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Introduction to

Accounting
and Business

After studying this chapter, you should be able to:


1. Describe the nature of a business and the

role of ethics and accounting in business.


2. Summarize the development of accounting

principles and relate them to practice.


3. State the accounting equation and define
each element of the equation.
2

After studying this chapter, you should be able to:


4. Describe and illustrate how business

transactions can be recorded in terms of the


resulting change in the basic elements of the
accounting equation.
5. Describe the financial statements of a
proprietorship and explain how they
interrelate.
3

1-1

Objective
Objective 11
Describe the nature of a
business and the role of ethics
and accounting in business.
4

1-1

Types of Businesses

Service
ServiceBusiness
Business
Plaza
Plaza Indonesia
Indonesia Realty
Realty Tbk.
Tbk.
Hotel
Hotel Sahid
Sahid Jaya
JayaTbk.
Tbk.
lodging
lodging
Bank
Bank Mandiri
MandiriTbk.
Tbk.
Garuda
Garuda Indonesia
Indonesia
Indosat
IndosatTbk.
Tbk.

Service
Service
Shopping
Shopping mall
mall
Hospitality
Hospitality and
and
Financial
Financial services
services
Transportation
Transportation
Telecommunication
Telecommunication
5

Types of Businesses

1-1

Merchandising
Merchandising Business
Business Product
Product
Matahari
Clothes
Matahari Putra
Putra Prima
PrimaTbk.
Tbk.
Clothes and
and apparel
apparel
Hero
Food
Hero Supermarket
SupermarketTbk.
Tbk.
Food and
and groceries
groceries
Toko
Books
Toko Gunung
GunungAgung
AgungTbk.
Tbk.
Books and
and stationeries
stationeries
Ace
Ace Hardware
Hardware Indonesia
IndonesiaTbk.
Tbk. Consumer
Consumer electronics
electronics
Alfa
Consumer
Alfa Retailindo
RetailindoTbk.
Tbk.
Consumer goods
goods

1-1

Types of Businesses

Manufacturing
Manufacturing Business
Business
Sepatu
Sepatu Bata
BataTbk.
Tbk.
Mustika
Mustika Ratu
RatuTbk.
Tbk.
Gudang
Gudang Garam
GaramTbk.
Tbk.
Mayora
Mayora Indah
IndahTbk.
Tbk.
Kalbe
Kalbe Farma
FarmaTbk.
Tbk.

Product
Product
Shoes
Shoes
Cosmetics
Cosmetics
Cigarettes
Cigarettes
Food
Food and
and beverages
beverages
Pharmaceutical
Pharmaceutical

Common Forms of Business Organizations

1-1

Proprietorship
Partnership
Corporation
Cooperatives

1-1

A proprietorship (perusahaan perseorangan)


is owned by one individual and
Most of Business entities in Indonesia is
proprietorship
Cost of organizing is low
Is limited to financial resources of the
owner.
Is used by small businesses.
9

1-1

A partnership is similar to a proprietorship


except that it is owned by two or more
individuals and
In Indonesia we know firma and CV as two
types of partnership. Firma and CV will be
discussed more in chapter 12.
Combines the skills and resources of more
than one person.
10

1-1

A corporation is organized under


government statues as a separate legal
taxable entity and

Continued
11

1-1

Includes ownership divided into shares


of stock, sold to shareholders
(stockholders).
Is able to obtain large amounts of
resources by issuing stock.
Is used by large businesses.

12

1-1

Cooperatives (Koperasi)
Is owned by a group of people (named as
member). Cooperatives mainly are
organized by and for member only. For
example Employee Cooperatives
(Koperasi Karyawan), Milk Farmer
Cooperatives (Koperasi Pengrajin Susu),
Batik Business Owner Cooperatives
(Koperasi Pengusaha Batik), and many
more

13

1-1

A business stakeholder is a
person or entity having an
interest in the economic
performance and well-being
of a business.
14

1-1

Capital market stakeholders


provide the major financing for the
business in order for the business to
begin and continue its operations.

15

1-1

Product or service market


stakeholders include customers
who purchase the businesss
products or services as well as
the vendors who supply inputs to
the business.
16

1-1

Government stakeholders have an


interest in the economic
performance of a business.
Provincial governments collect
taxes from businesses within their
jurisdiction.
17

1-1

Internal stakeholders include


individuals employed by the
business. Managers have an
incentive to maximize the
economic value of the business.
Employees have an interest
because their jobs depend on it.
18

1-1

The moral principles that guide


the conduct of individuals are
called ethics.

