1. 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.

2. Generally Accepted Accounting Principles (GAAP)

3. 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.

4. 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.

5. The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources owned by a business

6. The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the creditors, which represent debts of the business

7. The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the owners

8. What is a business transaction?
A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

9. On November 1, 2005, Chris Clark begins a business that will be known as NetSolutions.

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

11. b. NetSolutions exchanged $20,000 for land.
Assets =
Owner’s Equity
Cash Land
25,000
Chris Clark, Capital
25,000
Bal. =
b. –20, ,000
Bal. 5,000 20,000 25,000

12. c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account).
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital =
Bal. 5, , ,000
c , ,350
Bal. 5,000 1,350 20,000 1,350 25,000

13. d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 5,000 1,350 20,000 1,350 25,000 =
Fees earned
d , ,500
Bal. 12,500 1,350 20,000 1,350 32,500

14. e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 12,500 1,350 20,000 1,350 32,500
e. – 3,650 –2,125
– 800
– 450 –
Wages
Rent
Util.
Misc. =
Bal. 8,850 1,350 20,000 1,350 28,850

15. f. NetSolutions paid $950 to creditors during the month.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 8,850 1,350 20,000 1,350 28,850 =
f. – 950 – 950
Bal. 7,900 1,350 20, ,850

16. g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 7,900 1,350 20, ,850 =
Supplies expense
g. – 800 – 800
Bal. 7, , ,050

17. h. At the end of the month, Chris withdrew $2,000 in cash from the business for personal use.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 7, , ,050 =
With-drawal
h. –2,000 –2,000
Bal. 5, , ,050

18. Effects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
Decreased by
Increased by
Owner’s investments
Revenues
Net income

19. Accounting reports, called financial statements, provide summarized information to the owner.

20. Financial Statements
Income statement—A summary of the revenue and expenses for a specific period of time.
Statement of owner’s equity—A summary of the changes in the owner’s equity that have occurred during a specific period of time.
Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date.
Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.

21. For the Month Ended November 30, 2005
NetSolutions
Income Statement
For the Month Ended November 30, 2005
Fees earned $
Operating expenses:
Wages expense $
Rent expense
800 00
Supplies expense
800 00
Utilities expense
450 00
Miscellaneous expense
275 00
Total operating expenses
To the statement of owner’s equity
Net income $

22. Statement of Owner’s Equity For the Month Ended November 30, 2005
NetSolutions
Statement of Owner’s Equity
For the Month Ended November 30, 2005
Chris Clark, capital, November 1, 2005 $
Investment on November 1 $
Net income for November $
From the income statement
Less withdrawals
Increase in owner’s equity
Chris Clark, capital, November 30, $
To the balance sheet

23. This balance sheet presented using the account form
NetSolutions
Balance Sheet
November 30, 2005
From the statement of owner’s equity
Assets Liabilities
Cash $ Accounts Payable $
Supplies Owner’s Equity
Land Chris Clark, cap
Total liabilities and
Total assets $ owner’s equity $
This balance sheet presented using the account form

24. When the balance sheet displays the liabilities and owner’s equity below the assets, the report form is being used.

25. Statement of Cash Flows For the Month Ended November 30, 2005
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
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 owner’s investment $
Deduct cash withdrawal by owner
Net cash flow from financing activities
Net cash flow and Nov. 30, 2005 cash bal. $ )
Should match Cash on the balance sheet

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

27. Tools for Financial Analysis and Interpretation
The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze the firm’s ability to withstand poor business conditions.
Ratio of liabilities to owner’s equity =
Total Liabilities
Total owner’s equity (or total stockholders’ equity)

28. Tools for Financial Analysis and Interpretation
Ratio of liabilities to owner’s equity =
$400
$26,050 =
0.015
Ratio of liabilities to owner’s equity

29. Chapter 1
The End