Chapter Chapter 11Introduction to Accounting Introduction to Accounting

and Businessand Business

1. Describe the nature of a business.

2. Describe the role of accounting in business.

3. Describe the importance of business ethics and the basic principles of proper ethical conduct.

4. Describe the profession of accounting.

5. Summarize the development of accounting principles and relate them to practice.

6. State the accounting equation and define each element of the equation.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

7. Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation.

ObjectivesObjectivesObjectivesObjectives

8. Describe the financial statements of a proprietorship and explain how they interrelate.

9. Use the ratio of liabilities to owner’s equity to analyze the ability of a business to withstand poor business conditions.

STEP ONE

ANALYZING

LOOKING AT EVENTS THAT HAVE TAKEN PLACE AND THINKING ABOUT HOW

THEY AFFECT THE BUSINESS

STEP TWO

ENTERING FINANCIAL INFORMATION ABOUT

EVENTS INTO THE ACCOUNTING SYSTEM

RECORDING

STEP THREE

SORTING AND GROUPING SIMILAR ITEMS TOGETHER

CLASSIFYING

STEP FOUR

BRINGING THE VARIOUS ITEMS OF INFORMATION

TOGETHER TO DETERMINE A RESULT

SUMMARIZING

STEP FIVE

TELLING THE RESULTS

REPORTING

STEP SIX

DECIDING THE MEANING AND IMPORTANCE OF THE

INFORMATION IN VARIOUS REPORTS

INTERPRETING

Service BusinessService BusinessService BusinessService Business

ProductProduct ProductProduct

Triwasana EntertainmentGaruda Indonesia TransportationHilton Hotels Hospitality and lodgingBank BRI FinancialTelkomsel Telecommunication

Triwasana EntertainmentGaruda Indonesia TransportationHilton Hotels Hospitality and lodgingBank BRI FinancialTelkomsel Telecommunication

Types of Businesses

Merchandising BusinessMerchandising BusinessMerchandising BusinessMerchandising Business

ProductProduct ProductProduct

Matahari General merchandiseToys City ToysElectronic City Consumer electronicsAmazon.com Internet books, music, video

retailer

Matahari General merchandiseToys City ToysElectronic City Consumer electronicsAmazon.com Internet books, music, video

retailer

Types of Businesses

Manufacturing BusinessManufacturing BusinessManufacturing BusinessManufacturing Business

ProductProduct ProductProduct

Toyota Astra Motor Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftAdidas Athletic shoes and apparelCoca-Cola BeveragesPolytron Stereos and television

Toyota Astra Motor Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftAdidas Athletic shoes and apparelCoca-Cola BeveragesPolytron Stereos and television

Types of Businesses

There are three types of business organizations

There are three types of business organizations

Proprietorship Partnership Corporation

A proprietorship is owned by one

individual.

A proprietorship is owned by one

individual.

Advantages• Ease in organizing• Low cost of

organizing

Disadvantage• Limited source of

financial resources• Unlimited liability

Joe’s

A partnership is owned by two or more individuals.

A partnership is owned by two or more individuals.

Advantages• More financial

resources than a proprietorship.

• Additional management skills.

Disadvantage

• Unlimited liability.

Joe and Marty’s

A corporation is organized under state or federal statutes as a separate legal entity.

A corporation is organized under state or federal statutes as a separate legal entity.

Advantage• The ability to obtain

large amounts of resources by issuing stocks.

Disadvantage

• Double taxation.

J & M, Inc.

Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies

A business strategy is an integrated set of plans and actions designed to

enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.

Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies

Under a low-cost strategy, a business designs and produces products or

services of acceptable quality at a cost lower than that of its competitors.

Wal-Mart

Southwest Airlines

Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies

Under a differential strategy, a business designs and produces products or services

that possess unique attributes or characteristics which customers are willing

to pay a premium price.

Maytag

Tommy Hilfiger

Value Chain of a BusinessValue Chain of a BusinessValue Chain of a BusinessValue Chain of a Business

A value chain is the way a business adds value for its

customers by processing inputs into product or service.

InputsInputsBusiness Business ProcessesProcesses

Products or Products or ServicesServices

Customer Customer ValueValue

A business stakeholder is a person or entity having an interest in the

economic performance of the business.

Business StakeholdersBusiness StakeholdersBusiness StakeholdersBusiness Stakeholders

2Assess stakeholders’ informational needs.

The Process of The Process of Providing InformationProviding Information

The Process of The Process of Providing InformationProviding Information

STAKEHOLDERSInternal: Owners, managers, employees

External: Customers, creditors, government

1Identify stake-holders.

