You are on page 1of 54

Chapter 1

Introduction to Accounting
and Business

Objectives
1. Describe the nature
of a business.
After studying
this
2. Describe the chapter,
role of accounting
in business.
you should
3. Describe the importance
business ethics and
be ableofto:
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.

Objectives
7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
8. Describe the financial statements of a
proprietorship and explain how they interrelate.
9. Use the ratio of liabilities to owners 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
RECORDING
ENTERING FINANCIAL
INFORMATION ABOUT EVENTS INTO
THE ACCOUNTING SYSTEM

STEP THREE
CLASSIFYING
SORTING AND GROUPING SIMILAR
ITEMS TOGETHER

STEP FOUR
SUMMARIZING
BRINGING THE VARIOUS ITEMS OF
INFORMATION TOGETHER TO
DETERMINE A RESULT

STEP FIVE
REPORTING
TELLING THE RESULTS

STEP SIX
INTERPRETING
DECIDING THE MEANING AND
IMPORTANCE OF THE INFORMATION
IN VARIOUS REPORTS

Types of Businesses
Service Business
Product

Triwasana
Garuda Indonesia
Hilton Hotels
Bank BRI
Telkomsel

Entertainment
Transportation
Hospitality and lodging
Financial
Telecommunication

Types of Businesses
Merchandising Business
Product

Matahari
Toys City
Electronic City
Amazon.com

General merchandise
Toys
Consumer electronics
Internet books, music, video
retailer

Types of Businesses
Manufacturing Business
Product

Toyota Astra Motor


Intel
Boeing
Adidas
Coca-Cola
Polytron

Cars, trucks, vans


Computer chips
Jet aircraft
Athletic shoes and apparel
Beverages
Stereos and television

There are three types of


business organizations
Proprietorship
Partnership
Corporation

A proprietorship
is owned by one
individual.

Joes

Advantages
Ease in organizing
Low cost of
organizing

Disadvantage
Limited source of
financial resources
Unlimited liability

A partnership is
owned by two or
more individuals.

Joe and Martys

Advantages
More financial
resources than a
proprietorship.
Additional
management skills.
Disadvantage
Unlimited liability.

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

J & M, Inc.

Advantage
The ability to obtain
large amounts of
resources by issuing
stocks.
Disadvantage
Double taxation.

Business 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 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 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 Business


A value chain is the way a
business adds value for its
customers by processing inputs
into product or service.
Inputs

Business
Processes

Products or
Services

Customer
Value

Business Stakeholders
A business stakeholder is a person or
entity having an interest in the
economic performance of the business.

The Process of
Providing Information

Identify
stakeholders.

STAKEHOLDERS
External:
Internal:
Customers,
Owners,
creditors,
managers,
government
employees

Assess
stakeholders
informational
needs.

The Process of
Providing Information

Record
economic
data about
business
activities
and events.

Accounting
Information
System

Design the
accounting
information
system to meet
stakeholders
needs.

The Process of
Providing Information
STAKEHOLDERS

Internal:
Owners,
managers,
employees

Prepare
accounting
reports for
stakeholders.

External:
Customers,
creditors,
government

Accounting
Information
System

Business Ethics
Sound
Principles that
form the
foundation for
ethical
behavior

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.

Profession of 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.

Generally Accepted
Accounting
Principles (GAAP)

The business entity concept


limits the economic data in
the accounting system to
data related directly to the
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 objectivity concept


requires that the accounting
records and reports be based
upon objective evidence.
The unit-of-measure
concept requires that
economic data be
recorded in dollars.

The Accounting Equation


Assets = Liabilities + Owners Equity
The resources
owned by a
business

The Accounting Equation


Assets = Liabilities + Owners Equity
The rights of the
creditors, which
represent debts
of the business

The Accounting Equation


Assets = Liabilities + Owners Equity
The rights of the
owners

What is a business
transaction?

A business transaction is an economic event or


condition that directly changes an entitys 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


account in the name of NetSolutions.

a.

Assets

Cash
25,000

Owners Equity
Chris Clark, Capital
25,000 Investment
by Chris
Clark

b. NetSolutions exchanged $20,000 for land.

