Wey AP 8e Ch01

CHAPTER 1
Accounting: An
Overview and
Analysis
Accounting Principles, Eighth Edition
Chapter
1-1
Study
Study Objectives
Objectives
1.
Explain what accounting is.
2.
Identify the users and uses of accounting.
3.
Understand why ethics is a fundamental business concept.
4.
Explain generally accepted accounting principles and the

cost principle.
5.
Explain the monetary unit assumption and the economic

entity assumption.
6.
State the accounting equation, and define assets, liabilities,

and owners equity.
7.
Analyze the effects of business transactions on the

accounting equation.
8.
Understand the four financial statements and how they are

prepared.
Chapter
1-2
Accounting
Accounting in
in Action
Action
What
What is
is
Accounting?
Three
activities
Who uses
accounting
data
Chapter
1-3
The
The Building
Building
Blocks
Blocks of
of
Accounting
Accounting
Ethics in
financial
reporting
Generally
accepted
accounting
principles
Assumptions
The
The Basic
Basic
Accounting
Accounting
Equation
Equation
Assets
Liabilities
Owners
equity
Using
Using the
the
Basic
Basic
Accounting
Accounting
Equation
Equation
Transaction
analysis
Summary of
transactions
Financial
Financial
Statements
Income
statement
Owners
equity
statement
Balance
sheet
Statement of
cash flows
What
What is
is Accounting?
Accounting?
The purpose of accounting is to:
(1) identify,
identify record,
record and communicate the
economic events of an
(2) organization to
(3) interested users.
Chapter
1-4
LO 1 Explain what accounting is.
What
What is
is Accounting?
Accounting?
Three Activities
Illustration 1-1
Accounting process
The accounting process includes

the bookkeeping function.
Chapter
1-5
LO 1 Explain what accounting is.
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Internal Users
Management
IRS
Investors
Human
Resources
Finance
Common Questions
Creditors
Marketing
Customers
Chapter
1-6
Labor
Unions
SEC
External
Users
LO 2 Identify the users and uses of accounting.
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Common Questions Asked
1. Can we afford to give our
employees a pay raise?
User
Human Resources
2. Did the company earn a

satisfactory income?
Investors
3. Do we need to borrow in the

near future?
Management
4. Is cash sufficient to pay

dividends to the stockholders?
Finance
5. What price for our product

will maximize net income?
Marketing
6. Will the company be able to

pay its short-term debts?
Creditors
Chapter
1-7
LO 2 Identify the users and uses of accounting.
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Discussion Question
Q1. Accounting is ingrained in our society and it is
vital to our economic system. Do you agree? Explain.
See notes page for discussion

Chapter
1-8
LO 3 Understand why ethics is a fundamental business concept .
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Ethics In Financial Reporting
Standards of conduct by which ones 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.
Chapter
1-9
Ethics
Ethics
Review Question
Ethics are the standards of conduct by which one's

actions are judged as:
Chapter
1-10
a.
right or wrong.
b.
honest or dishonest.
c.
fair or not fair.
d.
all of these options.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Various users
need financial
information
The accounting profession

has attempted to develop
a set of standards that
are generally accepted
and universally practiced.
Chapter
1-11
Financial Statements
Balance Sheet
Income Statement
Statement of Owners Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting
Principles (GAAP)
LO 4 Explain generally accepted accounting principles and the cost principle.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Organizations Involved in Standard Setting:
Securities and Exchange Commission (SEC)
http://www.sec.gov/
Financial Accounting Standards Board (FASB)

http://www.fasb.org/
International Accounting Standards Board

(IASB)
http://www.iasb.org/
Chapter
1-12
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Cost Principle (Historical) dictates that companies
record assets at their cost.
Issues:
Reported at cost when purchased and also over the
time the asset is held.
Cost easily verified, whereas market value is often
subjective.
Fair value information may be more useful.
Chapter
1-13
Assumptions
Assumptions
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.
Forms of
Business Ownership
Corporation.
Chapter
1-14
LO 5 Explain the monetary unit assumption

and the economic entity assumption.
Forms
Forms of
of Business
Business Ownership
Ownership
Proprietorship
Chapter
1-15
Partnership
Corporation
Generally owned
by one person.
Owned by two or
more persons.
Often small
service-type
businesses
Often retail and

service-type
businesses
Ownership
divided into
shares of stock
Owner receives
any profits,
suffers any
losses, and is
personally liable
for all debts.
Generally
unlimited
personal liability
Separate legal
entity organized
under state
corporation law
Limited liability
Partnership
agreement
Assumptions
Assumptions
Review Question
Combining the activities of Kellogg and General

