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Accounting Principles, 6e
Weygandt, Kieso, & Kimmel
Prepared by
Marianne Bradford, Ph. D.
Bryant College
John Wiley & Sons, Inc.
CHAPTER 1
ACCOUNTING IN ACTION
After studying this chapter, you should be able to:
1 Explain what accounting is.
2 Identify the users and uses of accounting.
3 Understand why ethics is a fundamental
business concept.
4 Explain the meaning of generally accepted
accounting principles and the cost
principle.
CHAPTER 1
After studying this chapter, you should be able to:
5 Explain the meaning of the monetary unit
assumption and the economic entity assumption.
6 State the basic accounting equation and explain
the meaning of assets, liabilities, and owners
equity.
7 Analyze the effect of business transactions on the
basic accounting equation.
8 Understand what the four financial statements
are and how they are prepared.
PREVIEW OF CHAPTER 1
Accounting In Action
What is Accounting?
Who uses accounting data?

Brief history of accounting
Bookkeeping and
accounting
Accounting and you
The accounting profession
The Building Blocks

of Accounting
Ethics - a fundamental
business concept
Generally accepted
accounting principles
Assumptions
Basic accounting equation
Using the Building Blocks

Transaction analysis
Summary of transactions
Financial Statements
Income Statement
Owners Equity Statement
Balance Sheet
Statement of Cash Flows
STUDY OBJECTIVE 1
Explain
Explain what
what accounting
accounting is.
is.
WHAT IS ACCOUNTING?
Accounting is an information system that
1) identifies, 2) records, and 3) communicates
the economic events of an organization to
interested users
ILLUSTRATION 1-1
THE ACCOUNTING PROCESS
Communication
Identification
Recording
Accounting
Reports
Prepare
accounting
reports
SOFTBYTE
Select economic
events
(transactions)
Record,
classify
and
summarize
Annual Report
Analyze and
interpret
STUDY OBJECTIVE 2
Identify
Identify the
the users
users and
and uses
uses of
of accounting.
accounting.
ILLUSTRATION 1-2
QUESTIONS ASKED BY INTERNAL USERS
Is cash sufficient to pay

bills?
Can we afford to give

employee pay raises this
What is the cost of

manufacturing each unit of
product?
Which product line is the

most profitable?
ILLUSTRATION 1-3
QUESTIONS ASKED BY EXTERNAL USERS
Is the company
earning
satisfactory
income?
How does the company

compare in size and
profitability with its
competitors?
What do we
do if they
catch us?
Will the company be able to pay its debts as

they come due?
BOOKKEEPING DISTINGUISHED
FROM ACCOUNTING
Accounting
1 Includes bookkeeping
2 Also includes much more
Bookkeeping
1 Involves only the recording of economic
events
2 Is just one part of accounting
THE ACCOUNTING PROFESSION

Public accountants offer expert service to the general
public through the services they perform.
Private accountants are employees of individual
companies and are involved in a number of activities
including cost and tax accounting, systems, and internal
auditing.
Not for Profit accounting includes reporting and control
for government units, foundations, hospitals, labor
unions, colleges/universities, and charities.
ILLUSTRATION 1-4
ACCOUNTING CAREER LADDER
Private
Accounting
VP Finance
and Chief
Financial
Officer
Corporate
Controller
Senior
Accountant
Junior
Accountant
Public
Accounting
10+ years
6 to 8 years
2 to 4+ years
Entry level
Partner
Audit
Manager
Senior
Auditor
Junior
Auditor
STUDY OBJECTIVE 3
Understand
Understand why
why ethics
ethics isis aa fundamental
fundamental
business
business concept.
concept.
STUDY OBJECTIVE 4
Explain
Explain the
the meaning
meaning of
of generally
generally accepted
accepted
accounting
accounting principles
principles and
and the
the cost
cost principle.
principle.
STUDY OBJECTIVE 5
Explain
Explain the
the meaning
meaning of
of the
the monetary
monetary unit
unit
assumption
assumption and
and the
the economic
economic entity
entity assumption.
assumption.
THE BUILDING BLOCKS

