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