BA Chapter 1

Important
1. There will be three class tests.

2. Two class tests will be considered for final
evaluation.
3. Group Assignments and quiz will also be a part
of continuous assessment.
Chapter
1-1
Attention!!
 All participants are requested to bring the

reference book and calculator in the class.
Chapter
1-2
Chapter
1-3
CHAPTER 1
ACCOUNTING IN
ACTION
Accounting Principles, Eighth Edition
Chapter
1-4
Accounting in Action
The Building The Basic Using the

What is Basic Financial
Blocks of Accounting
Accounting? Accounting Statements
Accounting Equation Equation
Three Ethics in Assets Transaction Income

activities financial Liabilities analysis statement
Who uses reporting Summary of Owner’s
Owner’s
accounting Generally equity transactions equity
data accepted statement
accounting Balance
principles sheet
Assumptions Statement of
cash flows
Chapter
1-5
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
1-6 LO 1 Explain what accounting is.
What is Accounting?
Three Activities
Illustration 1-1
Accounting process
The accounting process includes

the bookkeeping function.
Chapter
1-7 LO 1 Explain what accounting is.
Who Uses Accounting Data?
Internal Users
Management IRS
Human Investors
Resources
There are two broad
groups of users of Labor
financial information: Unions
Finance
internal users and
external users. Creditors
Marketing
SEC
Customers External
Users
Chapter
1-8 LO 2 Identify the users and uses of accounting.
Common Questions Asked User
1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income? Investors
3. Do we need to borrow in the
near future? Management
4. Is cash sufficient to pay
dividends to the stockholders? Finance
5. What price for our product
will maximize net income? Marketing
6. Will the company be able to
pay its short-term debts? Creditors
Chapter
1-9 LO 2 Identify the users and uses of accounting.
Discussion Question
Q1. “Accounting is ingrained in our society and it is
vital to our economic system.” Do you agree? Explain.
LO 3 Understand why ethics is a fundamental business concept.

Chapter
1-10
The Building Blocks of Accounting
Ethics In Financial Reporting

Standards of conduct by which one’s actions are
judged as right or wrong, honest or dishonest, fair or
not fair, are Ethics.

Chapter
1-11
Ethics
Review Question
Ethics are the standards of conduct by which one's
actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.

Chapter
1-12
Ethics
Review Question
Ethics are the standards of conduct by which one's
actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.

Chapter
1-13
Financial Statements
Various users Balance Sheet
need financial Income Statement
Statement of Owner’s Equity
information Statement of Cash Flows
Note Disclosure
The accounting profession

has attempted to develop Generally Accepted
a set of standards that
Accounting
are generally accepted
and universally practiced.
Principles (GAAP)
Chapter
1-14 LO 4 Explain generally accepted accounting principles and the cost principle.
Organizations Involved in Standard Setting:
Securities and Exchange Commission (SEC)

http://www.sec.gov/
Financial Accounting Standards Board (FASB)

http://www.fasb.org/
International Accounting Standards Board

(IASB) http://www.iasb.org/
Chapter
Cost Principle (Historical) – dictates that companies

record assets at their cost.
Issues:
Reported at cost when purchased and also over the
time the asset is held.
Cost easily verified, whereas market value is often
subjective.
Fair value information may be more useful.
Chapter
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.
Forms of
Partnership. Business Ownership
Corporation.
Chapter LO 5 Explain the monetary unit assumption
and the economic entity assumption.
1-17
Forms of Business Ownership
Proprietorship Partnership Corporation
Generally owned Owned by two or Ownership

by one person. more persons. divided into
Often small shares of stock
Often retail and
service-type service-type Separate legal
businesses businesses entity organized
Owner receives under state
Generally
any profits, corporation law
unlimited
suffers any personal liability Limited liability
losses, and is
Partnership
personally liable
agreement
for all debts.
1-18
Assumptions
Review Question
Combining the activities of Kellogg and General
Mills would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.

1-19
Assumptions
Review Question
Combining the activities of Kellogg and General
Mills would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.

1-20
Review Question
A business organized as a separate legal entity
under state law having ownership divided into
shares of stock is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.

1-21
Review Question
A business organized as a separate legal entity
under state law having ownership divided into
shares of stock is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.

1-22
The Basic Accounting Equation
Owner’s
Assets = Liabilities +
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 LO 6 State the accounting equation, and define

assets, liabilities, and owner’s equity.
1-23
Owner’s
Equity

Assets
Resources a business owns.

Provide future services or benefits.
Cash, Supplies, Equipment, etc.
1-24
Owner’s
Equity

Liabilities
Claims against assets (debts and obligations).

Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
1-25
Owner’s
Equity

Owner’s Equity
Ownership claim on total assets.

Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or
Partnership).
1-26
Owners’ Equity
Illustration 1-6
Revenues result from business activities entered into for

the purpose of earning income.
Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
1-27
Owners’ Equity
Illustration 1-6
Expenses are the cost of assets consumed or services

used in the process of earning revenue.
Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.
1-28
Using The Basic Accounting Equation
Transactions are a business’s 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 LO 7 Analyze the effects of business transactions

on the accounting equation.
1-29
Transactions (Question?)
Q1-15: Are the following events recorded in the

accounting records? Owner
Supplies are An employee withdraws
Event purchased is hired. cash for
on account. personal use.
Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?
Record/
Don’t Record

1-30
Transactions
Discussion Question
Q18. In February 2008, Paula King invested an
additional $10,000 in her business, King’s
Pharmacy, which is organized as a proprietorship.
King’s accountant, Lance Jones, recorded this
receipt as an increase in cash and revenues. Is
this treatment appropriate? Why or why not?
See notes page for discussion

1-31
Transactions (Problem)
P1-1A: Barone’s Repair Shop was started on May 1 by

Nancy. Prepare a tabular analysis of the following
transactions for the month of May.
1. Invested $10,000 cash to start the repair shop.

Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment

1-32
2. Purchased equipment for $5,000 cash.
1. +10,000 +10,000 Investment
2. -5,000 +5,000

1-33
3. Paid $400 cash for May office rent.
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense

1-34
4. Received $5,100 from customers for repair service.
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue

1-35
5. Withdrew $1,000 cash for personal use.
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings

1-36
6. Paid part-time employee salaries of $2,000.
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense

1-37
7. Incurred $250 of advertising costs, on account.
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense

1-38
8. Provided $750 of repair services on account.
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. +750 +750 Revenue

1-39
9. Collected $120 cash for services previously billed.
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. +750 +750 Revenue
9. +120 -120
6,820 + 630 + 5,000 = 250 + 12,200
1-40
Chapter
1-41
Chapter
1-42
Problem
 P1-2B cindy Belton opened a law office, Cindy Belton Attorney at law, on July 1, 2008. On July 31, the
balance sheet showed cash $4000, Accounts Receivable $1500, Supplies $500, office equipment
$5000, accounts payable $4200 and Cindy Belton capital $6800. During August the following
transaction occurred:
 Collected $1400 of accounts receivables

 Paid $2700 cash on accounts payables
 Earned revenue of $9000, of which $3000 is collected in cash and the balance
is due on September
 Purchased additional office equipment for $1000, paying $400 in cash and the
balance on account
 Paid salaries $3000, rent for July $900, and advertising expense $350
 Withdrew $750 cash on personal use
 Received $2000 from Standard Federal Bank- money borrowed on a note
payable
 Incurred utility expense for month on account $250
 Instructions:
 Prepare a tabular analysis of the August transactions beginning with July 31 balances. The column
heading should be as follows: cash+ accounts receivable+ supplies+ office equipment= note payable+
Chapter
1-43accounts payable+ Cindy Belton, capital.
Companies prepare four financial statements from

the summarized accounting data:
Owner’s Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows
Chapter
1-44 LO 8 Understand the four financial statements and how they are prepared.
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
Income Statement
Barone’s Repair Shop Reports the revenues
Income Statement
For the Month Ended May 31, 2008
and expenses for a
Revenues:
specific period of time.
Service revenue $ 5,850
Expenses: Net income – revenues
Salary expense 2,000 exceed expenses.
Rent expense 400
Advertising expense 250
Total expenses 2,650
Net loss – expenses
Net income $ 3,200 exceed revenues.
Chapter
Owner’s Equity
Income Statement Statement
Barone’s Repair Shop Barone’s Repair Shop
Income Statement Owner's Equity Statement
For the Month Ended May 31, 2008 For the Month Ended May 31, 2008
Revenues: Barone's, Capital May 1 $ -

Service revenue $ 5,850 Add: Investment 10,000
Expenses: Net income 3,200
Salary expense 2,000 13,200
Rent expense 400 Less: Drawings 1,000
Advertising expense 250
Barone's, Capital May 31 $12,200
Total expenses 2,650
Net income $ 3,200
Net income is needed to determine
the ending balance in owner’s equity.
Chapter
Owner’s Equity
Statement
Statement indicates the Barone’s Repair Shop
reasons why owner’s Owner's Equity Statement

