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Introduction to Accounting and Business. 1.Describe the nature of a business. 2.Describe the role of accounting in business. 3.Describe the importance.

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Presentation on theme: "Introduction to Accounting and Business. 1.Describe the nature of a business. 2.Describe the role of accounting in business. 3.Describe the importance."— Presentation transcript:

1 Introduction to Accounting and Business

2 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. ObjectivesObjectives After studying this chapter, you should be able to:

3 7.Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation. ObjectivesObjectives 8.Describe the financial statements of a corporation and explain how they interrelate. 9.Use the ratio of liabilities to stockholders equity to analyze the ability of a business to withstand poor business conditions.

4 Manufacturing Business Product Product General MotorsCars, trucks, vans IntelComputer chips BoeingJet aircraft NikeAthletic shoes and apparel Coca-ColaBeverages SonyStereos and television General MotorsCars, trucks, vans IntelComputer chips BoeingJet aircraft NikeAthletic shoes and apparel Coca-ColaBeverages SonyStereos and television Types of Businesses

5 Merchandising Business Product Product Wal-MartGeneral merchandise Toys R UsToys Circuit CityConsumer electronics Lands EndApparel Amazon.comInternet books, music, video retailer Wal-MartGeneral merchandise Toys R UsToys Circuit CityConsumer electronics Lands EndApparel Amazon.comInternet books, music, video retailer Types of Businesses

6 Service Business Product Product DisneyEntertainment Delta Air LinesTransportation Marriott HotelsHospitality and lodging Merrill LynchFinancial advice SprintTelecommunication DisneyEntertainment Delta Air LinesTransportation Marriott HotelsHospitality and lodging Merrill LynchFinancial advice SprintTelecommunication Types of Businesses

7 There are three types of business organizations Proprietorship Partnership Corporation

8 A proprietorship is owned by one individual. Advantages Ease in organizing Low cost of organizing Disadvantage Limited source of financial resources Unlimited liability Joes

9 A partnership is owned by two or more individuals. Advantages More financial resources than a proprietorship. Additional management skills. Disadvantage Unlimited liability. Joe and Martys

10 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.

11 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.

12 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. 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.

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

14 2 Assess stakeholders informational needs. The Process of Providing Information STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government 1 Identify stake- holders.

15 Accounting Information System Design the accounting information system to meet stakeholders needs. 3 4 Record economic data about business activities and events. The Process of Providing Information

16 5 Prepare accounting reports for stakeholders. STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government Accounting Information System The Process of Providing Information

17 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.

18 Generally Accepted Accounting Principles (GAAP)

19 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.

20 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.

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

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

23 The Accounting Equation Assets = Liabilities + Owners Equity The rights of the owners

24 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.

25 On November 1, 2009, Clark organized a corporation that will be known as Net Solutions.

26 a. Clark deposits 25,000 in a bank account in the name of Net Solutions in return for shares of stock in the corporation. Capital Stock 25,000 Investment by stockholder Cash 25,000 a. Assets Owners Equity = =

27 b. NetSolutions exchanged 20,000 for land. Capital Stock 25,000 Cash + Land 25,000 Bal. Assets Owners Equity = = b. –20,000+20,000 Bal. 5,00020,00025,000

28 Accounts Capital Cash + Supplies + Land Payable Stock Assets c. During the month, NetSolutions purchased supplies for 1,350 and agreed to pay the supplier in the near future (on account). Owners Liabilities + Equity = Bal.5,00020,00025,000 c. + 1,350+ 1,350 Bal.5,0001,35020,0001,35025,000 =

29 d. + 7,500+ 7,500 Assets d. NetSolutions provided services to customers, earning fees of 7,500 and received the amount in cash. Owners Liab. + Equity = Bal.5,0001,35020,0001,35025,000= Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings Bal.12,5001,35020,0001,35025,0007,500 Fees earned

30 e. NetSolutions paid the following expenses: wages, 2,125; rent, 800; utilities, 450; and miscellaneous, 275. Bal.12,5001,35020,0001,35025,0007,500 Assets Owners Liab. + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings e. – 3,650–2,125 – 800 – 450 – 275 = Bal.8,8501,35020,0001,35025,0003,850 = Expenses

31 f. NetSolutions paid 950 to creditors during the month. Assets Owners Liab. + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings Bal.8,8501,35020,0001,35025,0003,850 = = f. – 950– 950 Bal.7,9001,35020, ,0003,850

32 g. At the end of the month, the cost of supplies on hand is 550, so 800 of supplies were used. Assets Owners Liab. + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings = =Bal.7,9001,35020, ,0003,850 g. – 800– 800 Bal.7, , ,0003,050 Supplies Expense

33 h. At the end of the month, NetSolutions pays 2,000 to stockholders. Assets Owners Liab. + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings =Bal.7, , ,0003,050 h. –2,000–2,000 Bal.5, , ,0001,050 = = Dividends

34 Increased by Capital Stock Effects of Transactions on Owners Equity Stockholders investments +

35 Decreased by Increased by Retained Earnings Effects of Transactions on Owners Equity Revenues + Expenses – Decreased by Dividends –

36 Accounting reports, called financial statements, provide summarized information to the users.

37 Financial Statements Income statementA summary of the revenue and expenses for a specific period of time. Retained earnings statementA summary of the earnings retained in the corporation for a specific period of time. Balance sheetA list of the assets, liabilities, and stockholders equity as of a specific date. Statement of cash flowsA summary of the cash receipts and disbursements for a specific period of time.

38 Fees earned$ Operating expenses: Rent expense $ Wages expense Supplies expense Utilities expense Miscellaneous expense Total operating expenses NetSolutions Income Statement For the Month Ended November 30, Net income$ Transfer this amount to the retained earnings statement.

39 NetSolutions Retained Earnings Statement For the Month Ended November 30, 2009 Less dividends Retained earnings, November 30, 2005$ Net income for November$ From the income statement Transferred to the balance sheet

40 Assets Liabilities NetSolutions Balance Sheet November 30, 2009 Cash$ Accounts Payable$ Supplies Stockholders Equity Land Capital Stock$25,000 Ret. Earnings l, Total liabilities and Total assets$ stockholders equity$ From the retained earnings statement This balance sheet presented using the account form

41 Cash flows from operating activities: Cash received from customers$ Deduct cash payments for expenses and payments to creditors Net cash flow from operating activities Cash flows from investing activities: Cash payment for acquisition of land( Cash flows from financing activities: Cash received as owners investment$ Deduct cash withdrawal by owner Net cash flow from financing activities Net cash flow and Nov. 30, 2005 cash bal.$ NetSolutions Statement of Cash Flows For the Month Ended November 30, 2009 Should match Cash on the balance sheet )

42 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.


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