chapter 1-1 chapter 1 accounting in action accounting principles, eighth edition
TRANSCRIPT
Chapter 1-1
CHAPTER CHAPTER 11
ACCOUNTING IN ACCOUNTING IN ACTIONACTION
Accounting Principles, Eighth Edition
Chapter 1-2
1. Explain what accounting is.
2. Identify the users and uses of accounting.
3. Understand why ethics is a fundamental business concept.
4. Explain generally accepted accounting principles and the cost principle.
5. Explain the monetary unit assumption and the economic entity assumption.
6. State the accounting equation, and define assets, liabilities, and owner’s equity.
7. Analyze the effects of business transactions on the accounting equation.
8. Understand the four financial statements and how they are prepared.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Chapter 1-3
Accounting in ActionAccounting in ActionAccounting in ActionAccounting in Action
Ethics in Ethics in financial financial reportingreporting
Generally Generally accepted accepted accounting accounting principlesprinciples
AssumptionsAssumptions
What is What is
Accounting?Accounting?
What is What is
Accounting?Accounting?
The Building The Building
Blocks of Blocks of
AccountingAccounting
The Building The Building
Blocks of Blocks of
AccountingAccounting
The Basic The Basic
Accounting Accounting
EquationEquation
The Basic The Basic
Accounting Accounting
EquationEquation
Using the Using the Basic Basic
Accounting Accounting EquationEquation
Using the Using the Basic Basic
Accounting Accounting EquationEquation
Financial Financial
StatementsStatements
Financial Financial
StatementsStatements
Three Three activitiesactivities
Who uses Who uses accounting accounting datadata
AssetsAssets
LiabilitiesLiabilities
Owner’s Owner’s equityequity
Transaction Transaction analysisanalysis
Summary of Summary of transactionstransactions
Income Income statementstatement
Owner’s Owner’s equity equity statementstatement
Balance Balance sheetsheet
Statement of Statement of cash flowscash flows
Chapter 1-4
What is Accounting?What is Accounting?What is Accounting?What is Accounting?
LO 1 Explain what accounting is.LO 1 Explain what accounting is.
The purpose of accounting is to:
(1)(1) identifyidentify, recordrecord, and communicatecommunicate the economic events of an
(2) organization to
(3) interested users.
Chapter 1-5
Three Activities
What is Accounting?What is Accounting?What is Accounting?What is Accounting?
LO 1 Explain what accounting is.LO 1 Explain what accounting is.
Illustration 1-1Accounting process
The accounting process includes the bookkeeping function.
Chapter 1-6
Management
There are two broad groups of users of
financial information: internal users and
external users.
Human Resources
IRS
Labor Unions
SEC
Marketing
Finance
Investors
Creditors
Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?
LO 2 Identify the users and uses of accounting.LO 2 Identify the users and uses of accounting.
Customers
Internal Users
External Users
Chapter 1-7
Common Questions Asked User
1. Can we afford to give our employees a pay raise?
Human Resources
2. Did the company earn a satisfactory income?
3. Do we need to borrow in the near future?
4. Is cash sufficient to pay dividends to the stockholders?
5. What price for our product will maximize net income?
Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?
LO 2 Identify the users and uses of accounting.LO 2 Identify the users and uses of accounting.
6. Will the company be able to pay its short-term debts?
Investors
Management
Finance
Marketing
Creditors
Chapter 1-8
Discussion Question
LO 3 Understand why ethics is a fundamental business conceptLO 3 Understand why ethics is a fundamental business concept.
Q1. “Accounting is ingrained in our society and it is vital to our economic system.” Do you agree? Explain.
See notes page for discussion
Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?
Chapter 1-9
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
Ethics In Financial Reporting
LO 3 Understand why ethics is a fundamental business conceptLO 3 Understand why ethics is a fundamental business concept.
Standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics.
Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others.
Congress passedSarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound ethical behavior.
Chapter 1-10
Various users need financial information
Various users need financial information
The accounting profession has
attempted to develop a set of standards that are generally accepted and universally practiced.
Financial StatementsBalance SheetIncome StatementStatement of Owner’s EquityStatement of Cash FlowsNote Disclosure
Financial StatementsBalance SheetIncome StatementStatement of Owner’s EquityStatement of Cash FlowsNote Disclosure
Generally Generally Accepted Accepted
Accounting Accounting Principles Principles
(GAAP)(GAAP)
Generally Generally Accepted Accepted
Accounting Accounting Principles Principles
(GAAP)(GAAP)
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
LO 4 Explain generally accepted accounting principles and the LO 4 Explain generally accepted accounting principles and the cost principle.cost principle.
Chapter 1-11
Organizations Involved in Standard Setting:
Securities and Exchange Commission (SEC)
Financial Accounting Standards Board (FASB)
International Accounting Standards Board (IASB)LO 4 Explain generally accepted accounting principles and the LO 4 Explain generally accepted accounting principles and the
cost principle.cost principle.
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
http://www.fasb.org/
http://www.sec.gov/
http://www.iasb.org/
Chapter 1-12
Cost Principle (Historical) – dictates that companies record assets at their cost.
