Chapter 1 Student Version

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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Intro: Tell me about you
1. Name
2. Hometown
3. Major
4. Have you taken an accounting class
before?
5. Goal or objective for this class

6. Something else about you : interests,
other activities, interesting fact
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Learning Objectives
1. Describe the nature of a business and the role of
accounting and ethics in business.
2. Summarize the development of accounting

principles and relate them to practice.
3. State the accounting equation and define each

element of the equation.
4. Describe and illustrate how business transactions

can be recorded in terms of the resulting change
in the elements of the accounting equation.
5. Describe the financial statements of a
corporation and explain how they interrelate.
Lear
n
Obje ing
Desc
c
t
i
ribe
v
e
t
he n
and
at
t
the r
u
ole o re of a
b u si
f a cc
n
ethic ounting ess
s in
bu s i a n d
n es s
.
Nature of Business and Accounting
A business is an organization in which

basic resources (inputs), such as
materials and labor, are assembled and
processed to provide goods or services
(outputs) to customers.
Nature of Business and Accounting
o What is the objective of most businesses?

to earn a profit.
o Profit is the difference between the
amounts received from customers for

goods or services and the amounts paid
for the inputs used to provide the goods or
services.
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 or
Other type of organization
Non-profits
Government entities
TYPES OF
BUSINESSES
Service Business
Service
Delta Air Lines
Transportation services
The Walt Disney Company
Entertainment services
Merchandising Business
Product
Walmart
General merchandise
Amazon.com
Internet books, music, videos
Manufacturing Business
Product
Ford Motor Company
Cars, trucks, vans
Dell, Inc.
Personal computers
TYPES OF
OTHER
Government
ORGANIZATION
City of Huntsville, TX
S
Service
Impose taxes, maintain local
law and order, administer local
programs (recreation, utilities,
school)
Sam Houston State University
Higher Education
State of Texas
Protection of lives and

property, transportation,
business regulation, education
Nonprofit- 501(c)3
Service
Red Cross
Disaster relief, CPR

certification, Blood donation
Habitat for Humanity
Affordable decent new housing
Churches
Worship services, etc.
Museums
varies
THE ROLE OF
ACCOUNTING
IN BUSINESS
Managerial Accounting
The area of accounting that provides

internal users with information is called
managerial accounting or management
accounting.
Managerial accountants employed by a

business are employed in private
accounting.
Financial Accounting
o
o
The area of accounting that provides

external users with information is called
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.
General-purpose financial statements are
one type of financial accounting report
that is distributed to external users.
Role of Ethics in Accounting and

Business
o The objective of accounting is to provide

relevant, timely information for user
decision making.
o Accountants must behave in an ethical

manner so that the information they
provide users will be trustworthy and,
thus, useful for decision making.
o Ethics are moral principles that guide the

conduct of individuals.
ROLE OF
ETHICS IN
ACCOUNTING
AND BUSINESS
Opportunities for Accountants
Accountants and their staffs who provide

services on a fee basis are said to be
employed in public accounting.
Accountants employed by a business firm

or a not-for-profit organization are said to
be employed in private accounting.
Public accountants who have met a state s

education, experience, and examination
requirements may become Certified Public
Accountants (CPAs).
OPPORTUNITIE
S FOR
ACCOUNTANTS
Lear
n
i
O bj e n g
Sum
c
t
i
m ar
ve
acco
ize t
he
u nt
deve
ting
prin
ciple lopmen
t
them s and re of
l a te
to p
ract
ice.
Generally Accepted Accounting Principles
Financial accountants follow generally

accepted accounting principles (GAAP) in
preparing reports.
Within the U.S., the Financial Accounting

Standards Board (FASB) has the primary
responsibility for developing accounting
principles.
Generally Accepted Accounting Principles
o The Securities and Exchange Commission
(SEC), an agency of the U.S. government,

has authority over the accounting and
financial disclosures for companies whose
shares of ownership (stock) are traded and
sold to the public.
o Many countries outside the United States

use generally accepted accounting
principles adopted by the International
Accounting Standards Board (IASB).
Business Entity Concept
Under the business entity concept, the

