1. College Accounting A Contemporary Approach
Fourth Edition
Chapter 1
Accounting: The Language of Business
PowerPoint Presentations for
College Accounting: A Contemporary Approach, 4th edition
By Haddock, Price, and Farina
Chapter 1 Accounting: The Language of Business. Chapter one introduces us to accounting.
This first section of the chapter describes how accounting rules are created. The chapter also discusses the various career opportunities in accounting and identifies the users of financial information.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. Learning Objectives
SECTION 1: 1-1 Define accounting. 1-2 Identify and discuss career opportunities in accounting. 1-3 Identify the users of financial information. 1-4 Compare and contrast the three types of business entities. SECTION 2: 1-5 Describe the process used to develop generally accepted accounting principles. 1-6 Define the accounting terms new to this chapter.
Chapter 1 Learning Objectives:
Section 1: Define accounting.
1-2 Identify and discuss career opportunities in accounting.
1-3 Identify the users of financial information.
1-4 Compare and contrast the three types of business entities.
Section 2:
1-5 Describe the process used to develop generally accepted accounting principles.
1-6 Define the accounting terms new to this chapter.

3. Section 1: What is Accounting?
Learning Objective 1-1: Define Accounting.
Learning Objective 1-1: Define Accounting.

4. Section 1, Objective 1-1: Define Accounting.
Accounting (1 of 3)
In running a business, you need answers to questions:
How much cash does the business have?
How much money do customers owe the business?
What is the cost of the merchandise sold?
What is the change in sales volume?
How much money is owed to suppliers?
What is the profit or loss?
Section 1, Objective 1-1: Define Accounting.
There is a strong need for financial accounting information. Businesses need answers to many questions. Take a moment and review the questions above. All of them can be answered with accurate accounting information.

5. Objective 1-1: Define Accounting.
Accounting (2 of 3)
QUESTION: What is accounting? ANSWER: Accounting is the process by which financial information about a business is classified, recorded, summarized, interpreted, and communicated to owners, managers and other interested parties.
Objective 1-1: Define Accounting.
In order to obtain the answers to the previous questions, a business needs a properly designed accounting system. An accounting information system records, classifies, summarizes, interprets and then communicates financial transactions and information to owners, managers and other interested parties.

6. Section 1, Objective 1-1: Define Accounting.
Accounting (3 of 3)
QUESTION: What are financial statements? ANSWER: Financial statements are periodic reports of a firm’s financial position and operating results.
Objective 1-1: Define Accounting.
Without financial statements, managers, owners and other interested parties would not be able to make important business-related decisions. Owners, managers, and other stakeholders obtain a lot of information from financial statements.

7. Section 1: What is Accounting?
Learning Objective 1-2: Identify and discuss career opportunities in accounting.
Learning Objective 1-2: Identify and discuss career opportunities in accounting.

8. Career Opportunities (1 of 2)
Section 1, Objective 1-2: Identify and discuss career opportunities in accounting.
Career Opportunities (1 of 2)
Many jobs are available in the accounting profession. Some examples are:
Bookkeepers & Accounting Clerks
Financial Managers
Financial Analysts
Objective 1-2: Identify and discuss career opportunities in accounting.
Let’s talk about career opportunities in accounting. Many jobs are available in the accounting profession and they require varying amounts of education and experience.
Bookkeeping, accounting, and auditing clerks produce financial records for organizations. There is usually very little experience required for these opening level positions. Occupations that require at least a Bachelor’s Degree and have job duties similar to those of accountants and auditors include budget analysts, cost estimators, financial analysts, financial examiners, financial managers, management analysts, personal financial advisors, tax examiners, and other executors. There are other career opportunities as well. Starting salaries and work hours for a variety of positions can be found at the Bureau of Labor Statistics.

9. Career Opportunities (2 of 2)
Section 1, Objective 1-2: Identify and discuss career opportunities in accounting.
Career Opportunities (2 of 2)
Accountants generally work in one of these areas:
Public accounting
Managerial accounting
Governmental accounting
Objective 1-2: Identify and discuss career opportunities in accounting.
Accountants usually choose to practice in one of three areas: Public accounting, managerial accounting or governmental accounting.

10. Public Accounting (1 of 2)
Section 1, Objective 1-2: Identify and discuss career opportunities in accounting.
Public Accounting (1 of 2)
Public accounting firms provide services such as:
Auditing
Tax accounting
Management advisory services
Objective 1-2: Identify and discuss career opportunities in accounting.
Public accounting firms provide accounting services for other companies. Usually they offer three services: auditing, tax accounting, and management advisory services.

