ACCOUNTING IN BUSINESS

Chapter 1

m
  
   
  

 IMPORTANCE OF ACCOUNTING
›

Accounting

Identifying
Select transactions and events

Recording
Input, measure and classify

Communicating
Prepare, analyze and interpret

Ú

 Slide 2
 ›

USERS OF ACCOUNTING
INFORMATION

External Users Internal Users

‡Lenders ‡Consumer Groups ‡Managers ‡Sales Staff

‡Shareholders ‡External Auditors ‡Officers/Directors ‡Budget Officers
‡Governments ‡Customers ‡Internal Auditors ‡Controllers

Ú

 Slide 3
›
USERS OF ACCOUNTING
INFORMATION

External Users Internal Users

Financial accounting provides Managerial accounting provides

external users with financial information needs for internal
statements. decision makers.

Ú

 Slide 4
›
OPPORTUNITIES IN ACCOUNTING
Financial Managerial Taxation
‡Preparation ‡General accounting ‡Preparation
‡Analysis ‡Cost accounting ‡Planning
‡Auditing ‡Budgeting ‡Regulatory
‡Regulatory ‡Internal auditing ‡Investigations
‡Consulting ‡Consulting ‡Consulting
‡Planning ‡Controller ‡Enforcement
‡Criminal ‡Treasurer ‡Legal services
investigation ‡Strategy ‡Estate plans

Accounting-related
‡Lenders ‡FBI investigators
‡Consultants ‡Market researchers
‡Analysts ‡Systems designers
‡Traders ‡Merger services
‡Directors ‡Business valuation
‡Underwriters ‡Human services
‡Planners ‡Litigation support
Ú

 ‡Appraisers ‡Entrepreneurs Slide 5
 ACCOUNTING JOBS BY AREA
›

Private
Public accounting
accounting 60%
25%

Government,
not-for-profit,
& education
15%

Ú

 Slide 6
›
ETHICS - A KEY CONCEPT

Ethics

Beliefs that Accepted standards

distinguish right of good and bad
from wrong behavior

Ú

 Slide 7
›

ETHICS - A KEY CONCEPT

9 Identify ethical 9 Analyze 9 Make ethical

concerns options decision

Use personal Consider all good Choose best

ethics to and bad option after
recognize ethical consequences. weighing all
concern. consequences.
Ú

 Slide 8
› GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
Financial accounting practice is governed by concepts
and rules known as generally accepted accounting
principles (GAAP).

Relevant Information Affects the decision of its users.

Reliable Information Is trusted by users.

Comparable Is helpful in contrasting

Information organizations.

Ú

 Slide 9
›
SETTING ACCOUNTING PRINCIPLES

Financial Accounting Standards Board

is the private group that sets both
broad and specific principles.

The Securities and Exchange Commission is the

government group that establishes reporting requirements
for companies that issue stock to the public.

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.
Ú

 Slide 10
 › PRINCIPLES AND ASSUMPTIONS OF
ACCOUNTING

Revenue Recognition Principle

1. Recognize revenue when it is earned. Cost Principle
2. Proceeds need not be in cash. Accounting information is based on
3. Measure revenue by cash received actual cost. Actual cost is
plus cash value of items received. considered objective.

Full Disclosure Principle

Matching Principle
A company is required to report the
A company must record its expenses
details behind financial statements
incurred to generate the revenue reported.
that would impact users¶ decisions.

Ú

 Slide 11
›
PRINCIPLES AND ASSUMPTIONS OF
ACCOUNTING

Now Future
Going-Concern Assumption Monetary Unit Assumption
Express transactions and events in
Reflects assumption that the business
monetary, or money, units.
will continue operating instead of
being closed or sold.

Business Entity Assumption Time Period Assumption

A business is accounted for Presumes that the life of a company can
separately from other business be divided into time periods, such as
entities, including its owner. months and years.
Ú

 Slide 12
 FORMS OF BUSINESS ENTITIES

Sole Partnership Corporation

Proprietorship

Ú

 Slide 13
 CHARACTERISTICS OF BUSINESSES
›

 
  

 
› 

 
    

   

  ñ  ñ 
   
 
   
 
    

* Proprietorships and partnerships that are

set up as LLCs provide limited liability.

