Accounting and the

Business Environment
Chapter 1
Objective 1

Use accounting
vocabulary
Accounting...

is an information system that...

measures business activities,

processes information, and...

communicates financial information.

Accounting...

is called the language of business.

Users of Accounting Information

External users Internal users

make decisions make decisions
about the entity. for the entity.
Fields of Accounting

Financial Accounting

Management Accounting
 The Authority Underlying
Accounting
Public Sector
(SEC)

Private Sector Private Sector

(AICPA) (IMA) (FASB)

GAAP
Standards of Professional
Conduct

Standards of
Ethical
AICPA’s Code of
Conduct of the
Professional
Institute of
Conduct
Management
Accountants
Types of Business Organizations

Proprietorships

Partnerships

Corporations
Proprietorships
 What are some advantages?
– total undivided authority
– no restrictions on type of business – must
be legal
 What are some disadvantages?
– unlimited liability
– limitation on size – fund raising power
Partnerships
 What are some advantages?
better credit standing – possibly
– more brain power, but consultation with
partners required
 What are some disadvantages?
– unlimited personal liability for general
partners
– need for written partnership agreement
Corporations
 What are some advantages?
– separate legal existence
– limited liability of stockholders
– transferability of ownership relatively easy
 What are some disadvantages?
– taxes – possible double taxation
– extensive governmental regulation
Objective 2

Apply Accounting
Concepts and Principles
Generally Accepted
Accounting Principles
 What is the primary objective of financial
reporting?

To provide information useful

for making investment and
lending decisions
The Entity Concept Example
 Assume that John decides to open up a gas
station and coffee shop.
 The gas station made $250,000 in profits,
while the coffee shop lost $50,000.
The Entity Concept Example
 How much money did John make?
 At a first glance, we would assume that
John made $200,000.
 However, by applying the entity concept we
realize that the gas station made $250,000
while the coffee shop lost $50,000.
 The Reliability (Objectivity)
Principle

Information must Information must

be reasonably be free from bias.
accurate.

Information must Individuals would

report what arrive at similar
actually conclusions using
happened. same data.
The Cost Principle

Assets and services

acquired
should be recorded
at their actual cost.
The Going Concern Concept

The entity will continue

to operate in the future.
The Stable-Monetary-Unit Concept

The dollar’s purchasing

power is relatively
stable.
Objective 3

Use the Accounting Equation

The Accounting Equation

Assets = Liabilities + Owner’s Equity

Economic Claims to
Resources Economic
Resources
Assets
 What is an asset?
 It is something a company owns which has
future economic value.
– land
– building
– equipment
– goodwill
Liability
 What is a liability?
 It is something a company owes.
– money
– service – legal retainers
– product – magazines
Owner’s Equity
 What is owner’s equity?
 It is what’s left of the assets after liabilities
have been deducted.
– the same as net assets
– the owner’s claim on the entity’s assets
 Transactions that Affect
Owner’s Equity
OWNER’S
EQUITY OWNER’S EQUITY
INCREASES DECREASES

Owner Investments Owner Withdrawals

in the Business from the Business

Owner’s Equity

Revenues Expenses
Revenues
 What are revenues?
 They are amounts received or to be received
from customers for sales of products or services.
– sales
– performance of services
– rent
– interest
Expenses
 What are expenses?
 They are amounts that have been paid or will be
paid later for costs that have been incurred to
earn revenue.
– salaries and wages
– utilities
– supplies used
– advertising
Objective 4

Analyze Business Transactions

Accounting for Business
Transactions
 What is a transaction?
 It is any event that both affects the financial
position of the business and can be reliably
recorded.
Accounting for Business
Transactions
1 Gay Gillen invests $30,000 to begin Gay
Gillen eTravel.
2 Gillen purchases an office location, paying
$20,000 in cash.
3 She buys office supplies, agreeing to pay
$500 in 30 days.
4 She earns and collects $5,500 revenues.
Accounting for Business
Transactions
5 Gillen performs services, and the client agrees
to pay $3,000 within one month.
6 During the month, she pays $3,300 for
expenses incurred.
7 Gillen pays $300 to the store from which she
purchased $500 worth of supplies.
 What is the effect of these transactions on the
accounting equation?
 Accounting for Business
Transactions
Owner’s
Assets = Liabilities + Equity
1) Cash + $30,000 + $30,000
2) Cash – 20,000
Land + 20,000
3) Supplies + 500 + 500
4) Cash + 5,500 + 5,500
5) Receivable + 3,000 + 3,000
6) Cash – 3,300 – 3,300
7) Cash – 300 – 300
Totals + $35,400 + 200 + $35,200
Accounting for Business
Transactions
 Notice that the equation always stays in
balance.
 Each transaction affects at least two
accounts, sometimes more.
 Some transactions affect only one side of
the equation; some affect both sides.
Accounting for Business
Transactions
 Other transactions that took place were as
follows:
 The business collected $1,000 from the
client.
 She sold some land at cost for $9,000.
 She withdrew $2,000 from the business.
Objective 5

Prepare Financial Statements

 Financial Statements...

– are the final

product of the
accounting process.

– tell how the

business is performing
and where it stands.
Financial Statements
– income statement
– statement of owner’s equity or retained
earnings
– balance sheet
– statement of cash flows
Objective 6

Evaluate Business
Performance
 Relationships Among the Statements:
Income Statement
Revenue:
Fees earned $8,500
Expenses:
Salary expense $1,200
Utilities and telephone expense 400
Equipment rental expense 600
Office rent expense 1,100 3,300
Net income $5,200
 Relationships Among the Statements:
Statement of Owner’s Equity

G. Gillen, capital, April 1, 20xx $ 0

Contribution of capital 30,000
Net income $ 5,200
Cash distributions – 2,000
G. Gillen, capital, April 30, 20xx $33,200
 Relationships Among the Statements:
Balance Sheet

Assets Liabilities
Cash $19,900 Accounts payable $ 200
Accounts receivable 2,000 Owner’s equity,
Supplies 500 G. Gillen, capital 33,200
Land 11,000 Total liabilities and
Total assets $ 33,400 owner’s equity $33,400
 Relationships Among the Statements:
Statement Of Cash Flows

Cash flows from operating activities:

Cash receipts from services rendered $6,500
Cash payments:
Supplies $ 300
Operating expenses 3,300 3,600
Net cash flows from
Operating activities $2,900
Cash flows from investing activities
Purchase and sale of land ($11,000)
Relationships Among the Statements:
Statement Of Cash Flows

Cash Flows from Financing Activities:

Investment by Owner $30,000
Withdrawals 2,000
Net Cash Flows from
Financing Activities $28,000
Cash at Beginning of Year 0
Cash at End of the Year $19,900
End of Chapter 1