The document provides an overview of accounting concepts including the importance of accounting, users of accounting information, governing organizations and rules, the accounting equation, and preparing and using financial statements. It covers key topics such as defining assets, liabilities, equity, transactions, and financial statements including the income statement, balance sheet, statement of retained earnings, and statement of cash flows. It also discusses evaluating business performance using return on assets. The learning objectives are to explain the importance of accounting, describe governing rules and organizations, define accounting equation components, analyze transactions, prepare financial statements, and use statements and return on assets to evaluate business performance.

1. © 2018 Pearson Education, Inc.
Chapter 1
Accounting and
the Business
Environment

2. © 2018 Pearson Education, Inc.
Chapter 1 Learning Objectives
1. Explain why accounting is
important and list the users
of accounting information
2. Describe the organizations
and rules that govern
accounting
3. Describe the accounting
equation and define assets,
liabilities, and equity
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3. © 2018 Pearson Education, Inc.
Chapter 1 Learning Objectives
4. Use the accounting
equation to analyze
transactions
5. Prepare financial
statements
6. Use financial statements
and return on assets (ROA)
to evaluate business
performance
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4. © 2018 Pearson Education, Inc.
Learning Objective 1
Explain why accounting
is important and list the
users of accounting
information
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WHY IS ACCOUNTING IMPORTANT?
• Accounting is the information system that:
– Measures business activities
– Processes the information into reports
– Communicates the results to decision makers
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This work is by The Pathways Commission. The Pathways Vision Model:
AI artwork: AAA Commons. American Accounting Association.

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Decision Makers: The Users of
Accounting Information
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Decision Makers: The Users of
Accounting Information
• Financial accounting provides information for
external decision makers, such as:
– Investors who own a portion of the business
– Creditors to whom the business owes money
– Taxing authorities, to whom the business owes
taxes
• Managerial accounting provides information
to internal decision makers, such as:
– Managers
– Employees
– Individuals
– Businesses
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9. © 2018 Pearson Education, Inc.
Accounting Matters
• Types of accountants:
– Certified Public Accountants (CPAs) serve the
general public.
– Certified Management Accountants (CMAs)
specialize in accounting and financial
management knowledge and often work for a
single company.
• Accounting positions:
– Public
– Private
– Governmental
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Learning Objective 2
Describe the
organizations and rules
that govern accounting
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• Governing organizations:
– The Financial Accounting Standards Board
(FASB) oversees creation and governance of
accounting standards.
– The Securities and Exchange Commission
(SEC) oversees the U.S. financial markets.
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WHAT ARE THE ORGANIZATIONS AND
RULES THAT GOVERN ACCOUNTING?

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WHAT ARE THE ORGANIZATIONS AND
RULES THAT GOVERN ACCOUNTING?
• Accounting guidelines are called Generally
Accepted Accounting Principles (GAAP).
• Useful accounting information must:
– Be relevant, allowing users to make a decision
– Have faithful representation by being
complete, neutral, and free from error
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14. © 2018 Pearson Education, Inc.
The Economic Entity Assumption
• An organization that stands apart as a
separate economic unit follows the
economic entity assumption.
• An Economic Entity can be a:
- Sole Proprietorship
- Partnership
- Corporation
- LLC
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The Economic Entity Assumption
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The Economic Entity Assumption
• Features of a corporation:
– Separate legal entity
– Continuous life and transferability of ownership
– No mutual agency
– Limited liability of stockholders (owners of the
corporation)
– Separation of ownership and management
– Corporate taxation
– Government regulation
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Economic entity
assumption
Cost principle
Going concern
assumption
Monetary unit
assumption
GAAP
WHAT ARE THE ORGANIZATIONS AND
RULES THAT GOVERN ACCOUNTING?

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• International Financial Reporting
Standards (IFRS)
– Global accounting guidelines
– Used or required by more than 116 nations
– Published by the International Accounting
Standards Board (IASB)
• Ethics in accounting and business
– An audit is an examination of a company’s
financial statements and records.
– The Sarbanes-Oxley Act (SOX) requires
companies to review internal controls.
WHAT ARE THE ORGANIZATIONS AND
RULES THAT GOVERN ACCOUNTING?

