CHAPTER 1

ACCOUNTING IN ACTION
Accounting Principles, Eighth Edition

Accounting in Action

What is Accounting?

The Building Blocks of Accounting Ethics in financial reporting Generally accepted accounting principles

The Basic Accounting Equation Assets Liabilities Owners equity

Using the Basic Accounting Equation Transaction analysis Summary of transactions

Financial Statements

Three activities Who uses accounting data

Income statement Owners equity statement Balance sheet

Assumptions

Statement of cash flows

Chapter 1-2

What is Accounting?
The purpose of accounting is to:
(1) identify, record, and communicate the economic events of an
(2) organization to (3) interested users.

Chapter 1-3

LO 1 Explain what accounting is.

What is Accounting?
Three Activities
Illustration 1-1 Accounting process

The accounting process includes the bookkeeping function.

Chapter 1-4

LO 1 Explain what accounting is.

Who Uses Accounting Data?

Internal Users Management IRS

Human Resources
Finance

Investors

There are two broad groups of users of financial information: internal users and external users.
Customers SEC

Labor Unions Creditors External Users

Marketing

Chapter 1-5

LO 2 Identify the users and uses of accounting.

The Building Blocks of Accounting

Ethics In Financial Reporting
Standards of conduct by which ones actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics.
Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others. Congress passedSarbanes-Oxley Act of 2002.

Effective financial reporting depends on sound ethical behavior.

Chapter 1-6

LO 3 Understand why ethics is a fundamental business concept.

Assumptions
Monetary Unit Assumption include in the
accounting records only transaction data that can be expressed in terms of money.

Economic Entity Assumption requires that

activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. Proprietorship.

Partnership.
Corporation.
Chapter 1-7

Forms of Business Ownership

LO 5 Explain the monetary unit assumption and the economic entity assumption.

Forms of Business Ownership

Proprietorship
Generally owned by one person. Often small service-type businesses Owner receives any profits, suffers any losses, and is personally liable for all debts.
Chapter 1-8

Partnership
Owned by two or more persons. Often retail and service-type businesses

Corporation
Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability

Generally unlimited personal liability

Partnership agreement

LO 5 Explain the monetary unit assumption and the economic entity assumption.

The Basic Accounting Equation

Assets = Liabilities + Owners Equity

Provides the underlying framework for recording and summarizing economic events. Assets are claimed by either creditors or owners. Claims of creditors must be paid before ownership claims.

Chapter 1-9

LO 6 State the accounting equation, and define assets, liabilities, and owners equity.

The Basic Accounting Equation

Assets = Liabilities + Owners Equity

Assets Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc.

Chapter 1-10

LO 6 State the accounting equation, and define assets, liabilities, and owners equity.

The Basic Accounting Equation

Assets = Liabilities + Owners Equity

Liabilities Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc.

Chapter 1-11

LO 6 State the accounting equation, and define assets, liabilities, and owners equity.

The Basic Accounting Equation

Assets Owners Equity = Liabilities + Owners Equity

Ownership claim on total assets.

Referred to as residual equity. Capital, Drawings, etc. (Proprietorship or Partnership).

Chapter 1-12

LO 6 State the accounting equation, and define assets, liabilities, and owners equity.

Owners Equity
Illustration 1-6

Revenues result from business activities entered into for the purpose of earning income.

Expenses are the cost of assets consumed or services used in the process of earning revenue.

Chapter 1-13

LO 6 State the accounting equation, and define assets, liabilities, and owners equity.

Using The Basic Accounting Equation

Transactions are a businesss economic events
recorded by accountants.
May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the accounting equation.

Chapter 1-14

LO 7 Analyze the effects of business transactions on the accounting equation.

Transactions (Question?)
Q1-15: Are the following events recorded in the accounting records? Owner Event
Supplies are purchased on account. An employee is hired.

withdraws cash for personal use.

Criterion

Is the financial position (assets, liabilities, or owners equity) of the company changed?

Record/ Dont Record

Chapter 1-15

LO 7 Analyze the effects of business transactions on the accounting equation.

Financial Statements
Companies prepare four financial statements from the summarized accounting data:

Income Statement

Owners Equity Statement

Balance Sheet

Statement of Cash Flows

Chapter 1-16

LO 8 Understand the four financial statements and how they are prepared.

Transaction Analysis
1) 2)

3)
4) 5) 6) 7) 8) 9) 10)

Investment by owner Purchase of equipment for cash Purchase of supplies on credit Services provided for cash Purchase of advertising on credit Services provided for cash and credit Payment of expenses Payment of accounts payable Receipt of cash on account Withdrawal of cash by owner

Chapter 1-17

Financial Statements

Review Question
Net income will result during a time period when:
a. assets exceed liabilities. b. assets exceed revenues. c. expenses exceed revenues. d. revenues exceed expenses.

Chapter 1-18

LO 8 Understand the four financial statements and how they are prepared.

Financial Statements

Review Question
Which of the following financial statements is prepared as of a specific date?
a. Balance sheet.

b. Income statement.
c. Owner's equity statement. d. Statement of cash flows.

Chapter 1-19

LO 8 Understand the four financial statements and how they are prepared.