PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPAWinston Kwok, Ph.D., CPA

Chapter 1

Accounting in Business

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

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IdentifyingSelect transactions and events

RecordingInput, measure and classify

CommunicatingPrepare, analyze and interpret

Importance of Accounting

Accounting

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Users of Accounting Information

External Users

•Lenders•Shareholders•Governments

•Consumer Groups•External Auditors•Customers

Internal Users

•Managers•Officers/Directors•Internal Auditors

•Sales Staff•Budget Officers•Controllers

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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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Users of Accounting Information

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Opportunities in AccountingC 2

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Beliefs that distinguish right

from wrong

Accepted standards of good and bad

behavior

Ethics - A Key ConceptC 3

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Ethics - A Key Concept

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Financial accounting practice is governed by concepts and rules known as generally accepted accounting

principles (GAAP).

Generally Accepted Accounting Principles

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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The Securities and Exchange Commission is the government agency that establishes reporting requirements

for companies that issue stock or shares to the public.

Setting Accounting Principles

Financial Accounting Standards Board Financial Accounting Standards Board is the private group that sets both is the private group that sets both

broad and specific principles. broad and specific principles.

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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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.

IASBIASB

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Principles and Assumptionsof Accounting

Cost PrincipleAccounting information is based on

actual cost. Actual cost is considered objective.

Revenue Recognition Principle1. 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 PrincipleA company must record its expenses

incurred to generate the revenue reported.

Full Disclosure PrincipleA company is required to report the

details behind financial statements that would impact users’ decisions.

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Accounting Assumptions

Monetary Unit AssumptionExpress transactions and events in

monetary, or money, units.

Business Entity AssumptionA business is accounted for

separately from other business entities, including its owner.

Time Period AssumptionPresumes that the life of a company can

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

Now Future

Going-Concern AssumptionReflects assumption that the business will continue operating instead of being

closed or sold.

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Forms of Business Entities

Sole Proprietorship

Partnership Corporation

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* Proprietorships and partnerships that are set up as LLCs provide limited liability.

Characteristics of Businesses

Characteristic Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes

**

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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).

CorporationC 4

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Transaction Analysis and the Accounting Equation

Assets = Liabilities + Equity

Accounting Equation

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Land

Equipment

Buildings

Cash

Vehicles

Store Supplies

Notes Receivable

Accounts Receivable

AssetsA 1

Resources owned or

controlled by a company

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Taxes Payable

Wages Payable

Notes Payable

Accounts Payable

Liabilities

Creditors’ claims on

assets

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Equity

Owner’s Claims on

Assets

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Transaction Analysis Equation

The accounting equation MUST remain in balance after each transaction.

Liabilities EquityAssets = +

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Transaction 1: Investment by Owners

The accounts involved are:(1) Cash (asset)(2) Owner Capital (equity)

On December 1, Chas Taylor invests $30,000 cash to start a consulting business.

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Transaction 2: PurchaseSupplies for Cash

The accounts involved are:(1) Cash (asset)(2) Supplies (asset)

Chas Taylor’s company, FastForward purchases supplies paying $2,500 cash.

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Transaction 3: PurchaseEquipment for Cash

The accounts involved are:(1) Cash (asset) (2) Equipment (asset)

FastForward purchases equipment for $26,000 cash.

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Transaction 4: PurchaseSupplies on Credit

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

FastForward purchases Supplies of $7,100 on account.

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Transaction 5: ProvideServices for Cash

The accounts involved are:(1) Cash (asset) (2) Revenues (equity)

The company provides consulting services receiving $4,200 cash.

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Transaction 6 and 7: Paymentof Expenses in Cash

The accounts involved are:(1) Cash (asset) (2) Expenses (equity)

The company pays $1,000 rent and $700 in salary to the company’s only employee.

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Summary of Transactions

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

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Financial StatementsLet’s prepare the financial statements reflecting the

transactions we have recorded.

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• 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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The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a

period of time due to earnings activities.

Income StatementP 2

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STATEMENT OF CHANGES IN EQUITYP 2

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The Balance Sheet describes a company’s financial position at a point in time.

Balance SheetP 2

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Statement of Cash FlowsP 2

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Decision Analysis

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

Net incomeAverage total assetsReturn on assets =

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1A Return and Risk AnalysisA 3

Many different returns may be reported.

ROA

Interest return on savings accounts.

Interest return on corporate bonds.

Risk is the uncertainty about the return we will

earn.

The lower the risk, the lower our expected return.

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1B - Business Activities and the Accounting Equation

There are three major types of activities in any organization:1.1.Financing Activities Financing Activities – Provide the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans.2.2.Investing Activities Investing Activities - Are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services.3.3.Operating Activities Operating Activities – Involve using resources to research, develop, and purchase, produce, distribute, and market products and services.

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1C - IASB’s Conceptual Framework for Financial

Reporting

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END OF CHAPTER 1