OF ACCOUNTING
Ethics - standards of conduct by which ones actions are
judged as right or wrong, honest or dishonest.
Generally Accepted Accounting Principles - primarily
established by the Financial Accounting Standards Board
and the Securities and Exchange Commission
Assumptions
1 Monetary Unit - only transaction data that
can
be expressed in terms of money is
included in
the accounting records.
2 Economic Entity - includes any organization
or
unit in society.
BUSINESS ENTERPRISES
A business owned by one person is generally a
proprietorship.
A business owned by two or more persons associated as
partners is a partnership.
A business organized as a separate legal entity under
state corporation law and having ownership divided into
transferable shares of stock is a corporation.
STUDY OBJECTIVE 6
State
State the
the basic
basic accounting
accounting equation
equation and
and
explain
explain the
the meaning
meaning of
of assets,
assets, liabilities,
liabilities,
and
and owners
owners equity.
equity.
ILLUSTRATION 1-6
BASIC ACCOUNTING EQUATION
The Basic Accounting Equation
Assets
Liabilities
Owners Equity
ASSETS AS A BUILDING BLOCK

Assets are resources owned by a business.
They are used in carrying out such activities as
production, consumption and exchange.
LIABILITIES AS A BUILDING BLOCK

Liabilities are claims against assets.
They are existing debts and obligations.
OWNERS EQUITY AS
A BUILDING BLOCK
Owners Equity is equal to total assets minus
total liabilities.
Owners Equity represents the ownership claim
on total assets.
Subdivisions of Owners Equity:
1 Capital or Investments by Owner
2 Drawing
3 Revenues
4 Expenses
INVESTMENTS BY OWNERS
AS A BUILDING BLOCK
Investments by Owner are the assets the owner
puts in the business.
These investments increase owners equity.
DRAWINGS AS A
BUILDING BLOCK
Drawings are withdrawals of cash or other
assets by the owner for personal use.
Drawings decrease owners equity.
REVENUES AS A
BUILDING BLOCK
Revenues are the gross increases in owners
equity resulting from business activities
entered into for the purpose of earning
income.
Revenues may result from sale of
merchandise, performance of services,
rental of property, or lending of money.
Revenues usually result in an increase in an
asset.
EXPENSES AS A
BUILDING BLOCK
Expenses are the decreases in owners equity
that result from operating the business.
They are the cost of assets consumed or
services used in the process of earning
revenue.
Examples of expenses may be utility expense,
rent expense, supplies expense, and tax
expense.
ILLUSTRATION 1-7
INCREASES AND DECREASES IN OWNERS EQUITY
INCREASES
DECREASES
Investments
by Owner
Withdrawals
by Owner
Owners
Equity
Revenues
Expenses
STUDY OBJECTIVE 7
Analyze
Analyze the
the effect
effect of
of business
business transactions
transactions
on
on the
the basic
basic accounting
accounting equation.
equation.
ILLUSTRATION 1-8
TRANSACTION IDENTIFICATION PROCESS
Purchase
computer
Answer
telephone
Pay rent
Is
Is the
the financial
financial position
position (assets, liabilities,
liabilities, and
owners
owners equity) of the
the company changed?
Yes
No
Yes
Record
Dont
Record
Record
TRANSACTION ANALYSIS
TRANSACTION 1
Ray Neal decides to open a computer programming
service.
On September 1, he invests $15,000 cash in the business,
which he names Softbyte.
BANK
Softbyte
TRANSACTION 1 SOLUTION
Assets
Cash
(1) +15,000
Liabilities
Owners Equity
R. Neal,