19

1-1

The answer to
1. Individual
What went
character
wrong for these
2. Firm culture
companies?
3. Laws and
(Exhibit 2)
enforcement
involves three
factors.
20

1-1

Accounting can be defined as an


information system that provides
reports to stakeholders about the
economic activities and
condition of a business.
21

1-1

The process by which accounting provides


information to business stakeholders is as follows:
Identify stakeholders.
Assess stakeholders information needs.
Design the accounting information system to
meet stakeholders needs.
Record economic data about business
activities and events.
Prepare accounting reports for stakeholders.
22

1-1

23
23

1-1

Financial accounting is primarily concerned


with the recording and reporting of economic
data and activities for a business.
Managerial accounting uses both financial
accounting and estimated data to aid
management in running day-to-day
operations and in planning future operations.
24

1-1

Accountants employed by a business firm or


a not-for-profit organization are said to be
employed in private accounting.
Accountants and their staff who provide
services on a fee basis are said to be
employed in public accounting.
25

1-2

Objective
Objective 22
Summarize the development
of accounting principles and
relate them to practice.
26

1-2

The business entity concept


limits the economic data in
the accounting system to
data related directly to the
activities of the business.
27

1-2

The cost concept is the


basis for entering the
exchange price, or cost
of an acquisition in the
accounting records.
28

1-2

The objectivity concept


requires that the accounting
records and reports be based
upon objective evidence.

29

1-2

The unit of measure


concept requires that
economic data be
recorded in rupiah.

30

1-2
Example Exercise 1-1
On August 25, Bengkel Agung Jaya extended an offer of
Rp125,000,000 for land that had been priced for sale at
Rp150,000,000. On September 3, Bengkel Agung Jaya accepted the
sellers counteroffer of Rp137,000,000. On October 20, the land was
assessed at a value of Rp98,000,000 for property tax purposes. On
December 4, Bengkel Agung Jaya was offered Rp160,000,000 for
the land by a national retail chain. At what value should the land be
recorded in Bengkel Agung Jayas records?

Follow My Example 1-1


Rp137,000,000. Under the cost concept, the land should be
recorded at the cost to Bengkel Agung Jaya.

31

1-3

Objective
Objective 33
State the accounting
equation and define each
element of the equation.
32

The Accounting Equation

1-3

Assets = Liabilities + Owners Equity


The resources
owned by a
business

33

The Accounting Equation

1-3

Assets = Liabilities + Owners Equity


The rights of the
creditors, which
represent debts
of the business
34

1-3

The Accounting Equation

Assets = Liabilities + Owners Equity


The rights of the
owners

35

1-3
Example Exercise 1-2
Asep Sunarya is the owner and operator of Pasti Sukses, a motivational consulting
business.
At the accounts
end of its accounting
Decembertrial
31, 2007,
PastiofSukses has
The
following
appear inperiod,
the adjusted
balance
assets of Rp800,000,000 and liabilities of Rp350,000,000. Using the accounting
Hindsight
Consulting. Indicate whether each account would be
equation, determine the following amounts:

reported in the (a) current asset; (b) property, plant, and


a. Owners(c)
equity,
as ofliability,
December(d)
31, long-term
2007.
equipment;
current
liability; or (e)
b. Owners
equity,
as ofof
December
31, 2008,31,
assuming
assets sheet
owners
equity
section
the December
2007,that
balance
increased by Rp130,000,000 and liabilities decreased by Rp25,000,000
of Hindsight
Consulting.
during 2008.

Follow My Example 1-2


a.

A = L + OE
Rp800,000,000 = Rp350,000,000 + OE
OE = Rp450,000,000

b.

A = L + OE
Rp130,000,000 = Rp25,000,000 + OE
OE = Rp155,000,000
OE on Dec. 31, 2008:
Rp605,000,000 (Rp450,000,000+Rp155,000,000)

36
36

1-4

Objective
Objective 44
Describe and illustrate how
business transactions can be
recorded in terms of the resulting
change in the basic elements of the
accounting equation.
37

1-4

A business transaction is an
economic event or condition that
directly changes an entitys
financial condition or directly
affects its results of operations.
38

1-4

@solusinet

On November 1, 2007, Cinta


Cita begins a business that will
be known as SolusiNet.
39

1-4

Assets
Cash
25,000,000

a.

