Chapter 1

ACCOUNTING IN BUSINESS

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
McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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C1

IMPORTANCE OF ACCOUNTING
Accounting
Identifying
Select transactions and events
Recording
Input, measure and classify

Communicating
Prepare, analyze and interpret

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C2

USERS OF ACCOUNTING
INFORMATION
External Users

Lenders
Consumer Groups
Shareholders External Auditors
Governments Customers

Internal Users

Managers
Sales Staff
Officers/Directors Budget Officers
Internal Auditors Controllers

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C2

USERS OF ACCOUNTING
INFORMATION
External Users

Financial accounting
provides external users
with financial statements.

Internal Users

Managerial accounting
provides information needs
for internal decision-makers.

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C2

OPPORTUNITIES IN ACCOUNTING

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C3

ETHICS - A KEY CONCEPT

Ethics
Beliefs that
distinguish right
from wrong

Accepted standards
of good and bad
behavior

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C3

ETHICS - A KEY CONCEPT

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C4

GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Financial accounting practice is governed by concepts
and rules known as generally accepted accounting
principles (GAAP).
Relevant Information

Affects the decision of its users.

Reliable Information

Is trusted by users.

Comparable
Information

Is helpful in contrasting
organizations.

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C4

SETTING ACCOUNTING PRINCIPLES

Financial Accounting Standards Board
is the private group that sets both
broad and specific principles.
The Securities and Exchange Commission is the
government agency that establishes reporting requirements
for companies that issue stock or shares to the public.

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.

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C4

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

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C4

PRINCIPLES AND ASSUMPTIONS

OF ACCOUNTING

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.

Cost Principle
Accounting information is based on
actual cost. Actual cost is
considered objective.

Full Disclosure Principle

A company is required to report the
details behind financial statements
that would impact users decisions.

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C4

ACCOUNTING ASSUMPTIONS
Now

Future

Going-Concern Assumption
Reflects assumption that the business
will continue operating instead of
being closed or sold.

Monetary Unit Assumption

Express transactions and events in
monetary, or money, units.

Business Entity Assumption

Time Period Assumption

A business is accounted for

separately from other business
entities, including its owner.

Presumes that the life of a company can

be divided into time periods, such as
months and years.

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C4

FORMS OF BUSINESS ENTITIES

Sole
Proprietorship

Partnership

Corporation

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C4

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

* Proprietorships and partnerships that are

set up as LLCs provide limited liability.

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C4

CORPORATION

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).

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A1

TRANSACTION ANALYSIS AND THE

ACCOUNTING EQUATION
Accounting Equation

Assets

= Liabilities + Equity

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A1

ASSETS
Cash
Accounts
Receivable

Vehicles

Store
Supplies

Notes
Receivable

Resources
owned or
controlled by
a company

Land

Buildings
Equipment

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A1

LIABILITIES
Accounts
Payable

Notes
Payable

Creditors
claims on
assets
Taxes
Payable

Wages
Payable

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A1

EQUITY
Owners
Claims on
Assets

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P1

TRANSACTION ANALYSIS EQUATION

The accounting equation MUST remain in
balance after each transaction.

Assets

Liabilities

Equity

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P1

TRANSACTION 1: INVESTMENT BY OWNERS

On December 1, Chas Taylor invests
$30,000 cash to start a consulting business.
The accounts involved are:
(1) Cash (asset)
(2) Owner Capital (equity)

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P1

TRANSACTION 2: PURCHASE
SUPPLIES FOR CASH
Chas Taylors company, FastForward
purchases supplies paying $2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)

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P1

TRANSACTION 3: PURCHASE
EQUIPMENT FOR CASH
FastForward purchases equipment for
$26,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)

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P1

TRANSACTION 4: PURCHASE
SUPPLIES ON CREDIT

FastForward purchases Supplies of $7,100 on

account.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)

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P1

TRANSACTION 5: PROVIDE
SERVICES FOR CASH
The company provides consulting services
receiving $4,200 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)

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P1

TRANSACTION 6 AND 7: PAYMENT

OF EXPENSES IN CASH
The company pays $1,000 rent and $700 in
salary to the companys only employee.
The accounts involved are:
(1) Cash (asset)
(2) Expenses (equity)

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P1

SUMMARY OF TRANSACTIONS
Other transactions were executed during December and the summary of
all transactions is shown below:

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P2

FINANCIAL STATEMENTS
Lets prepare the financial statements reflecting
the transactions we have recorded.
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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P2

INCOME STATEMENT

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.

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P2

STATEMENT OF CHANGES IN EQUITY

FASTFORWARD
Statement of Changes in Equity
For Month Ended December 31, 2011

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P2

BALANCE SHEET
The Balance Sheet describes a companys financial
position at a point in time.

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P2

STATEMENT OF CASH FLOWS

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A2

DECISION ANALYSIS
Return on assets (ROA) is stated in ratio form as
income divided by assets invested.

Return on assets =

Net income
Average total assets

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A3

1A RETURN AND RISK ANALYSIS

Many different
returns may be
reported.

Risk is the
uncertainty about the
return we will earn.
The lower the risk, the lower our expected return.

ROA
Interest return on
savings accounts.
Interest return on
corporate bonds.

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C5

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.

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C6

1C - IASBs Conceptual
Framework for Financial
Reporting

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END OF CHAPTER 1