Capital
+15,000 Investment
There
Thereisisan
anincrease
increasein
inthe
theasset
assetCash,
Cash,
$15,000,
$15,000,and
andan
anequal
equalincrease
increasein
inthe
the
owners
ownersequity,
equity,R.
R.Neal,
Neal,Capital,
Capital,$15,000.
$15,000.
TRANSACTION 2
Softbyte purchases computer equipment for $7,000 cash.
Assets
Old Bal.
(2)
New Bal.
Cash
$15,000
-7,000
$ 8,000
Equipment
+$7,000
$7,000
Liabilities
$15,000
Cash
Cashisisdecreased
decreased$7,000,
$7,000,and
andthe
theasset
asset
Equipment
Equipmentisisincreased
increased$7,000.
$7,000.
Owners Equity
R. Neal,
Capital
$15,000
$15,000
TRANSACTION 3
Softbyte purchases for $1,600 from Acme Supply
Company computer paper and other supplies expected to
last several months.
Acme agrees to allow Softbyte to pay this bill next month,
in October.
This transaction is referred to as a purchase on account
or a credit purchase.
Acme Supply Company
Softbyte
Assets
Old Bal.
Cash
$8,000
(3)
New Bal.
$8,000
Supplies
+$1,600
$1,600
$16,600
=
+
Equipment
$7,000
$7,000
Liabilities
Accounts
Payable
+$1,600
$1,600
+
+
Owners Equity
R. Neal,
Capital
$15,000
$15,000
$16,600
The
Theasset
assetSupplies
Suppliesisisincreased
increased$1,600,
$1,600,and
andthe
theliability
liability
Accounts
AccountsPayable
Payableisisincreased
increasedby
bythe
thesame
sameamount.
amount.
TRANSACTION 4
Softbyte receives $1,200 cash from customers for
programming services it has provided.
This transaction represents the Softbytes
principal revenue-producing activity.
Softbyte
Assets
(4)
Old Bal.
New Bal.
Cash
$8,000
+1,200
$9,200
Supplies +
$1,600
Equipment =
$7,000
Liabilities
Accounts
Payable
$1,600
$1,600 +
$7,000 =
$1,600
$17,800
Owners Equity
R. Neal,
Capital
$15,000
+1,200 Service Revenue
$16,200
$17,800
Cash
Cashisisincreased
increased$1,200,
$1,200,and
andR.
R.Neal,
Neal,
Capital
Capitalisisincreased
increased$1,200.
$1,200.
TRANSACTION 5
Softbyte receives a bill for $250 from the Daily News
for advertising but postpones payment of the bill
until a later date.
Softbyte
Bill
Daily
News
Assets
Supplies
$1,600
Equipment
$7,000
Old Bal.
Cash
$9,200
New Bal.
$9,200
$1,600
$7,000
(5)
$17,800
Liabilities
Accounts
Payable
$1,600
+250
$1,850
+
+
Owners Equity
R. Neal,
Capital
$16,200
-250 Advertising Expense
$15,950
$17,800
Accounts
AccountsPayable
Payableisisincreased
increased$250,
$250,and
and
R.
R.Neal,
Neal,Capital
Capitalisisdecreased
decreased$250.
$250.
TRANSACTION 6
Softbyte provides $3,500 of programming services
for customers.
Cash of $1,500 is received from customers, and
the balance of $2,000 is billed on account.
Softbyte
Bill
Assets
Old Bal.
(6)
Cash
+
$ 9,200
+1,500
New Bal.
$10,700 +
Accounts
Receivable
Supplies +
$1,600
Equipment =
$7,000
+2,000
Liabilities +
Accounts
Payable
+
$1,850
Owners Equity
R. Neal,
Capital
$15,950
+3,500 Service
$2,000 +
$21,300
$1,600 +
$7,000 =
$1,850 +
Revenue
$19,450
$21,300
Cash
Cashisisincreased
increased$1,500;
$1,500;Accounts
AccountsReceivable
Receivableisisincreased
increased
$2,000;
$2,000;and
andR.
R.Neal,
Neal,Capital
Capitalisisincreased
increased$3,500.
$3,500.
TRANSACTION 7
Expenses paid in cash for September are store rent

$600, salaries of employees $900, and utilities $200.
$600
Softbyte
$900
$200
Assets
(7)
Old Bal.
New Bal.
Cash
+
$10,700
-1,700
$ 9,000 +
Accounts
Receivable +
$2,000
Supplies +
$1,600
$2,000 +
$19,600
$1,600 +
Equipment =
$7,000
Liabilities +
Accounts
Payable
+
$1,850
-600 Rent Exp.