=
=

Owners Equity
Cinta Cita, Capital
25,000,000
Investment by Cinta
Cita

a. Cinta Cita deposits Rp25,000,000 in a


bank account in the name of SolusiNet

40

1-4
(in Rp000)

Assets
Cash + Land
Bal. 25,000
b. 20,000
+20,000
Bal. 5,000
20,000

=
=

Owners Equity
Cinta Cita, Capital
25,000
25,000

b. SolusiNet exchanged Rp20,000,000 for


land.
41

1-4
(in Rp000)
Assets

Cash + Supplies + Land


Bal. 5,000
c.
Bal. 5,000

20,000
+1,350
1,350

20,000

Owners
Liabilities + Equity
Accounts
Cinta Cita,
Payable
Capital

25,000
+1,350
1,350

25,000

c. During the month, SolusiNet purchased


supplies for Rp1,350,000 and agreed to pay
the supplier in the near future (on
account).

42

1-4

Beginning with entry (d) the


asset section will be shown
first, then the liabilities and
owners equity will be shown
in the following slide.

43

1-4
(in Rp000)
Assets
Cash + Supplies + Land
5,000
1,350
20,000

Bal.
d. +7,500
12,500
Bal.

1,350

20,000

d. SolusiNet provided services to


customers, earning fees of Rp7,500,000
and received the amount in cash.

44

(in Rp000)

1-4

Liabilities +
Owners Equity
Accounts
Cinta Cita,
Fees
Payable +
Capital + Earned
Bal.
1,350
25,000
+7,500 d.
1,350
25,000
7,500 Bal.

d. SolusiNet provided services to


customers, earning fees of Rp7,500,000
and received the amount in cash.
45

Expenses

1-4

The amounts used in earning revenue are


called expenses. Adding expenses to the
owners equity section results in a space
problem. To adjust for these added
headings, the word Bal. has been omitted
from Slides 48, 50, 52, and 54. The
bottom row in these four slides provides
the balances after each transaction.
46

1-4

(in Rp000)
Assets
Cash + Supplies + Land
Bal. 12,500
1,350
20,000
e. 3,650
Bal. 8,850

1,350

20,000

e. SolusiNet paid the following expenses:


wages, Rp2,125,000; rent, Rp800,000;
utilities, Rp450,000; and miscellaneous,
Rp275,000.

47

1-4

(in Rp000)
Liabilities +
Owners Equity
Accounts
Cinta Cita,
Fees
Wages
Rent
Utilities
Payable + Capital + Earned Expense Expense Expense
Expense
1,350
25,000
7,500
1,350

25,000

7,500

2,125

800

450

2,125

800

450

Misc.

275

e.

275

e. SolusiNet paid the following expenses: wages,


Rp2,125,000; rent, Rp800,000; utilities,
Rp450,000; and miscellaneous, Rp275,000.

48

1-4

(in Rp000)
Assets
Cash + Supplies + Land
Bal. 8,850
1,350
20,000
f. 950
Bal. 7,900

1,350

20,000

f. SolusiNet paid Rp950,000 to


creditors during the month.

49

1-4

(in Rp000)

Liabilities +
Owners Equity
Accounts
Cinta Cita,
Fees
Wages
Rent
Utilities
Misc.
Payable + Capital + Earned Expense Expense Expense
Expense
800
450
275
1,350
25,000
7,500 2,125

f.

950
400

25,000

7,500

2,125

800

450

f. NetSolutions paid Rp950,000 to


creditors during the month.

275

50

1-4

(in Rp000)
Assets
Cash + Supplies + Land
Bal. 7,900
1,350
20,000
g.
Bal. 7,900

800
550

20,000

g. At the end of the month, the cost


of supplies on hand is Rp550,000,
so Rp800,000 of supplies were
used.

51

1-4

(in Rp000)
Liabilities +

Owners Equity

Accounts Cinta Cita, Fees


Wages
Payable + Capital + Earned
Exp.
400
25,000
7,500 2,125
400

25,000

7,500

2,125

Rent Supplies Util. Misc.


Exp.
Exp.
Exp. Exp.
800
450 275
g.
800
800

800

450 275

g. At the end of the month, the cost


of supplies on hand is
Rp550,000, so Rp800,000 of
supplies were used.

52

1-4

(in Rp000)
Assets
Cash + Supplies + Land
Bal. 7,900
550
20,000
h. 2,000
Bal. 5,900

550

20,000

h. At the end of the month, Cinta


withdrew Rp2,000,000 in cash
from the business for personal
use.

53

1-4

(in Rp000)
Liabilities +

Owners Equity

Accounts Cinta Cita,


Cinta Cita Fees Wages
Payable + Capital + Drawing Earned Exp.
400

25,000

7,500 2,125

Rent Supplies Util. Misc.