Accounting Information

System

Design the accounting information system to meet stakeholders’ needs.

34Record economic data about business activities and events.

The Process of The Process of Providing InformationProviding Information

The Process of The Process of Providing InformationProviding Information

5Prepare accounting reports for stakeholders.

STAKEHOLDERSInternal: Owners, managers, employees

External: Customers, creditors, government

Accounting Information

System

The Process of The Process of Providing InformationProviding Information

The Process of The Process of Providing InformationProviding Information

Business EthicsBusiness EthicsBusiness EthicsBusiness Ethics

1. Avoid small ethical lapses.

2. Focus on your long-term reputation.

3. You may expect to suffer adverse personal consequences for holding to an ethical position.

Sound Principles that

form the foundation for

ethical behavior

Sound Principles that

form the foundation for

ethical behavior

Profession of AccountingProfession of AccountingProfession of AccountingProfession of Accounting

Accountants employed by a business firm or a not-for-profit organization are said to be

engaged in private accounting.

Accountants employed by a business firm or a not-for-profit organization are said to be

engaged in private accounting.

Accountants and their staff who provide services on a fee basis are said to be

employed in public accounting.

Accountants and their staff who provide services on a fee basis are said to be

employed in public accounting.

Generally Accepted Generally Accepted Accounting Accounting

Principles (GAAP)Principles (GAAP)

Generally Accepted Generally Accepted Accounting Accounting

Principles (GAAP)Principles (GAAP)

The The business entity conceptbusiness entity concept limits the economic data in limits the economic data in the accounting system to the accounting system to

data related directly to the data related directly to the activities of the business.activities of the business.

The The business entity conceptbusiness entity concept limits the economic data in limits the economic data in the accounting system to the accounting system to

data related directly to the data related directly to the activities of the business.activities of the business.

The cost concept is the basis for entering the

exchange price, or cost of an acquisition in the

accounting records.

The cost concept is the basis for entering the

exchange price, or cost of an acquisition in the

accounting records.

The The objectivity conceptobjectivity concept requires that the accounting requires that the accounting records and reports be based records and reports be based

upon objective evidence.upon objective evidence.

The The objectivity conceptobjectivity concept requires that the accounting requires that the accounting records and reports be based records and reports be based

upon objective evidence.upon objective evidence.

The unit-of-measure concept requires that

economic data be recorded in dollars.

The unit-of-measure concept requires that

economic data be recorded in dollars.

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources The resources owned by a owned by a

businessbusiness

The resources The resources owned by a owned by a

businessbusiness

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the The rights of the creditors, which creditors, which represent debts represent debts of the businessof the business

The rights of the The rights of the creditors, which creditors, which represent debts represent debts of the businessof the business

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the The rights of the ownersowners

The rights of the The rights of the ownersowners

What is a business transaction?

A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

On November 1, 2005, Chris

Clark begins a business that will

be known as NetSolutions.

a. Chris Clark deposits $25,000 in a bank a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.account in the name of NetSolutions.

a. Chris Clark deposits $25,000 in a bank a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.account in the name of NetSolutions.

Chris Clark, Capital25,000 Investment

by Chris Clark

Cash25,000 a.

Assets Owner’s Equity=

=

b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.

Chris Clark, Capital25,000

Cash + Land 25,000 Bal.

Assets Owner’s Equity=

=b. –20,000 +20,000Bal. 5,000 20,000 25,000

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

c. During the month, NetSolutions purchased c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).

c. During the month, NetSolutions purchased c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).

Owner’s Liabilities + Equity=

Bal. 5,000 20,000 25,000c. + 1,350 + 1,350

Bal. 5,000 1,350 20,000 1,350 25,000

=

d. NetSolutions provided services to d. NetSolutions provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.

d. NetSolutions provided services to d. NetSolutions provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.

Bal. 12,500 1,350 20,000 1,350 32,500d. + 7,500 + 7,500

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets Owner’s Liabilities + Equity

Bal. 5,000 1,350 20,000 1,350 25,000Fees earned

=

=

e. – 3,650 –2,125– 800– 450

– 275

Wages

Rent

Util.

Misc.

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

e. NetSolutions paid the following e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.

e. NetSolutions paid the following e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.

Owner’s Liabilities + Equity=

Bal. 12,500 1,350 20,000 1,350 32,500

=

Bal. 8,850 1,350 20,000 1,35028,850

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

f. NetSolutions paid $950 to f. NetSolutions paid $950 to creditors during the month.creditors during the month.

f. NetSolutions paid $950 to f. NetSolutions paid $950 to creditors during the month.creditors during the month.

