chapter 1 introduction to accounting and business accounting, 21 st edition author: warren reeve...

Chapter Chapter 11Introduction to Accounting Introduction to Accounting

and Businessand BusinessAccounting, 21st Edition

Author: Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.

Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

Manufacturing BusinessManufacturing BusinessManufacturing BusinessManufacturing Business

ProductProduct ProductProduct

General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television

General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television

Types of Businesses

Merchandising BusinessMerchandising BusinessMerchandising BusinessMerchandising Business


Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video

retailer

Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video

retailer

Types of Businesses

Service BusinessService BusinessService BusinessService Business


Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication

Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication

Types of Businesses

There are three types of business organizations:

There are three types of business organizations:

Proprietorship Partnership Corporation

A proprietorship is owned by one individual.

A proprietorship is owned by one individual.

Advantages• Ease in organizing• Low cost of

organizing

Disadvantage• Limited source of

financial resources• Unlimited liability

A partnership is owned by two or more individuals.

A partnership is owned by two or more individuals.

Advantages• More financial

resources than a proprietorship.

• Additional management skills.

Disadvantage

• Unlimited liability.

A corporation is organized under state or federal statutes as a separate legal entity.

A corporation is organized under state or federal statutes as a separate legal entity.

Advantage• The ability to obtain

large amounts of resources by issuing stocks.

Disadvantage

• Double taxation.

A business stakeholder is a person or entity having an interest in the economic performance of the business.

Business StakeholdersBusiness StakeholdersBusiness StakeholdersBusiness Stakeholders

STAKEHOLDERS

Internal: Owners, managers, employees

External: Customers, creditors, government

• Accounting provides information for managers to use in operating the business.

• In addition, accounting provides information to other stakeholders to use in assessing the economic performance and condition of the business.

The Role of Accounting in Business

The Role of Accounting in Business

•Accounting can be defined as an information system that provides reports to stakeholders about the economic activities and condition of a business.

•You may think of accounting as the “Language of business” this is because accounting is the means by which business information is communicated to the stakeholders.

Definition of AccountingDefinition of Accounting

Profession of AccountingProfession of AccountingProfession of AccountingProfession of Accounting

Accountants employed by a business firm or a not-for-profit organization are said to be

engaged in private accounting.

Accountants employed by a business firm or a not-for-profit organization are said to be

engaged in private accounting.

Accountants and their staff who provide services on a fee basis are said to be

employed in public accounting.

Accountants and their staff who provide services on a fee basis are said to be

employed in public accounting.

Generally Accepted Accounting Generally Accepted Accounting Principles (GAAP)Principles (GAAP)

Generally Accepted Accounting Generally Accepted Accounting Principles (GAAP)Principles (GAAP)

Financial accountants follow Generally Accepted Accounting Principles (GAAP) in preparing reports.

These reports allow investors and other stakeholders to compare one company to another.

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources The resources owned by a owned by a

businessbusiness

The resources The resources owned by a owned by a

businessbusiness



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

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



The rights of the The rights of the ownersowners

The rights of the The rights of the ownersowners

What is a business transaction?

A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

On November 1, 2005, Hassan Mohamed begins a business that will be known as Talasan

Business Transactions and the Accounting Equation

a. Hassan deposits $25,000 in a bank a. Hassan deposits $25,000 in a bank account in the name of account in the name of TalasanTalasan..

a. Hassan deposits $25,000 in a bank a. Hassan deposits $25,000 in a bank account in the name of account in the name of TalasanTalasan..

Hassan M, Capital25,000 Investment

by Hassan

Cash25,000 a.

Assets Owner’s Equity=

=

b. Talasan exchanged $20,000 for land.b. Talasan exchanged $20,000 for land.b. Talasan exchanged $20,000 for land.b. Talasan exchanged $20,000 for land.

Hassan M, Capital25,000

Cash + Land 25,000 Bal.

Assets Owner’s Equity=

=b. –20,000 +20,000Bal. 5,000 20,000 25,000

Accounts Hassan M,Cash + Supplies + Land Payable Capital

Assets

c. During the month, Talasan purchased c. During the month, Talasan purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).

c. During the month, Talasan purchased c. During the month, Talasan purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).

