ACCOUNTING IN BUSINESS

Chapter 1

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved
 IMPORTANCE OF ACCOUNTING
C1

Accounting

Identifying
Select transactions and events

Recording
Input, measure and classify

Communicating
Prepare, analyze and interpret

McGraw-Hill/Irwin Slide 2
 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

McGraw-Hill/Irwin Slide 3
C2 USERS OF ACCOUNTING
INFORMATION

External Users Internal Users

Financial accounting provides Managerial accounting provides

external users with financial information needs for internal
statements. decision makers.

McGraw-Hill/Irwin Slide 4
C3
OPPORTUNITIES IN ACCOUNTING
Financial Managerial Taxation
••Preparation
Preparation ••General
General accounting
accounting ••Preparation
Preparation
••Analysis
Analysis ••Cost
Cost accounting
accounting ••Planning
Planning
••Auditing
Auditing ••Budgeting
Budgeting ••Regulatory
Regulatory
••Regulatory
Regulatory ••Internal
Internal auditing
auditing ••Investigations
Investigations
••Consulting
Consulting ••Consulting
Consulting ••Consulting
Consulting
••Planning
Planning ••Controller
Controller ••Enforcement
Enforcement
••Criminal
Criminal ••Treasurer
Treasurer ••Legal
Legal services
services
investigation
investigation ••Strategy
Strategy ••Estate
Estate plans
plans

Accounting-related
••Lenders
Lenders ••FBI
FBI investigators
investigators
••Consultants
Consultants ••Market
Market researchers
researchers
••Analysts
Analysts ••Systems
Systems designers
designers
••Traders
Traders ••Merger
Merger services
services
••Directors
Directors ••Business
Business valuation
valuation
••Underwriters
Underwriters ••Human
Human services
services
••Planners
Planners ••Litigation
Litigation support
support
McGraw-Hill/Irwin ••Appraisers
Appraisers ••Entrepreneurs
Entrepreneurs Slide 5
 ACCOUNTING JOBS BY AREA
C3

Private
Public accounting
accounting 60%
25%

Government,
not-for-profit,
& education
15%

McGraw-Hill/Irwin Slide 6
C4
ETHICS - A KEY CONCEPT

Beliefs that Accepted standards

distinguish right of good and bad
from wrong behavior

McGraw-Hill/Irwin Slide 7
C4

ETHICS - A KEY CONCEPT

 Identify ethical Analyze  Make ethical
concerns options decision

Use personal Consider all good Choose best

ethics to and bad option after
recognize ethical consequences. weighing all
concern. consequences.
McGraw-Hill/Irwin Slide 8
C5 GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Financial accounting practice is governed by concepts
and rules known as generally accepted accounting
principles (GAAP).

Relevant Information Affects

Affects the decision of its
its users.

Reliable Information Is trusted by

by users.
users.

Comparable
Comparable Is helpful in
in contrasting
Information organizations.

McGraw-Hill/Irwin Slide 9
C5
SETTING ACCOUNTING PRINCIPLES

Financial
Financial Accounting
Accounting Standards
Standards Board
Board
is
is the
the private
private group
group that
that sets
sets both
both
broad
broad and
and specific
specific principles.
principles.

The Securities and Exchange Commission is the

government group 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.
McGraw-Hill/Irwin Slide 10
 C5 PRINCIPLES AND ASSUMPTIONS
OF ACCOUNTING

Revenue Recognition Principle

1. Recognize revenue when it is earned. Cost Principle
2. Proceeds need not be in cash. Accounting information is based on
3. Measure revenue by cash received actual cost. Actual cost is
plus cash value of items received. considered objective.

Full Disclosure Principle

Matching Principle A is required to report the details
A company must record its expenses
company behind financial statements
incurred to generate the revenue reported.
that would impact users’ decisions.

