PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA

Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CPA
Chapter 1
ACCOUNTING IN BUSINESS
McGraw-Hill/I rwin Copyright 2011 by The McGraw-Hill Companies, I nc. All rights reserved.
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Identifying
Select transactions and events
Recording
Input, measure and classify
Communicating
Prepare, analyze and interpret
IMPORTANCE OF ACCOUNTING
Accounting
C 1
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USERS OF ACCOUNTING
INFORMATION
External Users
Lenders
Shareholders
Governments
Consumer Groups
External Auditors
Customers
Internal Users
Managers
Officers/Directors
Internal Auditors
Sales Staff
Budget Officers
Controllers
C 2
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External Users
Financial accounting
provides external users
with financial statements.
Internal Users
Managerial accounting
provides information needs
for internal decision-makers.
C 2 USERS OF ACCOUNTING
INFORMATION
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OPPORTUNITIES IN ACCOUNTING
C 2
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Beliefs that
distinguish right
from wrong
Accepted standards
of good and bad
behavior
Ethics
ETHICS - A KEY CONCEPT
C 3
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C 3
ETHICS - A KEY CONCEPT
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Financial accounting practice is governed by concepts
and rules known as generally accepted accounting
principles (GAAP).
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Relevant Information Affects the decision of its users.
Reliable Information Is trusted by users.
Comparable
Information
Is helpful in contrasting
organizations.
C 4
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The Securities and Exchange Commission is the
government agency that establishes reporting requirements
for companies that issue stock or shares to the public.
SETTING ACCOUNTING PRINCIPLES
Financial Accounting Standards Board
is the private group that sets both
broad and specific principles.
The International Accounting Standards Board (IASB)
issues International Financial Reporting Standards that
identify preferred accounting practices to create harmony
among accounting practices of different countries.
C 4
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INTERNATIONAL STANDARDS
The International Accounting Standards Board (IASB), an
independent group (consisting of 16 individuals from many
countries), issues International Financial Reporting Standards
(IFRS) that identify preferred accounting practices.
IASB
C 4
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PRINCIPLES AND ASSUMPTIONS
OF ACCOUNTING
Cost Principle
Accounting information is based on
actual cost. Actual cost is
considered objective.
Revenue Recognition Principle
1. Recognize revenue when it is earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash received
plus cash value of items received.

Matching Principle
A company must record its expenses
incurred to generate the revenue reported.

Full Disclosure Principle
A company is required to report the
details behind financial statements
that would impact users decisions.
C 4
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ACCOUNTING ASSUMPTIONS
Monetary Unit Assumption
Express transactions and events in
monetary, or money, units.
Business Entity Assumption
A business is accounted for
separately from other business
entities, including its owner.
Time Period Assumption
Presumes that the life of a company can
be divided into time periods, such as
months and years.
Now Future
Going-Concern Assumption
Reflects assumption that the business
will continue operating instead of
being closed or sold.
C 4
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FORMS OF BUSINESS ENTITIES
Sole
Proprietorship
Partnership Corporation
C 4
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* Proprietorships and partnerships that are
set up as LLCs provide limited liability.
CHARACTERISTICS OF BUSINESSES
Characteristic Proprietorship Partnership Corporation
Business entity yes yes yes
Legal entity no no yes
Limited liability no no yes
Unlimited life no no yes
Business taxed no no yes
One owner allowed yes no yes
*
*
C 4
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Owners of a corporation are called
shareholders (or stockholders). Shareholders are
not personally liable for corporate acts. When a
corporation issues only one class of shares, we
call it ordinary shares (or share capital).
CORPORATION
C 4
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TRANSACTION ANALYSIS AND THE
ACCOUNTING EQUATION
Assets
=
Liabilities
+
Equity
Accounting Equation
A 1
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Land
Equipment
Buildings
Cash
Vehicles
Store
Supplies
Notes
Receivable
Accounts
Receivable
ASSETS
A 1
Resources
owned or
controlled by
a company
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Taxes
Payable
Wages
Payable
Notes
Payable
Accounts
Payable
LIABILITIES
Creditors
claims on
assets
A 1
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EQUITY
Owners
Claims on
Assets
A 1
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TRANSACTION ANALYSIS EQUATION
The accounting equation MUST remain in
balance after each transaction.
Liabilities Equity Assets
= +
P 1
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TRANSACTION 1: INVESTMENT BY OWNERS


The accounts involved are:
(1) Cash (asset)
(2) Owner Capital (equity)
On December 1, Chas Taylor invests
$30,000 cash to start a consulting business.
P 1
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TRANSACTION 2: PURCHASE
SUPPLIES FOR CASH
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Chas Taylors company, FastForward
purchases supplies paying $2,500 cash.
P 1
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TRANSACTION 3: PURCHASE
EQUIPMENT FOR CASH
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
FastForward purchases equipment for
$26,000 cash.
P 1
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TRANSACTION 4: PURCHASE
SUPPLIES ON CREDIT
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
FastForward purchases Supplies of $7,100 on
account.
P 1
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TRANSACTION 5: PROVIDE
SERVICES FOR CASH
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
The company provides consulting services
receiving $4,200 cash.
P 1
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TRANSACTION 6 AND 7: PAYMENT
OF EXPENSES IN CASH
The accounts involved are:
(1) Cash (asset)
(2) Expenses (equity)
The company pays $1,000 rent and $700 in
salary to the companys only employee.
P 1
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SUMMARY OF TRANSACTIONS
Other transactions were executed during December and the summary of
all transactions is shown below:
P 1
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FINANCIAL STATEMENTS
Lets prepare the financial statements reflecting
the transactions we have recorded.
P 2
Income statement (Statement of
comprehensive income)
Statement of changes in equity
Balance sheet (Statement of financial
position)
Statement of cash flows


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The income statement describes a companys revenues and
expenses along with the resulting net income or loss over a
period of time due to earnings activities.
INCOME STATEMENT
P 2
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STATEMENT OF CHANGES IN EQUITY
P 2
FASTFORWARD
Statement of Changes in Equity
For Month Ended December 31, 2011
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The Balance Sheet describes a companys financial
position at a point in time.
BALANCE SHEET
P 2
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STATEMENT OF CASH FLOWS
P 2
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DECISION ANALYSIS
Return on assets (ROA) is stated in ratio form as
income divided by assets invested.
Net income
Average total assets
Return on assets =
A 2
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1A RETURN AND RISK ANALYSIS
A 3
Many different
returns may be
reported.
ROA
Interest return on
savings accounts.
Interest return on
corporate bonds.
Risk is the
uncertainty about the
return we will earn.
The lower the risk, the lower our expected return.
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1B - BUSINESS ACTIVITIES AND THE
ACCOUNTING EQUATION
There are three major types of activities in any organization:
1.Financing Activities Provide the means organizations
use to pay for resources such as land, buildings, and
equipment to carry out plans.
2.Investing Activities - Are the acquiring and disposing of
resources (assets) that an organization uses to acquire and
sell its products or services.
3.Operating Activities Involve using resources to research,
develop, and purchase, produce, distribute, and market
products and services.
C 5
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1C - IASBs Conceptual
Framework for Financial
Reporting
C 6
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END OF CHAPTER 1