1. Introduction to Accounting and Business
Chapter 1 –
Introduction to Accounting and Business
After studying this chapter, you should be able to:
Describe the nature of a business and the role of accounting in business.
Summarize the development of accounting principles and relate them to practice.
State the accounting equation and define each element of the equation.
Describe and illustrate how business transactions can be recorded in terms of the resulting change in the basic elements of the accounting equation.
Describe the financial statements of a proprietorship

2. Service Business Service
Objective #1 - Describe the nature of a business and the role of accounting in business.
1-1
Types of Businesses
Service Business Service
The Walt Disney Company Entertainment
Atlas Air Transportation
Marriott International Hotels Hospitality and lodging
Bank of America Corporation Financial services
XM Satellite Radio Satellite radio

3. Merchandising Business Product
1-1
Types of Businesses
Merchandising Business Product
Wal-Mart General merchandise
GameStop Corporation Video games and accessories
Best Buy Consumer electronics
Gap Inc. Apparel
Amazon.com Internet books, music, video

4. Manufacturing Business Product
1-1
Types of Businesses
Manufacturing Business Product
General Motors Corp. Cars, trucks, vans
Samsung Cell phones
Dell Inc. Personal computers
Nike Athletic shoes and apparel
Pepsico Beverages and Snacks
Sony Corporation Stereos and televisions

5. Accounting can be defined as an information system that provides reports to stakeholders about the economic activities and condition of a business.
1-1
Who are stakeholders? – anyone or any entity that has an interest in the economic performance and well-being of a business
Bankers and other creditors – need to ensure that the business has the ability to repay loans, and on a timely basis
Suppliers – need to ensure their customer (the business) will be around to purchase their supplies and then be able to pay for them
Customers – are interested in the business to determine if they will always be around to provide a constant flow of goods and services
Government – need to ensure that the business pays the correct amount of taxes
Employees and Management– need to ensure that the business is doing well so that they will have a job

6. Different types of Accounting
1-1
Financial accounting is primarily concerned with the recording & reporting of economic data and activities for a business to external parties.
Managerial accounting uses both financial accounting and estimated data to aid management in running day-to-day operations and in planning future operations.
Accountants employed by a business firm or a not-for-profit organization are said to be employed in private accounting. E.g. CFO, Controller, or Financial Analyst of Pepsico
Accountants and their staff who provide services to the public (i.e. individuals and corporations) on a fee basis are said to be employed in public accounting. E.g. PricewaterhouseCoopers, Ernst & Young, KPMG, Deloitte

7. Objective #2 - Summarize the development of accounting principles and relate them to practice.
1-2
GAAP – Generally Accepted Accounting Principles. These are the rules that govern how businesses record and report financial transactions
FASB – Financial Accounting Standards Board. This body is the major one responsible for preparing US GAAP.
IASB – International Accounting Standards Board. This body is the one responsible for preparing International GAAP, which is also known as ‘International Financial Reporting Standards (IFRS)’
The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business. – i.e. nothing personal unless it has been given/assigned to the business
The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records. – e.g. what was paid for it.

8. Limited liability company
1-1
Common Forms of Business Entities
Proprietorship
Partnership
Corporation
Limited liability company

9. A proprietorship is owned by one individual and—
A proprietorship is owned by one individual and—
1-1
Comprises 70% of business organizations in the United States.
Requires low cost of organizing.
Is limited to financial resources of the owner.
Is used by small businesses.
A partnership is similar to a proprietorship except that it is owned by two or more individuals and—
Comprises 10% of business organizations in the United States.
Combines the skills and resources of more than one person.

10. 1-1
A corporation is organized under state or federal statues as a separate legal taxable entity and—
Generates 90% of the total dollars of business receipts received.
Comprises 20% of the businesses.
Includes ownership divided into shares of stock, sold to shareholders (stockholders).
Is able to obtain large amounts of resources by issuing stock.
Is used by large businesses.

11. 1-1
A limited liability company (LLC) combines attributes of a partnership and a corporation in that it is organized as a corporation. However, a limited liability corporation can elect to be taxed as a partnership and—
Is a popular alternative to a partnership.
Has tax and liability advantages to the owners.

12. Assets = Liabilities + Owner’s Equity
Objective #3 - State the accounting equation and define each element of the equation.
1-3
The Accounting Equation
Assets = Liabilities Owner’s Equity
The resources owned by a business
The rights of the owners
The rights of the creditors, which represent debts of the business

13. Objective #4 - Describe and illustrate how business transactions can be recorded in terms of the resulting change in the basic elements of the accounting equation.
1-4
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, 2007, Chris Clark begins a business that will be known as NetSolutions. This business provides web design services, and computer repair services etc.

14. 1-4
Assets
Owner’s Equity = =
Cash
25,000 a.
Chris Clark, Capital
25,000 Investment by Chris Clark
a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.

15. b. NetSolutions purchased land for $20,000.
1-4
Assets =
Owner’s Equity
Cash Land
25,000
Chris Clark, Capital
25,000
Bal. =
b. –20, ,000
Bal. 5,000 20,000 25,000
b. NetSolutions purchased land for $20,000.

