Chapter 01

ACCOUNTING IN BUSINESS

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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C1

IMPORTANCE OF ACCOUNTING
Accounting

Identifying
Select transactions and events

Recording
Input, measure and classify

Communicating
Prepare, analyze and interpret
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C2 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
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C2 USERS OF ACCOUNTING
INFORMATION

External Users Internal Users

Financial accounting Managerial accounting

provides external users provides information needs
with financial statements. for internal decision-makers.
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C2
OPPORTUNITIES IN ACCOUNTING
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C2

ACCOUNTING JOBS BY AREA

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C3

ETHICS - A KEY CONCEPT

Beliefs that Accepted standards

distinguish right of good and bad
from wrong behavior
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EXAMPLES OF ETHICAL DILEMMAS

Misleading information can lead to a
wrongful closing of a division that harms
workers, customers, and suppliers.
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C3

ETHICS - A KEY CONCEPT

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C4 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.
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C4

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 agency 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.
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C4

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.

IASB
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C4

INTERNATIONAL STANDARDS
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C4 PRINCIPLES AND ASSUMPTIONS

OF ACCOUNTING

Revenue Recognition Principle

1. Recognize revenue when it is earned.
(Goods are sold or services are
provided)
2. Proceeds need not be in cash.
3. Measure revenue by cash received plus
cash value of items received.
Cost Principle
Accounting information is based on
actual cost. Actual cost is
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.
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C4

ACCOUNTING ASSUMPTIONS

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.
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C4

FORMS OF BUSINESS ENTITIES

Sole Partnership Corporation

Proprietorship
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C4

CHARACTERISTICS OF BUSINESSES
Characteristic Proprietorship Partnership Corporation
Business entity yes yes yes
Legal entity no no yes
Limited liability no* no* yes
Unlimited life no no yes
Business taxed no no yes
One owner allowed yes no yes

* Proprietorships and partnerships that are

set up as LLCs provide limited liability.
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C4
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).
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READINGS AND EXERCISES

Readings:
Chapter 1 (pages 1—9)

Exercises for the tutorial:

EX. 1-6,1-7,1-8.
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A1 TRANSACTION ANALYSIS AND THE

ACCOUNTING EQUATION

Accounting Equation

Assets = Liabilities + Equity

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A1

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

Store Buildings
Supplies
Equipment
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A1

LIABILITIES

Accounts Notes
Payable Payable

Creditors’
claims on
assets
Taxes Wages
Payable Payable
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A1

EQUITY
Owner’s
Claims on
Assets
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P1

TRANSACTION ANALYSIS EQUATION

The accounting equation MUST remain in
balance after each transaction.

Assets = Liabilities + Equity

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P1

TRANSACTION 1: INVESTMENT BY OWNERS

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

The accounts involved are:

(1) Cash (asset)
(2) Owner Capital (equity)
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P1 TRANSACTION 2: PURCHASE
SUPPLIES FOR CASH
Chas Taylor’s company, FastForward
purchases supplies paying $2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
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P1 TRANSACTION 3: PURCHASE
EQUIPMENT FOR CASH
FastForward purchases equipment for
$26,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
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P1 TRANSACTION 4: PURCHASE
SUPPLIES ON CREDIT
FastForward purchases Supplies of $7,100 on
account.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
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P1 TRANSACTION 5: PROVIDE
SERVICES FOR CASH
The company provides consulting services
receiving $4,200 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
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P1 TRANSACTION 6 AND 7: PAYMENT

OF EXPENSES IN CASH
The company pays $1,000 rent and $700 in
salary to the company’s only employee.
The accounts involved are:
(1) Cash (asset)
(2) Expenses (equity)
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P1

SUMMARY OF TRANSACTIONS
Other transactions were executed during December and the summary of
all transactions is shown below:
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P2

FINANCIAL STATEMENTS
Let’s prepare the financial statements reflecting the
transactions we have recorded.

1.Income Statement
2.Statement of Owner’s Equity
3.Balance Sheet
4.Statement of Cash Flows
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P2

INCOME STATEMENT

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.
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P2

STATEMENT OF OWNER’S EQUITY

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P2

BALANCE SHEET
The Balance Sheet describes a company’s financial
position at a point in time.
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P2
STATEMENT OF CASH FLOWS
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READINGS AND EXERCISES

Readings
Chapter One (pages 9-17 –except Cash flows)

Exercises for the tutorial

EX. 1-15,1-16,1-17 and Problem 1-2a.

Chapter Exercises:

Priority 1 QS 1-8, 1-10

Ex 1-6, 1-7, 1-8, 1-9, , 1-13, 1-15, 1-16, 1-17
Pr 1-2A
Priority 2 QS 1-6
EX 1-11, 1-12
Pr 1-3A, 1-4A, 1-5A, 1-7 A, 1-2B
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END OF CHAPTER 01