Owner’s Liabilities + Equity=

Bal. 8,850 1,350 20,000 1,350 28,850f. – 950 – 950

=

Bal. 7,900 1,350 20,000 400 28,850

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.

g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.

Owner’s Liabilities + Equity=

Bal. 7,900 1,350 20,000 400 28,850g. – 800 – 800

=

Bal. 7,900 550 20,000 400 28,050

Supplies expense

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

h. At the end of the month, Chris h. At the end of the month, Chris withdrew $2,000 in cash from the withdrew $2,000 in cash from the business for personal use.business for personal use.

h. At the end of the month, Chris h. At the end of the month, Chris withdrew $2,000 in cash from the withdrew $2,000 in cash from the business for personal use.business for personal use.

Owner’s Liabilities + Equity

Bal. 7,900 550 20,000 400 28,050h. –2,000 –2,000Bal. 5,900 550 20,000 400 26,050

With-drawal

=

=

Owner’s withdrawals

Expenses

Decreased byDecreased by

Owner’s Equity

Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity

Increased byIncreased by

Owner’s investments

Revenues

Net income

Accounting reports, called financial statements, provide summarized

information to the owner.

Accounting reports, called financial statements, provide summarized

information to the owner.

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements• Income statement—A summary of the revenue and

expenses for a specific period of time.

• Statement of owner’s equity—A summary of the changes in the owner’s equity that have occurred during a specific period of time.

• Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date.

• Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.

Fees earned $7 500 00

Operating expenses:

Rent expense

$2 125 00Wages expense

800 00

Supplies expense

450 00Utilities expense

275 00Miscellaneous expense

Total operating expenses 1 135 00

NetSolutionsIncome Statement

For the Month Ended November 30, 2005

800 00

Net income $3 050 00To the statement To the statement of owner’s equityof owner’s equityTo the statement To the statement of owner’s equityof owner’s equity

Chris Clark, capital, November 1, 2005 $ 0

NetSolutionsStatement of Owner’s Equity

For the Month Ended November 30, 2005

Investment on November 1 $25 000 00Net income for November 3 050 00

$28 050 00Less withdrawals 2 000 00Increase in owner’s equity 26 050 00Chris Clark, capital, November 30, 2005 $26 050 00

From the income From the income statementstatement

From the income From the income statementstatement

To the To the balance sheetbalance sheet

To the To the balance sheetbalance sheet

Assets Liabilities

NetSolutionsBalance Sheet

November 30, 2005

Cash $ 5 900 00 Accounts Payable $ 400 00

Supplies 550 00 Owner’s Equity

Land 20 000 00 Chris Clark, cap. 26 050 00

Total liabilities and

Total assets $26 450 00 owner’s equity $26 450 00

From the From the statement of statement of

owner’s equityowner’s equity

From the From the statement of statement of

owner’s equityowner’s equity

This balance sheet presented using the account form

When the balance sheet displays the liabilities and owner’s equity below the assets, the report form

is being used.

When the balance sheet displays the liabilities and owner’s equity below the assets, the report form

is being used.

Cash flows from operating activities:Cash received from customers $ 7 500 00Deduct cash payments for expenses and payments to creditors 4 600 00Net cash flow from operating activities 2 900 00

Cash flows from investing activities:Cash payment for acquisition of land (20 000 00

Cash flows from financing activities:

Cash received as owner’s investment $25 000 00

Deduct cash withdrawal by owner 2 000 00Net cash flow from financing activities 23 000 00

Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00

NetSolutionsStatement of Cash Flows

For the Month Ended November 30, 2005

Should match Should match CashCash on the balance sheet on the balance sheetShould match Should match CashCash on the balance sheet on the balance sheet

)

Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsCash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations.

Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets.

Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.

Ratio of liabilities to owner’s equity

=Total Liabilities

Total owner’s equity (or total stockholders’ equity)

The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze

the firm’s ability to withstand poor business conditions.

The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze

the firm’s ability to withstand poor business conditions.

Tools for Financial Tools for Financial Analysis and InterpretationAnalysis and Interpretation

Tools for Financial Tools for Financial Analysis and InterpretationAnalysis and Interpretation

Ratio of liabilities to

owner’s equity=

$400

$26,050

Tools for Financial Tools for Financial Analysis and InterpretationAnalysis and Interpretation

Tools for Financial Tools for Financial Analysis and InterpretationAnalysis and Interpretation

= 0.015Ratio of

liabilities to owner’s equity

The EndThe End

Chapter 1Chapter 1