1. Accounting and the Business Environment
Chapter 1

2. Use accounting vocabulary
Objective 1
Use accounting vocabulary

3. What’s accounting

4. Accounting is an information system

5. Accounting information system...
INPUT
PROCESS
OUTPUT
Data
Data processing
Information
Recording
Classifying
Summarizing
Analysing
Etc.
Source documents
Checks
Purchase Orders
Bank Statement
Sales Invoices
Reporting
&
Communicating
(Financial Statements)
A key product of accounting is a set of documents called financial statements. FS report on a business in monetary terms.

6. Accounting: The Language of Business
In fact…
Accounting: The Language of Business
The better you understate the language, the better you manage the business.

7. The Accounting System: The Flow of Information
Businesses prepare reports to show the results of their operations.
People make decisions
Business transaction occur

8. Fields of Accounting & Sub-systems...
Financial Accounting
Management Accounting
output
Accounting information

9. Accounting... is an information system that...
measures business activities,
processes information, and...
communicates financial information.

10. to help users make better decisions.
Accounting...
is a
system that
Accounting
Identifies
Records
information
that is
Relevant
Communicates
Reliable
to help users make better decisions.
Comparable

11. Accounting... language of business.
The better you understate the language,
The better you manage the business.

12. Users of Accounting Information
External users
make decisions
about the entity.
Internal users
make decisions
for the entity.

13. Users of Accounting Information
Exh.
1.8
Users of Accounting Information
FINANCIAL ACCOUNTING
(External Users)
MANAGEMENT ACCOUNTING
(Internal Users)
Individuals
Businesses
Investors
Creditors
Government Regulatory Agencies
Taxing Authorities
Owners
Managers
All those are the decision makers for their own objectives

14. Types of Business Organizations
Proprietorships
Partnerships
Corporations

15. Types of Business Organizations
Proprietorship
Sally’s
Grocery
Corporation
Partnership
Proprietorship
Partnership
Corporation
Owner (s)
Properietor Only one owner
Partners Two or more owners
Stockholders
Generally many owners
Life of the organization
Limited by the owner’s choice, or death
Indefinite
Personal liability of the owner(s) for the business’s debts
Properietor is personally liable.
Stockholders are not personally liable.

16. Concepts and Principles
Objective 2
Apply Accounting
Concepts and Principles

17. Generally Accepted Accounting Principles
What is the primary objective of financial reporting?
To provide information useful
for making investment and
lending decisions

18. Basic Accounting Concepts and Principles
The Entity Concept
A business is accounted for separately from its owner or owners.
The Reliability (Objectivity) Principle
Financial statement information is supported by independent, unbiased evidence.
Cost Principle
Financial statements are based on actual costs incurred in business transactions.
Going-Concern Concept
A business continues operating instead of being closed or sold.
Monetary Unit Principle
Express transactions and events in monetary units.

19. The Entity Concept Example
Assume that John decides to open up a gas station and coffee shop.
The gas station made $250,000 in profits, while the coffee shop lost $50,000.

20. The Entity Concept Example
How much money did John make?
At a first glance, we would assume that John made $200,000.
However, by applying the entity concept we realize that the gas station made $250,000 while the coffee shop lost $50,000.

21. The Reliability (Objectivity) Principle
Information must
be reasonably
accurate.
Information must
be free from bias.
Information must report what actually happened.
Individuals would
arrive at similar
conclusions using
same data.

22. The Reliability (Objectivity) Principle Example
Suppose you want to open an gas station. For location of the business, you trasfer a small land to the business.
You beleive the land is worth YTL To confirm its cost to the business, you ask a real state company to estimate the value of the land.
The company values the land at YTL
Which is the more reliable estimate of the land’s value, your estimate of YTL or YTL professional appraisal?
The appraisal of YTL is more reliable because it is supported by an independent observation.

23. The Cost Principle Assets and services acquired should be
Recorded at their actual cost
(historical cost).
The item is recorded at the price actually paid
Not at the “expected” cost.

