n to

u c t i o
o d
Intr n g an d
u nt i
co 1
s s
A c
Bp u t
s e
i nre
a Ch
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Objectives

1. Describe the nature of a business and the role of

accounting and ethics 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.
4. Describe and illustrate how business transactions can
be recorded in terms of the resulting change in the
elements of the accounting equation.
5. Describe the financial statements of a proprietorship
and explain how they interrelate.
6. Describe and illustrate the use of the ratio of liabilities
to owners equity in evaluating a companys financial
condition.
 Lear
n
O bj e n g i
c t ive
busi
ness
Desc
r i be s, th
e ro the nat
1
and le of ac ure of a
ethi
cs in counting
bu s i ,
ness
.

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Nature of Business and Accounting

o A business is an organization in which

basic resources (inputs), such as
materials and labor, are assembled and
processed to provide goods or services
(outputs) to customers.
Nature of Business and Accounting

o The objective of most businesses is to

earn a profit.
o Profit is the difference between the
amounts received from customers for
goods or services and the amounts paid
for the inputs used to provide the goods or
services.
Types of Businesses

Service Businesses Service

Delta Air Lines Transportation services
The Walt Disney Company Entertainment services

Merchandising Businesses Product

WalMart General merchandise
Amazon.com Internet books, music, videos

Manufacturing Businesses Product

Ford Motor Company Cars, trucks, vans
Dell Inc. Personal computers
The Role of Accounting in Business

o Accounting can be defined as an

information system that provides reports
to users about the economic activities and
condition of a business.
The Role of Accounting in Business

o The process by which accounting provides

information to users is as follows:
Identify users.
Assess users information needs.
Design the accounting information system to
meet users needs.
Record economic data about business activities
and events.
Prepare accounting reports for users.
THE ROLE OF
ACCOUNTING
IN BUSINESS
Managerial Accounting

o The area of accounting that provides

internal users with information is called
managerial accounting or management
accounting.
o Managerial accountants employed by a
business are employed in private
accounting.
Financial Accounting

o The area of accounting that provides

external users with information is called
financial accounting.
o The objective of financial accounting is to
provide relevant and timely information
for the decision-making needs of users
outside of the business.
o General-purpose financial statements are
one type of financial accounting report
that is distributed to external users.
Role of Ethics in Accounting and
Business
o The objective of accounting is to provide
relevant, timely information for user
decision making.
o Accountants must behave in an ethical
manner so that the information they
provide users will be trustworthy and,
thus, useful for decision making.
o Ethics are moral principles that guide the
conduct of individuals.
Role of Ethics in Accounting and Business
Role of Ethics in Accounting and
Business
The answer to Failure of individual
character
What went wrong for Firm culture of
these companies? greed and ethical
indifference

involves one or both of

these factors. (Exhibit
2)
Role of Ethics in Accounting and
Business
Opportunities for Accountants

o Accountants and their staff who provide

services on a fee basis are said to be
employed in public accounting.
o Accountants employed by a business firm,
government, or a not-for-profit organization
are said to be employed in private accounting.
o Public accountants who have met a states
education, experience, and examination
requirements may become Certified Public
Accountants (CPAs).
Opportunities for Accountants
 Lear
Obje ingn
Sum c t i ve
acco
m ar
un
ize t
he nting
prin
deve
ciple lopmen
2
t
them s and re of
to p l a te
ract
ice.

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Generally Accepted Accounting Principles

o Financial accountants follow generally

accepted accounting principles (GAAP) in
preparing reports.
o Within the U.S., the Financial Accounting
Standards Board (FASB) has the primary
responsibility for developing accounting
principles.
Generally Accepted Accounting Principles

o The Securities and Exchange Commission

(SEC), an agency of the U.S. government,
has authority over the accounting and
financial disclosures for companies whose
shares of ownership (stock) are traded and
sold to the public.
o Many countries outside the United States
use generally accepted accounting
principles adopted by the International
Accounting Standards Board (IASB).
Business Entity Concept

o Under the business entity concept, the

activities of a business are recorded
separately from the activities of its
owners, creditors, or other businesses.
PROPRIETORSHIP

A proprietorship is 70% of business

owned by one entities in the U.S.
are proprietorships.
individual.
They are easy and
cheap to organize.
Resources are
limited to those of
the owner.
Used by small
businesses.
PARTNERSHIP

