3 ACCOUNTING What is accounting? The language of business! Planning RecordingAnalyzingInterpreting financial informationThe language of business!
4 ACCOUNTING SYSTEMA planned process for providing financial information that will be useful to management
5 ACCOUNTING RECORDSOrganized summaries of a business’s financial activities
6 FINANCIAL STATEMENTSFinancial reports that summarize the financial condition and operations of a business.Used by:Suppliers that are considering extending credit to a businessInstitutions that are considering extending loans to a businessBusiness owners and managers
7 SERVICE BUSINESS A business that performs an activity for a fee. AccountingDoctorStylistLawn careDaycareCar Wash
8 PROPRIETORSHIP A business owned and controlled by one person AdvantagesEase of formationTotal control by the ownerProfits that are not sharedDisadvantagesLimited resourcesUnlimited liabilityLimited expertiseLimited lifeObligation to follow the laws of both the federal government and the state and city in which the business is formed.
9 ASSET Anything of value that is owned Cash Supplies Accounts ReceivablePrepaid InsuranceEquipment
10 Equities Financial right to the assets of a business Two types Equity of those to whom money is owed – LiabilitiesEquity of the owner
11 Liabilities An amount owed by a business Accounts payable Notes payable
12 OWNER’S EQUITYThe amount remaining after the value of all liabilities is subtracted from the value of all assets.
13 ACCOUNTING EQUATIONAn equation showing the relationship among assets, liabilities, and owner’s equity.ASSETS = LIABILITIES + OWNER’S EQUITYA = L + OE
14 ETHICSThe principles of right and wrong that guide an individual in making decisions.
15 BUSINESS ETHICSThe use of ethics in making business decisions.
16 REVIEW OF 1-1 What is accounting? Give two examples of a service business.What is a proprietorship?State the accounting equation.
17 LESSON 1-2How Business Activities Change the Accounting Equation
18 TRANSACTIONA business activity that changes assets, liabilities, or owner’s equity.ExampleA business pays cash for suppliesAfter each transaction, the accounting equation must remain in balance.
19 ACCOUNTA record summarizing all the information pertaining to a single item.
22 CAPITALThe account uses to summarize the owner’s equity in a business.The capital account is an owner’s equity account
23 REVIEW OF 1-2What must be done if a transaction increases on the left side of the accounting equation?How can a transaction affect only one side of the accounting equation?To what does the phrase on account refer?
24 LESSON 1-3How Transactions Change Owner’s Equity in an Accounting Equation
25 REVENUEAn increase in owner’s equity resulting from the operation of a business.Money from a sale.
26 SALE ON ACCOUNT OR A CHARGE SALE A sale for which cash will be received at a later date.
27 EXPENSEA decrease in owner’s equity resulting from the operation of a business.UtilitiesRepairsMiscellaneousRentSalaries
28 WITHDRAWALSAssets taken out of a business for the owner’s personal use.
29 REVIEW OF 1-3How is owner’s equity affected when cash is received from sales?How is owner’s equity affected when services are sold on account?How is owner’s equity affected when cash is paid for expenses.
30 GAAP Generally Accepted Accounting Principles Why is GAAP necessary? By requiring the financial statement preparers to consistently follow certain standards and rules such as GAAP, the users are able to compare the financial statements of several companies and to track the results of one company over several time periods.
31 SEC Security and Exchange Commission Has the authority to establish GAAPAllowed a series of private organizations to determine GAAP
32 FASB Financial Accounting Standards Board The organization that the SEC has given the authority to set accounting standards.Established in 1973.
33 ACCOUNTING CONCEPTS FOR CHAPTER 1 Business EntityApplied when a business’s financial information is recorded and reported separately from the owner’s personal financial information.Unit of MeasurementApplied when business transactions are stated in numbers that have common values.Example – in the US transactions are recorded in dollars.