principles of accounting

1. Chapter
1-1
CHAPTER 1
ACCOUNTING IN
ACTION
Accounting Principles, Eighth Edition

2. Chapter
1-2
What is Accounting?
LO 1 Explain what accounting is.
Definition: Accounting is a numerical
representation of what is happening
within a company.
The purpose of accounting is to:
(1) identify, record, and communicate the
economic events of an organization to
interested users.

3. Chapter
1-3
Three Activities
What is Accounting?
LO 1 Explain what accounting is.
Illustration 1-1
Accounting process
The accounting process includes
the bookkeeping function.

4. Chapter
1-4
Management
Common Questions
Human
Resources
IRS
Labor
Unions
SEC
Marketing
Finance
Investors
Creditors
Who Uses Accounting Data?
LO 2 Identify the users and uses of accounting.
Customers
Internal Users
External
Users

5. Chapter
1-5
Common Questions Asked User
1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income?
3. Do we need to borrow in the
near future?
4. Is cash sufficient to pay
dividends to the stockholders?
5. What price for our product
will maximize net income?
Who Uses Accounting Data?
LO 2 Identify the users and uses of accounting.
6. Will the company be able to
pay its short-term debts?
Investors
Management
Finance
Marketing
Creditors

6. Chapter
1-6
The Building Blocks of Accounting
Ethics In Financial Reporting
LO 3 Understand why ethics is a fundamental business concept.
Standards of conduct by which one’s actions are
judged as right or wrong, honest or dishonest, fair or
not fair, are Ethics.
Recent financial scandals include: Enron,
WorldCom, HealthSouth, AIG, and others.
Congress passed Sarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound
ethical behavior.

7. Chapter
1-7
Ethics are the standards of conduct by which one's
actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.
Review Question
Ethics
LO 3 Understand why ethics is a fundamental business concept.

8. Chapter
1-8
Various users
need financial
information
The accounting profession
has attempted to develop
a set of standards that
are generally accepted
and universally practiced.
Financial Statements
Balance Sheet
Income Statement
Statement of Owners’ Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting
Principles (GAAP)
The Building Blocks of Accounting
LO 4 Explain generally accepted accounting principles and the cost principle.

9. Chapter
1-9
Organizations Involved in Standard Setting:
Securities and Exchange Commission (SEC)
Financial Accounting Standards Board (FASB)
International Accounting Standards Board
(IASB)
LO 4 Explain generally accepted accounting principles and the cost principle.
The Building Blocks of Accounting
http://www.fasb.org/
http://www.sec.gov/
http://www.iasb.org/

10. Chapter
1-10
Historical Cost Principle (or cost principle) dictates that
companies record assets at their cost.
Fair Value Principle states that assets and liabilities should
be reported at fair value (the price received to sell an asset or
settle a liability).
Generally Accepted Accounting Principles
Measurement Principles
LO 4 Explain generally accepted accounting principles.
Selection of which principle to follow
generally relates to trade-offs
between relevance and faithful
representation.

11. Chapter
1-11
Monetary Unit Assumption – include in the
accounting records only transaction data that can be
expressed in terms of money.
Economic Entity Assumption – requires that
activities of the entity be kept separate and distinct
from the activities of its owner and all other economic
entities.
Proprietorship.
Partnership.
Corporation.
Assumptions
LO 5 Explain the monetary unit assumption
and the economic entity assumption.
Forms of
Business Ownership

12. Chapter
1-12
Proprietorship Partnership Corporation
Owned by two or
more persons.
Often retail and
service-type
businesses
Generally
unlimited
personal liability
Partnership
agreement
Ownership
divided into
shares of stock
Separate legal
entity organized
under state
corporation law
Limited liability
Forms of Business Ownership
Generally owned
by one person.
Often small
service-type
businesses
Owner receives
any profits,
suffers any
losses, and is
personally liable
for all debts.
LO 5 Explain the monetary unit assumption
and the economic entity assumption.