A partnership is 10% of business

similar to a organizations in
proprietorship the U.S.
(combined with
except that it is
limited liability
owned by two or companies) are
more individuals. partnerships.
Combines the
skills and
resources of more
than one person.
CORPORATION

A corporation is Generates 90% of

business revenues.
organized under
state or federal
20% of the business
organizations in the
statutes as a U.S.
separate legal Ownership is divided
into shares, called
taxable entity. stock.
Can obtain large
amounts of resources
by issuing stock.
Used by large
businesses.
LIMITED LIABILITY COMPANY
(LLC)
A limited liability 10% of business
company (LLC) organizations in
combines the the U.S. (combined
with partnerships).
attributes of a
partnership and a Often used as an
corporation. alternative to a
partnership.
Has tax and legal
liability advantages
for owners.
Cost Concept

o Under the cost concept, amounts are

initially recorded in the accounting records
at their cost or purchase price.
Cost Concept

o Aaron Publishers purchased a building on

February 20, 2012, for $150,000. Other
amounts related to this purchased are
shown on the next slide.
Cost Concept

Price listed by seller on Jan. 1, 2012 $160,000

Aaron Publishers initial offer to buy on Jan. 31, 2012
140,000
Purchase price on Feb. 20, 2012 150,000
Estimated selling price on Dec. 31, 2014 220,000
Assessed value for property taxes, Dec. 31, 2014 190,000
Under the cost concept, Aaron Publishers records
the purchase of the building on February 20,
2012, at the purchase price of
$150,000.
The other amounts listed above have no effect on
the accounting records.
Objectivity Concept

o The objectivity concept requires that the

amounts recorded in the accounting
records be based on objective evidence.
o Only the final agreed-upon amount is
objective enough to be recorded in the
accounting records.
Unit of Measure Concept

o The unit of measure concept requires that

economic data be recorded in dollars.
 Lear
n
O bj e n g i
c t i ve
3
Stat
an d e t h e ac
de co fine unti
e ac h ng e
elem quatio
ent n
of th
equa e
tion

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
The Accounting Equation

o The resources owned by a business are its

assets.
o The rights of creditors are the debts of the
business and are called liabilities.
o The rights of the owners are called
owners equity.
o The equation Assets = Liabilities +
Owners Equity is called the accounting
equation.
 THE
ACCOUNTING
EQUATION

Assets = Liabilities + Owners Equity

The resources
owned by a
business
 THE
ACCOUNTING
EQUATION

Assets = Liabilities + Owners Equity

The rights of
creditors are the
debts of the
business
 THE
ACCOUNTING
EQUATION

Assets = Liabilities + Owners Equity

The rights of the

owners
 Lear
O n in g
b j ec
Des c
tive
4
ribe
a nd
tran illu s
te
rms s action tra
te h
e le m o f the s ca n ow b
ents resu be r u s in
o f th lting e c or es s
e ac c h an de d
coun ge in in
ting
e q u a th e
t io n

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Business Transaction

o A business transaction is an economic

event or condition that directly changes
an entitys financial condition or its results
of operations.
TRANSACTION
A

On November 1, 2013, Chris Clark deposited

$25,000 in a bank account in the name of
NetSolutions.
TRANSACTION
B

On November 5, 2013, NetSolutions paid

$20,000 for the purchase of land as a future
building site.
TRANSACTION
C

On November 10, 2013, NetSolutions

purchased supplies for $1,350 and agreed to
pay the supplier in the near future.
Transaction C

o The liability created by a purchase on

account is called an account payable.
o Items such as supplies that will be used in
the business in the future are called
prepaid expenses, which are assets.
TRANSACTION
D

On November 18, 2013, NetSolutions received cash of

$7,500 for providing services to customers. A business
earns money by selling goods or services to its
customers. This amount is called revenue.
Transaction D

o Revenue from providing services is recorded

as fees earned.
o Revenue from the sale of merchandise is
recorded as sales.
o Other examples of revenue include rent,
which is recorded as rent revenue, and
interest, which is recorded as interest
revenue.
o An account receivable is a claim against a
customer, which is an asset.
TRANSACTION
E

During the month, NetSolutions spent cash or

used up other assets in earning revenue.
Assets used in this process of earning revenue
are called expenses.
TRANSACTION
E

On November 30, 2013, NetSolutions paid the

following expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
TRANSACTION
F

On November 30, 2013, NetSolutions paid

creditors on account, $950.
TRANSACTION
G

On November 30, 2013, Chris Clark

determined that the cost of supplies on
hand at the end of the period was $550.
TRANSACTION
H
On November 30, 2013, Chris Clark
withdrew $2,000 from NetSolutions for
personal use.
SUMMARY
Types of Transactions Affecting Owners Equity
 Lear
n
O bj e n gi
ctive
and
state
expl
me n
t
ai n h
s of
a
ibe t
he fi
Desc
ri
n an c
5
ow t p ro prie i al
he y to
inte rship
rrela
te .