Owner’s Liabilities + Equity=

Bal. 5,000 20,000 25,000c. + 1,350 + 1,350

Bal. 5,000 1,350 20,000 1,350 25,000

=

d. Talasan provided services to d. Talasan provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.

d. Talasan provided services to d. Talasan provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.

Bal. 12,500 1,350 20,000 1,350 32,500d. + 7,500 + 7,500


Assets Owner’s Liabilities + Equity

Bal. 5,000 1,350 20,000 1,350 25,000Fees earned

=

=

e. – 3,650 –2,125– 800– 450

– 275

Wages

Rent

Util.

Misc.


Assets

e. Talasan paid the following expenses: e. Talasan paid the following expenses: wages, $2,125; rent, $800; utilities, wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.$450; and miscellaneous, $275.

e. Talasan paid the following expenses: e. Talasan paid the following expenses: wages, $2,125; rent, $800; utilities, wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.$450; and miscellaneous, $275.


Bal. 12,500 1,350 20,000 1,350 32,500

=

Bal. 8,850 1,350 20,000 1,35028,850


Assets

f. Talasan paid $950 to creditors f. Talasan paid $950 to creditors during the month.during the month.

f. Talasan paid $950 to creditors f. Talasan paid $950 to creditors during the month.during the month.


Bal. 8,850 1,350 20,000 1,350 28,850f. – 950 – 950

=

Bal. 7,900 1,350 20,000 400 28,850


Assets

g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.

g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.


Bal. 7,900 1,350 20,000 400 28,850g. – 800 – 800

=

Bal. 7,900 550 20,000 400 28,050

Supplies expense


Assets

h. At the end of the month, Hassan h. At the end of the month, Hassan withdrew $2,000 in cash from the withdrew $2,000 in cash from the business for personal use.business for personal use.

h. At the end of the month, Hassan h. At the end of the month, Hassan withdrew $2,000 in cash from the withdrew $2,000 in cash from the business for personal use.business for personal use.

Owner’s Liabilities + Equity

Bal. 7,900 550 20,000 400 28,050h. –2,000 –2,000Bal. 5,900 550 20,000 400 26,050

With-drawal

=

=

Owner’s withdrawals

Expenses

Decreased byDecreased by

Owner’s Equity

Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity

Increased byIncreased by

Owner’s investments

Revenues

Net income

Accounting reports, called financial statements, provide summarized information to the owner.

Accounting reports, called financial statements, provide summarized information to the owner.

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements• Income statement—A summary of the revenue and

expenses for a specific period of time.

• Statement of owner’s equity—A summary of the changes in the owner’s equity that have occurred during a specific period of time.

• Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date.

• Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.

Fees earned $7 500 00

Operating expenses:

Rent expense

$2 125 00Wages expense

800 00

Supplies expense

450 00Utilities expense

275 00Miscellaneous expense

Total operating expenses 1 135 00

TalasanIncome Statement

For the Month Ended November 30, 2005

800 00

Net income $3 050 00

Hassan M, capital, November 1, 2005 $ 0

TalasanStatement of Owner’s Equity

For the Month Ended November 30, 2005

Investment on November 1 $25 000 00Net income for November 3 050 00

$28 050 00Less withdrawals 2 000 00Increase in owner’s equity 26 050 00Hassan M, capital, November 30, 2005 $26 050 00

Assets Liabilities

TalasanBalance Sheet

November 30, 2005

Cash $ 5 900 00 Accounts Payable $ 400 00

Supplies 550 00 Owner’s Equity

Land 20 000 00 Hassan M, cap. 26 050 00

Total liabilities and

Total assets $26 450 00 owner’s equity $26 450 00

This balance sheet presented using the account form

When the balance sheet displays the liabilities and owner’s equity below the

assets, the report form is being used.

When the balance sheet displays the liabilities and owner’s equity below the

assets, the report form is being used.

The EndThe End

Chapter 1Chapter 1

chapter 1 introduction to accounting and business accounting, 21 st edition author: warren reeve...

Documents

business information

government accounting

public accounting

role of accounting

private accounting

business firm

language of business

economic performance