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Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
Chapter 01 - Principal Accounting (Warren Reeve Fess)
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Chapter 01 - Principal Accounting (Warren Reeve Fess)

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Principal Accounting
Warren Reeve Fess
Chapter 01

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  • 1. ChapterChapter 11 Introduction to AccountingIntroduction to Accounting and Businessand Business
  • 2. 1. Describe the nature of a business. 2. Describe the role of accounting in business. 3. Describe the importance of business ethics and the basic principles of proper ethical conduct. 4. Describe the profession of accounting. 5. Summarize the development of accounting principles and relate them to practice. 6. State the accounting equation and define each element of the equation. ObjectivesObjectivesObjectivesObjectives After studying thisAfter studying this chapter, you shouldchapter, you should be able to:be able to: After studying thisAfter studying this chapter, you shouldchapter, you should be able to:be able to:
  • 3. 7. Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation. ObjectivesObjectivesObjectivesObjectives 8. Describe the financial statements of a proprietorship and explain how they interrelate. 9. Use the ratio of liabilities to owner’s equity to analyze the ability of a business to withstand poor business conditions.
  • 4. STEP ONE ANALYZING LOOKING AT EVENTS THAT HAVE TAKEN PLACE AND THINKING ABOUT HOW THEY AFFECT THE BUSINESS
  • 5. STEP TWO ENTERING FINANCIAL INFORMATION ABOUT EVENTS INTO THE ACCOUNTING SYSTEM RECORDING
  • 6. STEP THREE SORTING AND GROUPING SIMILAR ITEMS TOGETHER CLASSIFYING
  • 7. STEP FOUR BRINGING THE VARIOUS ITEMS OF INFORMATION TOGETHER TO DETERMINE A RESULT SUMMARIZING
  • 8. STEP FIVE TELLING THE RESULTS REPORTING
  • 9. STEP SIX DECIDING THE MEANING AND IMPORTANCE OF THE INFORMATION IN VARIOUS REPORTS INTERPRETING
  • 10. Service BusinessService BusinessService BusinessService Business ProductProductProductProduct Triwasana Entertainment Garuda Indonesia Transportation Hilton Hotels Hospitality and lodging Bank BRI Financial Telkomsel Telecommunication Triwasana Entertainment Garuda Indonesia Transportation Hilton Hotels Hospitality and lodging Bank BRI Financial Telkomsel Telecommunication Types of Businesses
  • 11. Merchandising BusinessMerchandising BusinessMerchandising BusinessMerchandising Business ProductProductProductProduct Matahari General merchandise Toys City Toys Electronic City Consumer electronics Amazon.com Internet books, music, video retailer Matahari General merchandise Toys City Toys Electronic City Consumer electronics Amazon.com Internet books, music, video retailer Types of Businesses
  • 12. Manufacturing BusinessManufacturing BusinessManufacturing BusinessManufacturing Business ProductProductProductProduct Toyota Astra Motor Cars, trucks, vans Intel Computer chips Boeing Jet aircraft Adidas Athletic shoes and apparel Coca-Cola Beverages Polytron Stereos and television Toyota Astra Motor Cars, trucks, vans Intel Computer chips Boeing Jet aircraft Adidas Athletic shoes and apparel Coca-Cola Beverages Polytron Stereos and television Types of Businesses
  • 13. There are three types of business organizations There are three types of business organizations  Proprietorship  Partnership  Corporation
  • 14. A proprietorship is owned by one individual. A proprietorship is owned by one individual. Advantages • Ease in organizing • Low cost of organizing Disadvantage • Limited source of financial resources • Unlimited liability Joe’s
  • 15. A partnership is owned by two or more individuals. A partnership is owned by two or more individuals. Advantages • More financial resources than a proprietorship. • Additional management skills. Disadvantage • Unlimited liability. Joe and Marty’s
  • 16. A corporation is organized under state or federal statutes as a separate legal entity. A corporation is organized under state or federal statutes as a separate legal entity. Advantage • The ability to obtain large amounts of resources by issuing stocks. Disadvantage • Double taxation. J & M, Inc.
  • 17. Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies A business strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.
  • 18. Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies Under a low-cost strategy, a business designs and produces products or services of acceptable quality at a cost lower than that of its competitors. Wal-Mart Southwest Airlines
  • 19. Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies Under a differential strategy, a business designs and produces products or services that possess unique attributes or characteristics which customers are willing to pay a premium price. Maytag Tommy Hilfiger
  • 20. Value Chain of a BusinessValue Chain of a BusinessValue Chain of a BusinessValue Chain of a Business A value chain is the way a business adds value for its customers by processing inputs into product or service. InputsInputs BusinessBusiness ProcessesProcesses Products orProducts or ServicesServices CustomerCustomer ValueValue
  • 21. A business stakeholder is a person or entity having an interest in the economic performance of the business. Business StakeholdersBusiness StakeholdersBusiness StakeholdersBusiness Stakeholders
  • 22. 2 Assess stakeholders’ informational needs. The Process ofThe Process of Providing InformationProviding Information The Process ofThe Process of Providing InformationProviding Information STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government 1 Identify stake- holders.
