Accounting in

Action
Chapter
1-1

Accounting
Accounting in
in Action
Action

What is
Accounting?
Three
activities
Who uses
accounting
data

Chapter
1-2

The Building
Blocks of
Accounting
Ethics in
financial
reporting
Generally
accepted
accounting
principles
Assumptions

The Basic
Accounting
Equation
Assets
Liabilities
Owners
equity

Using the
Basic
Accounting
Equation
Transaction
analysis
Summary of
transactions

Financial
Statements
Income
statement
Owners
equity
statement
Balance
sheet
Statement of
cash flows

Transactions are a businesss economic events recorded

by accountants.

Chapter
1-3

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the accounting

equation.

What
What is
is Accounting?
Accounting?
The purpose of accounting is to:
(1) identify,
identify record,
record and communicate the

economic events of an

(2) organization to
(3) interested users.

Chapter
1-4

SO 1 Explain what accounting is.

What
What is
is Accounting?
Accounting?

Three Activities

Illustration 1-1
Accounting process

The accounting process includes

the bookkeeping function.
Chapter
1-5

SO 1 Explain what accounting is.

Who
Who Uses
Uses Accounting
Accounting Data?
Data?

Chapter
1-6

SO 2 Identify the users and uses of accounting.

Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Common Questions Asked
1. Can we afford to give our
employees a pay raise?

User
Human Resources

2. Did the company earn a

satisfactory income?

Investors

3. Do we need to borrow in the

near future?
4. Is cash sufficient to pay
dividends to the stockholders?

Management
Finance

5. What price for our product

will maximize net income?

Marketing

6. Will the company be able to

pay its short-term debts?

Creditors

Chapter
1-7

SO 2 Identify the users and uses of accounting.

The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Ethics In Financial Reporting
Standards of conduct by which ones actions are
judged as right or wrong, honest or dishonest, fair
or not fair, are Ethics.
Recent financial scandals include: Enron,
WorldCom, HealthSouth, AIG, and others.
Congress passed Sarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound
ethical behavior.
Chapter
1-8

SO 3 Understand why ethics is a fundamental business concept .

Building
Building blocks
blocks of
of accounting
accounting
Sarbanes-Oxley Act 2002
Reduce unethical behavior
Top

management has to certify accuracy of

financial information

Severe

penalties for fraud

Increased
Chapter
1-9

independence of outside auditors

Building
Building blocks
blocks of
of accounting
accounting
Generally Accepted Accounting Principles (GAAP) - A set of
rules and practices, having substantial authoritative support, that
the accounting profession recognizes as a general guide for
financial reporting purposes.
Standard-setting bodies determine these guidelines:

Chapter
1-10

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB)

International Accounting Standards Board (IASB)

The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Measurement Principles
Cost Principle Or historical cost principle, dictates that
companies record assets at their cost.

Fair Value Principle Indicates that assets and liabilities should

be reported at fair value (the price received to sell an asset or settle a
liability).

Chapter
1-11

SO 4 Explain generally accepted accounting principles and the cost principle.

Assumptions
Assumptions
Monetary Unit Assumption include in the

accounting records only transaction data that can be

expressed in terms of money.

Economic Entity Assumption requires that

activities of the entity be kept separate and distinct

from the activities of its owner and all other economic
entities.
Proprietorship.
Partnership.

Forms of
Business Ownership

Corporation.
Chapter
1-12

SO 5 Explain the monetary unit assumption

and the economic entity assumption.

Forms
Forms of
of Business
Business Ownership
Ownership
Proprietorship

Chapter
1-13

Partnership

Corporation

Owned by one
person.

Owned by two or
more persons.

Often small
service-type
businesses

Often retail and

service-type
businesses

Ownership
divided into
shares of stock

Owner receives
any profits,
suffers any
losses, and is
personally liable
for all debts.

Generally
unlimited
personal liability

Separate legal
entity organized
under state
corporation law
Limited liability

Partnership
agreement
SO 5 Explain the monetary unit assumption
and the economic entity assumption.

Basic
Basic accounting
accounting Equation
Equation

Chapter
1-14

Basic
Basic accounting
accounting equation
equation
Owners Equity increases

with

Investment (Capital): When owner puts in

cash in the business
Revenues: Anything coming into the
business due to business activity.

Owners Equity decreases

Chapter
1-15

with

Drawings: When owners withdraw cash from

business
Expenses: Costs of assets and services
consumed or used

Using the accounting equation

Transaction (1): Ray Neal decides to open a computer programming service
which he names Softbyte. On September 1, 2012, Ray Neal invests $15,000
cash in the business.

Chapter
1-16

Using the accounting equation

Transaction (2): Purchase of Equipment for Cash. Softbyte purchases
computer equipment for $7,000 cash.

Chapter
1-17

Using the accounting equation

Transaction (3): Softbyte purchases for $1,600 from Acme Supply Company
computer paper and other supplies expected to last several months. The
purchase is made on account.

Chapter
1-18

Using the accounting equation

Transaction (4): Softbyte receives $1,200 cash from customers for
programming services it has provided.

Chapter
1-19

Using the accounting equation

Transaction (5): Softbyte receives a bill for $250 from the Daily News for
advertising but postpones payment until a later date.

Chapter
1-20

Using the accounting equation

Transaction (6): Softbyte provides $3,500 of programming services for
customers. The company receives cash of $1,500 from customers, and it bills
the balance of $2,000 on account.

Chapter
1-21

Using the accounting equation

Transaction (7): Softbyte pays the following expenses in cash for September:
store rent $600, salaries of employees $900, and utilities $200.

Chapter
1-22

Using the accounting equation

Transaction (8): Softbyte pays its $250 Daily News bill in cash.

Chapter
1-23

Using the accounting equation

Transaction (9): Softbyte receives $600 in cash from customers who had
been billed for services [in Transaction (6)].

Chapter
1-24

Using the accounting equation

Transaction (10): Ray Neal withdraws $1,300 in cash from the business for
his personal use.

Chapter
1-25

Using the accounting equation

Illustration 1-8
Tabular summary of
Softbyte transactions

Chapter
1-26

Using the accounting equation

Illustration 1-8
Tabular summary of
Softbyte transactions

Chapter
1-27

Using the accounting equation

Illustration 1-8
Tabular summary of
Softbyte transactions

Chapter
1-28

Financial Statements
Companies prepare four financial statements :

Income
Statement

Chapter
1-29

Owners
Equity
Statement

Balance
Sheet

Statement of
Cash Flows

Financial Statements
Income Statement presents the revenues and expenses and resulting net
income or net loss for a specific period of time.
Owners Equity Statement summarizes the changes in the owners equity for
a specific period of time.

Chapter
1-30

Financial Statements
Balance Sheet reports the assets, liabilities, and owners equity at a specific
date. It ensures that the accounting equation is maintained.

Chapter
1-31

Financial Statements
Statement of Cash Flows: Summarizes
information about the cash inflows
(receipts) and outflows (payments) for a
specific period of time

Answers the following:

1. Where did cash come from?

2. What was cash used for?
3. What was the change in the cash balance?

Chapter
1-32