Accounting 1

Copyright © 2012 Pearson Education1

Copyright © 2012 Pearson Education

Chapter 1

2


Define accounting vocabulary

Define the users of financial information

Describe the accounting profession and the organizations that govern it

Identify the different types of business organizations

Delineate the distinguishing characteristics

and organization of a proprietorship

3


Apply accounting concepts and principles

Describe the accounting equation, and define assets, liabilities, and equity

Use the accounting equation to analyze transactions

Prepare financial statements

Use financial statements to evaluate business performance

4


Define accounting vocabulary

5

1


Accounting is “the language of business.”

The information system that:

Measures business activity

Processes the data into reports

Communicates the results to decision makers

Presents information in monetary terms

6


Define the users of financial information

7

2


Individuals Businesses

Creditors Investors

Taxing Authorities


Financial Accounting

Provides information for external decision makers

Investors

Creditors

Taxing Authorities

Competition

Suppliers

Managerial Accounting

Focuses on information for internal decision makers

Managers

Business Owners

9


S1-2: USERS OF FINANCIAL INFORMATION

Suppose you are the manager of Greg’s Tunes. The company needs a bank loan in order to purchase music equipment. In evaluating the loan request, the banker asks about the assets and liabilities of the business. In particular, the banker wants to know the amount of the business’s stockholders’ equity.

Requirements:

1. Is the banker considered an internal or external user of financial information?

2. Which financial statement would provide the best information to answer the banker’s questions?

10

The banker is an external user.

The balance sheet would include assets,

liabilities and equity.


Describe the accounting profession and the organizations

that govern it

11

3


Lucrative career with many opportunities

Certified Public Accountants (CPAs)

Pass qualifying exam

Meet education and/or experience requirements

12

• Licensed professional accountants who serve the general publicCertified Public

Accountants, or CPAs

• Certified professionals who work for a single company.

Certified Management Accountants, or CMAs


• Financial Accounting Standards Board

• A privately funded organization, formulates accounting standards.

FASB

• Securities and Exchange Commission

• U.S. governmental agency that oversees U.S. financial markets.

SEC

• American Institute of Certified Public Accountants

• Private organization of public accountants AICPA

• Generally Accepted Accounting Principles

• Main U.S. accounting rule bookGAAP

• International Accounting Standards Board

• Publishes the International Financial Reporting Standards, the international accounting rule book

IASB


Investors and creditors want reliable financial information

Companies want to attract investors

Conflict of Interest


SEC requires companies to have financial statements examined by independent accountants

Auditors will provide an opinion on financial statements, if possible

Recent accounting scandals hurt investor confidence

U.S. Government passed the Sarbanes-Oxley Act (SOX)

Criminal offense to falsify financial statements

Also created the Public Companies Accounting Oversight Board (PCAOB)

Watchdog of accounting profession

15


Code of Professional Conduct

Guides CPAS in their work

AICPAStandards of Ethical Conduct

Sets standards for private accountants

IMA


Identify the different typesof business organizations

17

4


Proprietorship Partnership

Corporation LLC and LLP

Not-for-profit


Proprietorship Partners Corporation LLC, LLPNot-for-

Profit

OwnersProprietor:

One Owner

Partners:

Two or

more

Stockholders:

usually manyMembers None

Life of

Organization

Limited by

owner's

choice or

death

Limited by

owner’s

choice or

death

Indefinite Indefinite Indefinite

Liability of

owners for

business

debts

Proprietor:

Owner is

personally

liable

Partners are

personally

liable

Stockholders

not personally

liable

Members

are not

personally

liable

Fiduciary

liability

of board

members


Delineate the distinguishing characteristics and organization of

a proprietorship

20

5


• Distinct from owners

Separate Legal Entity

• The life of business is limited by the owner’s choice or the owner’s death

No Continuous Life/Transferability of Ownership

• Owner has unlimited liability for the business’s debts

Unlimited Liability of Owner


• Owners manage the business

Unification of Ownership and Management

• Not a separate taxable entity

• Income flows directly to the sole owner’s tax return, where he or she pays self-employment and income tax

Business Taxation

• Minimal regulation is an advantages

Government Regulation


Incorporators obtain charter from the state

Charter authorizes corporation to:

Issue stock

Conduct business in accordance with state law

Incorporators agreed to a set of bylaws

Bylaws are the rule book that guides the corporation.

