Chapter 1 and 2

Definition of Accounting The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information ” (American Accounting Association)

Bookkeeping & Accounting Bookkeeping is only part of accounting – recording & classifying events Accounting includes summarizing & interpreting

Basic Functions of an Accounting System  Summarize and communicate information to decision makers.  Classify similar transactions into useful reports.  Interpret and record business transactions.

Branches of Accounting Financial Accounting Cost Accounting Managerial Accounting Tax Accounting Auditing Accounting Systems

Forms of Business Organization Sole Proprietorship Partnership Limited Liability Company (LLC) Corporation

Generally Accepted Accounting Principles (GAAP) Principles of Identity – Business Entity – Going Concern Define the identity of an organization by setting it up as a unique entity that is separate from its owners as well as other entities, and that is presumed to operate indefinitely

Generally Accepted Accounting Principles (GAAP) – continued Principles of Operation – Unit of Measurement – Objectivity -Cost Define how the accounting systems works, i.e. how financial events are measured, recorded and repeated –Consistency –Matching/Revenue Recognition

Generally Accepted Accounting Principles (GAAP) – continued Principles of Reporting – Conservatism – Materiality – Full Disclosure Decide how financial events are reported by defining the margin that can affect business decisions, and cautioning against understating or overstating figures

Accounting Methods Cash Basis Accounting Methods – Recognizes Accounting transaction at point of cash inflow or outflow Accrual Basis Accounting Methods – Recognizes all revenue earned and records all expenses incurred for the period – Requires adjusting entries

Introduction to Financial Statements Three primary financial statements. Income Statement Balance Sheet Statement of Cash Flows We will use a corporation to describe these statements.

Financial Statements Balance Sheet – Outlines the fundamental accounting equation – Reports assets, liabilities, and stockholder’s equity of a business enterprise at a specific date. Income Statement – Also called Profit & Loss Statement – Shows results of operation (revenues ad expenses resulting in net income or net loss) for a period Statement of Cash Flow – Shows cash inflows and outflows for a period

Relationships Among Financial Statements Date at beginning of period Date at end of period Balance Sheet Time Income Statement Statement of Cash Flows

Financial Statement Articulation

The Need for Adequate Disclosure Notes to the financial statements often provide facts necessary for the proper interpretation of the statements. Income Statement Balance Sheet Statement of Cash Flows

A Starting Point: Statement of Financial Position

Assets Assets are economic resources that are owned by the business and are expected to provide positive future cash flows.

Liabilities Liabilities are debts that represent negative future cash flows for the enterprise.

Owners’ Equity Owners’ equity represents the owners’ claims to the assets of the business.

The Accounting Equation Assets = Liabilities + Owners’ Equity $300,000 = $80,000 + $220,000 Assets = Liabilities + Owners’ Equity $300,000 = $80,000 + $220,000

Recording Business Transactions 1.Invested $8,000 in his business in exchange for common stock. 2.Purchased $500 of supplies for cash. 3.Purchased $4,000 of equipment on account. 4.Received $3,000 cash for consulting services. 5.Paid salaries of $800 6.Paid the first month’s rent of $ Paid $1,000 owed to a creditor. 8.The corporation paid a dividend of $1,500 in cash to Sam Doty, the stockholder. A. Review of Selected Transactions Mr. Sam Doty opened and incorporated a hospitality consulting firm during the month of September and provided you with the following data. Instructions: Prepare the tabular summary for the transactions above.

Recording Business Transactions (continued) Answer: Summary of Transactions Month of September 2008 Assets=Liabilities+Stockholders’ Equity Trans- action Cash+ Sup- plies + Equip- ment = Accounts Payable + Common Stock Retained Earnings (1) (2) (3) (4) (5) (6) (7) (8) Causes of changes on SE must be indicated