  • 23. Accounting Information System Design the accounting information system to meet stakeholders’ needs. 34 Record economic data about business activities and events. The Process ofThe Process of Providing InformationProviding Information The Process ofThe Process of Providing InformationProviding Information
  • 24. 5 Prepare accounting reports for stakeholders. STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government Accounting Information System The Process ofThe Process of Providing InformationProviding Information The Process ofThe Process of Providing InformationProviding Information
  • 25. Business EthicsBusiness EthicsBusiness EthicsBusiness Ethics 1. Avoid small ethical lapses. 2. Focus on your long-term reputation. 3. You may expect to suffer adverse personal consequences for holding to an ethical position. Sound Principles that form the foundation for ethical behavior Sound Principles that form the foundation for ethical behavior
  • 26. Profession of AccountingProfession of AccountingProfession of AccountingProfession of Accounting Accountants employed by a business firm or a not-for-profit organization are said to be engaged in private accounting. Accountants employed by a business firm or a not-for-profit organization are said to be engaged in private accounting. Accountants and their staff who provide services on a fee basis are said to be employed in public accounting. Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.
  • 27. Generally AcceptedGenerally Accepted AccountingAccounting Principles (GAAP)Principles (GAAP) Generally AcceptedGenerally Accepted AccountingAccounting Principles (GAAP)Principles (GAAP)
  • 28. TheThe business entity conceptbusiness entity concept limits the economic data inlimits the economic data in the accounting system tothe accounting system to data related directly to thedata related directly to the activities of the business.activities of the business. TheThe business entity conceptbusiness entity concept limits the economic data inlimits the economic data in the accounting system tothe accounting system to data related directly to thedata related directly to the activities of the business.activities of the business. The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records. The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.
  • 29. TheThe objectivity conceptobjectivity concept requires that the accountingrequires that the accounting records and reports be basedrecords and reports be based upon objective evidence.upon objective evidence. TheThe objectivity conceptobjectivity concept requires that the accountingrequires that the accounting records and reports be basedrecords and reports be based upon objective evidence.upon objective evidence. The unit-of-measure concept requires that economic data be recorded in dollars. The unit-of-measure concept requires that economic data be recorded in dollars.
  • 30. The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation Assets = Liabilities + Owner’s Equity The resourcesThe resources owned by aowned by a businessbusiness The resourcesThe resources owned by aowned by a businessbusiness
  • 31. The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation Assets = Liabilities + Owner’s Equity The rights of theThe rights of the creditors, whichcreditors, which represent debtsrepresent debts of the businessof the business The rights of theThe rights of the creditors, whichcreditors, which represent debtsrepresent debts of the businessof the business
  • 32. The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation Assets = Liabilities + Owner’s Equity The rights of theThe rights of the ownersowners The rights of theThe rights of the ownersowners
  • 33. What is a business transaction? A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.
  • 34. On November 1, 2005, Chris Clark begins a business that will be known as NetSolutions.
  • 35. a. Chris Clark deposits $25,000 in a banka. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.account in the name of NetSolutions. a. Chris Clark deposits $25,000 in a banka. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.account in the name of NetSolutions. Chris Clark, Capital 25,000 Investment by Chris Clark Cash 25,000a. Assets Owner’s Equity= =
  • 36. b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land. Chris Clark, Capital 25,000 Cash + Land 25,000Bal. Assets Owner’s Equity= = b. –20,000 +20,000 Bal. 5,000 20,000 25,000
  • 37. Accounts Chris Clark, Cash + Supplies + Land Payable Capital Assets c. During the month, NetSolutions purchasedc. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay thesupplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).). c. During the month, NetSolutions purchasedc. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay thesupplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).). Owner’s Liabilities + Equity= Bal. 5,000 20,000 25,000 c. + 1,350 + 1,350 Bal. 5,000 1,350 20,000 1,350 25,000 =
  • 38. d. NetSolutions provided services tod. NetSolutions provided services to customers, earning fees of $7,500 andcustomers, earning fees of $7,500 and received the amount in cash.received the amount in cash. d. NetSolutions provided services tod. NetSolutions provided services to customers, earning fees of $7,500 andcustomers, earning fees of $7,500 and received the amount in cash.received the amount in cash. Bal. 12,500 1,350 20,000 1,350 32,500 d. + 7,500 + 7,500 Accounts Chris Clark, Cash + Supplies + Land Payable Capital Assets Owner’s Liabilities + Equity Bal. 5,000 1,350 20,000 1,350 25,000 Fees earned = =
  • 39. e. – 3,650 –2,125 – 800 – 450 – 275 Wages Rent Util. Misc. Accounts Chris Clark, Cash + Supplies + Land Payable Capital Assets e. NetSolutions paid the followinge. NetSolutions paid the following expenses: wages, $2,125; rent, $800;expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275. e. NetSolutions paid the followinge. NetSolutions paid the following expenses: wages, $2,125; rent, $800;expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275. Owner’s Liabilities + Equity= Bal. 12,500 1,350 20,000 1,350 32,500 = Bal.8,850 1,350 20,000 1,350 28,850
