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Objectives
1. Describe the naturestudying this After of a business. 2. Describe the chapter, you should business. role of accounting in 3. Describe the importance of business ethics and be able to: the basic principles of proper ethical conduct. 4. Describe the profession of accounting. 5. Summarize the development of accounting principles and relate them to practice. 6. State the accounting equation and define each element of the equation.
Objectives
7. Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation. 8. Describe the financial statements of a proprietorship and explain how they interrelate. 9. Use the ratio of liabilities to owners equity to analyze the ability of a business to withstand poor business conditions.
STEP ONE
ANALYZING LOOKING AT EVENTS THAT HAVE TAKEN PLACE AND THINKING ABOUT HOW THEY AFFECT THE BUSINESS
STEP TWO
RECORDING ENTERING FINANCIAL INFORMATION ABOUT EVENTS INTO THE ACCOUNTING SYSTEM
STEP THREE
CLASSIFYING
STEP FOUR
SUMMARIZING
STEP FIVE
REPORTING
STEP SIX
INTERPRETING
Types of Businesses
Service Business
Product
Types of Businesses
Merchandising Business
Product
General merchandise Toys Consumer electronics Internet books, music, video retailer
Types of Businesses
Manufacturing Business
Product
Cars, trucks, vans Computer chips Jet aircraft Athletic shoes and apparel Beverages Stereos and television
Advantages
Ease in organizing Low cost of organizing Disadvantage Limited source of financial resources Unlimited liability
Joes
Advantages More financial resources than a proprietorship. Additional management skills. Disadvantage Unlimited liability.
Advantage The ability to obtain large amounts of resources by issuing stocks. Disadvantage Double taxation.
J & M, Inc.
Business Strategies A business strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.
Business Strategies
Under a low-cost strategy, a business designs and produces products or services of acceptable quality at a cost lower than that of its competitors.
Wal-Mart Southwest Airlines
Business Strategies
Under a differential strategy, a business designs and produces products or services that possess unique attributes or characteristics which customers are willing to pay a premium price.
Maytag Tommy Hilfiger
Business Stakeholders
A business stakeholder is a person or entity having an interest in the economic performance of the business.
Identify stakeholders.
Business Ethics
Sound Principles that form the foundation for ethical behavior
1. Avoid small ethical lapses. 2. Focus on your long-term reputation. 3. You may expect to suffer adverse personal consequences for holding to an ethical position.
Profession of 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.
The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business. The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.
The objectivity concept requires that the accounting records and reports be based upon objective evidence. The unit-of-measure concept requires that economic data be recorded in dollars.
On November 1, 2005, Chris Clark begins a business that will be known as NetSolutions.
Assets Cash + Land Bal. 25,000 b. 20,000 +20,000 Bal. 5,000 20,000
= =
c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account). (on account).
Assets Cash + Supplies + Land Bal. 5,000 c. Bal. 5,000 20,000 + 1,350 1,350 20,000 = + 1,350 1,350 = Owners Liabilities + Equity Accounts Chris Clark, Payable Capital 25,000 25,000
d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash.
Assets Cash + Supplies + Land Bal. 5,000 1,350 20,000 d. + 7,500 Bal. 12,500 1,350 20,000 = Owners Liabilities + Equity Accounts Chris Clark, Payable Capital 1,350 25,000 + 7,500 Fees earned 1,350 32,500
e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
Assets Cash + Supplies + Land Bal. 12,500 1,350 20,000 e. 3,650 = Owners Liabilities + Equity Accounts Chris Clark, Payable Capital 1,350 32,500 2,125 Wages 800 Rent 450 Util. 275 Misc. 1,350 28,850
Bal.8,850
1,350
20,000
g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used.
Assets Cash + Supplies + Land Bal. 7,900 1,350 20,000 g. 800 Bal. 7,900 550 20,000 = Owners Liabilities + Equity Accounts Chris Clark, Payable Capital 400 28,850 800 Supplies expense 400 28,050
h. At the end of the month, Chris withdrew $2,000 in cash from the business for personal use.
Assets Cash + Supplies + Land Bal. 7,900 550 20,000 h. 2,000 Bal. 5,900 550 20,000 = Owners Liabilities + Equity Accounts Chris Clark, Payable Capital 400 28,050 2,000 Withdrawal 400 26,050
Accounting reports, called financial statements, provide summarized information to the owner.
Financial Statements
Income statementA summary of the revenue and expenses for a specific period of time. Statement of owners equityA summary of the changes in the owners equity that have occurred during a specific period of time. Balance sheetA list of the assets, liabilities, and owners equity as of a specific date. Statement of cash flowsA summary of the cash receipts and disbursements for a specific period of time.
NetSolutions Income Statement For the Month Ended November 30, 2005 Fees earned Operating expenses: Wages expense Rent expense Supplies expense Utilities expense Miscellaneous expense Total operating expenses Net income $2 125 00 800 00 800 00 450 00 275 00 1 135 00 $3 050 00 $7 500 00
NetSolutions Statement of Owners Equity For the Month Ended November 30, 2005 Chris Clark, capital, November 1, 2005 Investment on November 1 From the income Net income for November $ $25 000 00 3 050 00 $28 050 00 2 000 00 26 050 00 $26 050 00 0
statement
Less withdrawals Increase in owners equity To the Chris Clark, capital, November 30, 2005
balance sheet
NetSolutions Balance Sheet November 30, 2005 Assets Cash Supplies Land Total assets
$ 5 900 00 Accounts Payable 550 00 Owners Equity 20 000 00 Chris Clark, cap.
When the balance sheet displays the liabilities and owners equity below the assets, the report form is being used.
NetSolutions Statement of Cash Flows For the Month Ended November 30, 2005 Cash flows from operating activities: Cash received from customers $ 7 500 00 Deduct cash payments for expenses and payments to creditors 4 600 00 Net cash flow from operating activities 2 900 00 Cash flows from investing activities: Cash payment for acquisition of land (20 000 00 ) Cash flows from financing activities: Cash received as owners investment $25 000 00 Deduct cash withdrawal by owner 2 000 00 Net cash flow from financing activities 23 000 00 Net cash flow and Nov. 30, 2005 cash bal. sheet $ 5 900 00 Should match Cash on the balance