Exp.
Exp.
Exp. Exp.
800

800 450 275

h.

2,000
400

25,000

2,000

7,500 2,125

800

800

450

h. At the end of the month, Cinta


withdrew Rp2,000,000 in cash from
the business for personal use.

275

54

1-4

Owners Equity
Increased by

Decreased by

Owners
investments

Owners
withdrawals

Revenues

Expenses
55

1-4
Example Exercise 1-3
Simatupang Express is owned and operated by Bonar
Simatupang. The following selected transactions were
completed by Simatupang Express during February:
1. Received cash from owner as additional investment,
Rp35,000,00.
2. Paid creditors on account, Rp1,800,000.
3. Billed customers for delivery services on account,
Rp11,250,000.
4. Received cash from customers on account, Rp6,740,000.
5. Paid cash to owners for personal use, Rp1,000,000.
56
Continued

1-4
Example Exercise 1-3
Indicate the effect of each transaction on the accounting
equation elements (Assets, Liabilities, Owners Equity,
Drawing, Revenue, and Expense) by listing the numbers
identifying the transactions, (1) through (5). Also, indicate
the specific item within the accounting equation element
that is affected. To illustrate, the answer to (1) is shown
below.
(1) Asset (Cash) increases by Rp35,000,000; Owners
Equity (Bonar Simatupang, Capital) increases by
Rp35,000,000.

57

1-4
Follow My Example 1-3
(2) Asset (Cash) decreases by Rp1,800,000; Liability
(Accounts Payable) decreases by Rp1,800,000.
(3) Asset (Accounts Receivable) increases by Rp11,250,000;
Revenue (Simatupang Express) increases by
Rp11,250,000.
(4) Asset (Cash) increases by Rp6,740,000; Asset (Accounts
Receivable) decreases by Rp6,740,000.
(5) Asset (Cash) decreases by Rp1,000,000; Owners Equity
(Bonar Simatupang, Drawing) increases by Rp1,000,000.
58
For Practice: PE 1-3A, PE 1-3B

1-5

Objective
Objective 55
Describe the financial
statements of a proprietorship
and explain how they
interrelate.
59

1-5

Accounting reports, called


financial statements,
provide summarized
information to the owner.

60

1-5

The income statement is a


summary of the revenue
and expenses for a
specific period of time,
such as a month or a year.

61

1-5

Income Statement

Net income is carried to the


statement of owners equity
62

1-5

A statement of owners equity is


a summary of the changes in
the owners equity that have
occurred during a specific
period of time.

63

Statement of Owners Equity

1-5

From the income statement

To the balance sheet

64

1-5

A balance sheet is a list of


the assets, liabilities, and
owners equity as of a
specific date.

65

1-5

Balance Sheet

This amount is compared to the


net cash flow on the statement of
cash flows

From the statement


of owners equity
66

1-5

A statement of cash flows


is a summary of the cash
receipts and payments for
a specific period of time.

67

Statement of Cash Flows

This amount should match


Cash on the balance sheet.

1-5

68

Income Statement

1-5

The income statement reports the


revenues and expenses for a period of
time based on the matching concept.
This concept is applied by matching the
expenses with the revenue generated
during a period by those expenses.
69

1-5

The excess of revenue over


the expenses is called net
income or net profit. If the
expenses exceed the revenue,
the excess is a net loss.
70

1-5
Example Exercise 1-4
The assets and liabilities of Cimande Travel Service at April 30,
2008, the end of the current year, and its revenue and expenses
for the year are listed below. The capital of the owner, Adam
Kuncoro, was Rp80,000,000 at May 1, 2007, the beginning of the
current year.
Accounts payable
Accounts receivable
Cash
Fees earned
Land

Rp 12,200,000
31,350,000
53,050,000
263,200,000
80,000,000

Miscellaneous expense
Office expense
Supplies
Wages expense

Rp 12,950,000
63,000,000
3,350,000
131,700,000

Prepare an income statement for the current year ended April


30, 2008.
71

1-5
Follow My Example 1-4
CIMANDE TRAVEL SERVICE
INCOME STATEMENT
For the Year Ended April 30, 2008

Fees earned
Expenses:
Wages expense
Office expense
Miscellaneous expense
Total expenses
Net income

Rp263,200,000
Rp131,700,000
63,000,000
12,950,000

For practice: PE 1-4A, PE 1-4B

207,650,000
Rp 55,550,000

72

Statement of Owners Equity

1-5

The statement of owners


equity reports the changes in
the owners equity for a period
of time. It is prepared after the
income statement.
73

1-5
Example Exercise 1-5

Using the data for Cimande Travel Service shown


in Example Exercise 1-4, prepare a statement of
owners equity for the current year ended April 30,
2008. Adam Kuncoro invested an additional
Rp50,000,000 in the business during the year and
withdrew cash of Rp30,000,000 for personal use.

