Chapter 1

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
Winston Kwok, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
 1-2

C4

FORMS OF BUSINESS ENTITIES

Sole
Sole Partnership
Partnership Corporation
Corporation
Proprietorship
Proprietorship
 1-3

C4

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

* Proprietorships and partnerships that are

set up as LLCs provide limited liability.
 1-4

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 shares, we
call it ordinary shares (or share capital).
 1-5

KEN FRANKLIN OWNS

A1
CLASS ACTIVITY
AND OPERATES KEN'S BURGERS, A SMALL FAST
FOOD STORE, LOCATED AT THE EDGE OF CITY COLLEGE CAMPUS IN
NEWTON, OHIO. AFTER SEVERAL VERY PROFITABLE YEARS, KEN'S
BURGERS BEGAN TO HAVE PROBLEMS. MOST OF THE PROBLEMS WERE
RELATED TO KEN'S EXPANSION OF THE EATING AREA IN THE
RESTAURANT WITHOUT CORRESPONDING INCREASES IN THE FOOD
PREPARATION AREA. KEN DOES NOT HAVE THE CASH OR FINANCIAL
BACKING TO EXPAND FURTHER. HE HAS THEREFORE DECIDED TO SELL
HIS BUSINESS.
 
TRENTON NEWELL IS INTERESTED IN PURCHASING THE BUSINESS.
HOWEVER, HE IS LOCATED IN ANOTHER CITY AND IS UNFAMILIAR WITH
NEWTON. HE HAS ASKED KEN WHY HE IS SELLING KEN'S BURGERS.
KEN REPLIES THAT HIS ELDERLY MOTHER REQUIRES EXTRA CARE, AND
THAT HIS BROTHER NEEDS HELP IN HIS MANUFACTURING BUSINESS.
BOTH ARE TRUE, BUT NEITHER IS HIS PRIMARY REASON FOR SELLING.
KEN REASONS THAT TRENTON SHOULD NOT HAVE ASKED HIM ANYWAY,
SINCE PROFITABLE BUSINESSES DON'T COME UP FOR SALE.
 
REQUIRED 1. IDENTIFY THE STAKEHOLDERS IN THIS SITUATION.
2. DID KEN ACT ETHICALLY IN NOT REVEALING FULLY HIS
REASONS FOR
SELLING THE BUSINESS? WHY OR WHY NOT?
 1-6

A1 TRANSACTION ANALYSIS AND

THE ACCOUNTING EQUATION

Accounting Equation

Assets = Liabilities + Equity

 1-7

A1

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

Store Buildings
Supplies
Equipment
 1-8

A1

LIABILITIES

Accounts Notes
Payable Payable

Creditors’
claims on
assets
Taxes Wages
Payable Payable
 1-9

A1

EQUITY
Owner’s
Claims on
Assets
 1 - 10

P1
TRANSACTION ANALYSIS
EQUATION
The accounting equation MUST remain in
balance after each transaction.

Assets
Assets = Liabilities
Liabilities + Equity
Equity
 1 - 11

P2

FINANCIAL STATEMENTS
Let’s prepare the financial statements reflecting the
transactions we have recorded.
• Income statement (Statement of
comprehensive income)
• Statement of changes in equity
• Balance sheet (Statement of financial
position)
• Statement of cash flows
 1 - 12

P2

BALANCE SHEET
The Balance Sheet describes a company’s financial
position at a point in time.
 1 - 13

P2
STATEMENT OF CASH FLOWS
 1 - 14

A2

DECISION ANALYSIS
Return on assets (ROA) is stated in ratio form as
income divided by assets invested.

Net income
Return on assets =
Average total assets
 1 - 15

A3

1A RETURN AND RISK ANALYSIS

Many different Risk is the uncertainty
returns may be about the return we will
reported. earn.

The lower the risk, the lower our expected return.

ROA
Interest return on
savings accounts.
Interest return on
corporate bonds.
 1 - 16

C5

1B - BUSINESS ACTIVITIES AND

THE ACCOUNTING EQUATION
There are three major types of activities in any organization:
1.Financing Activities – Provide the means organizations
use to pay for resources such as land, buildings, and
equipment to carry out plans.
2.Investing Activities - Are the acquiring and disposing of
resources (assets) that an organization uses to acquire and
sell its products or services.
3.Operating Activities – Involve using resources to research,
develop, and purchase, produce, distribute, and market
products and services.
 1 - 17

PREPARE AN INCOME STATEMENT, AN OWNER'S EQUITY STATEMENT,

AND A BALANCE SHEET FOR THE DENTAL PRACTICE OF CARL CRAFT,
DDS, FROM THE ITEMS LISTED BELOW FOR THE MONTH OF SEPTEMBER.
 
CARL CRAFT, CAPITAL, SEPTEMBER 1 $40,000
ACCOUNTS PAYABLE 7,000
EQUIPMENT 30,000
SERVICE REVENUE 24,000
CARL CRAFT, DRAWINGS 5,000
DENTAL SUPPLIES EXPENSE 3,500
CASH 6,000
UTILITIES EXPENSE 700
DENTAL SUPPLIES 2,800
SALARIES EXPENSE 7,000
ACCOUNTS RECEIVABLE 14,000
RENT EXPENSE 2,000
 1 - 18

END OF CHAPTER