16. 1-4
Owner’s
Liabilities Equity
Assets
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital =
Bal.
5, , ,000
+1,350 +1,350 c.
5,000 1,350 20,000 1,350 25,000
Bal.
c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account).
Note – these supplies e.g. wires, cables etc, will be used up later in the business

17. A company earns revenues by selling products - Sales
1-4
Revenue and expenses
A company earns revenues by
selling products - Sales
providing services - Fees Earned
renting out premises - Rent Revenue
lending money - Interest Revenue
The amounts used in earning revenue are called expenses.
Note:
Expenses that have paid for (or incurred) but not yet been used up are referred to as prepaid expenses e.g. supplies.
When these prepaid expenses have been used up, they will then become regular expenses e.g. supplies expenses

18. 1-4
Assets
Liabilities Owner’s Equity
Cash Supplies + Land
Accounts Chris Clark, Fees
Payable Capital Earned +
Bal.
5, , ,000
1, ,000
+7,500 d.
+7,500 =
Bal.
12, , ,000
1,350
25, ,500
d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash.
Note – If the customers did not pay immediately, but opted to pay on account ( i.e. at a later date), then the asset that would have been increased would have been accounts receivable

19. 1-4
Note……….
Adding expenses to the owner’s equity section results in a space problem. To adjust for these added headings, the word “Bal.” has been omitted from some slides. The bottom row still provides the balances after each transaction.
Beginning with entry (e) the asset section will be shown first, then the liabilities and owner’s equity will be shown in the following slide.

20. 1-4
Assets
Cash Supplies + Land
Bal. 12,500 1,350 20,000
e. –3,650
Bal. 8,850 1,350 20,000
e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

21. 1-4
Liabilities Owner’s Equity
Accounts Chris Clark, Fees Wages Rent Utilities Misc.
Payable Capital Earned Expense Expense Expense Expense
1, ,000 7,500
–2,125 –800 –450 –275 e.
1,350 25,000 7,500 –2,125 –800 –450 –275
e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

22. f. NetSolutions paid $950 to creditors during the month.
1-4
Assets
Cash Supplies + Land
Bal. 8,850 1,350 20,000
f. –950
Bal. 7,900 1,350 20,000
f. NetSolutions paid $950 to creditors during the month.

23. f. NetSolutions paid $950 to creditors during the month.
1-4
Liabilities Owner’s Equity
Accounts Chris Clark, Fees Wages Rent Utilities Misc.
Payable Capital Earned Expense Expense Expense Expense
1, ,000 7,500
–2,125 –800 –450 –275 f.
–950
400 25,000 7,500 –2,125 –800 –450 –275
f. NetSolutions paid $950 to creditors during the month.

24. 1-4
Assets
Cash Supplies + Land
Bal. 7,900 1,350 20,000
g. –800
Bal. 7, ,000
g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies must have been used up

25. 1-4
Liabilities Owner’s Equity
Accounts Chris Clark, Fees Wages Rent Supplies Util. Misc.
Payable + Capital Earned Exp Exp Exp Exp. Exp.
400 25,000 7,500 –2,125 –800 –450 –275 g.
–800
400 25,000 7,500 –2,125 –800 –800 –450 –275
g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies must have been used up

26. 1-4
Assets
Cash Supplies + Land
Bal. 7, ,000
h. –2,000
Bal. 5, ,000
h. At the end of the month, Chris withdrew $2,000 in cash from the business for personal use.

27. 1-4
Liabilities Owner’s Equity
Accounts Chris Clark, Chris Clark Fees Wages Rent Supplies Util. Misc.
Payable + Capital Drawing Earned Exp Exp Exp Exp. Exp.
400 25,000 7,500 –2,125 –800 –800 –450 –275 h.
–2,000
400 25,000 –2,000 7,500 –2,125 –800 –800 –450 –275
h. At the end of the month, Chris withdrew $2,000 in cash from the business for personal use.

28. Summary

29. Owner’s Equity Increased by Decreased by 1-4 Owner’s investments
1-4
Owner’s Equity
Increased by
Owner’s investments
Revenues
Owner’s withdrawals
Expenses
Decreased by

30. Objective #5 - Describe the financial statements of a proprietorship and explain how they interrelate.
1-5
Accounting reports, called financial statements, provide summarized information to the owner.
The 4 common financial statements are prepared in the following order:
Income Statement
Statement of Owner’s Equity
Balance Sheet
Statement of Cash Flow
Refer to Exhibit 6 on page 20!

31. 1-5
The income statement is a summary of the revenue and expenses for a specific period of time, such as a month or a year.
The income statement is based on the matching concept.
This concept is applied by matching expenses with the revenues they generated, only during the period that those revenues were generated.
Note - The excess of revenue over the expenses is called net income or net profit. If the expenses exceed the revenue, the difference is a net loss.

32. Net income is carried to the statement of owner’s equity
Income Statement
1-5
Link to the “Net effect” of the accounting equation columnar slides shown earlier.
Net income is carried to the statement of owner’s equity

33. 1-5
A statement of owner’s equity is a summary of the changes in the owner’s equity that have occurred during a specific period of time.