24. The Cost Principle Example
Suppose an entity purchases some spare parts from a supplier who is going out of business.
Assume that the entity get a good deal and pay only YTL for the parts that would have cost the entity YTL elsewhere.
The cost principle requires the entity to record the parts at its actual cost of YTL not the YTL that the entity believe the equipment is worth.

25. The Going Concern Concept
The entity will continue
to operate in the future.
Under this concept, accountant assume
that the business will remain in operation
long nough to use existing resources for their
intended pupose.
A store holding a going out of business sale is
trying to sell everything. In that case, instead of
historical cost, the relevant measure is current
market value. But going out of business is the
exception rather than the rule.

26. Use the Accounting Equation
Objective 3
Use the Accounting Equation

27. The Accounting Equation=
Liabilities + Owner’s Equity
Assets
Economic
Resources
Claims to
Economic
Resources

28. The Accounting Equation
Exh.
1.5
The Accounting Equation
_ _ _
LIABILITIES +
OWNER’S EQUITY
(Capital)
ASSETS
The two sides maust always be equal

29. The Accounting Equation
Exh.
1.5
The Accounting Equation =
ASSETS
OWNER’S EQUITY+LIABILITIES
ASSETS - LIABILITIES
OWNER’S EQUITY = =
ASSETS-OWNER’S EQUITY
LIABILITIES

30. The Accounting Equation
Exh.
1.5
The Accounting Equation
LIABILITIES +
OWNER’S EQUITY
Bono
ASSETS
Cash
Merchandise inventory
Furniture
Land
Building
Equipment
Goodwill
Account receivable
Notes receivable
Account payable
Notes payable
Owner’s equity

31. Assets
What is an asset?
It is something a company owns which has future economic value.
Cash
Merchandise inventory
Furniture
land
building
equipment
Goodwill
Receivable
Account receivable: A promise to receive cah from customers to whom the business has sold goods or for whom the business has performed services
Notes receivable: A written promise for future collection of cash.

32. Liability What is a liability? It is something a company owes.
An economic obligation (a dept) payable to an individual or organization outside the business.
All payables are liabilities.
Account payable: A liability backed by the general reputation and credit standing of the deptor.
Notes payable: A written promise of future payment.

33. Owner’s Equity What is owner’s equity?
It is what’s left of the assets after liabilities have been deducted.
Owner’s equity is the amount of an antity’s assets that remain after its liabilities are subtracted.
the same as net assets
the owner’s claim on the entity’s assets =
ASSETS - LIABILITIES
OWNER’S EQUITY

34. Transactions that Affect Owner’s Equity
INCREASES
OWNER’S EQUITY
DECREASES
Owner Withdrawals
from the Business
Owner Investments
in the Business
Owner’s Equity
Expenses
Revenues
OWNER’S EQUITY
+ Owner investments in the business
+ Revenues
- Owner withdrawals from the business
- Expenses

35. Revenues What are revenues?
They are amounts received or to be received from customers for sales of products or services.
sales
performance of services
rent
interest

36. Expenses What are expenses?
They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue.
salaries and wages
utilities
supplies used
advertising

37. Analyze Business Transactions
Objective 4
Analyze Business Transactions

38. Accounting for Business Transactions
What is a transaction?
It is any event that both affects the financial position of the business and can be reliably recorded.

39. Accounting for Business Transactions
1. Gay Gillen invests $30,000 to begin Gay Gillen eTravel.
What is the effect of these transactions on the accounting equation?
Owner’s
Assets = Liabilities Equity
Cash
1) ,000
G&G, Capital
30,000
For each transaction, the amount on the left side of the equation must equal the amount on the right side.
First transaction increases both the assets (in this case, Cash) and the owner’s equity.