Mills would violate the
Chapter
1-16
a.
cost principle.
b.
economic entity assumption.
c.
monetary unit assumption.
d.
ethics principle.

Forms
Forms of
of Business
Business Ownership
Ownership
Review Question
A business organized as a separate legal entity

under state law having ownership divided into
shares of stock is a
Chapter
1-17
a.
proprietorship.
b.
partnership.
c.
corporation.
d.
sole proprietorship.
The
The Basic
Basic Accounting
Accounting Equation
Equation
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.
Chapter
1-18
LO 6 State the accounting equation, and define

assets, liabilities, and owners equity.
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Owners
Equity

Assets
Resources a business owns.

Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Chapter
1-19

The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Owners
Equity

Liabilities
Claims against assets (debts and obligations).

Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
Chapter
1-20

The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Owners
Equity

Owners Equity
Ownership claim on total assets.

Referred to as residual equity.
Chapter
1-21
Capital, Drawings, etc. (Proprietorship or

Partnership).

Owners
Owners Equity
Equity
Illustration 1-6
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.
Chapter
1-22

Owners
Owners Equity
Equity
Illustration 1-6
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.
Chapter
1-23

Using
Using The
The Basic
Basic Accounting
Accounting Equation
Equation
Transactions are a businesss 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.
Chapter
1-24
LO 7 Analyze the effects of business transactions

on the accounting equation.
Transactions
Transactions (Question?)
(Question?)
Q1-15: Are the following events recorded in the
accounting records?
Owner
An employee
is hired.
withdraws
cash for
personal use.
Event
Supplies are
purchased
on account.
Criterion
Is the financial position (assets, liabilities, or

owners equity) of the company changed?
Record/
Dont Record
Chapter
1-25

Transactions
Transactions
Discussion Question
Q18. In February 2008, Paula King invested an
additional $10,000 in her business, Kings
Pharmacy, which is organized as a proprietorship.
Kings accountant, Lance Jones, recorded this
receipt as an increase in cash and revenues. Is
this treatment appropriate? Why or why not?
Chapter
1-26

Transactions
Transactions (Problem)
(Problem)
P1-1A: Barones Repair Shop was started on May 1 by
Nancy. Prepare a tabular analysis of the following
transactions for the month of May.
1. Invested $10,000 cash to start the repair shop.
Cash
1. +10,000
Chapter
1-27
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
+ Receivable + Equipment = Payable + Capital
+10,000
Investment

Transactions
(Problem)
2. Purchased equipment for $5,000 cash.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
1. +10,000
2.
-5,000
Chapter
1-28
+10,000
Investment
+5,000

Transactions
(Problem)
3. Paid $400 cash for May office rent.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
1. +10,000
2.
-5,000
3.
-400
Chapter
1-29
+10,000
Investment
+5,000
-400
Expense

Transactions
(Problem)
4. Received $5,100 from customers for repair service.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
1. +10,000
2.
-5,000
3.
4.
-400
+5,100
Chapter
1-30
+10,000
Investment
+5,000
-400
+5,100
Expense
Revenue

Transactions
(Problem)
5. Withdrew $1,000 cash for personal use.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
1. +10,000
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
-1,000
-1,000
Drawings
Chapter
1-31
+5,000

Transactions
(Problem)
6. Paid part-time employee salaries of $2,000.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
1. +10,000
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
6.
-1,000
-2,000
-1,000
-2,000
Drawings
Expense
Chapter
1-32
+5,000