34. From the income statement
Statement of Owner’s Equity
1-5
From the income statement
Refer to the increase / decrease in owner equity slide
To the balance sheet

35. 1-5
A balance sheet is a list of the assets, liabilities, and owner’s equity as of a specific date.

36. From the statement of owner’s equity
Balance Sheet
1-5
This amount is compared to the net cash flow on the statement of cash flows
From the statement of owner’s equity

37. 1-5
A statement of cash flows is a summary of the cash receipts and payments for a specific period of time.
Note - It basically shows how the company spent its money, and the sources from which it received money.

38. This amount should match Cash on the balance sheet.
Statement of Cash Flows
1-5
This amount should match Cash on the balance sheet.

39. 1-5 Example Exercise 1-4, 1-5 & 1-6
1-5
Example Exercise 1-4, 1-5 & 1-6
The assets and liabilities of Chickadee Travel Service at April 30, 2010, the end of the current year, and its revenue and expenses for the year are listed below. The capital of the owner, Adam Cellini, was $80,000 at May 1, 2009, the beginning of the current year.
Accounts payable $ 12,200 Miscellaneous expense $ 12,950
Accounts receivable 31,350 Office expense 63,000
Cash 53,050 Supplies 3,350
Fees earned 263,200 Wages expense 131,700
Land 80,000
Adam Cellini invested an additional $50,000 in the business during the year and withdrew cash of $30,000 for personal use.
For the current year ended April 30, 2010.
a. Prepare an income statement
b. Prepare a statement of owner’s equity
c. Prepare a balance sheet

40. CHICKADEE TRAVEL SERVICE
1-5
Example Exercise 1-4 & 1-5
Example Exercise 1-4, 1-5 & 1-6
CHICKADEE TRAVEL SERVICE
INCOME STATEMENT
For the Year Ended April 30, 2010
Fees earned $263,200
Expenses:
Wages expense $131,700
Office expense 63,000
Miscellaneous expense 12,950
Total expenses ,650
Net income $ 55,550

41. CHICKADEE TRAVEL SERVICE
1-5
Example Exercise 1-4, 1-5 & 1-6
CHICKADEE TRAVEL SERVICE
STATEMENT OF OWNER’S EQUITY
For the Year Ended April 30, 2010
Adam Cellini, capital, May 1, $ 80,000
Additional investment by owner during year $ 50,000
Net income for the year ,550
$105,550
Less withdrawals ,000
Increase in owner’s equity ,550
Adam Cellini, capital, April 30, $155,550

42. Balance Sheet
1-5
The account form of balance sheet lists the assets on the left and the liabilities and owner’s equity on the right—similar to design of an account.
The report form of balance sheet presents the liabilities and owner’s equity sections below the assets section.

43. CHICKADEE TRAVEL SERVICE
1-5
Example Exercise 1-4, 1-5 & 1-6
CHICKADEE TRAVEL SERVICE
BALANCE SHEET
April 30, 2010
Assets Liabilities
Cash $ 53,050 Accounts payable $12,200
Accounts receivable 31,350
Supplies 3, Owner’s Equity
Land 80,000 Adam Cellini, capital 155,550
Total assets $167,750 Total liab. & owner’s eq. $167,750

44. The statement of cash flows consists of three sections:
Statement of Cash Flows
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The statement of cash flows consists of three sections:
Operating activities
Investing activities
Financing activities

45. The cash flows from operating activities section reports a summary of cash receipts and cash payments from operations.
1-5
The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively permanent assets.
The cash flows from financing activities section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.

46. The cash balance as of May 1, 2009, was $72,050.
1-5
Example Exercise 1-7
A summary of cash flows for Chickadee Travel Service for the year ended April 30, 2010, is shown below.
Cash receipts:
Cash received from customers $251,000
Cash received from additional
investment of owner 50,000
Cash payments:
Cash paid for expenses 210,000
Cash paid for land 80,000
Cash paid to owner for personal use 30,000
The cash balance as of May 1, 2009, was $72,050.
Prepare a statement of cash flows for Chickadee Travel Service for the year ended April 30, 2010.

47. CHICKADEE TRAVEL SERVICE
1-5
Follow My Example 1-7
CHICKADEE TRAVEL SERVICE
STATEMENT OF CASH FLOWS
For the Year Ended April 30, 2010
Cash flows from operating activities:
Cash received from customers $251,000
Deduct cash payments for expenses 210,000
Net cash flows from operating activities $ 41,000
Cash flows from investing activities:
Cash payments for purchase of land (80,000)
Cash flows from financing activities:
Cash received from owner as investment $ 50,000
Deduct cash withdrawals by owner 30,000
Net cash flows from financing activities ,000
Net decrease in cash during year $(19,000)
Cash as of May 1, ,050
Cash as of April 30, $ 53,050

48. Financial Analysis and Interpretation5
Financial Analysis and Interpretation
Ratio of Liabilities to Owner’s Equity
Total Liabilities
Total Owner’s Equity (or Total Stockholders’ Equity) =
For NetSolutions:
Ratio of Liabilities to Owner’s Equity =
$400
$26,050 = 48