1. Introduction to Accounting and Business
Chapter 1
Student Version
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2. Learning Objective 1
Describe the nature of a business, the role of accounting, and ethics in business.

3. Nature of Business and Accounting
LO 1
Nature of Business and Accounting
A business is an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.

4. Nature of Business and Accounting
LO 1
Nature of Business and Accounting
The objective of most businesses is to earn a profit.
Profit is the difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services.

5. The Role of Accounting in Business
LO 1
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.

6. The Role of Accounting in Business
LO 1
The Role of Accounting in Business
The process by which accounting provides information to users is as follows:
Identify users.
Assess users’ information needs.
Design the accounting information system to meet users’ needs.
Record economic data about business activities and events.
Prepare accounting reports for users.

7. Managerial Accounting
LO 1
Managerial Accounting
The area of accounting that provides internal users with information is called managerial accounting or management accounting.
Managerial accountants employed by a business are employed in private accounting.

8. LO 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.
General-purpose financial statements are one type of financial accounting report that is distributed to external users. 8

9. Role of Ethics in Accounting and Business
LO 1
Role of Ethics in Accounting and Business
The objective of accounting is to provide relevant, timely information for user decision making.
Accountants must behave in an ethical manner so that the information they provide users will be trustworthy and, thus, useful for decision making.
Ethics are moral principles that guide the conduct of individuals.

10. Opportunities for Accountants
LO 1
Opportunities for Accountants
Accountants and their staffs who provide services on a fee basis are said to be employed in public accounting.
Accountants employed by a business firm or a not-for-profit organization are said to be employed in private accounting.
Public accountants who have met a state’s education, experience, and examination requirements may become Certified Public Accountants (CPAs).

11. Learning Objective 2
Summarize the development of accounting principles and relate them to practice.

12. Generally Accepted Accounting Principles
LO 2
Generally Accepted Accounting Principles
Financial accountants follow generally accepted accounting principles (GAAP) in preparing reports.
Within the U.S., the Financial Accounting Standards Board (FASB) has the primary responsibility for developing accounting principles.

13. Generally Accepted Accounting Principles
LO 2
Generally Accepted Accounting Principles
The Securities and Exchange Commission (SEC), an agency of the U.S. government, has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public.
Many countries outside the United States use generally accepted accounting principles adopted by the International Accounting Standards Board (IASB).

14. Business Entity Concept
LO 2
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.

15. Proprietorship A proprietorship is owned by one individual.
LO 2
Proprietorship
A proprietorship is owned by one individual.
70% of business entities in the U.S. are proprietorships.
They are easy and cheap to organize.
Resources are limited to those of the owner.
Used by small businesses.

16. LO 2
Partnership
A partnership is similar to a proprietorship except that it is owned by two or more individuals.
10% of business organizations in the U.S. (combined with limited liability companies) are partnerships.
Combines the skills and resources of more than one person.

17. LO 2
Corporation
A corporation is organized under state or federal statutes as a separate legal taxable entity.
Corporations generate 90% of business revenues.
20% of the business organizations in the U.S. are corporations.
Ownership is divided into shares, called stock.
(continued)

18. LO 2
Corporation
A corporation is organized under state or federal statutes as a separate legal taxable entity.
Can obtain large amounts of resources by issuing stocks.
Used by large businesses.

19. LO 2
Accounting Concepts
Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price.
The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence.
Only the final agreed-upon amount is objective enough to be recorded in the accounting records.

20. State the accounting equation and define each element of the equation.
Learning Objective 3
State the accounting equation and define each element of the equation.

21. The Accounting Equation
LO 3
The Accounting Equation
The resources owned by a business are its assets.
The rights of creditors are the debts of the business and are called liabilities.
The rights of the owners are called owner’s equity.
The equation Assets = Liabilities + Owner’s Equity is called the accounting equation.

22. The Accounting Equation
LO 3
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources owned by a business
The rights of the owners
The rights of creditors are the debts of the business

23. Learning Objective 4
Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation.

24. LO 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.

25. LO 4
Transaction A
On November 1, 2011, Chris Clark deposited $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation.

26. LO 4
Transaction B
On November 5, 2011, NetSolutions paid $20,000 for the purchase of land as a future building site.
The new amounts are called balances.

27. LO 4
Transaction C
On November 10, 2011, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future.

28. LO 4
Transaction C
The liability created by a purchase on account is called an account payable.
Items such as supplies that will be used in the business in the future are called prepaid expenses, which are assets.

29. LO 4
Transaction D
On November 18, 2011, 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.

30. LO 4
Transaction D
Revenue from providing services is recorded as fees earned.
Revenue from the sale of merchandise is record as sales.
Other examples of revenue include rent, which is recorded as rent revenue, and interest, which is recorded as interest revenue.
An account receivable is a claim against a customer, which is an asset.

31. LO 4
Transaction E
During the month, NetSolutions spent cash or used up other assets in earning revenue. Assets used in this process of earning revenue are called expenses.

32. LO 4
Transaction E
On November 30, 2011, NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

33. LO 4
Transaction F
On November 30, 2011, NetSolutions paid creditors on account, $950.

34. LO 4
Transaction G
On November 30, 2011, Chris Clark determined that the cost of supplies on hand at the end of the period was $550; therefore, the amount of supplies used amounted to $800 ($1,350 – $550 = $800).

35. LO 4
Transaction H
On November 30, 2011, NetSolutions paid $2,000 to stockholders as dividends.
Dividends are distributions of earnings to stockholders.

36. Learning Objective 5
Describe the financial statements of a corporation and explain how they interrelate.

37. LO 5
Financial Statements
After transactions have been recorded and summarized, reports are prepared for users. The accounting reports providing this information are called financial statements.

38. LO 5
Financial Statements
The income statement reports the revenues and expenses for a period of time, based on the matching concept.
The matching concept is applied by “matching” the expenses incurred during a period with the revenue that those expenses generated.
The excess of the revenue over the expenses is called net income, net profit, or earnings. If expenses exceed revenue, the excess is a net loss.

39. LO 5
Financial Statements
The retained earnings statement reports the changes in the retained earnings for a period of time.
It is prepared after the income statement because the net income or net loss for the period must be reported in this statement.
A balance sheet is a list of the assets, liabilities, and stockholders’ equity as of a specific date.

40. LO 5
Financial Statements
A statement of cash flows is a summary of the cash receipts and cash payments for a specific period of time.
It consists of three sections: (1) operating activities (2) investing activities (3) financing activities

41. Cash Flows from Various Activities
The cash flows from operating activities section reports a summary of cash receipts and cash payments from operations.
The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively permanent assets.
The cash flows from financing activities section reports the cash transactions related to cash investments by the owner, borrowings, and withdrawals by the owner.

42. Learning Objective 6
Describe and illustrate the use of the ratio of liabilities to stockholders’ equity in evaluating a company’s financial condition.

43. Ratio of Liabilities to Stockholders’ Equity
LO 6
Ratio of Liabilities to Stockholders’ Equity
Ratio of Liabilities to Stockholders’ Equity =
Total Liabilities
Total Stockholders’ Equity)
Ratio of Liabilities to Stockholders’ Equity =
$400
$26,050 =

44. Introduction to Accounting and Business
The End
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