40. Accounting for Business Transactions
Gillen purchases an office location, paying $20,000 in cash.
Owner’s
Assets = Liabilities Equity
Cash Land
30,000
-20, ,000
Bal , ,000
G&G, Capital
30,000
Bal ,000
30,000
30,000

41. Accounting for Business Transactions
3 She buys office supplies, agreeing to pay $500 in 30 days.
Owner’s
Assets = Liabilities Equity
Cash Land Supplies
30,000
-20, ,000
500
Bal , ,
Accounts Payable G&G, Capital ,000
500
Bal ,000
30,500
30,500

42. Accounting for Business Transactions
4. She earns and collects $5,500 revenues.
Owner’s
Assets = Liabilities Equity
Cash Land Supplies
30,000
-20, ,000
500
5,500
Bal , ,
Accounts Payable G&G, Capital ,000
500
5,500
Bal ,500
35,500
35,500

43. Accounting for Business Transactions
Gillen performs services, and the client agrees to pay
$3,000 within one month.
Owner’s
Assets = Liabilities + Equity
Cash Land + Supplies + Receivable
30,000
-20, ,000
500
5,500
3,000
Bal , , ,000
Accounts Payable G&G, Capital ,000
500
5,500
3,000
Bal ,500
39,000
39,000

44. Accounting for Business Transactions
6. During the month, she pays $3,300 for expenses incurred.
Salary expense $1,200, Utilities and telephone expense 400,
Equipment rental expense 600 Office rent expense 1,100
Owner’s
Assets = Liabilities + Equity
Cash Land + Supplies + Receivable
30,000
-20, ,000
500
5,500
3,000
-3,300
Bal , , ,000
Accounts Payable G&G, Capital ,000
500
5,500
3,000
-3,300
Bal ,200
35,700
35,700

45. Accounting for Business Transactions
7 .Gillen pays $300 to the store from which she purchased
$500 worth of supplies.
Owner’s
Assets = Liabilities + Equity
Cash Land + Supplies + Receivable
30,000
-20, ,000
500
5,500
3,000
-3,300
Bal , , ,000
Accounts Payable G&G, Capital ,000
500
5,500
3,000
-3,300
-300
Bal ,200
35,400
35,400

46. Accounting for Business Transactions
Notice that the equation always stays in balance.
Each transaction affects at least two accounts, sometimes more.
Some transactions affect only one side of the equation; some affect both sides.

47. Accounting for Business Transactions
Other transactions that took place were as follows:
8. The business collected $1,000 from the client.
9. She sold some land at cost for $9,000.
10. She withdrew $2,000 from the business.
Owner’s
Assets = Liabilities + Equity
Transferred Balance
Cash Land + Supplies + Receivable
Bal. 11, , ,000
1, ,000
9, ,000
-2,000
Bal. 19, , ,000
Accounts Payable + G&G, Capital Bal ,200
-2,000
Bal ,200
33,400
33,400

48. Prepare Financial Statements
Objective 5
Prepare Financial Statements

49. business is performing
Financial Statements...
– are the final
product of the
accounting process.
– tell how the
business is performing
and where it stands.

50. Financial Statements income statement
statement of owner’s equity or retained earnings
balance sheet
statement of cash flows

51. Relationships Among the Statements: Income Statement
Exh.
1.7
Relationships Among the Statements: Income Statement
An income statement reports on operating activities. It lists sales (revenues), costs, and expenses over a period of time. The relationship is expressed:
Net Income = Revenues - Expenses

52. Relationships Among the Statements: Statement of Owner’s Equity
G. Gillen, capital, April 1, 20xx $
Contribution of capital ,000
Net income $ 5,200
Cash distributions – 2,000
G. Gillen, capital, April 30, 20xx $33,200

53. Assets = Liabilities + Equity
Exh.
1.7
Balance Sheet
A balance sheet reports on investing and financing activities. It lists amounts for assets, liabilities, and equity at a point in time. The relationship is reflected in the Balance Sheet equation:
Assets = Liabilities + Equity

54. Relationships Among the Statements: Statement Of Cash Flows
Cash flows from operating activities:
Cash receipts from services rendered $6,500
Cash payments:
Supplies $ 300
Operating expenses , ,600
Net cash flows from Operating activities $2,900
Cash flows from investing activities:
Sale of Land ,000
Purchase of land ($20,000)
Net cash flows from investing activities $(11,000)
Cash Flows from Financing Activities:
Investment by Owner $30,000
Withdrawals (2,000)
Net Cash Flows from Financing Activities $28,000
Cash at Beginning of Year
Cash at End of the Year $19,900

55. End of Chapter 1