20. © 2018 Pearson Education, Inc.
Learning Objective 3
Describe the accounting
equation and define
assets, liabilities, and
equity
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WHAT IS THE ACCOUNTING
EQUATION?
• The accounting equation is the basic tool
of accounting, measuring the resources of
the business and the claims to those
resources.
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Assets
• An asset is an economic resource that is
expected to benefit the business in the
future.
• Examples:
– Cash
– Merchandise Inventory
– Furniture
– Land
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23. © 2018 Pearson Education, Inc.
Liabilities
• Liabilities are debts that are owed to
creditors.
• Many liabilities have the word payable in
their titles.
• Examples:
– Accounts Payable
– Notes Payable
– Salaries Payable
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Equity
• The owners’ claims to the assets of the
business are called equity.
– Also called stockholders’ equity
• Increases in equity result from:
– Contributed capital (owner contributions)
– Revenues
• Decreases in equity result from:
– Dividends (owner distributions)
– Expenses
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25. © 2018 Pearson Education, Inc.
Equity
Equity consists of two components:
1. Contributed capital:
• Also called paid-in capital, contributed
capital is the amount invested in the
corporation by its owners, the stockholders.
• Common stock represents the basic
ownership of every corporation.
2. Retained earnings:
• Equity earned from profitable operations
that is not distributed to shareholders
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Equity
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The accounting equation is expanded to show
the components of equity:
• Net income
Revenues > Expenses
• Net loss
Revenues < Expenses

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Learning Objective 4
Use the accounting
equation to analyze
transactions
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HOW DO YOU ANALYZE A
TRANSACTION?
A transaction is any
event that affects the
financial position of the
business and can be
measured with faithful
representation.
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Is it a transaction?
Buying a
computer for the
office for $2,000
cash
xHiring a new
employee

29. © 2018 Pearson Education, Inc.
Transaction 1—Owner Contribution
Sheena Bright contributes $30,000 cash to Smart Touch
Learning, a corporation, in exchange for stock. The effect
of this transaction on the accounting equation is:
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Transaction Analysis for Smart Touch
Learning

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Transaction 2—Purchase of Land for Cash
Smart Touch Learning purchases land for an office
location, paying cash of $20,000.
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Transaction Analysis for Smart Touch
Learning

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Transaction 3—Purchase of Office Supplies on Account
Smart Touch Learning buys office supplies on account
agreeing to pay $500 within 30 days.
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Transaction Analysis for Smart Touch
Learning

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Transaction 4—Earning of Service Revenue for Cash
Smart Touch Learning earns service revenue by providing
training services for clients. The business collects $5,500
revenue in cash.
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Transaction Analysis for Smart Touch
Learning

33. © 2018 Pearson Education, Inc.
Transaction 5—Earning of Service Revenue on
Account
Smart Touch Learning performs a service for clients who do
not pay immediately. The clients promise to pay $3,000
within one month.
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Transaction Analysis for Smart Touch
Learning

34. © 2018 Pearson Education, Inc.
Transaction 6—Payment of Expenses with Cash
Smart Touch Learning pays $3,200 in cash expenses:
$2,000 for office rent and $1,200 for employee salaries.
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Transaction Analysis for Smart Touch
Learning

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Transaction 7—Payment on Account (Accounts Payable)
Smart Touch Learning pays $300 to the store from which it
purchased office supplies in Transaction 3.
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Transaction Analysis for Smart Touch
Learning

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Transaction 8—Collection on Account (Accounts
Receivable)
Smart Touch Learning now collects $2,000 from the client
from Transaction 5.
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Transaction Analysis for Smart Touch
Learning

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Transaction 9—Payment of Cash Dividend
Smart Touch Learning distributes a $5,000 cash dividend
to the stockholder, Sheena Bright.
Transaction Analysis for Smart Touch
Learning

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39. © 2018 Pearson Education, Inc.
Learning Objective 5
Prepare financial
statements
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HOW DO YOU PREPARE FINANCIAL
STATEMENTS?
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HOW DO YOU PREPARE FINANCIAL
STATEMENTS?
1-41
Statement
of Cash
Flows
Balance
Sheet
Statement
of
Retained
Earnings
Income
Statement
• Financial statements are business
documents that are used to communicate
information needed to make business
decisions.

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The income statement reports the net income
or net loss of the business for a specific period.

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The statement of retained earnings reports how
the company’s retained earnings balance changed
from the beginning to the end of the period.

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The balance sheet reports on the assets,
liabilities, and stockholders’ equity of the
business as of a specific date.

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The statement of cash flows reports the change in cash during the period.

46. © 2018 Pearson Education, Inc.
Learning Objective 6
Use financial statements
and return on assets
(ROA) to evaluate
business performance
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47. © 2018 Pearson Education, Inc.
HOW DO YOU USE FINANCIAL STATEMENTS
TO EVALUATE BUSINESS PERFORMANCE?
• One of the many tools used to evaluate
performance is return on assets.
• Return on assets (ROA) measures how
profitably a company uses it assets.
– ROA is calculated by dividing net income by
average total assets.
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