  • 40. Accounts Chris Clark, Cash + Supplies + Land Payable Capital Assets f. NetSolutions paid $950 tof. NetSolutions paid $950 to creditors during the month.creditors during the month. f. NetSolutions paid $950 tof. NetSolutions paid $950 to creditors during the month.creditors during the month. Owner’s Liabilities + Equity= Bal. 8,850 1,350 20,000 1,350 28,850 f. – 950 – 950 = Bal. 7,900 1,350 20,000 400 28,850
  • 41. Accounts Chris Clark, Cash + Supplies + Land Payable Capital Assets g. At the end of the month, the costg. At the end of the month, the cost of supplies on hand is $550, soof supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used. g. At the end of the month, the costg. At the end of the month, the cost of supplies on hand is $550, soof supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used. Owner’s Liabilities + Equity= Bal. 7,900 1,350 20,000 400 28,850 g. – 800 – 800 = Bal. 7,900 550 20,000 400 28,050 Supplies expense
  • 42. Accounts Chris Clark, Cash + Supplies + Land Payable Capital Assets h. At the end of the month, Chrish. At the end of the month, Chris withdrew $2,000 in cash from thewithdrew $2,000 in cash from the business for personal use.business for personal use. h. At the end of the month, Chrish. At the end of the month, Chris withdrew $2,000 in cash from thewithdrew $2,000 in cash from the business for personal use.business for personal use. Owner’s Liabilities + Equity Bal. 7,900 550 20,000 400 28,050 h. –2,000 –2,000 Bal. 5,900 550 20,000 400 26,050 With- drawal = =
  • 43. Owner’s withdrawals Expenses Decreased byDecreased by Owner’s Equity Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity Increased byIncreased by Owner’s investments Revenues Net income
  • 44. Accounting reports, called financial statements, provide summarized information to the owner. Accounting reports, called financial statements, provide summarized information to the owner.
  • 45. Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements • Income statement—A summary of the revenue and expenses for a specific period of time. • Statement of owner’s equity—A summary of the changes in the owner’s equity that have occurred during a specific period of time. • Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date. • Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.
  • 46. Fees earned $7 500 00 Operating expenses: Rent expense $2 125 00Wages expense 800 00 Supplies expense 450 00Utilities expense 275 00Miscellaneous expense Total operating expenses 1 135 00 NetSolutions Income Statement For the Month Ended November 30, 2005 800 00 Net income $3 050 00To the statementTo the statement of owner’s equityof owner’s equity To the statementTo the statement of owner’s equityof owner’s equity
  • 47. Chris Clark, capital, November 1, 2005 $ 0 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2005 Investment on November 1 $25 000 00 Net income for November 3 050 00 $28 050 00 Less withdrawals 2 000 00 Increase in owner’s equity 26 050 00 Chris Clark, capital, November 30, 2005 $26 050 00 From the incomeFrom the income statementstatement From the incomeFrom the income statementstatement To theTo the balance sheetbalance sheet To theTo the balance sheetbalance sheet
  • 48. Assets Liabilities NetSolutions Balance Sheet November 30, 2005 Cash $ 5 900 00 Accounts Payable $ 400 00 Supplies 550 00 Owner’s Equity Land 20 000 00 Chris Clark, cap. 26 050 00 Total liabilities and Total assets $26 450 00 owner’s equity $26 450 00 From theFrom the statement ofstatement of owner’s equityowner’s equity From theFrom the statement ofstatement of owner’s equityowner’s equity This balance sheet presented using the account form
  • 49. When the balance sheet displays the liabilities and owner’s equity below the assets, the report form is being used. When the balance sheet displays the liabilities and owner’s equity below the assets, the report form is being used.
  • 50. Cash flows from operating activities: Cash received from customers $ 7 500 00 Deduct cash payments for expenses and payments to creditors 4 600 00 Net cash flow from operating activities 2 900 00 Cash flows from investing activities: Cash payment for acquisition of land (20 000 00 Cash flows from financing activities: Cash received as owner’s investment $25 000 00 Deduct cash withdrawal by owner 2 000 00 Net cash flow from financing activities 23 000 00 Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00 NetSolutions Statement of Cash Flows For the Month Ended November 30, 2005 Should matchShould match CashCash on the balance sheeton the balance sheetShould matchShould match CashCash on the balance sheeton the balance sheet )
  • 51. Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows Cash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations. Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets. Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.
  • 52. Ratio of liabilities to owner’s equity = Total Liabilities Total owner’s equity (or total stockholders’ equity) The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze the firm’s ability to withstand poor business conditions. The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze the firm’s ability to withstand poor business conditions. Tools for FinancialTools for Financial Analysis and InterpretationAnalysis and Interpretation Tools for FinancialTools for Financial Analysis and InterpretationAnalysis and Interpretation
  • 53. Ratio of liabilities to owner’s equity = $400 $26,050 Tools for FinancialTools for Financial Analysis and InterpretationAnalysis and Interpretation Tools for FinancialTools for Financial Analysis and InterpretationAnalysis and Interpretation = 0.015 Ratio of liabilities to owner’s equity
  • 54. The EndThe End Chapter 1Chapter 1

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