11. Public Accounting (2 of 2)
Section 1, Objective 1-2: Identify and discuss career opportunities in accounting.
Public Accounting (2 of 2)
QUESTION: Who is a certified public accountant? ANSWER: A certified public accountant, or CPA, is an independent accountant who provides accounting services to the public for a fee.
Objective 1-2: Identify and discuss career opportunities in accounting.
Many public accountants are certified public accountants or CPAs.

12. Managerial Accounting (1 of 2)
Section 1, Objective 1-2: Identify and discuss career opportunities in accounting.
Managerial Accounting (1 of 2)
QUESTION: What is managerial accounting? ANSWER: Managerial accounting includes a wide range of work carried on by an accountant employed by a single business in industry.
Objective 1-2: Identify and discuss career opportunities in accounting.
Managerial accounting, also referred to as private accounting, involves working for a single business in industry. Many managerial accountants become CMAs (Certified Management Accountants).

13. Managerial Accounting (2 of 2)
Section 1, Objective 1-2: Identify and discuss career opportunities in accounting.
Managerial Accounting (2 of 2)
Managerial Accounting, or private accounting, involves working for a single business to:
Establish accounting policies
Provide financial advice to management
Manage the accounting system
Prepare and interpret financial statements
Prepare tax forms and do tax planning
Prepare internal reports for management
Objective 1-2: Identify and discuss career opportunities in accounting.
Managerial accountants perform a wide range of activities including establishing accounting policies, providing financial advice to management, preparing tax forms and preparing internal reports for management.

14. Governmental Accounting (1 of 2)
Section 1, Objective 1-2: Identify and discuss career opportunities in accounting.
Governmental Accounting (1 of 2)
QUESTION: What is governmental accounting? ANSWER: Governmental accounting involves keeping financial records and preparing financial reports for a federal, state, or local governmental unit.
Objective 1-2: Identify and discuss career opportunities in accounting.
Governmental accounting involves keeping financial records and preparing financial reports as part of the staff of federal, state, or local governmental units. Governmental units do not earn profits.

15. Governmental Accounting (2 of 2)
Section 1, Objective 1-2: Identify and discuss career opportunities in accounting.
Governmental Accounting (2 of 2)
Governmental accounting involves keeping financial records and preparing financial reports as part of the staff of federal, state, or local governmental units, such as:
Securities and Exchange Commission (SEC)
Internal Revenue Service (IRS)
Federal Bureau of Investigation (FBI)
Homeland Security (DHS)
Objective 1-2: Identify and discuss career opportunities in accounting.
Some governmental agencies hire accountants to audit the financial statements and records of the businesses under their jurisdiction and to uncover possible violations of the law. The Securities and Exchange Commission, the Internal Revenue Service, the Federal Bureau of Investigation, and the Homeland Security employ a large number of accountants.

16. Section 1: What is Accounting?
Learning Objective 1- 3: Identify the users of financial information.
Learning Objective 1-3: Identify the users of financial information.

17. Section 1, Objective 1-3: Identify the users of financial information.
Financial Reports
Objective 1-3: Identify the users of financial information.
It’s important that we identify the users of accounting information. The results of the accounting process are communicated to many individuals and organizations. Inside users of financial information include: owners and managers who need information that will help them evaluate the results of their operations and plan and make decisions for the future. Additionally, many users outside the business including the IRS, suppliers, banks and customers, as well as regulatory agencies are also interested in the financial position of a business.

18. Financial Information (1 of 3)
Section 1, Objective 1-3: Identify the users of financial information.
Financial Information (1 of 3)
Use financial information (Suppliers)
Assess the firm’s ability to pay its bills
Set a credit limit for the firm
Use financial information (Banks)
Decide whether to make a loan
Determine the terms of the loan
Objective 1-3: Identify the users of financial information.
Suppliers need to be able to assess the ability of a business to pay its bills.
Banks use financial information to decide whether to make loans and the terms of any loans granted.

19. Financial Information (2 of 3)
Section 1, Objective 1-3: Identify the users of financial information.
Financial Information (2 of 3)
Tax Authorities
Use financial information to determine the tax base for:
Income taxes
Sales taxes
Property taxes
Objective 1-3: Identify the users of financial information.
The Internal Revenue Service (IRS) and other state and local tax authorities are interested in the financial information of a business.

20. Financial Information (3 of 3)
Section 1, Objective 1-3: Identify the users of financial information.
Financial Information (3 of 3)
Regulatory Agencies and Investors
The Securities and Exchange Commission (SEC) is the federal agency that oversees the financial information of public corporations.
Public corporations are those whose stock is traded on stock exchanges and over-the- counter markets.
Objective 1-3: Identify the users of financial information.
If an industry is regulated by a governmental agency, businesses in that industry have to supply financial information to the regulating agency. The SEC enforces security laws and protects against infractions like insider trading, accounting fraud, and companies which provide misleading information about their financial condition.