-900 Salaries Exp.
$7,000 =
$1,850 +
Owners Equity
R. Neal,
Capital
$19,450
-200 Salaries Exp.
$17,750
$19,600
Cash
Cashisisdecreased
decreased$1,700
$1,700and
andR.
R.Neal,
Neal,Capital
decreased
by
bythe
thesame
sameamount.
amount.
TRANSACTION 8
Softbyte pays its $250 Daily News advertising bill in
cash.
Softbyte
Daily
News
Assets
Old Bal.
(8)
New Bal.
Cash
+
$9,000
-250
$8,750 +
Accounts
Receivable +
$2,000
Supplies +
$1,600
$2,000 +
$19,350
$1,600 +
Equipment =
$7,000
$7,000 =
Liabilities +
Accounts
Payable
+
$1,850
-250
$1,600 +
Owners Equity
R. Neal,
Capital
$17,750
$17,750
$19,350
Cash
Cashisisdecreased
decreased$250
$250and
andAccounts
AccountsPayable
Payableisisdecreased
decreased
by
bythe
thesame
sameamount.
amount.
TRANSACTION 9
The sum of $600 in cash is received from
customers who have previously been billed
for services (in Transaction 6).
Softbyte
Assets
Old Bal.
(9)
New Bal.
Cash
+
$8,750
+600
$9,350 +
Accounts
Receivable +
$2,000
-600
$1,400 +
Supplies +
$1,600
Equipment =
$7,000
Liabilities +
Accounts
Payable
+
$1,600
$1,600 +
$7,000 =
$1,600 +
$19,350
Owners Equity
R. Neal,
Capital
$17,750
$19,350
Cash
Cashisisincreased
increased$600
$600and
andAccounts
Accounts
Receivable
Receivableisisdecreased
decreasedby
bythe
thesame
sameamount.
amount.
$17,750
TRANSACTION 10
Ray Neal withdraws $1,300 in cash from

the business for his personal use.
Softbyte
$1,300
Assets
Old Bal.
(10)
Cash
+
$9,350
Accounts
Receivable +
$1,400
Supplies +
$1,600
Equipment =
$7,000
Liabilities +
Accounts
Payable
+
$1,600
-1,300
New Bal.
$8,050 +
Owners Equity
R. Neal,
Capital
$17,750
-1,300 Drawings
$1,400 +
$18,050
$1,600 +
$7,000 =
$1,600 +
$16,450
$18,050
Cash
Cashisisdecreased
decreased$1,300
$1,300and
andR.
R.Neal,
Neal,Capital
decreased
by
bythe
thesame
sameamount.
amount.
STUDY OBJECTIVE 8
Understand
Understand what
what the
the four
four financial
financial
statements
statements are
are and
and how
how they
they are
are
prepared.
prepared.
FINANCIAL STATEMENTS
After transactions are identified, recorded, and summarized,
4 financial statements are prepared from the summarized
accounting data:
1 An income statement presents the revenues and expenses
and resulting net income or net loss for a specific period of
time.
2 An owners equity statement summarizes the changes in
owners equity for a specific period of time.
3 A balance sheet reports the assets, liabilities, and owners
equity at a specific date.
4 A statement of cash flows summarizes information
about the cash inflows (receipts) and outflows
(payments) for a specific period of time.
ILLUSTRATION 1-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE
Income Statement
For the Month Ended September 30, 2002
Revenues
Service revenue
Expenses
Salaries expense
Rent expense
Advertising expense
Utilities expense
Total expenses
Net income
$ 4,700
$ 900
600
250
200
1,950
2,750
Net income of $2,750 shown on the income statement is added to the