Corporations begins to exist when stock is issued

Stockholders vote on who will serve on Board of Directors

23



S1-4: TYPES OF BUSINESS ORGANIZATION

Chloe Michaels plans on opening Chloe Michaels’ Floral Designs. She is considering the various types of business organizations and wishes to organize her business with unlimited life and limited liability features. Additionally, Chloe wants the option to raise additional equity easily in the future. Which type of business organization will meet Chloe’s needs best?

25

A corporation has all the requirements of Chloe’s

request. A corporation has an unlimited life,

shareholders have limited liability and additional

stock can be sold to raise additional equity.


Apply accounting concepts and principles

26

6


Generally Accepted Accounting Principles

Guidelines that govern accounting

Based on a conceptual framework

Goals include:

Provide useful information for investment and lending decisions

Must be relevant, reliable, and comparable

27


Entity Concept

Faithful Representation

Principle

Cost

Principle

Going-Concern Concept

Stable Monetary Unit

Concept


Entity Concept

• A business is separate from its owners

Faithful Representation Principle

• Accounting information is complete, neutral, and free from material error

Cost Principle

• Assets are recorded at purchase price


Going-Concern

• Assumption that business will remain in operation for the foreseeable future

Stable Monetary Unit Concept

• In the U.S. amounts are recorded in dollars

• The dollar is considered a stable unit of measure


Describe the accounting equation, and define assets, liabilities, and

equity

31

7


ASSETS LIABILITIES EQUITY

Economic

Resources

Claims to Economic

Resources


Economic resources

Benefit the business in the future

Examples:

Cash

Accounts receivable

Merchandise inventory

Furniture

Land

33


LiabilitiesDebts payable to outsiders

Examples:

Accounts payable

Bank loans

Mortgages

EquityOwner’s claims to the assets of the business

In a proprietorship, owner’s equity

34


Assets

Liabilities

Owner’s

Equity

$5,000 $2,000 $3,000

Assets Liabilities Equity


Capital

+ Net income(loss)

- Drawing

+ Revenues

- Expenses


Amounts earned by delivering goods or services to customers

Sales revenue

Service revenue

Interest revenue

Dividend revenue

37


Outflows of assets or increasing liabilities in the course of delivering goods or services to customers

Store or rent expense

Salary expense

Advertising expense

Utilities expense

Interest expense

Property tax expense

38


E1-16: CHARACTERISTICS OF A CORPORATION, ACCOUNTING CONCEPTS, AND USING THE

ACCOUNTING EQUATION

Select financial information for three corporations follows:

Requirements:

1. Compute the missing amount in the accounting equation for each entity.

39

Assets Liabilities Equity

New Rock Gas $24,000 $50,000

DJ Video Rentals $75,000 $32,000

Corner Grocery $100,000 $53,000

$ ?

$ ?

$ ?

$74,000

$43,000

$47,000


E1-16: CONTINUED

2. List the five main characteristics of a corporation.

3. Which accounting concept tells us that the previous three companies will cease to exist if the owners die?

40

Business Taxation

Government Regulation

Separate Entity with No Continuous Life

Unification of Ownership and Management

Unlimited Liability of Owner

Going Concern Concept


Use the accounting equation to analyze transactions

41

8


An event that affects the financial position of the business

Can be measured reliably

Every transaction impacts at least two items

The accounting equation balances before and after each transaction

42


Caren Smith opened a medical practice. During July, the first

month of operation, the business, titled Caren Smith, M.D.

experienced the following events:

1. Analyze the effects of these events on the accounting

equation of the medical practice of Caren Smith, M.D.


Caren Smith opened a medical practice. During July, the first

month of operation, the business, titled Caren Smith, M.D.

experienced the following events:

1. Analyze the effects of these events on the accounting

equation of the medical practice of Caren Smith, M.D.

Assets Liabilities Owner’s Equity

Date CashMedical supplies

LandAccounts payable

Smith, capital

Jul 6 $ 55,000 $ 55,000

Bal $ 55,000 $ 0 $ 0 $ 0 $ 55,000

9 (46,000) 46,000

Bal $9,000 $ 0 $46,000 $ 0 $55,000


Assets Liabilities Owner’sEquity



Smith, capital

Jul 12 $1,800 $1,800

Bal $9,000 $1,800 $46,000 $1,800 $55,000

15

Bal $9,000 $1,800 $46,000 $1,800 $55,000

15-31 8,000 8,000

Bal $17,000 $1,800 $46,000 $1,800 $63,000

29(1,600)

(900)(100)

(1,600)(900)(100)


Assets Liabilities Stockholders’ Equity



Common stock

Retained earnings

Bal $14,400 $1,800 $46,000 $1,800 $55,000 $5,400

30 (700) (700)

Bal $14,400 $1,100 $46,000 $1,100 $55,000 $5,400

31 (1,100) (1,100)

Bal $13,300 $1,100 $46,000 $ 0 $55,000 $5,400


Prepare financial statements

47

9


Income Statement

Statement of Owner’s Equity

Balance Sheet

Statement ofCash Flows







The statement of cash flows reports the cash coming in (positive amounts) and the cash going out (negative amounts) during a period.