McGraw-Hill/Irwin Slide 11
C5
PRINCIPLES AND ASSUMPTIONS
OF ACCOUNTING

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.
McGraw-Hill/Irwin Slide 12
 FORMS OF BUSINESS ENTITIES

Sole
Sole Partnership
Partnership Corporation
Corporation
Proprietorship
Proprietorship

McGraw-Hill/Irwin Slide 13
 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.

McGraw-Hill/Irwin Slide 14
 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).

McGraw-Hill/Irwin Slide 15
 SARBANES-OXLEY (SOX)
Congress passed the Sarbanes-Oxley Act to help curb financial abuses at
companies that issue their stock to the public. Management must issue a report
stating that internal control are effective. Auditors must verify the effectiveness of
internal controls.

Company Alleged Accounting Abuses

Enron Inflating income, hid debt, and bribed officials
WorldCom Understated expenses to inflate income and hid debt
Fannie Mae Inflated income
Adelphia Communications Undersstated expenses to inflate income and hid debt
AOL Time Warner Inflated revenues and income
Xerox Inflated income
Bristol-Myers Squibb Inflated revenues and income
Nortel Networds Understated expenses to inflate income

McGraw-Hill/Irwin Slide 16
A1 TRANSACTION ANALYSIS AND THE
ACCOUNTING EQUATION

Accounting Equation

Assets = Liabilities + Equity

McGraw-Hill/Irwin Slide 17
A1

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

Store
Store Buildings
Buildings
Supplies
Supplies Equipment
Equipment
McGraw-Hill/Irwin Slide 18
A1

LIABILITIES

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

Creditors’
Creditors’
claims
claims on
on
assets
assets
Taxes
Taxes Wages
Wages
Payable
Payable Payable
Payable

McGraw-Hill/Irwin Slide 19
 A

EQUITY
Owner’s
Owner’s
Claims
Claimson
on
Assets
Assets

Equal
Equal to to
Assets
Assets Minus
Minus
Liabilities
Liabilities
(Net
(Net Assets)
Assets)
McGraw-Hill/Irwin Slide 20
 EXPANDED ACCOUNTING
EQUATION
A1

Assets
Assets = Liabilities
Liabilities + Equity
Equity

Owner Capital
Capital _ Owner
Owner _
Owner Withdrawals
Withdrawals + Revenues
Revenues Expenses
Expenses

Owner's Equity
McGraw-Hill/Irwin Slide 21
 TRANSACTION ANALYSIS
EQUATION
A2

The accounting equation MUST remain in

balance after each transaction.

Assets
Assets = Liabilities
Liabilities + Equity
Equity

McGraw-Hill/Irwin Slide 22
 TRANSACTION ANALYSIS
A2

Chuck Taylor invests $30,000 cash to

start a consulting business.
The accounts involved are:
(1) Cash (asset)
(2) Owner Capital (equity)z

McGraw-Hill/Irwin Slide 23
 TRANSACTION ANALYSIS
A2

Chuck Taylor invests $30,000 cash to

start a consulting business.
  Assets = Liabilities + Equity
Accounts Notes C. Taylor
  Cash Supplies Equipment   Payable Payable   Capital
(1) $ 30,000             $ 30,000
                 
                 
                 
                 
  $ 30,000 $ - $ -   $ - $ -   $ 30,000
                 
    $ 30,000   =   $ 30,000    
                 

McGraw-Hill/Irwin Slide 24
 TRANSACTION ANALYSIS
A2

Purchased supplies paying $2,500 cash.

The accounts involved are:

(1) Cash (asset)
(2) Supplies (asset)

McGraw-Hill/Irwin Slide 25
 TRANSACTION ANALYSIS
A2

Purchased supplies paying $2,500 cash.

