Accounting - Chapter 1


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  • Accounting can be divided into two fields – financial accounting and management accounting. Financial accounting focuses on information for people outside the entity. Management accounting focuses on information for internal decision makers of an entity.
  • All professions have regulations. Accounting is no different. The major organizations that influence the profession are shown here. In the public sector, the Securities and Exchange Commission (SEC) requires companies to have their financial statements audited by independent accountants. In the private sector, the FASB determines how accounting is practiced in the United States, which is put forth in generally accepted accounting principles, called GAAP. The American Institute of Certified Public Accountants and the Institute of Management Accountants in the private sector work closely with both the SEC and the FASB.
  • Ethical considerations affect everything accountants do. External users making investment decisions rely on the financial information accountants generate, yet there is considerable pressure on the accountants to make the company’s financial position look as good as possible. See the conflict? Both the AICPA and the IMA have codes or standards of ethical conduct for their members, and the vast majority of accountants adhere to them without any difficulty. It’s the headline-makers associated with companies such as Enron and Worldcom that harm investor confidence and rock the stock market.
  • Accounting - Chapter 1

    1. 1. Accounting and the Business Environment Chapter 1
    2. 2. Objective 1 <ul><li>Use accounting vocabulary </li></ul>
    3. 3. Accounting... is an information system that... measures business activities, processes information, and... communicates financial information.
    4. 4. Accounting... is called the language of business.
    5. 5. Users of Accounting Information External users make decisions about the entity. Internal users make decisions for the entity.
    6. 6. Fields of Accounting Management Accounting Financial Accounting
    7. 7. The Authority Underlying Accounting Public Sector (SEC) Private Sector (FASB) Private Sector (AICPA) (IMA) GAAP
    8. 8. Standards of Professional Conduct AICPA’s Code of Professional Conduct Standards of Ethical Conduct of the Institute of Management Accountants
    9. 9. Types of Business Organizations Proprietorships Partnerships Corporations
    10. 10. Proprietorships <ul><li>What are some advantages? </li></ul><ul><li>total undivided authority </li></ul><ul><li>no restrictions on type of business – must be legal </li></ul><ul><li>What are some disadvantages? </li></ul><ul><li>unlimited liability </li></ul><ul><li>limitation on size – fund raising power </li></ul>
    11. 11. Partnerships <ul><li>What are some advantages? </li></ul>
    12. 12. better credit standing – possibly <ul><li>more brain power, but consultation with partners required </li></ul><ul><li>What are some disadvantages? </li></ul><ul><li>unlimited personal liability for general partners </li></ul><ul><li>need for written partnership agreement </li></ul>
    13. 13. Corporations <ul><li>What are some advantages? </li></ul><ul><li>separate legal existence </li></ul><ul><li>limited liability of stockholders </li></ul><ul><li>transferability of ownership relatively easy </li></ul><ul><li>What are some disadvantages? </li></ul><ul><li>taxes – possible double taxation </li></ul><ul><li>extensive governmental regulation </li></ul>
    14. 14. Objective 2 <ul><li>Apply Accounting </li></ul><ul><li>Concepts and Principles </li></ul>
    15. 15. Generally Accepted Accounting Principles <ul><li>What is the primary objective of financial reporting? </li></ul>To provide information useful for making investment and lending decisions
    16. 16. The Entity Concept Example <ul><li>Assume that John decides to open up a gas station and coffee shop. </li></ul><ul><li>The gas station made $250,000 in profits, while the coffee shop lost $50,000. </li></ul>
    17. 17. The Entity Concept Example <ul><li>How much money did John make? </li></ul><ul><li>At a first glance, we would assume that John made $200,000. </li></ul><ul><li>However, by applying the entity concept we realize that the gas station made $250,000 while the coffee shop lost $50,000. </li></ul>
    18. 18. The Reliability (Objectivity) Principle Information must be reasonably accurate. Information must be free from bias. Information must report what actually happened. Individuals would arrive at similar conclusions using same data.
    19. 19. The Cost Principle Assets and services acquired should be recorded at their actual cost.
    20. 20. The Going Concern Concept The entity will continue to operate in the future.
    21. 21. The Stable-Monetary-Unit Concept The dollar’s purchasing power is relatively stable.