Ú

 Slide 14
 CORPORATION

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 stock, we
call it common stock (or capital stock).

Ú

 Slide 15
 SARBANES-OXLEY (SOX)
Congress passed the Sarbanes-Oxley Act to help curb financial abuses at
companies that issue their stock to the public. Management must issue a report
stating that internal control are effective. Auditors must verify the effectiveness of
internal controls.

   

 
   
      
!Ú
 
       
"#$
% 
&
 
' Ú()
% 
* *     

Ú

 Slide 16
2 TRANSACTION ANALYSIS AND THE
ACCOUNTING EQUATION

Accounting Equation

Assets = Liabilities + Equity

Ú

 Slide 17
2

ASSETS
Cash
Accounts Notes
Receivable Receivable
Resources
owned or
Vehicles controlled by Land
a company

Store Buildings
Supplies
Equipment
Ú

 Slide 18
2

LIABILITIES

Accounts Notes
Payable Payable

Creditors¶
claims on
assets
Taxes Wages
Payable Payable

Ú

 Slide 19
 2

EQUITY
Owner¶s
Claims on
Assets

Equal to
Assets Minus
Liabilities
(Net Assets)
Ú

 Slide 20
2
EXPANDED ACCOUNTING EQUATION

2  ˜
      

 

  
›
 

 

    

Owner's Equity
Ú

 Slide 21
2

TRANSACTION ANALYSIS EQUATION

The accounting equation MUST remain in

balance after each transaction.

2  ˜
      

Ú

 Slide 22
2

TRANSACTION ANALYSIS

Chuck Taylor invests $30,000 cash to

start a consulting business.

w e accounts n o ed a e:
(1) Cas (asset)
(2) Owne Cap ta (equ ty)

Ú

 Slide 23
2

TRANSACTION ANALYSIS

Chuck Taylor invests $30,000 cash to

start a consulting business.
2ssets = L ab t es + Equ ty
2ccounts Notes C. way o
Cas
upp es Equ pment ayab e ayab e Cap ta
(1) $ 30 000 $ 30 000

$ 30 000 $ - $ - $ - $ - $ 30 000

$ 30 000 = $ 30 000

Ú

 Slide 24
2

TRANSACTION ANALYSIS
Purchased supplies paying $2,500 cash.

w e accounts n o ed a e:
(1) Cas (asset)
(2)
upp es (asset)

Ú

 Slide 25
2

TRANSACTION ANALYSIS
Purchased supplies paying $2,500 cash.
2ssets = L ab t es + Equ ty

2ccounts Notes C. way o

Cas
upp es Equ pment ayab e ayab e Cap ta
(1) $ 30 000 $ 30 000
(2) (2 500) $ 2 500

$ 27 500 $ 2 500 $ - $ - $ - $ 30 000

$ 30 000 = $ 30 000

Ú

 Slide 26
2

TRANSACTION ANALYSIS

Purchased equipment for $26,000 cash.

w e accounts n o ed a e:
(1) Cas (asset)
(2) Equ pment (asset)

Ú

 Slide 27
2

TRANSACTION ANALYSIS

Purchased equipment for $26,000 cash.

2ssets = L ab t es + Equ ty
2ccounts Notes C. way o
Cas
upp es Equ pment ayab e ayab e Cap ta
(1) $ 30 000 $ 30 000
(2) (2 500) $ 2 500
(3) (26 000) $ 26 000

$ 1 500 $ 2 500 $ 26 000 $ - $ - $ 30 000

$30 000 = $30 000

Ú

 Slide 28
2

TRANSACTION ANALYSIS

Purchased Supplies of $7,100 and on account.

w e accounts n o ed a e:
(1)
upp es (asset)
(2) 2ccounts ayab e ( ab ty)

Ú

 Slide 29
2

TRANSACTION ANALYSIS

Purchased Supplies of $7,100 and on account.