Transactions
(Problem)
7. Incurred $250 of advertising costs, on account.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
1. +10,000
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
6.
-1,000
-2,000
-1,000
-2,000
Drawings
Expense
7.
Chapter
1-33
+5,000
+250
-250
Expense

Transactions
(Problem)
8. Provided $750 of repair services on account.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
1. +10,000
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
6.
-1,000
-2,000
-1,000
-2,000
Drawings
Expense
7.
8.
Chapter
1-34
+5,000
+250
+750
-250
+750
Expense
Revenue

Transactions
(Problem)
9. Collected $120 cash for services previously billed.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
1. +10,000
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
6.
-1,000
-2,000
-1,000
-2,000
Drawings
Expense
7.
8.
9.
+250
+750
+120
6,820 +
Chapter
1-35
+5,000
-120
630 +
5,000 =
250 +
-250
+750
Expense
Revenue
12,200

Financial
Statements
Companies
Companies prepare
prepare four
four financial
financial statements
statements from
from
the
the summarized
summarized accounting
accounting data:
data:
Income
Statement
Chapter
1-36
Owners
Equity
Statement
Balance
Sheet
Statement
of Cash
Flows
LO 8 Understand the four financial statements and how they are prepared.
Financial
Statements
Review Question
Net income will result during a time period when:
Chapter
1-37
a.
assets exceed liabilities.
b.
assets exceed revenues.
c.
expenses exceed revenues.
d.
revenues exceed expenses.
Financial
Statements
Income Statement
Barones Repair Shop
Income Statement
For the Month Ended May 31, 2007
Revenues:
Service revenue
Expenses:
Salary expense
Rent expense
Advertising expense
Total expenses
Net income
Chapter
1-38
5,850
2,000
400
250
2,650
3,200
Reports the revenues

and expenses for a
specific period of time.
Net income revenues
exceed expenses.
Net loss expenses
exceed revenues.
Financial
Statements
Income Statement
Owners Equity
Statement
Barones Repair Shop
Barones Repair Shop
Income Statement
Owners' Equity Statement
Revenues:
Service revenue
Expenses:
Salary expense
Rent expense
Advertising expense
Total expenses
Net income
5,850
2,000
400
250
2,650
3,200
Barone's, Capital May 1
Add: Investment
Net income
10,000
3,200
Less: Drawings
13,200
1,000
12,200
Net income is needed to determine

the ending balance in owners equity.
Chapter
1-39
Financial
Statements
Owners Equity
Statement
Statement indicates the
reasons why owners
equity has increased or
decreased during the
period.
Barones Repair Shop

10,000
3,200
13,200
1,000
12,200
Add: Investment
Net income
Less: Drawings
Chapter
1-40
Financial
Statements
Balance Sheet
Barones Repair Shop
Barones Repair Shop
Balance Sheet
May 31, 2007
Assets
Cash
Accounts receivable
Equipment
Total assets
6,820
630
5,000
12,450
Liabilities
Accounts payable
Owners' Equity
Barone's, capital
Total liab. & equity
Chapter
1-41
Owners Equity
Statement
250
Add: Investment
Net income
10,000
3,200
13,200
1,000
$ 12,200
Less: Drawings
12,200
$
12,450
The ending balance in owners equity is

needed in preparing the balance sheet
Financial
Statements
Balance Sheet
Barones Repair Shop
Balance Sheet
May 31, 2007
Assets
Cash
Accounts receivable
Equipment
Total assets
6,820
630
5,000
12,450
250
12,200
12,450
Liabilities
Accounts payable
Owners' Equity
Barone's, capital
Chapter
1-42
Reports the assets,

liabilities, and owners
equity at a specific date.
Assets listed at the top,
followed by liabilities
and owners equity.
Total assets must equal
total liabilities and
owners equity.
Financial
Statements
Balance Sheet
Balance Sheet
Cash flow from Operations
May 31, 2007

Assets
$
6,820
630
5,000
12,450
Liabilities
Accounts payable
Owners' Equity
Barone's, capital
Barones Repair Shop

Barones Repair Shop
Cash
Accounts receivable
Equipment
Total assets
250
12,200
12,450
Cash receipts from customers

Cash paid for expenses
Cash provided by operations
Cash flow from Investing
5,220
(2,400)
2,820
Purchase of equipment
Cash flow from Financing
(5,000)
Investment by owners
Drawings by owners
Cash provided by financing
Net increase in cash
10,000
(1,000)
9,000
6,820
Cash balance, May 1
6,820
Cash balance, May 31

Chapter
1-43
Financial
Statements
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?