21. Section 1, Objective 1-3: Identify the users of financial information.
Sarbanes-Oxley Act
The Act led to a major change in the regulatory environment.
The Act was designed as a regulatory crackdown on corporate fraud and corruption.
Objective 1-3: Identify the users of financial information.
Major changes occurred in the regulatory environment in the accounting profession with the passage of the Public Company Accounting Reform and Investor Protection Act of 2002 (also known as the Sarbanes-Oxley Act). The Act was the most far-reaching regulatory crackdown on corporate fraud and corruption since the creation of the Securities and Exchange Commission in One of the purposes of the legislation was to restore public confidence in financial statements and markets and change the regulatory environment in which accountants operate.

22. Customers Use financial information to:
Section 1, Objective 1-3: Identify the users of financial information.
Customers
Use financial information to:
Determine the economic health of the business
Determine the likelihood that the firm will remain in business to provide parts, service, and support
Objective 1-3: Identify the users of financial information.
Customers pay special attention to financial information about the firms with which they do business.

23. Employees and Unions Use financial information to:
Section 1, Objective 1-3: Identify the users of financial information.
Employees and Unions
Use financial information to:
Negotiate wages and benefits
Monitor profitability of profit-sharing plans
Objective 1-3: Identify the users of financial information.
Employees are also interested in the financial information of the business that employs them whether it is due to job security, profit sharing plans or union negotiations if they happen to be members of a labor union.

24. Section 2: Business and Accounting
Learning Objective 1- 4: Compare and contrast the three types of business entities.
Learning Objective 1-4: Compare and contrast the three types of business entities.

25. Three Types of Business Entities
Section 2, Objective 1-4: Compare and contrast the three types of business entities.
Three Types of Business Entities
Sole Proprietorship
Partnership
Corporation
Ownership
1 owner
2 or more
Can be one or thousands
Life
Ends when owner:
is unable to carry on,
dies, or
closes the firm
Ends when partner(s):
dies,
close the firm
withdraws
Continues indefinitely; ends when:
business goes bankrupt
stockholders vote to liquidate
Responsibility for business debts if firm is unable to pay
Owner
Partners individually and jointly
Stockholders can lose only the amount invested
Objective 1-4: Compare and contrast the three types of business entities.
The owner of a sole proprietorship is legally responsible for the debts and taxes of the business. If the business is unable to pay its debts, the creditors can turn to the owner for payment.
The partners in a partnership choose how to share the ownership and profits of the business. When a partner leaves, the partnership is dissolved and a new partnership may be formed with the remaining partners. Partners are individually, and jointly as a group, responsible for the debts and taxes of the partnership.
A corporation may have one owner or thousands of owners. Ownership of a corporation is acquired by buying shares of its stock. One of the advantages of the corporate form of business is the indefinite life of the corporation because a corporation does not end when ownership changes. Corporate owners, called stockholders or shareholders, are not personally responsible for the debts or taxes of the corporation.

26. Sole Proprietorship (1 of 2)
Section 2, Objective 1-4: Compare and contrast the three types of business entities.
Sole Proprietorship (1 of 2)
Three major legal forms of a business entity:
Sole Proprietorship
Partnership
Corporation
Section 2, Objective 1-4: Compare and contrast the three types of business entities.
In section 2 of the chapter, the three types of businesses: sole proprietorships, corporations and partnerships are discussed. We will also discuss the process used to develop generally accepted accounting principles.
The three major legal forms of a business entity are the sole proprietorship, the partnership, and the corporation. In general, the accounting process is the same for all three forms of business.

27. Sole Proprietorship (2 of 2)
Section 2, Objective 1-4: Compare and contrast the three types of business entities.
Sole Proprietorship (2 of 2)
QUESTION: What is a sole proprietorship? ANSWER: A sole proprietorship is a business entity owned by one person who is legally responsible for the debts and taxes of the business.
Objective 1-4: Compare and contrast the three types of business entities.
A sole proprietorship is a business entity owned by one person. The life of the business ends when the owner is no longer willing or able to keep the business going. Many small businesses are operated as sole proprietorships.

28. Section 2, Objective 1-4: Compare and contrast the three types of business entities.
Partnership
QUESTION: What is a partnership? ANSWER: A partnership is a business entity owned by two or more people who are legally responsible for the debts and taxes of the business.
Objective 1-4: Compare and contrast the three types of business entities.
A partnership is a business entity owned by two or more people who are legally responsible for the debts and taxes of the business.

29. Typical Partnerships Professional services such as: Medical Practices
Objective 1-4: Compare and contrast the three types of business entities.
Typical Partnerships
Professional services such as:
Medical Practices
Accounting Firms
Law Firms
Dental Practices
Architectural Firms
Objective 1-4: Compare and contrast the three types of business entities.
The partnership structure is common in businesses that offer professional services, such as law firms, accounting firms, architectural firms, medical practices, and dental practices.

