1. Accounting and Business1
Introduction to
Accounting and Business
Student Version

2. 1 1
Describe the nature of a business, the role of accounting, and ethics in business.
1-2

3. 1
Types of Businesses
Service Business Service
Delta Air Lines Transportation services
Merchandising Business Product
Wal-Mart General merchandise
Manufacturing Business Product
General Motors Corp. Cars, trucks, vans

4. The Role of Accounting in Business1
The Role of Accounting in Business
Accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business.

5. Managerial Accounting1
Managerial Accounting
The area of accounting that provides internal users with information is called managerial accounting.
The objective of managerial accounting is to provide relevant and timely information for managers’ and employees’ decision-making needs.

6. 1
Financial Accounting
The area of accounting that provides external users with information is called financial accounting.
The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business.

7. 2
Summarize the development of accounting principles and relate them to practice.
1-7

8. Business Entity Concept2
Business Entity Concept
Under the business entity concept, the activities of a business are recorded separately from the activities of its owners, creditors, or other businesses.

9. Forms of Business Entity2
Forms of Business Entity
A proprietorship is owned by one individual.
A partnership is similar to proprietorship except that it is owned by two or more individuals.
A corporation is organized under state or federal statutes as a separate legal taxable entity.
A limited liability company (LLC) combines attributes of a partnership and a corporation.

10. 2
Cost Concept
Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price.

11. 2
Objectivity Concept
The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence.

12. Unit of Measure Concept2
Unit of Measure Concept
The unit of measure concept requires that economic data be recorded in dollars.

13. 3
State the accounting equation and define each element of the equation.
1-13

14. The Accounting Equation3
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources owned by a business
The rights of the creditors are the debts of the business
The rights of the owners

15. 4
Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation.
1-15

16. 4
Business Transaction
A business transaction is an economic event or condition that directly changes an entity’s financial condition or its results of operations.

17. 4
Transaction A
On November 1, 2009, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.

18. 4 Assets Owner’s Equity = = 25,000 25,000 Investment by Chris Clark a.
Transaction A (continued)
Assets =
Owner’s Equity
CASH
25,000 a.
CHRIS CLARK, CAPITAL
25, Investment by Chris Clark =

19. 4
Transaction B
On November 5, 2009, NetSolutions paid $20,000 for the purchase of land as a future building site.

20. 4 Assets Owner’s Equity = = CASH + LAND 25,000 25,000 Bal.
Transaction B (continued)
Assets =
Owner’s Equity
CASH LAND
25,000
CHRIS CLARK, CAPITAL
25,000
Bal. =
b –20, ,000
Bal. 5,000 20, ,000

21. 4
Transaction C
On November 10, 2009, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future.

22. 4 = Transaction C (continued) Assets Liabilities + Owner’s Equity
ACCOUNTS CHRIS CLARK,
PAYABLE CAPITAL
CASH + SUPPLIES + LAND
5, , ,000 =
Bal.
c , ,350
Bal. 5, , , , ,000

23. 4
Transaction D
On November 18, 2009, NetSolutions received cash of $7,500 for providing services to customers. A business earns money by selling goods or services to its customers. This amount is called Revenue.

24. 4 Transaction D (continued) Assets CASH + SUPPLIES + LAND
5, , ,000
Bal.
d ,500
Bal , ,000

25. Liabilities + Owner’s Equity4
Transaction D (continued)
Liabilities Owner’s Equity
ACCOUNTS CHRIS CLARK, FEES
PAYABLE CAPITAL EARNED
1, ,000
Bal.
d ,500
Bal , , ,500

26. 4
Transaction E
On November 30, 2009, NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

27. 4 Transaction E (continued) Assets CASH + SUPPLIES + LAND
12, , ,000
Bal.
e –3,650
Bal , ,000

28. 4 Transaction E (continued) Liabilities + Owner’s Equity
ACCOUNTS CHRIS CLARK, FEES WAGES RENT UTIL. MISC.
PAYABLE + CAPITAL EARNED – EXP. – EXP. – EXP. – EXP.
1, , ,500
Bal.
e –2, – –450 –275
Bal , , , –2, – –450 –275

29. On November 30, 2009, NetSolutions paid creditors on account, $950.4
Transaction F
On November 30, 2009, NetSolutions paid creditors on account, $950.

30. 4 Transaction F (continued) Assets CASH + SUPPLIES + LAND
8, , ,000
Bal.
f –950
Bal , ,000

31. 4 Transaction F (continued) Liabilities + Owner’s Equity
ACCOUNTS CHRIS CLARK, FEES WAGES RENT UTIL. MISC.
PAYABLE + CAPITAL EARNED – EXP. – EXP. – EXP. – EXP.
1, , , –2, – – –275
Bal.
f –950
Bal , , –2, – – –275

32. 4
Transaction G
On November 30, 2009, Chris Clark determined that the cost of supplies on hand at the end of the period was $550.

33. 4 Transaction G (continued) Assets CASH + SUPPLIES + LAND
7, , ,000
Bal.
g –800
Bal , ,000

34. 4 Transaction G (continued) Liabilities + Owner’s Equity
ACCOUNTS CHRIS CLARK, FEES WAGES RENT SUP. UTIL. MISC.
PAYABLE + CAPITAL EARNED – EXP. – EXP. – EXP. – EXP. – EXP.
, , –2, – –450 –275
Bal.
g –800
Bal , , –2, – –800 –450 –275

35. 4
Transaction H
On November 30, 2009, Chris Clark withdrew $2,000 from NetSolutions for personal use.

36. 4 Transaction H (continued) Assets CASH + SUPPLIES + LAND
7, ,000
Bal.
h –2,000
Bal , ,000

37. 4 Transaction H (continued) Liabilities + Owner’s Equity
ACCTS CLARK, CLARK, FEES WAGES RENT SUP. UTIL. MISC.
PAY CAPITAL – DRAW. + EARNED – EXP. – EXP. – EXP. – EXP. – EXP.
, , –2, –800 –800 –450 –275
Bal.
h –2,000
Bal , –2, , –2, –800 –800 –450 –275

38. 5
Describe the financial statements of a proprietorship and explain how they interrelate.
1-38

39. 5
Income Statement
The income statement reports the revenues and expenses for a period of time, based on the matching concept.

40. 5
Matching Concept
The matching concept is applied by matching the expenses with the revenue generated during a period by those expenses.

41. 5
The excess of revenue over the expenses is called net income or net profit. If the expenses exceed the revenue, the excess is a net loss.

42. Net income is carried to the statement of owner’s equity.5
Exhibit 6
Financial Statements for NetSolutions
Net income is carried to the statement of owner’s equity.

43. From the income statement5
Exhibit 6
Financial Statements for NetSolutions (continued)
From the income statement
To the balance sheet

44. 5 Exhibit 6 Financial Statements for NetSolutions (continued)
This amount is compared to the net cash flow on the statement of cash flows.
From the statement of owner’s equity

45. 5 Exhibit 6 Financial Statements for NetSolutions (continued)
This amount should match Cash on the balance sheet.