Barones Repair Shop
Cash flow from Operations
Cash receipts from customers
Cash paid for expenses
Cash provided by operations
Cash flow from Investing
5,220
(2,400)
2,820
Purchase of equipment
Cash flow from Financing
(5,000)
Investment by owners
Drawings by owners
Cash provided by financing
Net increase in cash
10,000
(1,000)
9,000
6,820
Cash balance, May 1

Cash balance, May 31
Chapter
1-44
6,820
Financial
Statements
Review Question
Which of the following financial statements is

prepared as of a specific date?
Chapter
1-45
a.
Balance sheet.
b.
Income statement.
c.
Owner's equity statement.
d.
Statement of cash flows.
Financial
Statements
Discussion Question
Q19. A companys net income appears directly
on the income statement and the owners equity
statement, and it is included indirectly in the
companys balance sheet. Do you agree? Explain.

Chapter
1-46
Copyright
Copyright
Copyright 2006 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act
without the express written permission of the copyright owner
is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for his/her own
use only and not for distribution or resale. The Publisher
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caused by the use of these programs or from the use of the
information contained herein.
Chapter
1-47

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CHAPTER 1

Explain what accounting is.

Identify the users and uses of accounting.

Understand why ethics is a fundamental business concept.

Explain generally accepted accounting principles and the

Explain the monetary unit assumption and the economic

State the accounting equation, and define assets, liabilities,

Analyze the effects of business transactions on the

Understand the four financial statements and how they are

LO 1 Explain what accounting is.

The accounting process includes

LO 1 Explain what accounting is.

LO 2 Identify the users and uses of accounting.

2. Did the company earn a

3. Do we need to borrow in the

4. Is cash sufficient to pay

5. What price for our product

6. Will the company be able to

LO 2 Identify the users and uses of accounting.

See notes page for discussion

LO 3 Understand why ethics is a fundamental business concept .

LO 3 Understand why ethics is a fundamental business concept .

Ethics are the standards of conduct by which one's

fair or not fair.

all of these options.

LO 3 Understand why ethics is a fundamental business concept .

The accounting profession

LO 4 Explain generally accepted accounting principles and the cost principle.

Financial Accounting Standards Board (FASB)

International Accounting Standards Board

LO 4 Explain generally accepted accounting principles and the cost principle.

LO 4 Explain generally accepted accounting principles and the cost principle.

accounting records only transaction data that can be

Economic Entity Assumption requires that

activities of the entity be kept separate and distinct

LO 5 Explain the monetary unit assumption

Often retail and

Combining the activities of Kellogg and General

economic entity assumption.

monetary unit assumption.

LO 5 Explain the monetary unit assumption

A business organized as a separate legal entity

Provides the underlying framework for recording and

LO 6 State the accounting equation, and define

Provides the underlying framework for recording and

Resources a business owns.

LO 6 State the accounting equation, and define

Provides the underlying framework for recording and

Claims against assets (debts and obligations).

LO 6 State the accounting equation, and define

Provides the underlying framework for recording and

Ownership claim on total assets.

Capital, Drawings, etc. (Proprietorship or

LO 6 State the accounting equation, and define

Revenues result from business activities entered into for

LO 6 State the accounting equation, and define

Expenses are the cost of assets consumed or services

LO 6 State the accounting equation, and define

May be external or internal.

LO 7 Analyze the effects of business transactions

Is the financial position (assets, liabilities, or

LO 7 Analyze the effects of business transactions

LO 7 Analyze the effects of business transactions