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Introduction toAccounting and Business

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Student Version

21-21-2

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1

Describe the nature of a business, the role of accounting, and ethics in business.

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31-31-3

Types of Businesses

Delta Air Lines Transportation services

Service Business Service

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Merchandising Business Product

Wal-Mart General merchandise

Manufacturing Business Product

General Motors Corp. Cars, trucks, vans

41-41-4

The Role of Accounting in Business

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

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51-51-5

The area of accounting that provides internal users with information is called managerial accounting.

Managerial Accounting

The objective of managerial accounting is to provide relevant and timely information for managers’ and employees’ decision-making needs.

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61-61-6

The area of accounting that provides external users with information is called financial accounting.

Financial Accounting

The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business.

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71-71-7

Summarize the development of accounting principles and relate them to practice.

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1-7

81-81-8

Under the Under the business entity concept, the activities of a the activities of a business are recorded business are recorded separately from the activities separately from the activities of its owners, creditors, or of its owners, creditors, or other businesses.other businesses.

Business Entity Concept

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91-91-9

• A proprietorship is owned by one individual.• A partnership is similar to proprietorship

except that it is owned by two or more individuals.

• A corporation is organized under state or federal statutes as a separate legal taxable entity.

• A limited liability company (LLC) combines attributes of a partnership and a corporation.

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Forms of Business Entity

101-101-10

Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price.

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Cost Concept

111-111-11

The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence.

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Objectivity Concept

121-121-12

The unit of measure concept requires that economic data be recorded in dollars.

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Unit of Measure Concept

131-131-13

State the accounting equation and define each element of the equation.

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1-13

141-141-14

Assets = Liabilities + Owner’s Equity

The Accounting Equation

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The resources owned by a

business

The rights of the creditors are the

debts of the business

The rights of the owners

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Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation.

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161-161-16

A business transaction is an economic event or condition that directly changes an entity’s financial condition or its results of operations.

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Business Transaction

171-171-17

On November 1, 2009, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.

Transaction A

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181-181-18

CHRIS CLARK, CAPITAL

25,000 Investment by Chris Clark

CASH

25,000 a. =

Assets Owner’s Equity=

Transaction A (continued)

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191-191-19

Transaction B

On November 5, 2009, NetSolutions paid $20,000 for the purchase of land as a future building site.

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201-201-20

CASH + LAND

25,000 Bal.

Assets =

=

Bal. 5,000 20,000 25,000

b. –20,000 +20,000

CHRIS CLARK, CAPITAL

25,000

Owner’s Equity

Transaction B (continued)

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211-211-21

On November 10, 2009, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future.

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Transaction C

221-221-22

CASH + SUPPLIES + LAND 5,000 20,000 25,000Bal.

Assets =

=

ACCOUNTS CHRIS CLARK, PAYABLE + CAPITAL

Liabilities + Owner’s Equity

Transaction C (continued)

c. +1,350 +1,350

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

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231-231-23

On November 18, 2009, NetSolutions received cash of $7,500 for providing services to customers. A business earns money by selling goods or services to its customers. This amount is called Revenue.

Transaction D

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241-241-24

CASH + SUPPLIES + LAND 5,000 1,350 20,000 Bal.

Assets

Transaction D (continued)

d. +7,500

Bal. 12,500 1.350 20,000

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251-251-25

Transaction D (continued)

ACCOUNTS CHRIS CLARK, FEES PAYABLE + CAPITAL + EARNED 1,350 25,000 Bal.

Liabilities + Owner’s Equity

d. +7,500

Bal. 1,350 25,000 7,500

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261-261-26

On November 30, 2009, NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

Transaction E

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271-271-27

CASH + SUPPLIES + LAND 12,500 1,350 20,000 Bal.

Assets

Transaction E (continued)

e. –3,650

Bal. 8,850 1.350 20,000

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281-281-28

Transaction E (continued)

ACCOUNTS CHRIS CLARK, FEES WAGES RENT UTIL. MISC. PAYABLE + CAPITAL + EARNED – EXP. – EXP. – EXP. – EXP. 1,350 25,000 7,500 Bal.

Liabilities + Owner’s Equity

e. –2,125 –800 –450 –275

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

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291-291-29

On November 30, 2009, NetSolutions paid creditors on account, $950.

Transaction F

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301-301-30

CASH + SUPPLIES + LAND 8,850 1,350 20,000 Bal.

Assets

Transaction F (continued)

f. –950

Bal. 7,900 1.350 20,000

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311-311-31

ACCOUNTS CHRIS CLARK, FEES WAGES RENT UTIL. MISC. PAYABLE + CAPITAL + EARNED – EXP. – EXP. – EXP. – EXP. 1,350 25,000 7,500 –2,125 –800 –450 –275 Bal.

Liabilities + Owner’s Equity

f. –950

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

Transaction F (continued)

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321-321-32

On November 30, 2009, Chris Clark determined that the cost of supplies on hand at the end of the period was $550.

Transaction G

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331-331-33

CASH + SUPPLIES + LAND 7,900 1,350 20,000 Bal.

Assets

Transaction G (continued)

g. –800

Bal. 7,900 550 20,000

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341-341-34

ACCOUNTS CHRIS CLARK, FEES WAGES RENT SUP. UTIL. MISC. PAYABLE + CAPITAL + EARNED – EXP. – EXP. – EXP. – EXP. – EXP. 400 25,000 7,500 –2,125 –800 –450 –275

Bal.

Liabilities + Owner’s Equity

g. –800

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

Transaction G (continued)

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351-351-35

On November 30, 2009, Chris Clark withdrew $2,000 from NetSolutions for personal use.

Transaction H

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361-361-36

CASH + SUPPLIES + LAND 7,900 550 20,000 Bal.

Assets

Transaction H (continued)

h. –2,000

Bal. 5,900 550 20,000

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371-371-37

Transaction H (continued)

ACCTS. CLARK, CLARK, FEES WAGES RENT SUP. UTIL. MISC. PAY. + CAPITAL – DRAW. + EARNED – EXP. – EXP. – EXP. – EXP. – EXP. 400 25,000 7,500 –2,125 –800 –800 –450 –275 Bal.

Liabilities + Owner’s Equity

h. –2,000

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

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381-381-38

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Describe the financial statements of a proprietorship and explain how they interrelate.

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391-391-39

The income statement reports the revenues and expenses for a period of time, based on the matching concept.

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Income Statement

401-401-40

The matching concept is applied by matching the expenses with the revenue generated during a period by those expenses.

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Matching Concept

411-411-41

The excess of revenue over the expenses is called net income or net profit. If the expenses exceed the revenue, the excess is a net loss.

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421-421-42

Net income is carried to the statement of

owner’s equity.

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Exhibit 6 Financial Statements for NetSolutions

431-431-43

From the income statement

To the balance sheet

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Exhibit 6 Financial Statements for NetSolutions (continued)

441-441-44

This amount is compared to the net cash flow on the statement of cash flows.

From the statement of owner’s equity

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Exhibit 6 Financial Statements for NetSolutions (continued)

451-451-45

This amount should match Cash on the balance sheet.

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Financial Statements for NetSolutions (continued)Exhibit 6

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