Issues:
Reported at cost when purchased and also over the time the asset is held.
Cost easily verified, whereas market value is often subjective.
Fair value information may be more useful.
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
LO 4 Explain generally accepted accounting principles and the LO 4 Explain generally accepted accounting principles and the cost principle.cost principle.
Chapter 1-13
Monetary Unit Assumption – include in the accounting records only transaction data that can be expressed in terms of money.
Economic Entity Assumption – requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.
Proprietorship.
Partnership.
Corporation.
AssumptionsAssumptionsAssumptionsAssumptions
LO 5 Explain the monetary unit LO 5 Explain the monetary unit assumption and the economic assumption and the economic entity assumption.entity assumption.
Forms of Business
Ownership
Chapter 1-14
Proprietorship
Partnership Corporation
Owned by two Owned by two or more or more persons.persons.
Often retail and Often retail and service-type service-type businessesbusinesses
Generally Generally unlimited unlimited personal personal liabilityliability
Partnership Partnership agreementagreement
Ownership Ownership divided into divided into shares of stockshares of stock
Separate legal Separate legal entity entity organized organized under state under state corporation lawcorporation law
Limited liabilityLimited liability
Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership
Generally Generally owned by one owned by one person.person.
Often small Often small service-type service-type businessesbusinesses
Owner receives Owner receives any profits, any profits, suffers any suffers any losses, and is losses, and is personally personally liable for all liable for all debts.debts.
LO 5 Explain the monetary unit LO 5 Explain the monetary unit assumption and the economic assumption and the economic entity assumption.entity assumption.
Chapter 1-15
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquity
Owner’s Owner’s EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership claims.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.
Chapter 1-16
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquity
Owner’s Owner’s EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
AssetAssetssAssetAssetss
Chapter 1-17
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquity
Owner’s Owner’s EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
LiabilitiLiabilitiesesLiabilitiLiabilitieses
Chapter 1-18
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquity
Owner’s Owner’s EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or Partnership).
Owner’s Owner’s EquityEquityOwner’s Owner’s EquityEquity
Chapter 1-19
Owners’ EquityOwners’ EquityOwners’ EquityOwners’ Equity
Revenues result from business activities entered into for the purpose of earning income.
Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.
Illustration 1-6
LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.
Chapter 1-20
Owners’ EquityOwners’ EquityOwners’ EquityOwners’ Equity
Expenses are the cost of assets consumed or services used in the process of earning revenue.
Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc.
Illustration 1-6
LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.
Chapter 1-21
Using The Basic Accounting Using The Basic Accounting EquationEquationUsing The Basic Accounting Using The Basic Accounting EquationEquation
Transactions are a business’s economic events recorded by accountants.
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the accounting equation.
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
Chapter 1-22
Q:Q: Are the following events recorded in the accounting records?
Event
Supplies are
purchased on account.
Criterion
Is the financial position (assets, liabilities, or owner’s equity) of the company
changed?
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
An employee is hired.
Owner withdraws cash for
personal use.
Record/ Don’t Record
Transactions (Question?)Transactions (Question?)Transactions (Question?)Transactions (Question?)
Chapter 1-23
Discussion Question
Q. In February 2008, Paula King invested an
additional $10,000 in her business, King’s
Pharmacy, which is organized as a
proprietorship. King’s accountant, Lance
Jones, recorded this receipt as an increase in
cash and revenues. Is this treatment
appropriate? Why or why not?
See notes page for discussion
TransactionsTransactionsTransactionsTransactions
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
Chapter 1-24
P1-1A:P1-1A: Barone’s Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May.
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
Barone, Capital
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
+ + = +
1. Invested $10,000 cash to start the repair shop.
Investment
Assets Liabilities Equity
Chapter 1-25
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
Barone, Capital
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
2. Purchased equipment for $5,000 cash.
-5,0002. +5,000
+ + = +
Investment
Assets Liabilities Equity
Chapter 1-26
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
3. Paid $400 cash for May office rent.
-5,0002. +5,000
+ + = +
-4003. -400 Expense
Barone, Capital
Investment
Assets Liabilities Equity
Chapter 1-27
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
4. Received $5,100 from customers for repair service.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e
Barone, Capital
Investment
Assets Liabilities Equity
Chapter 1-28
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
5. Withdrew $1,000 cash for personal use.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings
Barone, Capital
Investment
Assets Liabilities Equity
Chapter 1-29
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
6. Paid part-time employee salaries of $2,000.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
Barone, Capital
Investment
Assets Liabilities Equity
Chapter 1-30
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
7. Incurred $250 of advertising costs, on account.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
+2507. -250 Expense
Barone, Capital
Investment
Assets Liabilities Equity
Chapter 1-31
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
8. Provided $750 of repair services on account.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
+2507. -250 Expense+7508. +750 Revenu
e
Barone, Capital
Investment
Assets Liabilities Equity
Chapter 1-32
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
9. Collected $120 cash for services previously billed.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
+2507. -250 Expense+7508. +750 Revenu
e+1209. -120
Barone, Capital
Investment
Assets Liabilities Equity
6,820 + 630 + 5,000 = 250 + 12,200
Chapter 1-33
Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:
Balance Sheet
Income Statemen
t
Statement of Cash
Flows
Owner’s Equity
Statement
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Chapter 1-34
Income Statement
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Reports the revenues and expenses for a specific period of time.