equity has increased or
Barone's, Capital May 1 $ -
decreased during the Add: Investment 10,000
period. Net income 3,200
13,200
Less: Drawings 1,000
Barone's, Capital May 31 $12,200
Chapter
Owners’ Equity
Balance Sheet Statement
Barone’s Repair Shop
Balance Sheet
Owner's Equity Statement
May 31, 2008
Assets
Cash $ 6,820 Barone's, Capital May 1 $ -
Accounts receivable 630 Add: Investment 10,000
Equipment 5,000 Net income 3,200
Total assets $12,450 13,200
Liabilities Less: Drawings 1,000
Accounts payable $ 250 Barone's, Capital May 31 $ 12,200
Owner's Equity
Barone's, capital 12,200
Total liab. & equity $12,450 The ending balance in owner’s equity is
needed in preparing the balance sheet
Chapter
Balance Sheet
Reports the assets,
Balance Sheet liabilities, and owner’s
May 31, 2008
equity at a specific date.
Assets
Cash $ 6,820
Accounts receivable 630
Assets listed at the top,
Equipment 5,000 followed by liabilities
Total assets $12,450
and owner’s equity.
Liabilities
Accounts payable $ 250
Owner's Equity
Total assets must equal
Barone's, capital 12,200 total liabilities and
Total liab. & equity $12,450 owner’s equity.
Chapter
Statement of Cash Flows
Balance Sheet Barone’s Repair Shop
Balance Sheet
Cash flow from operating activities
May 31, 2008
Cash receipts from revenues $ 5,220
Assets
Cash paid for expenses (2,400)
Cash $ 6,820 Cash provided by operations 2,820
Accounts receivable 630 Cash flow from investing activitites
Equipment 5,000 Purchase of equipment (5,000)
Total assets $12,450 Cash flow from financing activities
Liabilities Investment by owners 10,000
Accounts payable $ 250 Drawings by owners (1,000)
Owner's Equity Cash provided by financing 9,000
Barone's, capital 12,200 Net increase in cash 6,820
Total liab. & equity $12,450 Cash balance, May 1 -
Cash balance, May 31 $ 6,820
Chapter
Information for a
specific period of time. Statement of Cash Flows
Answers the following: Cash flow from operating activities
Cash receipts from customers $ 5,220
1. Where did cash come Cash paid for expenses (2,400)
from? Cash provided by operations 2,820
Cash flow from investing activities
2. What was cash used Purchase of equipment (5,000)
Cash flow from financing activities
for? Investment by owners 10,000
Drawings by owners (1,000)
3. What was the change Cash provided by financing 9,000
in the cash balance? Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 $ 6,820
Chapter
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
Discussion Question
Q19. “A company’s net income appears directly
on the income statement and the owner’s equity
statement, and it is included indirectly in the
company’s balance sheet.” Do you agree? Explain.
See notes page for discussion
Chapter

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Important

1. There will be three class tests.

 All participants are requested to bring the

Accounting Principles, Eighth Edition

The Building The Basic Using the

Three Ethics in Assets Transaction Income

The purpose of accounting is to:

The accounting process includes

LO 3 Understand why ethics is a fundamental business concept.

Ethics In Financial Reporting

LO 3 Understand why ethics is a fundamental business concept.

LO 3 Understand why ethics is a fundamental business concept.

LO 3 Understand why ethics is a fundamental business concept.

The accounting profession

Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB)

International Accounting Standards Board

Cost Principle (Historical) – dictates that companies

Monetary Unit Assumption – include in the

Proprietorship Partnership Corporation

Generally owned Owned by two or Ownership

Chapter LO 5 Explain the monetary unit assumption

Chapter LO 5 Explain the monetary unit assumption

Chapter LO 5 Explain the monetary unit assumption

Chapter LO 5 Explain the monetary unit assumption

Provides the underlying framework for recording and

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership

Chapter LO 6 State the accounting equation, and define

Provides the underlying framework for recording and

Resources a business owns.

Provides the underlying framework for recording and

Claims against assets (debts and obligations).

Provides the underlying framework for recording and

Ownership claim on total assets.

Revenues result from business activities entered into for

Expenses are the cost of assets consumed or services

Transactions are a business’s economic events

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the

Chapter LO 7 Analyze the effects of business transactions

Q1-15: Are the following events recorded in the

Criterion Is the financial position (assets, liabilities, or

Chapter LO 7 Analyze the effects of business transactions

See notes page for discussion

P1-1A: Barone’s Repair Shop was started on May 1 by

1. Invested $10,000 cash to start the repair shop.

Chapter LO 7 Analyze the effects of business transactions

Chapter LO 7 Analyze the effects of business transactions

Chapter LO 7 Analyze the effects of business transactions

Chapter LO 7 Analyze the effects of business transactions

Chapter LO 7 Analyze the effects of business transactions

Chapter LO 7 Analyze the effects of business transactions

Chapter LO 7 Analyze the effects of business transactions

Chapter LO 7 Analyze the effects of business transactions

 Collected $1400 of accounts receivables

Companies prepare four financial statements from

Revenues: Barone's, Capital May 1 $ -

reasons why owner’s Owner's Equity Statement

See notes page for discussion

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