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Financial Statements

o After transactions have been recorded

and summarized, reports are prepared for
users. The accounting reports providing
this information are called financial
statements.
 FINANCIAL
STATEMENTS
Income Statement

o The income statement reports the revenues

and expenses for a period of time, based on the
matching concept.
o The matching concept is applied by matching
the expenses incurred during a period with the
revenue that those expenses generated.
o The excess of the revenue over the expenses is
called net income, net profit, or earnings. If
expenses exceed revenue, the excess is a net
loss.
Statement of Owners Equity

o The statement of owners equity reports

the changes in the owners equity for a
period of time.
o It is prepared after the income statement
because the net income or net loss for the
period must be reported in this statement.
Financial Statements Income Statement

Net income is carried to

the statement of
owners equity.
Financial Statements Statement of Owners Equity

From the income statement

To the balance sheet

(continued)
Balance Sheet

o A balance sheet is a list of the assets,

liabilities, and owners equity as of a
specific date.
Account Form

o The account form of a balance sheet lists

the assets on the left and the liabilities
and owners equity on the right. It
resembles the basic format of the
accounting equation.
Financial Statements Balance Sheet

This amount is
compared to the From the statement
net cash flow on of owners equity
the statement of
cash flows.
(continued)
Statement of Cash Flows

o A statement of cash flows is a summary of

the cash receipts and cash payments for a
specific period of time.
It consists of three sections:
(1) operating activities
(2) investing activities
(3) financing activities
Financial Statements Statement of Cash Flows

This amount should match

Cash on the balance sheet
(concluded)
Cash Flows from Operating Activities
o The cash flows from operating activities
section reports a summary of cash
receipts and cash payments from
operations.
Cash Flows from Investing Activities

o The cash flows from investing activities

section reports the cash transactions for
the acquisition and sale of relatively
permanent assets.
Cash Flows from Financing Activities

o The cash flows from financing activities

section reports the cash transactions
related to cash investments by the owner,
borrowings, and withdrawals by the
owner.
INTERRELATIONSHIPS
AMONG FINANCIAL
STATEMENTS
Income Statement Net income or net
and Statement of loss reported on
Owners Equity the income
statement is also
reported on the
statement of
owners equity
and any additional
investments by
the owner during
the year.
Interrelationships Among Financial
Statements
o In Exhibit 6, NetSolutions net income of
$3,050 for November is added to Chris
Clarks investment of $25,000 in the
statement of owners equity.
INTERRELATIONSHIPS
AMONG FINANCIAL
STATEMENTS
Statement of Owners The owners
Equity and capital at the end
Balance Sheet of the period is
reported on the
statement of
owners equity
and is also
reported on the
balance sheet as
owners capital.
Interrelationships Among Financial
Statements
o In Exhibit 6, Chris Clark, Capital of $26,050 as of
November 30, 2013, on the statement of owners
equity also appears on the November 30, 2013,
balance sheet as Chris Clark, Capital.
INTERRELATIONSHIPS
AMONG FINANCIAL
STATEMENTS
Balance Sheet and The cash
Statement of Cash reported on the
Flows balance sheet is
also reported as
the end-of-
period cash on
the statement
of cash flows.
Interrelationships Among Financial
Statements
o In Exhibit 6, cash of $5,900 reported on
the balance sheet as of November 30,
2013, is also reported on the November
statement of cash flows as the end-of-
period cash.
 Lear
O n in g
b j ec
Desc
t ive
6
ribe
the a nd
r ati o illus
of lia trate
com biliti th e
e u
pany quity in es to ow se of
s fin eval ner
anci uatin s
al c o
ndit g a
ion.

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
 RATIO OF
LIABILITIES TO
OWNERS
EQUITY
Ratio of Liabilities Total Liabilities
=
to Owners Equity Total Owners Equity (or Total
Stockholders Equity)

Ratio of Liabilities $400

= = 0.015
to Owners Equity $26,050
 n to
u c t i o
o d
Intr n g a n d
un t i
c o d
s s
A c
Be u s E
i nne
Th T
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.