500

Expenses:    

Wages expense.……………………………………………………………………

$2,125  

Rent expense..………………………………………………………………………

800  

Supplies expense.…………………………………………………………………

800  

Utilities expense.…………………………………………………………………

450  

Miscellaneous expense…………………………………………………………

275  

Total expense..………………………………………………………………

  4,450

Net Income..………………………………………………………………………………

$3,050

NetSolutionsStatement of Owner’s Equity

For the Month Ended November 30, 2011

Chris Clark, Capital, November 1, 2011 .………………………………

  $0

Investment on November 1, 2011 .…………………………………………

$25,000  

Net income for November.……………………………….……………………

3,050  

  $28,050  

Less withdrawals.……………………………… .……………………………………

2,000  

Increase in owner’s equity.……………………………… ……………………

  26,050

Chris Clark, Capital, November 30, 2011 ……………………………

  $26,050

NetSolutionsBalance Sheet

November 30, 2011

Assets   Liabilities  

Cash ………………………………

$5,900 Account payable ……………………………………

$400

Supplies ..………………………

550 Owner’s Equity  

Land ………………………………

20,000 Chris Clark, capital ………………………………

26,050

Total assets ..………………

$26,050 Total liabilities and owner’s equity..… 26,050$

Self-Study PracticeIn the space provided, indicate: (1) the type of account (A = asset, L = liability, OE = ownership equity, R = revenue, E = expense), and (2) whether it is reported on the income statement (I/S), statement of cash flows (SCF), or balance sheet (B/S). Account Title Type

Statement1. Land 2. Wages Expense3. Accounts

Receivable4. Rent Revenue5. Contributed

Capital6. Note Payable

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