13. Chapter
1-13
Combining the activities of Kellogg and General
Mills would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
Assumptions
LO 5 Explain the monetary unit assumption
and the economic entity assumption.
Review Question

14. Chapter
1-14
A business organized as a separate legal entity
under state law having ownership divided into
shares of stock is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
LO 5 Explain the monetary unit assumption
and the economic entity assumption.
Forms of Business Ownership
Review Question

15. Chapter
1-15
Assets Liabilities
Owners’
Equity
= +
Provides the underlying framework for recording and
summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership
claims.
The Basic Accounting Equation
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.

16. Chapter
1-16
Assets Liabilities
Owners’
Equity
= +
Provides the underlying framework for recording and
summarizing economic events.
The Basic Accounting Equation
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Assets

17. Chapter
1-17
Assets Liabilities
Owners’
Equity
= +
Provides the underlying framework for recording and
summarizing economic events.
The Basic Accounting Equation
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
Liabilities

18. Chapter
1-18
Assets Liabilities
Owners’
Equity
= +
Provides the underlying framework for recording and
summarizing economic events.
The Basic Accounting Equation
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or
Partnership).
Owners’ Equity

19. Chapter
1-19
Owners’ Equity
Revenues result from business activities entered into for
the purpose of earning income.
Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
Illustration 1-6
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.

20. Chapter
1-20
Owners’ Equity
Expenses are the cost of assets consumed or services
used in the process of earning revenue.
Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.
Illustration 1-6
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.

21. Chapter
1-21
Using The Basic Accounting Equation
Transactions are a business’s economic events
recorded by accountants.
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the
accounting equation.
LO 7 Analyze the effects of business transactions
on the accounting equation.

22. Chapter
1-22
Q1-15: Are the following events recorded in the
accounting records?
Event
Supplies are
purchased
on account.
Criterion Is the financial position (assets, liabilities, or
owner’s equity) of the company changed?
LO 7 Analyze the effects of business transactions
on the accounting equation.
An employee
is hired.
Owner
withdraws
cash for
personal use.
Record/
Don’t Record
Transactions (Question?)

23. Chapter
1-23
P1-1A: Barone’s Repair Shop was started on May 1 by
Nancy. Prepare a tabular analysis of the following
transactions for the month of May.
Transactions (Problem)
+10,000
1. +10,000
Cash
Accounts
Receivable Equipment
Accounts
Payable
Barone,
Capital
LO 7 Analyze the effects of business transactions
on the accounting equation.
+ + = +
1. Invested $10,000 cash to start the repair shop.
Investment
Assets Liabilities Equity

24. Chapter
1-24
Transactions (Problem)
+10,000
1. +10,000
Cash
Accounts
Receivable Equipment
Accounts
Payable
Barone,
Capital
LO 7 Analyze the effects of business transactions
on the accounting equation.
2. Purchased equipment for $5,000 cash.
-5,000
2. +5,000
+ + = +
Investment
Assets Liabilities Equity

25. Chapter
1-25
Transactions (Problem)
+10,000
1. +10,000
Cash
Accounts
Receivable Equipment
Accounts
Payable
LO 7 Analyze the effects of business transactions
on the accounting equation.
3. Paid $400 cash for May office rent.
-5,000
2. +5,000
+ + = +
-400
3. -400 Expense
Barone,
Capital
Investment
Assets Liabilities Equity

26. Chapter
1-26
Transactions (Problem)
+10,000
1. +10,000
Cash
Accounts
Receivable Equipment
Accounts
Payable
LO 7 Analyze the effects of business transactions
on the accounting equation.
4. Received $5,100 from customers for repair service.
-5,000
2. +5,000
+ + = +
-400
3. -400 Expense
+5,100
4. +5,100 Revenue
Barone,
Capital
Investment
Assets Liabilities Equity

27. Chapter
1-27
Transactions (Problem)
+10,000
1. +10,000
Cash
Accounts
Receivable Equipment
Accounts
Payable
LO 7 Analyze the effects of business transactions
on the accounting equation.
5. Withdrew $1,000 cash for personal use.
-5,000
2. +5,000
+ + = +
-400
3. -400 Expense
+5,100
4. +5,100 Revenue
-1,000
5. -1,000 Drawings
Barone,
Capital
Investment
Assets Liabilities Equity