Net income – revenues exceed expenses.
Net loss – expenses exceed revenues.
Revenues:
S ervice revenue 5,850$
Expenses:
S alary expense 2,000
Rent expense 400
Adver tising expense 250
T otal expenses 2,650
Net income 3,200$
Barone’s Repair Shop
I ncome Statement
For the Month Ended May 31, 2008
Chapter 1-35
Revenues:
S ervice revenue 5,850$
Expenses:
S alary expense 2,000
Rent expense 400
Adver tising expense 250
T otal expenses 2,650
Net income 3,200$
Barone’s Repair Shop
I ncome Statement
For the Month Ended May 31, 2008
Income Statement
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Barone' s, Capital May 1 -$
Add: I nvestment 10,000
N et income 3,200
13,200
Less: Drawings 1,000
Barone' s, Capital May 31 12,200$
Barone’s Repair Shop
Owner' s Equity Statement
For the Month Ended May 31, 2008
Owner’s Equity Statement
Net income is needed to determine the ending balance in owner’s
equity.
Chapter 1-36
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Barone' s, Capital May 1 -$
Add: I nvestment 10,000
N et income 3,200
13,200
Less: Drawings 1,000
Barone' s, Capital May 31 12,200$
Barone’s Repair Shop
Owner' s Equity Statement
For the Month Ended May 31, 2008
Owner’s Equity Statement
Statement indicates the reasons why owner’s equity has increased or decreased during the period.
Chapter 1-37
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Barone' s, Capital May 1 -$
Add: I nvestment 10,000
N et income 3,200
13,200
Less: Drawings 1,000
Barone' s, Capital May 31 12,200$
Barone’s Repair Shop
Owner' s Equity Statement
For the Month Ended May 31, 2008
Owners’ Equity Statement
Assets
Cash 6,820$
Accounts receivable 630
Equipment 5,000
T otal assets 12,450$
Liabilities
Accounts payable 250$
Owner' s Equity
Barone' s, capital 12,200
T otal liab. & equity 12,450$
Balance Sheet
Barone’s Repair Shop
May 31, 2008
The ending balance in owner’s equity is needed in preparing the
balance sheet
Balance Sheet
Chapter 1-38
Balance Sheet
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Reports the assets, liabilities, and owner’s equity at a specific date.
Assets listed at the top, followed by liabilities and owner’s equity.
Total assets must equal total liabilities and owner’s equity.
Assets
Cash 6,820$
Accounts receivable 630
Equipment 5,000
T otal assets 12,450$
Liabilities
Accounts payable 250$
Owner' s Equity
Barone' s, capital 12,200
T otal liab. & equity 12,450$
Balance Sheet
Barone’s Repair Shop
May 31, 2008
Chapter 1-39
Balance Sheet
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Assets
Cash 6,820$
Accounts receivable 630
Equipment 5,000
T otal assets 12,450$
Liabilities
Accounts payable 250$
Owner' s Equity
Barone' s, capital 12,200
T otal liab. & equity 12,450$
Balance Sheet
Barone’s Repair Shop
May 31, 2008Cash fl ow f rom operating activities
Cash receipts f rom revenues 5,220$
Cash paid f or expenses (2,400)
Cash provided by operations 2,820
Cash fl ow f rom investing activitites
Purchase of equipment (5,000)
Cash fl ow f rom fi nancing activities
I nvestment by owners 10,000
Drawings by owners (1,000)
Cash provided by fi nancing 9,000
Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 6,820$
Statement of Cash Flows
Barone’s Repair Shop
For the Month Ended May 31, 2008
Statement of Cash Flows
Chapter 1-40
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Cash fl ow f rom operating activities
Cash receipts f rom customers 5,220$
Cash paid f or expenses (2,400)
Cash provided by operations 2,820
Cash fl ow f rom investing activities
Purchase of equipment (5,000)
Cash fl ow f rom fi nancing activities
I nvestment by owners 10,000
Drawings by owners (1,000)
Cash provided by fi nancing 9,000
Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 6,820$
Statement of Cash Flows
Barone’s Repair Shop
For the Month Ended May 31, 2008
Statement of Cash Flows
Information for a specific period of time.
Answers the following:1. Where did cash
come from?
2. What was cash used for?
3. What was the change in the cash balance?
Chapter 1-41
Forensic AccountingCareers with insurance companies and law offices to conduct investigations into theft and fraud.
Opportunities in GovernmentCareers with the IRS, the FBI, the SEC, and in public colleges and universities.
Private AccountingCareers in industry working in cost accounting, budgeting, accounting information systems, and taxation.
LO 9 Explain the career opportunities in accounting.LO 9 Explain the career opportunities in accounting.
Accounting Career OpportunitiesAccounting Career OpportunitiesAccounting Career OpportunitiesAccounting Career Opportunities
Public AccountingCareers in auditing and taxation serving the general public.