2ssets = L ab t es + Equ ty
2ccounts C. way o
Cas
upp es Equ pment ayab e Notes ayab e Cap ta
(1) $ 30 000 $ 30 000
(2) (2 500) $ 2 500
(3) (26 000) $ 26 000
(4) 7 100 $ 7 100

$ 1 500 $ 9 600 $ 26 000 $ 7 100 $ - $ 30 000

$ 37 100 = $ 37 100

Ú

 Slide 30
2

TRANSACTION ANALYSIS

Provided consulting services receiving $4,200

cash.

w e accounts n o ed a e:
(1) Cas (asset)
(2) Re enues (equ ty)

Ú

 Slide 31
2

TRANSACTION ANALYSIS

Provided consulting services receiving $4,200

cash.
2ssets = L ab t es + Equ ty
Equ pmen 2ccounts Notes C. way o
Cas
upp es t ayab e ayab e Cap ta Re enue
(1) $ 30 000 $ 30 000
(2) (2 500) $ 2 500
(3) (26 000) $ 26 000
(4) 7 100 $ 7 100
(5) 4 200 $ 4 200
$ 5 700 $ 9 600 $ 26 000 $ 7 100 $ - $ 30 000 $ 4 200

$ 41 300 = $ 41 300

Ú

 Slide 32
ï
FINANCIAL STATEMENTS
Let¶s prepare the Financial Statements reflecting
the transactions we have recorded.

1.
1.Income
Income Statement
2.
2.Statement
Statement of Owner¶s Equity
3.
3.Balance
Balance Sheet
4.
4.Statement
Statement of Cash Flows

Ú

 Slide 33
ï
INCOME STATEMENT
!
! " #
$ 

 

! %
&# #'  ( )*
`
  Net income is the


 
` 
 
  difference between

 
   Revenues and
  
` 
    Expenses.
      

     

   

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.
Ú

 Slide 34
 ï

STATEMENT OF OWNER¶S EQUITY

ðastð
wa
d
nc me
tatement
ð
 nt Endedecembe
312009 The net income of $4,400

e enues: increases Owner's Equity

C nsu tn 
e enue $ 00

enta 
e enue 300 by $4,400.
w ta 
e enues $ 100
Expenses:

entexpense 1000

a a
esexpense  00
w ta expenses 100
Netnc me $4400 ðastð
wa
d

tatement f Owne
s Equ ty
ð
 nt Endedecembe
31 2009
C way
Cap ta ecembe
12009 $-
us:n estmentby we
$30000
Netnc me 4400
34400
Less: t d
awa sby wne
200
C.way
Capta ecembe
312009 $34200

Ú

 Slide 35
 BALANCE SHEET
ï

The Balance Sheet describes a company¶s financial

position at a point in time.

ð
tð 

  n t
D   



t
L t
qut
›
  unt
p   
upp
  t  t

qup nt  qut
›.  › pt  
 t 

t
   t  t
 ndqut  

Ú

 Slide 36
ï
STATEMENT OF CASH FLOWS
,
, 
+  ›
,

,-.) !$'

›

 
      

›
   

›




 

›

 
›




 

 !
      

›

  
     

"
#
 $
 

  
     
$
›

        

%
 ! 
&   ! $
 

 !       
$'(
 
 
 (
›
!  ) !$' *
›
!  ) !$' (
Ú

 Slide 37
2
1A - RETURN AND RISK ANALYSIS
2

Return on assets (ROA) is

stated in ratio form as income
divided by assets invested.
Return on Assets
30 Year Bonds Risk is the uncertainty
about the return we will
7.80%
High-risk corporate
earn.
Medium-risk corporate 6.90%

Low-risk corporate 5.80%

U.S. Treasury 5.10%

0.00% 2.00% 4.00% 6.00% 8.00%

Ú

 Slide 38
› 1B - BUSINESS ACTIVITIES AND THE
ACCOUNTING EQUATION
There are three major types of activities in any organization:
1. Financing Activities ± Provide the means organizations
use to pay for resources such as land, buildings, and
equipment to carry out plans.
2. Investing Activities - Are the acquiring and disposing of
resources (assets) that an organization uses to acquire
and sell its products or services.
3. Operating Activities ± Involve using resources to
research, develop, and
purchase, produce, distribute, and market products and
services.

Ú

 Slide 39
 END OF CHAPTER 1

Ú

 Slide 40