28. Chapter
1-28
Transactions (Problem)
+10,000
1. +10,000
Cash
Accounts
Receivable Equipment
Accounts
Payable
LO 7 Analyze the effects of business transactions
on the accounting equation.
6. Paid part-time employee salaries of $2,000.
-5,000
2. +5,000
+ + = +
-400
3. -400 Expense
+5,100
4. +5,100 Revenue
-1,000
5. -1,000 Drawings
-2,000
6. -2,000 Expense
Barone,
Capital
Investment
Assets Liabilities Equity

29. Chapter
1-29
Transactions (Problem)
+10,000
1. +10,000
Cash
Accounts
Receivable Equipment
Accounts
Payable
LO 7 Analyze the effects of business transactions
on the accounting equation.
7. Incurred $250 of advertising costs, on account.
-5,000
2. +5,000
+ + = +
-400
3. -400 Expense
+5,100
4. +5,100 Revenue
-1,000
5. -1,000 Drawings
-2,000
6. -2,000 Expense
+250
7. -250 Expense
Barone,
Capital
Investment
Assets Liabilities Equity

30. Chapter
1-30
Transactions (Problem)
+10,000
1. +10,000
Cash
Accounts
Receivable Equipment
Accounts
Payable
LO 7 Analyze the effects of business transactions
on the accounting equation.
8. Provided $750 of repair services on account.
-5,000
2. +5,000
+ + = +
-400
3. -400 Expense
+5,100
4. +5,100 Revenue
-1,000
5. -1,000 Drawings
-2,000
6. -2,000 Expense
+250
7. -250 Expense
+750
8. +750 Revenue
Barone,
Capital
Investment
Assets Liabilities Equity

31. Chapter
1-31
Transactions (Problem)
+10,000
1. +10,000
Cash
Accounts
Receivable Equipment
Accounts
Payable
LO 7 Analyze the effects of business transactions
on the accounting equation.
9. Collected $120 cash for services previously billed.
-5,000
2. +5,000
+ + = +
-400
3. -400 Expense
+5,100
4. +5,100 Revenue
-1,000
5. -1,000 Drawings
-2,000
6. -2,000 Expense
+250
7. -250 Expense
+750
8. +750 Revenue
+120
9. -120
Barone,
Capital
Investment
Assets Liabilities Equity
6,820 + 630 + 5,000 = 250 + 12,200

32. Chapter
1-32
Companies prepare four financial statements from
the summarized accounting data:
Balance
Sheet
Income
Statement
Statement
of Cash
Flows
Owners’
Equity
Statement
Financial Statements
LO 8 Understand the four financial statements and how they are prepared.

33. Chapter
1-33
Income Statement
Financial Statements
LO 8 Understand the four financial statements and how they are prepared.
Reports the revenues
and expenses for a
specific period of time.
Net income – revenues
exceed expenses.
Net loss – expenses
exceed revenues.
Revenues:
Service revenue 5,850
$
Expenses:
Salary expense 2,000
Rent expense 400
Advertising expense 250
Total expenses 2,650
Net income 3,200
$
Barone’s Repair Shop
Income Statement
For the Month Ended May 31, 2007

34. Chapter
1-34
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
Financial Statements
LO 8 Understand the four financial statements and how they are prepared.
Review Question

35. Chapter
1-35
Revenues:
Service revenue 5,850
$
Expenses:
Salary expense 2,000
Rent expense 400
Advertising expense 250
Total expenses 2,650
Net income 3,200
$
Barone’s Repair Shop
Income Statement
For the Month Ended May 31, 2007
Income Statement
Financial Statements
LO 8 Understand the four financial statements and how they are prepared.
Barone's, Capital May 1 -
$
Add: Investment 10,000
Net income 3,200
13,200
Less: Drawings 1,000
Barone's, Capital May 31 12,200
$
Barone’s Repair Shop
Owners' Equity Statement
For the Month Ended May 31, 2007
Owners’ Equity
Statement
Net income is needed to determine
the ending balance in owner’s equity.

