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18th Edition
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007
Chapter 1
Accounting in Business
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Importance of Accounting
is a Accounting
system that Identifies
that is
Communicates
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Accounting Activities
Recording Business Activities
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Lenders
Consumer Groups
C2
C3
Opportunities in Accounting
Financial Managerial
General accounting Cost accounting Budgeting Internal auditing Consulting Controller Treasurer Strategy Lenders Consultants Analysts Traders Directors Underwriters Planners Appraisers
Taxation
Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate plans FBI investigators Market researchers Systems designers Merger services Business valuation Human services Litigation support Entrepreneurs
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Accountingrelated
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C4
Ethics
Beliefs that distinguish right from wrong
Accepted standards of good and bad behavior
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Use personal Consider all good ethics to and bad recognize ethical consequences. concern.
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Comparable Information
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Principles of Accounting
Now
Future
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Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. The McGraw-Hill Companies, Inc., 2007
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Principles of Accounting
Monetary Unit Principle Express transactions and events in monetary, or money, units.
Revenue Recognition Principle 1. Recognize revenue when it is earned. 2. Proceeds need not be in cash. 3. Measure revenue by cash received plus cash value of items received.
Business Entity Principle A business is accounted for separately from other business entities, including its owner.
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Sole Proprietorship
Partnership
Corporation
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Characteristics of Businesses
Characteristic Proprietorship Partnership Corporation Business entity yes yes yes Legal entity no no yes Limited liability no* no* yes Unlimited life no no yes Business taxed no no yes One owner allowed yes no yes
* Proprietorships and partnerships that are set up as LLCs provide limited liability.
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Corporation
Owners of a corporation are called shareholders (or stockholders). When a corporation issues only one class of stock, we call it capital stock.
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Accounting Equation
EQUITY Assets
Liabilities
Equity
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Sarbanes-Oxley Act
Also known as SOX Passed by Congress to help curb financial abuses at companies that sell stock to the public Requires accounting oversight and stringent internal controls Penalties include stock market delisting and criminal prosecution
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Assets
Cash Accounts Receivable Notes Receivable
Vehicles
Land
Store Supplies
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Buildings Equipment
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Liabilities
Accounts Payable Notes Payable
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Equity
Owner Investments
CAPITAL
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=
_
Liabilities
+
Revenues
Equity
Owner Capital
Owner Withdrawals
Expenses
Owner's Equity
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Assets
Liabilities
Equity
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Transaction Analysis
J. Scott invests $20,000 cash to start the business. The accounts involved are: (1) Cash (asset) (2) Owner Capital (equity)
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Transaction Analysis
$ 20,000 $
$ $
20,000
$ 20,000
$ 20,000
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Transaction Analysis
Purchased supplies paying $1,000 cash. The accounts involved are: (1) Cash (asset) (2) Supplies (asset)
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Transaction Analysis
Purchased supplies paying $1,000 cash.
Assets = Liabilities Accounts Notes Payable Payable + Equity Owner Capital $ 20,000
$ 19,000 $
1,000 $
$ $
20,000
$ 20,000
$ 20,000
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Transaction Analysis
Purchased equipment for $15,000 cash.
The accounts involved are: (1) Cash (asset) (2) Equipment (asset)
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Transaction Analysis
Purchased equipment for $15,000 cash.
Assets = Liabilities Accounts Notes Payable Payable + Equity Owner Capital $ 20,000
Cash Supplies Equipment (1) $ 20,000 (2) (1,000) $ 1,000 (3) (15,000) $ 15,000
15,000 =
$ $
20,000
$ 20,000
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A2
Transaction Analysis
Purchased Supplies of $200 and Equipment of $1,000 on account.
The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability)
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2007
A2
Transaction Analysis
Purchased Supplies of $200 and Equipment of $1,000 on account.
Assets =
Cash Supplies Equipment (1) $ 20,000 (2) (1,000) $ 1,000 (3) (15,000) $ 15,000 (4) 200 1,000 $ 4,000 $ 1,200 $ $ 21,200
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16,000
A2
Transaction Analysis
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Transaction Analysis
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Transaction Analysis
The balances so far appear below. Note that the Balance Sheet Equation is still in balance.
Assets Cash Supplies Equipment Bal. $ 8,000 $ 1,200 $ 16,000 = Liabilities Accounts Notes Payable Payable $ 1,200 $ 4,000 + Equity Owner Capital $ 20,000
8,000 $
1,200 $
16,000 =
1,200 $
4,000
$ 20,000
$ 25,200
$ 25,200
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Transaction Analysis
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Transaction Analysis
Provided consulting services receiving $3,000 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity)
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Transaction Analysis
Provided consulting services receiving $3,000 cash.
Assets = Liabilities Accounts Notes Payable Payable $ 1,200 $ 4,000 + Equity Owner Capital Revenue $ 20,000 $ 3,000
$ 11,000 $
1,200 $
16,000 =
20,000 $
3,000
$ 28,200
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A2
Transaction Analysis
Paid salaries of $800 to employees. The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity)
Remember that the balance in the salaries expense account actually increases. But, equity decreases because expenses reduce equity.
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A2
Transaction Analysis
Paid salaries of $800 to employees.
Assets = Liabilities Accounts Notes Payable Payable $ 1,200 $ 4,000 + Equity Owner Capital Revenue Expenses $ 20,000 $ 3,000 $ (800) $ 20,000 $ 3,000 $ (800)
Cash Supplies Equipment Bal. $ 8,000 $ 1,200 $ 16,000 (6) 3,000 (7) (800) $ 10,200 $ $ 1,200 $ 16,000 27,400 =
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Transaction Analysis
A withdrawal of $500 is made by the owner. The accounts involved are: (1) Cash (asset) (2) Withdrawals (equity)
Remember that the withdrawal account actually increases. But, total equity decreases because the withdrawal reduces equity.
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Transaction Analysis
$ 26,900
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Financial Statements
Lets prepare the Financial Statements reflecting the transactions we have recorded.
1. Income Statement
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Income Statement
Scott Company Income Statement For Month Ended December 31, 2007 Revenues: Consulting revenue Expenses: Salaries expense Net income
The income statement describes a companys revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.
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Balance Sheet
The Balance Sheet describes a companys financial position at a point in time.
Scott Company Balance Sheet December 31, 2007 Assets $ Liabilities & Equity Accounts payable $ Notes payable Total liabilities Owner Capital Total liabilities and equity $
Total assets
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26,900
P1
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End of Chapter 1
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