Principle Accounting Chp 1

Chapter 1 Introduction to Accounting and Business

Objectives 1. Describe the nature of a business. After studying this 2. Describe the role of accounting in business. chapter, you should 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 owner’s 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 SORTING AND GROUPING SIMILAR ITEMS TOGETHER

STEP FOUR SUMMARIZING BRINGING THE VARIOUS ITEMS OF INFORMATION TOGETHER TO DETERMINE A RESULT

STEP FIVE REPORTING TELLING THE RESULTS

STEP SIX INTERPRETING DECIDING THE MEANING AND IMPORTANCE OF THE INFORMATION IN VARIOUS REPORTS

Types of Businesses Service Business Product

Triwasana Garuda Indonesia Hilton Hotels Bank BRI Telkomsel

Entertainment Transportation Hospitality and lodging Financial Telecommunication

Types of Businesses Merchandising Business Product

Matahari Toys City Electronic City Amazon.com

General merchandise Toys Consumer electronics Internet books, music, video retailer

Types of Businesses Manufacturing Business Product

Toyota Astra Motor Intel Boeing Adidas Coca-Cola Polytron

Cars, trucks, vans Computer chips Jet aircraft Athletic shoes and apparel Beverages Stereos and television

There are three types of business organizations  Proprietorship  Partnership  Corporation

A proprietorship is owned by one individual.

Joe’s

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.

Joe and Marty’s

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.

J & M, Inc.

Advantage • The ability to obtain large amounts of resources by issuing stocks. Disadvantage • Double taxation.

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

Value Chain of a Business A value chain is the way a business adds value for its customers by processing inputs into product or service. Inputs

Business Processes

Products or Services

Customer Value

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

The Process of Providing Information

1

Identify stakeholders.

STAKEHOLDERS External: Internal: Customers, Owners, creditors, managers, government employees

2

Assess stakeholders’ informational needs.

The Process of Providing Information

4

Record economic data about business activities and events.

Accounting Information System

3

Design the accounting information system to meet stakeholders’ needs.

The Process of Providing Information STAKEHOLDERS

Internal: Owners, managers, employees

5

Prepare accounting reports for stakeholders. Accounting Information System

External: Customers, creditors, government

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.

Generally Accepted Accounting Principles (GAAP)

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.

The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business

The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business

The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners

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, Chris Clark begins a business that will be known as NetSolutions.

a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.

a.

Assets

=

Cash 25,000

=

Owner’s Equity Chris Clark, Capital 25,000 Investment by Chris Clark

b. NetSolutions exchanged $20,000 for land. Assets Cash + Land Bal. 25,000 b. –20,000 +20,000 Bal. 5,000 20,000

= =

Owner’s Equity Chris Clark, Capital 25,000 25,000

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

=

Cash + Supplies + Land Bal. 5,000 c. Bal. 5,000

20,000 + 1,350 1,350

20,000

Owner’s Liabilities + Equity Accounts Chris Clark, Payable Capital

=

25,000 + 1,350 1,350

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

=

=

Owner’s 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

Bal.8,850

1,350

20,000

=

Owner’s Liabilities + Equity Accounts Chris Clark, Payable Capital 1,350 32,500 –2,125 Wages – 800 Rent – 450 Util. – 275 Misc. 1,350 28,850

f. NetSolutions paid $950 to creditors during the month. Assets Cash + Supplies + Land Bal. 8,850 1,350 20,000 f. – 950 Bal. 7,900 1,350 20,000

=

=

Owner’s Liabilities + Equity Accounts Chris Clark, Payable Capital 1,350 28,850 – 950 400 28,850

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

=

=

Owner’s 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

=

=

Owner’s Liabilities + Equity Accounts Chris Clark, Payable Capital 400 28,050 –2,000 Withdrawal 400 26,050

Effects of Transactions on Owner’s Equity Owner’s Equity Decreased by

Increased by

Owner’s withdrawals

Owner’s investments

Expenses

Revenues Net income

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

Financial 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.

NetSolutions Income Statement For the Month Ended November 30, 2005 Fees earned

$7 500 00

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

To the statement of owner’s equity

275 00 4 450 00 $3 050 00

NetSolutions Statement of Owner’s 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

statement

$

0

$25 000 00 3 050 00 $28 050 00 2 000 00

Less withdrawals Increase in owner’s equity To the Chris Clark, capital, November 30, 2005

balance sheet

26 050 00 $26 050 00

NetSolutions Balance Sheet November 30, 2005

From the statement of Liabilities owner’s equity

Assets Cash Supplies Land

$ 5 900 00 Accounts Payable 550 00

$

400 00

Owner’s Equity

20 000 00 Chris Clark, cap.

26 050 00

Total liabilities and Total assets

$26 450 00

owner’s equity

This balance sheet presented using the account form

$26 450 00

When the balance sheet displays the liabilities and owner’s 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 owner’s investment $25 000 00 Deduct cash withdrawal by owner 2 000 00 Net cash flow from financing activities 23 000 00 Net cashShould flow and Nov. 30, on 2005 bal. sheet $ 5 900 00 match Cash thecash balance

Statement of Cash Flows Cash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations. Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets. Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.

Tools for Financial Analysis and Interpretation The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze the firm’s ability to withstand poor business conditions. Total Liabilities Ratio of liabilities = to owner’s equity Total owner’s equity (or total stockholders’ equity)

Tools for Financial Analysis and Interpretation Ratio of $400 liabilities to = $26,050 owner’s equity Ratio of liabilities to = 0.015 owner’s equity

Chapter 1 The End