74

1-5
Follow My Example 1-5
CIMANDE TRAVEL SERVICE
STATEMENT OF OWNERS EQUITY
For the Year Ended April 30, 2008
Adam Kuncoro, capital, May 1, 2007
Additional investment by owner during year
Net income for the year
Less withdrawals
Increase in owners equity
Adam Kuncoro, capital, April 30, 2008

For Practice: PE 1-5A, PE 1-5B

Rp 80,000,000
Rp 50,000,000
55,550,000
Rp 105,550,000
30,000,000
75,550,000
Rp 155,550,000

75

Balance Sheet

1-5

The balance sheet reports


the amounts of a firms
assets, liabilities, and
owners equity at the end
of a specific period.

76

1-5

The account form of balance


sheet lists the assets on the left
and the liabilities and owners
equity on the rightsimilar to
design of an account.
77

1-5

The report form of balance


sheet presents the liabilities
and owners equity sections
below the assets section.

78

1-5
Example Exercise 1-6
Using the data for Cimande Travel Service shown in Example
Exercise 1-4 and 1-5, prepare the balance sheet as of April 30, 2008.

Follow My Example 1-6


CIMANDE TRAVEL SERVICE
BALANCE SHEET

Assets
Cash
Accounts receivable
Supplies
Land
Total assets

April 30, 2008

Liabilities

Rp 53,050,000 Accounts payable


31,350,000
3,350,000
Owners Equity
80,000,000 Adam Kuncoro, capital
Rp167,750,000 Total liab. & owners eq.

For Practice: PE 1-6A, PE 1-6B

Rp 12,200,000
155,550,000
Rp 167,750,000

79

Statement of Cash Flows

1-5

The statement of cash flows


consists of three sections:
(1) Operating activities
(2) Investing activities
(3) Financing activities

80

1-5

The cash flows from


operating activities section
reports a summary of cash
receipts and cash payments
from operations.

81

1-5

The cash flows from investing


activities section reports the cash
transactions for the acquisition and sale
of relatively permanent assets.

82

1-5

The cash flows from financing


activities section reports the
cash transactions related to cash
investments by the owner,
borrowings, and cash
withdrawals by the owner.
83

1-5

Example Exercise 1-7

A summary of cash flows for Cimande Travel Service for the


year ended April 30, 2008, is shown below.
Cash receipts:
Cash received from customers
Cash received from additional
investment of owner
Cash payments:
Cash paid for expenses
Cash paid for land
Cash paid to owner for personal use

Rp 251,000,000
50,000,000
210,000,000
80,000,000
30,000,000

The cash balance as of May 1, 2007, was Rp72,050,000.


Prepare a statement of cash flows for Cimande
Travel Service for the year ended April 30. 2008.

84
84

1-5

Follow My Example 1-7


CIMANDE TRAVEL SERVICE
STATEMENT OF CASH FLOWS
For the Year Ended April 30, 2008
Cash flows from operating activities:
Cash received from customers
Deduct cash payments for expenses
Net cash flows from operating activities
Cash flows from investing activities:
Cash payments for purchase of land
Cash flows from financing activities:
Cash received from owner as investment
Deduct cash withdrawals by owner
Net cash flows from financing activities
Net decrease in cash during year
Cash as of May 1, 2007
Cash as of April 30, 2008

For Practice: PE 1-7A, PE 1-7B

Rp251,000,000
210,000,000

Rp 41,000,000
(80,000,000)

Rp 50,000,000
30,000,000

20,000,000
Rp (19,000,000)
72,050,000
Rp 53,050,000

85
85

Interrelationships Among Financial Statements

1-5

The income statement and the statement


of owners equity are interrelated.
Net income or net loss
appears on both statements.

86

1-5

The statement of owners equity and


the balance sheet are interrelated.
The owners capital at the end of the
period on the statement of owners
equity also appears on the balance
sheet as owners capital.
87

1-5

The balance sheet and the statement


of cash flows are interrelated.

The cash on the balance sheet also


appears as the end-of-period cash on
the statement of cash flows.
88

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