activities of a business are recorded
separately from the activities of its
owners, creditors, or other businesses.
PROPRIETORSHIP
A proprietorship is
owned by one
individual.
70% of business
entities in the
U.S. are
proprietorships.
They are easy
and cheap to
organize.
Resources are
limited to those
of the owner.
Used by small
businesses.
PARTNERSHIP
A partnership is
similar to a
proprietorship
except that it is
owned by two or
more individuals.
10% of business
organizations in
the U.S.
(combined with
limited liability
companies) are
partnerships.
Combines the
skills and
resources of more
than one person.
CORPORATION
A corporation is
organized under state
or federal statutes as
a separate legal
taxable entity.
Corporations
generate 90% of
business revenues.
20% of the business
organizations in the
U.S. are corporations.
Ownership is divided
into shares, called
stock.
Can obtain large
amounts of resources
by issuing stocks.
Used by large
businesses.
LIMITED LIABILITY COMPANY

(LLC)
A limited liability
company (LLC)
combines the
attributes of a
partnership and a
corporation.
10% of business
organizations in
the U.S. (combined
with partnerships).
Often used as an
alternative to a
partnership.
Has tax and legal

liability advantages
for owners.
Cost Concept
o Under the cost concept, amounts are
initially recorded in the accounting records

at their cost or purchase price.
Cost Concept
o Aaron Publishers purchased a building on

February 20, 2012, for $150,000. Other
amounts related to this purchased are
shown on the next slide.
Cost Concept
Price listed by seller on January 1, 2012 $160,000
Aaron Publishers initial offer to buy on
January 31, 2012
140,000
Purchase price on February 20, 2012

150,000
Estimated selling price on
December 31, 2014
220,000
Assessed value for property taxes,

December 31, 2014
190,000
Under the cost concept, Aaron Publishers records the purchase of

the building on February 20, 2012, at the purchase price of
150,000
The other amounts listed above have no effect on the accounting

records.
Objectivity Concept
The objectivity concept requires that the

amounts recorded in the accounting
records be based on objective evidence.
Only the final agreed-upon amount is

objective enough to be recorded in the
accounting records.
Unit of Measure Concept
The unit of measure concept requires that

economic data be recorded in dollars.
Lear
n
i
O bj e n g
c
Stat
t
i
ve
e
t
h
an d
e ac
co
de
unti
fine
ng e
e ac h
elem quatio
n
ent
of th
e
equa
tion.
THE
ACCOUNTING
EQUATION
Assets = Liabilities + Stockholders Equity
The resources
owned by a
business
(probable future
economic benefit)
THE
ACCOUNTING
EQUATION
The rights of
creditors are the
debts of the
business
THE
ACCOUNTING
EQUATION
The rights of the
owners
Lear
n
i
O bj e n g
Desc
c
t
r
i
ibe a
v
tran
e
n
s
d
a
i
c
l
lustr
tions
of th
a
e re
sulti can be te how
ng c
r
b
hang ecorded usiness
of th
e ac e in the in term
s
coun
e
ting lement
s
e qu a
tion.
Business Transaction
1. A business transaction is an economic
event or condition that directly changes

an entitys financial condition or its results
of operations.
THE ACCOUNTING EQUATION

SOME EXAMPLES
TYPES OF
TRANSACTIONS
AFFECTING
OWNERS EQUITY
Types of Revenues
o Revenue from providing services is

recorded as fees earned.
o Revenue from the sale of merchandise is

recorded as sales.
o Other examples of revenue include rent,

which is recorded as rent revenue, and
interest, which is recorded as interest
revenue.
An account receivable is a claim against a
customer, which is an asset.
o Take out Chapter 1 handouts
Recap:
o The effect of every transactions is an
increase or a decrease in one or more of

the accounting equation elements.
o The two sides of the accounting equation

are always equal.
o The stockholders equity (owners equity)

is increased by amounts invested by
stockholders (capital stock).
Recap:
o The stockholders equity (owners equity) is

increased by revenues and decreased by
expenses.
o The stockholders equity (owners equity) is

decreased by dividends paid to
stockholders.
o Retained earnings is the stockholders
equity created from business operations

through revenue and expense transactions.
Lear
n
i
O bj e n g
ctive
Desc
ri
state
men
ibe t
t
s
he fi
of a
expl
n an c
c
ai n h
orpo
i al
ow t
ratio
hey
inte n and
rrela
te .
Financial Statements
After transactions have been recorded

and summarized, reports are prepared for
users. The accounting reports providing
this information are called financial
statements.
FINANCIAL
STATEMENTS
Income Statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
Income Statement
o The income statement reports the revenues
and expenses for a period of time, based on the