  Assets = Liabilities + Equity

Accounts Notes C. Taylor

  Cash Supplies Equipment   Payable Payable   Capital
(1) $ 30,000             $ 30,000
(2) (2,500) $ 2,500            
                 
                 
                 
  $ 27,500 $ 2,500 $ -   $ - $ -   $ 30,000
                 
    $ 30,000   =   $ 30,000    
                 

McGraw-Hill/Irwin Slide 26
 TRANSACTION ANALYSIS
A2

Purchased equipment for $26,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)

McGraw-Hill/Irwin Slide 27
 TRANSACTION ANALYSIS
A2

Purchased equipment for $26,000 cash.

  Assets = Liabilities +Equity
Accounts Notes C. Taylor
  Cash Supplies Equipment   Payable Payable   Capital
(1) $ 30,000            $ 30,000
(2) (2,500) $ 2,500           
(3) (26,000)   $ 26,000          
                
                
$ -
  $ 1,500 $ 2,500 $ 26,000   $ -   $ 30,000
                

    $30,000   =  $30,000    
                

McGraw-Hill/Irwin Slide 28
 TRANSACTION ANALYSIS
A2

Purchased Supplies of $7,100 and on account.

The accounts involved are:

(1) Supplies (asset)
(2) Accounts Payable (liability)

McGraw-Hill/Irwin Slide 29
A2
TRANSACTION ANALYSIS

Purchased Supplies of $7,100 and on account.

  Assets = Liabilities + Equity
Accounts C. Taylor
  Cash Supplies Equipment   Payable Notes Payable   Capital
(1) $ 30,000             $ 30,000
(2) (2,500) $ 2,500            
(3) (26,000)   $ 26,000          
(4)   7,100     $ 7,100      
                 
  $ 1,500 $ 9,600 $ 26,000   $ 7,100 $ -   $ 30,000
                 
    $ 37,100   =   $ 37,100    
                 

McGraw-Hill/Irwin Slide 30
 TRANSACTION ANALYSIS
A2

Provided consulting services receiving $4,200

cash.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

McGraw-Hill/Irwin Slide 31
 TRANSACTION ANALYSIS
A2

Provided consulting services receiving $4,200

cash.
  Assets = Liabilities + Equity
Equipmen Accounts Notes C. Taylor
  Cash Supplies t   Payable Payable   Capital   Revenue
(1) $ 30,000             $ 30,000   

(2) (2,500) $ 2,500               

$
(3) (26,000)   26,000             
(4)   7,100     $ 7,100         
(5) 4,200                $ 4,200
$
  $ 5,700 $ 9,600 26,000   $ 7,100 $ -   $ 30,000   $ 4,200
                    
    $ 41,300   =   $ 41,300       
                    

McGraw-Hill/Irwin Slide 32
P1
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

McGraw-Hill/Irwin Slide 33
P1
INCOME STATEMENT

Net income is the

difference between
Revenues and
Expenses.

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.
McGraw-Hill/Irwin Slide 34
P1

STATEMENT OF OWNER’S EQUITY

The net income of $4,400

increases Owner's Equity
by $4,400.

FastForward
Statement of Owner's Equity
For Month Ended December 31, 2009
C, Taylor, Capital December 1, 2009   $ -
Plus: Investment by ower $ 30,000  
Net income 4,400  
    34,400
Less: Withdrawals by owner   200
C. Taylor, Capital, December 31, 2009   $ 34,200
     
McGraw-Hill/Irwin Slide 35
 BALANCE SHEET
P1

The Balance Sheet describes a company’s financial

position at a point in time.

McGraw-Hill/Irwin Slide 36
P1
STATEMENT OF CASH FLOWS

McGraw-Hill/Irwin Slide 37
A3
1A - RETURN AND RISK ANALYSIS
A4

Return on assets (ROA) is

stated in ratio form as income
divided by assets invested.
Return on Assets
30 Year Bonds Risk is the uncertainty
about the return we will
earn.

McGraw-Hill/Irwin Slide 38
C6 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.

McGraw-Hill/Irwin Slide 39
 END OF CHAPTER 1

McGraw-Hill/Irwin Slide 40