30. Partners Must Agree Upon
Objective 1-4: Compare and contrast the three types of business entities.
Partners Must Agree Upon
Amount each partner will contribute to the business.
Percentage of ownership of each partner.
Share of profits of each partner.
Duties each partner will perform.
Debts - the responsibility each partner has for the partnership’s debts.
Objective 1-4: Compare and contrast the three types of business entities.
At the beginning of the partnership, two or more individuals enter into a contract that details the rights, obligations, and limitations of each partner, including: the amount each partner will contribute to the business, each partner’s percentage of ownership, each partner’s share of the profits, the duties each partner will perform, the responsibility each partner has for the amounts owed by the business to creditors and tax authorities.

31. Objective 1-4: Compare and contrast the three types of business entities.
Corporation
QUESTION: What is a corporation? ANSWER: A corporation is a publicly or privately owned business entity that is separate from its owners and has a legal right to own property and do business in its own name; stockholders are not responsible for the debts or taxes of the business.
Objective 1-4: Compare and contrast the three types of business entities.
Corporations are different from sole proprietorships and partnerships. A corporation is a separate legal entity.

32. Section 2, Objective 1-4: Compare and contrast the three types of business entities.
Stock
QUESTION: What is stock? ANSWER: Stock is issued in the form of stock certificates, and represents the ownership of the corporation.
Objective 1-4: Compare and contrast the three types of business entities.
Corporations may be privately or publicly owned. Stock ownership of privately owned corporations is limited to specific individuals, usually family members. In contrast, stock of publicly owned corporations is bought and sold on stock exchanges and in over-the-counter markets.
If you own common stock in a corporation, then as an owner, you have the right to vote at stockholder (owner) meetings. If the corporation is unable to pay its bills, the most stockholders can lose is their investment in the stock.
An owner’s share of the corporation is determined by the number of shares of stock held by the owner compared to the total number of shares issued by the corporation. Most large corporations have issued (sold) millions of shares of stock.

33. Important Distinction
Section 2, Objective 1-4: Compare and contrast the three types of business entities.
Important Distinction
For accounting purposes, all forms of business entities are considered separate entities.
However, the corporation is the only form of business that is a separate legal entity.
Objective 1-4: Compare and contrast the three types of business entities.
In the eyes of the law, a corporation is an artificial person—a separate legal entity. It has the legal right to own property and do business in its own name. It is important that whatever form a business takes, whether it is a corporation, a partnership or a sole proprietorship, that its financial records and transactions are kept separately from its owner’s personal transactions.

34. Separate Entity Assumption
Section 2, Objective 1-4: Compare and contrast the three types of business entities.
Separate Entity Assumption
QUESTION: What is the separate entity assumption? ANSWER: The separate entity assumption is the concept of keeping a firm’s financial records separate from the owner’s personal financial records.
Objective 1-4: Compare and contrast the three types of business entities.
It is important that whatever form a business takes, whether it is a corporation, a partnership or a sole proprietorship, that its financial records and transactions are kept separately from its owners.
If a person owns three separate businesses, he or she will keep four sets of financial records---one for each of the three businesses and one set for his/her own personal financial transactions.

35. Section 2: Business and Accounting
Learning Objective 1- 5: Describe the process used to develop generally accepted accounting principles.
Learning Objective 1-5: Compare and contrast the three types of business entities.

36. Section 2, Objective 1-5: Describe the process used to develop generally accepted accounting principles.
GAAP
QUESTION: What are generally accepted accounting principles (GAAP)? ANSWER: Generally accepted accounting principles (GAAP) are accounting standards developed and applied by professional accountants.
Objective 1-5: Describe the process used to develop generally accepted accounting principles.
The last objective of this chapter deals with the rules that accountants use in recording financial transactions. Generally accepted accounting principles, or GAAP, are standards developed and applied by professional accountants.
New principles continue to be developed by the accounting profession as the need arises.
Generally accepted accounting principles must be followed by publicly owned companies in recording financial transactions unless they can show that doing so would produce information that is misleading to financial statement users.
Accounting principles vary from country to country. International accounting is the study of accounting principles used by different countries. The International Accounting Standards Board (IASB) deals with issues caused by the lack of uniform accounting principles.

37. Section 2, Objective 1-5: Describe the process used to develop generally accepted accounting principles.
Auditor’s Report
QUESTION: What is an auditor’s report? ANSWER: An auditor’s report accompanies an independent accountant’s audit or review of a firm’s financial statements.
Objective 1-5: Describe the process used to develop generally accepted accounting principles.
The financial statements of publicly traded companies are audited by independent certified public accountants (CPAs). The auditor’s report contains the auditor’s opinion about the fair presentation of the operating results and financial position of the business.