Assets
Cash + Land
Bal. 25,000
b. 20,000
+20,000
Bal. 5,000
20,000

=
=

Owners Equity
Chris Clark, Capital
25,000
25,000

c. During the month, NetSolutions purchased


supplies for $1,350 and agreed to pay the
supplier in the near future (on account).
Assets

Cash + Supplies + Land


Bal. 5,000
c.
Bal. 5,000

20,000
+ 1,350
1,350

20,000

Owners
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital

25,000
+ 1,350
1,350

25,000

d. NetSolutions provided services to


customers, earning fees of $7,500 and
received the amount in cash.
Assets

Cash + Supplies + Land


Bal. 5,000
1,350
20,000
d. + 7,500
Bal. 12,500
1,350
20,000

Owners
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
1,350
25,000
+ 7,500 Fees
earned
1,350
32,500

e. NetSolutions paid the following


expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
Assets

Cash + Supplies + Land


Bal. 12,500
1,350
20,000
e. 3,650

Bal.8,850

1,350

20,000

Owners
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
1,350
32,500
2,125 Wages
800 Rent
450 Util.
275 Misc.
1,350
28,850

f. NetSolutions paid $950 to


creditors during the month.
Assets

Cash + Supplies + Land


Bal. 8,850
1,350
20,000
f.
950
Bal. 7,900
1,350
20,000

Owners
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
1,350
28,850
950
400
28,850

g. At the end of the month, the cost


of supplies on hand is $550, so
$800 of supplies were used.
Assets

Cash + Supplies + Land


Bal. 7,900
1,350
20,000
g.
800
Bal. 7,900
550
20,000

Owners
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
400
28,850
800 Supplies
expense
400
28,050

h. At the end of the month, Chris


withdrew $2,000 in cash from the
business for personal use.
Assets

Cash + Supplies + Land


Bal. 7,900
550
20,000
h. 2,000
Bal. 5,900
550
20,000

Owners
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
400
28,050
2,000 Withdrawal
400
26,050

Effects of Transactions on Owners Equity


Owners Equity
Decreased by

Increased by

Owners
withdrawals

Owners
investments

Expenses

Revenues

Net
income

Accounting reports, called


financial statements,
provide summarized
information to the owner.

Financial Statements
Income statementA summary of the revenue
and expenses for a specific period of time.
Statement of owners equityA summary of
the changes in the owners equity that have
occurred during a specific period of time.
Balance sheetA list of the assets, liabilities,
and owners equity as of a specific date.
Statement of cash flowsA summary of the
cash receipts and disbursements for a specific
period of time.

NetSolutions
Income Statement
For the Month Ended November 30, 2005
Fees earned

$7 500 00

Operating expenses:
Wages expense

$2 125 00
800 00

Rent expense
Supplies expense

Utilities expense
Miscellaneous expense
Total operating expenses
Net income

To the statement
of owners equity

800 00
450 00
275 00

4 450 00
$3 050 00

NetSolutions
Statement of Owners Equity
For the Month Ended November 30, 2005
Chris Clark, capital, November 1, 2005
Investment on November 1
From the income
Net income for November

statement

$25 000 00
3 050 00
$28 050 00
2 000 00

Less withdrawals
Increase in owners equity
To
the
Chris Clark, capital, November 30, 2005

balance sheet

26 050 00
$26 050 00

NetSolutions
Balance Sheet
November 30, 2005
Assets

Cash
Supplies
Land
Total assets

From the
statement of
Liabilities owners equity

$ 5 900 00 Accounts Payable $ 400 00


550 00 Owners Equity
20 000 00 Chris Clark, cap.
26 050 00
Total liabilities and
$26 450 00 owners equity
$26 450 00

This balance sheet presented


using the account form

When the balance sheet displays


the liabilities and owners equity
below the assets, the report form is
being used.

NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
Cash flows from operating activities:
Cash received from customers
$ 7 500 00
Deduct cash payments for expenses
and payments to creditors
4 600 00
Net 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 owners investment
$25 000 00
Deduct cash withdrawal by owner
2 000 00
Net cash flow from financing activities
23 000 00
Net cashShould
flow and
Nov.
30, 2005
bal. sheet
$ 5 900 00
match
Cash
on thecash
balance

Statement of Cash Flows


Cash Flows from Operating ActivitiesThis section
reports a summary of cash receipts and cash payments
from operations.
Cash Flows from Investing ActivitiesThis section
reports the cash transactions for the acquisition and sale
of relatively permanent assets.
Cash Flows from Financing ActivitiesThis section
reports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.

Tools for Financial


Analysis and Interpretation
The ratio of liabilities to owners equity
allows owners like Chris Clark to analyze
the firms ability to withstand poor
business conditions.
Total Liabilities
Ratio of liabilities
=
to owners equity
Total owners equity (or total
stockholders equity)

Tools for Financial


Analysis and Interpretation
Ratio of
$400
liabilities to =
$26,050
owners equity
Ratio of
liabilities to = 0.015
owners equity

Chapter 1

The End

You might also like