36. Chapter
1-36
Financial Statements
LO 8 Understand the four financial statements and how they are prepared.
Barone's, Capital May 1 -
$
Add: Investment 10,000
Net income 3,200
13,200
Less: Drawings 1,000
Barone's, Capital May 31 12,200
$
Barone’s Repair Shop
Owners' Equity Statement
For the Month Ended May 31, 2007
Owners’ Equity
Statement
Statement indicates the
reasons why owner’s
equity has increased or
decreased during the
period.

37. Chapter
1-37
Financial Statements
LO 8 Understand the four financial statements and how they are prepared.
Barone's, Capital May 1 -
$
Add: Investment 10,000
Net income 3,200
13,200
Less: Drawings 1,000
Barone's, Capital May 31 12,200
$
Barone’s Repair Shop
Owners' Equity Statement
For the Month Ended May 31, 2007
Owners’ Equity
Statement
Assets
Cash 6,820
$
Accounts receivable 630
Equipment 5,000
Total assets 12,450
$
Liabilities
Accounts payable 250
$
Owners' Equity
Barone's, capital 12,200
Total liab. & equity 12,450
$
Balance Sheet
Barone’s Repair Shop
May 31, 2007
The ending balance in owner’s equity is
needed in preparing the balance sheet
Balance Sheet

38. Chapter
1-38
Balance Sheet
Financial Statements
LO 8 Understand the four financial statements and how they are prepared.
Reports the assets,
liabilities, and owner’s
equity at a specific date.
Assets listed at the top,
followed by liabilities
and owner’s equity.
Total assets must equal
total liabilities and
owner’s equity.
Assets
Cash 6,820
$
Accounts receivable 630
Equipment 5,000
Total assets 12,450
$
Liabilities
Accounts payable 250
$
Owners' Equity
Barone's, capital 12,200
Total liab. & equity 12,450
$
Balance Sheet
Barone’s Repair Shop
May 31, 2007

39. Chapter
1-39
Balance Sheet
Financial Statements
LO 8 Understand the four financial statements and how they are prepared.
Assets
Cash 6,820
$
Accounts receivable 630
Equipment 5,000
Total assets 12,450
$
Liabilities
Accounts payable 250
$
Owners' Equity
Barone's, capital 12,200
Total liab. & equity 12,450
$
Balance Sheet
Barone’s Repair Shop
May 31, 2007
Cash flow from Operations
Cash receipts from customers 5,220
$
Cash paid for expenses (2,400)
Cash provided by operations 2,820
Cash flow from Investing
Purchase of equipment (5,000)
Cash flow from Financing
Investment by owners 10,000
Drawings by owners (1,000)
Cash provided by financing 9,000
Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 6,820
$
Statement of Cash Flows
Barone’s Repair Shop
For the Month Ended May 31, 2007
Statement of Cash Flows

40. Chapter
1-40
Financial Statements
LO 8 Understand the four financial statements and how they are prepared.
Cash flow from Operations
Cash receipts from customers 5,220
$
Cash paid for expenses (2,400)
Cash provided by operations 2,820
Cash flow from Investing
Purchase of equipment (5,000)
Cash flow from Financing
Investment by owners 10,000
Drawings by owners (1,000)
Cash provided by financing 9,000
Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 6,820
$
Statement of Cash Flows
Barone’s Repair Shop
For the Month Ended May 31, 2007
Statement of Cash Flows
Information for a
specific period of time.
Answers the following:
1. Where did cash come
from?
2. What was cash used
for?
3. What was the change
in the cash balance?

41. Chapter
1-41
Which of the following financial statements is
prepared as of a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.
Financial Statements
LO 8 Understand the four financial statements and how they are prepared.
Review Question

42. Chapter
1-42
End of Chapter One