matching concept.
o The matching concept is applied by matching

the expenses incurred during a period with the
revenue that those expenses generated.
o The excess of the revenue over the expenses is

called net income, net profit, or earnings. If
expenses exceed revenue, the excess is a net
loss.
See Ch. 1 handout
INCOME
STATEMENT
Net income is carried to the

retained earnings statement
Retained Earnings Statement
The retained earnings statement reports

the changes in the retained earnings for a
period of time.
It is prepared after the income statement

because the net income or net loss for the
period must be reported in this statement.
o
Chapter 1 handout
Retained Earnings Statement
o To illustrate, assume that NetSolutions earned net

income of $4,155 and paid dividends of $2,000
during December. The following statement would
be prepared.
RETAINED
EARNINGS
STATEMENT
From the income statement
To the balance sheet
Balance Sheet
A balance sheet is a list of the assets,

liabilities, and stockholders equity as of a
specific date.
BALANCE
SHEET
This amount is compared

to the net cash flow on the
statement of cash flows.
From the retained

earnings statement
Statement of Cash Flows
A statement of cash flows is a summary of

the cash receipts and cash payments for a
specific period of time.
It consists of three sections:
(1) operating activities

(2) investing activities
(3) financing activities
STATEMENT OF
CASH FLOWS
This amount should match

Cash on the balance sheet.
Cash Flows from Operating Activities
The cash flows from operating activities

section reports a summary of cash
receipts and cash payments from
operations.
Cash Flows from Investing Activities
The cash flows from investing activities

section reports the cash transactions for
the acquisition and sale of relatively
permanent assets.
Cash Flows from Financing Activities
The cash flows from financing activities

section reports the cash transactions
related to cash investments by
stockholders, borrowings, and cash
dividends.
Interrelationships Among Financial

Statements
o In Exhibit 6, NetSolutions net income of $3,050

for November is added to the beginning retained
earnings on November 1, 2013, in the retained
earnings statement.
o Ch. 1 Handout

Statements
o In Exhibit 6, NetSolutions retained earnings of

$1,050 as of November 30, 2013, on the retained
earnings statement also appears on the November
30, 20l3, balance sheet as retained earnings.
INTERRELATIONSHIPS
AMONG FINANCIAL
STATEMENTS

Statements
o In Exhibit 6, cash of $5,900 reported on the

balance sheet as of November 30, 2013, is also
reported on the November statement of cash flows
as the end-of-period cash.
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f

Intro: Tell me about you

5. Goal or objective for this class

2. Summarize the development of accounting

3. State the accounting equation and define each

4. Describe and illustrate how business transactions

5. Describe the financial statements of a

corporation and explain how they interrelate.

Nature of Business and Accounting

A business is an organization in which

Nature of Business and Accounting

o What is the objective of most businesses?

o Profit is the difference between the

amounts received from customers for

The Role of Accounting in Business

Accounting can be defined as an

Delta Air Lines

The Walt Disney Company

Internet books, music, videos

Ford Motor Company

Cars, trucks, vans

Sam Houston State University

Protection of lives and

Disaster relief, CPR

Habitat for Humanity

Affordable decent new housing

Worship services, etc.

The area of accounting that provides

Managerial accountants employed by a

The area of accounting that provides

Role of Ethics in Accounting and

o The objective of accounting is to provide

o Accountants must behave in an ethical

o Ethics are moral principles that guide the

Opportunities for Accountants

Accountants and their staffs who provide

Accountants employed by a business firm

Public accountants who have met a state s

Generally Accepted Accounting Principles

Financial accountants follow generally

Within the U.S., the Financial Accounting

Generally Accepted Accounting Principles

o The Securities and Exchange Commission

(SEC), an agency of the U.S. government,

o Many countries outside the United States

Business Entity Concept

Under the business entity concept, the

LIMITED LIABILITY COMPANY

Has tax and legal

o Under the cost concept, amounts are

initially recorded in the accounting records

o Aaron Publishers purchased a building on

Purchase price on February 20, 2012

Assessed value for property taxes,

Under the cost concept, Aaron Publishers records the purchase of

The other amounts listed above have no effect on the accounting

The objectivity concept requires that the

Only the final agreed-upon amount is

Unit of Measure Concept

The unit of measure concept requires that

1. A business transaction is an economic

event or condition that directly changes