beginning balance of owners capital in the owners equity statement.
ILLUSTRATION 1-11
SOFTBYTE
Capital, September 1
Add: Investments
Net income
Less: Drawings
$
$ 15,000
2,750
17,750
17,750
1,300
$ 16,450
Net income of $2,750 is determined from the information in the owners

equity column of the Summary of Transactions (Illustration 1-7).
ILLUSTRATION 1-11
SOFTBYTE
Add: Investments
Net income
Less: Drawings
$
$ 15,000
2,750
17,750
17,750
1,300
$16,450
Net income of $2,750 carried forward from the income statement to the
owners equity statement. The owners capital of $16,450 at the end of the
reporting period is shown as the final total of the owners equity column of the
Summary of Transactions (Illustration 1-7).
ILLUSTRATION 1-11
SOFTBYTE
Balance Sheet
September 30, 2002
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
$ 8,050
1,400
1,600
7,000
$ 18,050
Liabilities and Owners Equity

Liabilities
Accounts payable
Owners equity
R. Neal, capital
Total liabilities and owners equity
$ 1,600
16,450
$ 18,050
Owners capital of $16,450 at the end of the reporting period shown

in the owners equity statement is shown on the balance sheet.
ILLUSTRATION 1-11
SOFTBYTE
Balance Sheet
September 30, 2002
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
$ 8,050
1,400
1,600
7,000
$ 18,050
Liabilities and Owners Equity
Liabilities
Accounts payable
Owners equity
R. Neal, capital
Total liabilities and owners equity
$ 1,600
$ 18,050
Cash of $8,050 on the balance sheet is reported on the statement of cash flows.
ILLUSTRATION 1-11
SOFTBYTE
Statement of Cash Flows
Cash flows from operating activities
Cash receipts from revenues
Cash payments for expenses
Net cash provided by operating activities
Cash flows from investing activities
Purchase of equipment
Cash flows from financing activities
Investment by owners
Withdraws by owners
Net cash provided by financing activities
Net increase in cash
Cash at the beginning of the period
Cash at the end of the period
$ 3,300
(1,950)
1,350
(7,000)
$ 15,000
(1,300)
13,700
8,050
0
$ 8,050
Cash of $8,050 on the balance sheet and statement of cash flows is shown as the
final total of the cash column of the Summary of Transactions (Illustration 1-7).
COPYRIGHT
Copyright 2002 John Wiley & Sons, Inc. All rights reserved. Reproduction or
translation of this work beyond that permitted in Section 117 of the 1976 United
States Copyright Act without the express written consent of the copyright owner is
unlawful. Request for further information should be addressed to the Permissions
Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for
his/her own use only and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
CHAPTER 1

CH 01

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CH 01

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Drs.Gusnardi,SE.,M.Si.

Jl.Sail No. 96-c RT.01/12

John Wiley & Sons, Inc.

Who uses accounting data?

The Building Blocks

Using the Building Blocks

Is cash sufficient to pay

Can we afford to give

What is the cost of

Which product line is the

How does the company

Will the company be able to pay its debts as

THE ACCOUNTING PROFESSION

THE BUILDING BLOCKS

The Basic Accounting Equation

ASSETS AS A BUILDING BLOCK

LIABILITIES AS A BUILDING BLOCK

Softbyte purchases computer equipment for $7,000 cash.

Expenses paid in cash for September are store rent

-600 Rent Exp.

Ray Neal withdraws $1,300 in cash from

Net income of $2,750 shown on the income statement is added to the

Net income of $2,750 is determined from the information in the owners

Liabilities and Owners Equity

Owners capital of $16,450 at the end of the reporting period shown

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