    22. 22. Objective 3 <ul><li>Use the Accounting Equation </li></ul>
    23. 23. The Accounting Equation Economic Resources Claims to Economic Resources Assets = Liabilities + Owner’s Equity
    24. 24. Assets <ul><li>What is an asset? </li></ul><ul><li>It is something a company owns which has future economic value. </li></ul><ul><li>land </li></ul><ul><li>building </li></ul><ul><li>equipment </li></ul><ul><li>goodwill </li></ul>
    25. 25. Liability <ul><li>What is a liability? </li></ul><ul><li>It is something a company owes. </li></ul><ul><li>money </li></ul><ul><li>service – legal retainers </li></ul><ul><li>product – magazines </li></ul>
    26. 26. Owner’s Equity <ul><li>What is owner’s equity? </li></ul><ul><li>It is what’s left of the assets after liabilities have been deducted. </li></ul><ul><li>the same as net assets </li></ul><ul><li>the owner’s claim on the entity’s assets </li></ul>
    27. 27. Transactions that Affect Owner’s Equity OWNER’S EQUITY INCREASES OWNER’S EQUITY DECREASES Owner Investments in the Business Revenues Expenses Owner Withdrawals from the Business Owner’s Equity
    28. 28. Revenues <ul><li>What are revenues? </li></ul><ul><li>They are amounts received or to be received from customers for sales of products or services. </li></ul><ul><li>sales </li></ul><ul><li>performance of services </li></ul><ul><li>rent </li></ul><ul><li>interest </li></ul>
    29. 29. Expenses <ul><li>What are expenses? </li></ul><ul><li>They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. </li></ul><ul><li>salaries and wages </li></ul><ul><li>utilities </li></ul><ul><li>supplies used </li></ul><ul><li>advertising </li></ul>
    30. 30. Objective 4 <ul><li>Analyze Business Transactions </li></ul>
    31. 31. Accounting for Business Transactions <ul><li>What is a transaction? </li></ul><ul><li>It is any event that both affects the financial position of the business and can be reliably recorded. </li></ul>
    32. 32. Accounting for Business Transactions <ul><li>Gay Gillen invests $30,000 to begin Gay Gillen eTravel. </li></ul><ul><li>Gillen purchases an office location, paying $20,000 in cash. </li></ul><ul><li>She buys office supplies, agreeing to pay $500 in 30 days. </li></ul><ul><li>She earns and collects $5,500 revenues. </li></ul>
    33. 33. Accounting for Business Transactions <ul><li>Gillen performs services, and the client agrees to pay $3,000 within one month. </li></ul><ul><li>During the month, she pays $3,300 for expenses incurred. </li></ul><ul><li>Gillen pays $300 to the store from which she purchased $500 worth of supplies. </li></ul><ul><li>What is the effect of these transactions on the accounting equation? </li></ul>
    34. 34. Accounting for Business Transactions Owner’s Assets = Liabilities + Equity 1) Cash + $30,000 + $30,000 2) Cash – 20,000 Land + 20,000 3) Supplies + 500 + 500 4) Cash + 5,500 + 5,500 5) Receivable + 3,000 + 3,000 6) Cash – 3,300 – 3,300 7) Cash – 300 – 300 Totals + $35,400 + 200 + $35,200
    35. 35. Accounting for Business Transactions <ul><li>Notice that the equation always stays in balance. </li></ul><ul><li>Each transaction affects at least two accounts, sometimes more. </li></ul><ul><li>Some transactions affect only one side of the equation; some affect both sides. </li></ul>
    36. 36. Accounting for Business Transactions <ul><li>Other transactions that took place were as follows: </li></ul><ul><li>The business collected $1,000 from the client. </li></ul><ul><li>She sold some land at cost for $9,000. </li></ul><ul><li>She withdrew $2,000 from the business. </li></ul>
    37. 37. Objective 5 <ul><li>Prepare Financial Statements </li></ul>
    38. 38. Financial Statements... – are the final product of the accounting process. – tell how the business is performing and where it stands.
    39. 39. Financial Statements <ul><li>income statement </li></ul><ul><li>statement of owner’s equity or retained earnings </li></ul><ul><li>balance sheet </li></ul><ul><li>statement of cash flows </li></ul>
    40. 40. Objective 6 <ul><li>Evaluate Business Performance </li></ul>
    41. 41. Relationships Among the Statements: Income Statement <ul><li>Revenue: </li></ul><ul><ul><li>Fees earned $8,500 Expenses: </li></ul></ul><ul><ul><li>Salary expense $1,200 </li></ul></ul><ul><ul><li>Utilities and telephone expense 400 </li></ul></ul><ul><ul><li>Equipment rental expense 600 </li></ul></ul><ul><ul><li>Office rent expense 1,100 3,300 </li></ul></ul><ul><ul><li>Net income $5,200 </li></ul></ul>
    42. 42. Relationships Among the Statements: Statement of Owner’s Equity G. Gillen, capital, April 1, 20xx $ 0 Contribution of capital 30,000 Net income $ 5,200 Cash distributions – 2,000 G. Gillen, capital, April 30, 20xx $33,200
    43. 43. Relationships Among the Statements: Balance Sheet Assets Cash $19,900 Accounts receivable 2,000 Supplies 500 Land 11,000 Total assets $ 33,400 Liabilities Accounts payable $ 200 Owner’s equity, G. Gillen, capital 33,200 Total liabilities and owner’s equity $33,400
    44. 44. Relationships Among the Statements: Statement Of Cash Flows <ul><li>Cash flows from operating activities: </li></ul><ul><li>Cash receipts from services rendered $6,500 </li></ul><ul><li>Cash payments: </li></ul><ul><li>Supplies $ 300 </li></ul><ul><li>Operating expenses 3,300 3,600 </li></ul><ul><li>Net cash flows from </li></ul><ul><li>Operating activities $2,900 </li></ul><ul><li>Cash flows from investing activities </li></ul><ul><li>Purchase and sale of land ($11,000) </li></ul>
    45. 45. <ul><li>Cash Flows from Financing Activities: </li></ul><ul><li>Investment by Owner $30,000 </li></ul><ul><li>Withdrawals 2,000 </li></ul><ul><li>Net Cash Flows from </li></ul><ul><li>Financing Activities $28,000 </li></ul><ul><li>Cash at Beginning of Year 0 </li></ul><ul><li>Cash at End of the Year $19,900 </li></ul>Relationships Among the Statements: Statement Of Cash Flows
    46. 46. End of Chapter 1