Business activities result in a net cash inflow or a net cash outflow.

The statement of cash flows reports the net increase or decrease in cash during the period and the ending cash balance

54


Studio Photography works weddings and prom-type parties. The balance

of Ansel, capital was $16,000 at December 31, 2011. At December 31,

2012, the business’s accounting records show these balances:

Prepare the following financial statements for Studio Photography, Inc.

for the year ended December 31, 2012:

a. Income statement

b. Statement of owner’s equity

c. Balance sheet

Insurance expense $ 8,000 Accounts receivable $ 8,000

Cash 37,000 Note payable 12,000

Accounts payable 7,000 Ansel, capital, Dec 31, 2012 ?

Advertising expense 3,000 Salary expense 25,000

Service revenue 80,000 Equipment 50,000

Ansel, drawing 31,000 Owner’s investment, 2012 29,000


Studio Photography

Income Statement

Year Ended December 31, 2012

Revenue:

Service revenue $ 80,000

Expenses:

Salary expense $ 25,000

Insurance expense 8,000

Advertising expense 3,000

Total expenses 36,000

Net income $ 44,000


Studio Photography


Year Ended December 31, 2012

Ansel, capital, December 31, 2011 $ 16,000

Owner investment 29,000

Net income 44,000

Subtotal $ 89,000

Less: Drawings (13,000)

Ansel, capital, December 31, 2012 $ 76,000


Studio Photography, Inc.

Balance Sheet

December 31, 2012

Assets Liabilities

Cash $37,000 Accounts payable $ 7,000

Accounts receivable 8,000 Note payable 12,000

Equipment 50,000 Total liabilities 19,000

Owner’s Equity

Ansel, capital

Total assets $95,000Total liabilities and

owner’s equity$95,000

76,000


Use financial statements to evaluate business performance

59

10


Income Statement

Demonstrates profitability


Shows changes in

capital balance

Balance Sheet

Demonstrateseconomicresourcesas well asdebts the company

owes


Accounting is the language of business. Financial statements report a company’s activities in monetary terms.

Different users—including individuals, business owners, managers, investors, creditors, and tax authorities—review a company’s financial statements for different reasons. Each user’s goal will determine which pieces of the financial statements he or she will find most useful.

61


Most U.S. businesses follow generally accepted accounting principles (GAAP). If the company is publicly traded, then it must also follow SEC guidelines. If the company operates internationally, then international financial reporting standards (IFRS) will apply. The goal is that, eventually, all public U.S. companies will report using IFRS rules.

There are five main forms of business organizations: proprietorships, partnerships, corporations, LLPs/LLCs, and not-for-profits. Each is unique in its formation, ownership, life, and liability exposure.

62


Proprietorships are formed when one person creates a business. One person owns the proprietorship. Although the proprietorship is a separate entity, it has no continuous life, and the owner has unlimited liability for the business’s debts. Proprietorships have a more difficult time raising capital, but have the advantage of reduced regulation and less taxes than the corporate form of business.

The accounting concepts are the underlying assumptions used when recording financial information for a business. Think of the concepts like rules of a game. You have to play by the rules.

63


The accounting equation must always equal. That is, Assets (what you own) must equal Liabilities (what you owe) + Equity (net worth).

The accounting equation is Assets = Liabilities + Equity. Every business transaction affects various parts of the equation, but after each transaction is recorded, the equation must ALWAYS balance (equal).

Financial statements are prepared from the ending balances of each account. Each financial statement shows a different view of the company’s overall results

64


Financial statements are prepared from the transaction analyses (summary of events) reported in each account (Exhibit 1-6) in the order shown in Exhibit 1-7. No one financial statement shows everything about a company. It is the financial statements AND the relationships the statements show that give users the overall picture for a specific company.

65



Copyright

All rights reserved. No part of this publication may be reproduced, stored

in a retrieval system, or transmitted, in any form or by any means,

electronic, mechanical, photocopying, recording, or otherwise, without the

prior written permission of the publisher. Printed in the United States of

America.

Date post:	18-Jan-2016
Category:	Documents
Upload:	ebrucuhadaroglu
View:	135 times
Download:	0 times

Accounting 1

Documents