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Introduction to Accounting and Business

Student Version 1

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

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

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

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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.
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2 Forms of Business Entity

A proprietorship is owned by one individual. A partnership is similar to proprietorship

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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.
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Cost Concept

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

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Objectivity Concept

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

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Unit of Measure Concept

The unit of measure concept requires that economic data be recorded in dollars.

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State the accounting equation and define each element of the equation.

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3 The Accounting Equation

Assets = Liabilities + Owners Equity

The resources The rights of the The rights of the owned by a creditors are the owners debts of the business business

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

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Business Transaction

A business transaction is an economic event or condition that directly changes an entitys financial condition or its results of operations.
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Transaction A

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

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Transaction A (continued)

Assets
CASH

= =

Owners Equity
CHRIS CLARK, CAPITAL

a.

25,000

25,000
Investment by Chris Clark

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Transaction B

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

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Transaction B (continued)

Assets
CASH + LAND

= =

Owners Equity
CHRIS CLARK, CAPITAL

Bal. 25,000 b. 20,000 Bal. 5,000

25,000
25,000

+20,000 20,000

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Transaction C

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

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Transaction C (continued)

Assets
CASH + SUPPLIES + LAND Bal. 5,000 20,000 c. +1,350

= Liabilities + Owners Equity

= ACCOUNTS CHRIS CLARK, PAYABLE + CAPITAL 25,000 +1,350

Bal. 5,000

1,350

20,000

1,350

25,000

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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.
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Transaction D (continued)

Assets
Bal. d. Bal. CASH 5,000 +7,500 12,500 + SUPPLIES + 1,350 1.350 LAND 20,000 20,000

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Transaction D (continued)

Liabilities +
ACCOUNTS PAYABLE 1,350 1,350
+

Owners Equity
CHRIS CLARK, FEES CAPITAL + EARNED 25,000
+7,500

Bal. d.

Bal.

25,000

7,500

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Transaction E

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

Assets
Bal. e. Bal. CASH + 12,500 3,650 8,850 SUPPLIES + 1,350 1.350 LAND 20,000 20,000

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Transaction E (continued)

Liabilities +
Bal.

Owners Equity

ACCOUNTS CHRIS CLARK, FEES WAGES RENT UTIL. MISC. PAYABLE + CAPITAL + EARNED EXP. EXP. EXP. EXP.

1,350 1,350

25,000 25,000

7,500

e.
Bal. 7,500

2,125
2,125

800
800

450 275
450 275

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Transaction F

On November 30, 2009, NetSolutions paid creditors on account, $950.

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Transaction F (continued)

Assets
Bal. f. Bal. CASH 8,850 950 7,900 + SUPPLIES + 1,350 1.350 LAND 20,000 20,000

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Transaction F (continued)

Liabilities

Owners Equity

ACCOUNTS CHRIS CLARK, FEES WAGES RENT UTIL. MISC. PAYABLE + CAPITAL + EARNED EXP. EXP. EXP. EXP.

Bal. f. Bal.

1,350 950 400

25,000 25,000

7,500 7,500

2,125 2,125

800 800

450 450

275 275

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Transaction G

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

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Transaction G (continued)

Assets
Bal. g. Bal. CASH + 7,900 7,900 SUPPLIES 1,350 800 550 + LAND 20,000 20,000

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Transaction G (continued)

Liabilities +

Owners Equity

ACCOUNTS CHRIS CLARK, FEES WAGES RENT SUP. UTIL. MISC. PAYABLE + CAPITAL + EARNED EXP. EXP. EXP. EXP. EXP.

Bal. g. Bal.

400 400

25,000 25,000

7,500 7,500

2,125 2,125

800

450 275

800
800 800 450 275

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Transaction H

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

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Transaction H (continued)

Assets
Bal. h. Bal. CASH + 7,900 2,000 5,900 SUPPLIES 550 550 + LAND 20,000 20,000

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Transaction H (continued)

Liabilities +

Owners Equity
2,125 2,125 800 800 450 275 800 800 450 275

ACCTS. CLARK, CLARK, FEES WAGES RENT SUP. UTIL. MISC. PAY. + CAPITAL DRAW. + EARNED EXP. EXP. EXP. EXP. EXP.

Bal. 400 h. Bal.400

25,000

7,500

2,000
25,000 2,000 7,500

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Describe the financial statements of a proprietorship and explain how they interrelate.

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Income Statement

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

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Matching Concept

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

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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.

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Exhibit 6 Financial Statements for NetSolutions

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Net income is carried to the statement of owners equity.

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Exhibit 6 Financial Statements for NetSolutions (continued) From the income statement

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Exhibit 6 Financial Statements for NetSolutions (continued)

This amount is compared to the net cash flow on the statement of cash flows.
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From the statement of owners equity

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Exhibit 6 Financial Statements for NetSolutions (continued)

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This amount should match Cash on the balance sheet.

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