CH 01

Chapter 1-1
CHAPTER 1
ACCOUNTING IN ACTION
Accounting Principles, Eighth Edition
Chapter 1-2
Study Objectives Study Objectives

1. 2. 3. 4. 5. 6. 7. 8.
Explain what accounting is. Identify the users and uses of accounting. Understand why ethics is a fundamental business concept. Explain generally accepted accounting principles and the cost principle. Explain the monetary unit assumption and the economic entity assumption. State the accounting equation, and define assets, liabilities, and owners equity. Analyze the effects of business transactions on the accounting equation. Understand the four financial statements and how they are prepared.
Chapter 1-3
Accounting in Action Accounting in Action

The Building The Building Blocks of Blocks of Accounting Accounting Ethics in financial reporting Generally accepted accounting principles Assumptions The Basic The Basic Accounting Accounting Equation Equation Assets Liabilities Owners equity Using the Basic Accounting Accounting Equation Equation Transaction analysis Summary of transactions
What is Accounting? Accounting? Three activities Who uses accounting data
Financial Statements Statements Income statement Owners equity statement Balance sheet Statement of cash flows
Chapter 1-4
What is Accounting? What is Accounting?

The purpose of accounting is to:
(1) identify, record, and communicate the identify record
economic events of an
(2) organization to (3) interested users.
Chapter 1-5
LO 1 Explain what accounting is.
What is Accounting? What is Accounting?

Three Activities
Illustration 1-1 Accounting process
The accounting process includes the bookkeeping function.

Chapter 1-6
LO 1 Explain what accounting is.
Who Uses Accounting Data? Who Uses Accounting Data?

Internal Users Human Resources Finance Management IRS 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 1-7
LO 2 Identify the users and uses of accounting.

Common Questions Asked
1. Can we afford to give our employees a pay raise? 2. Did the company earn a satisfactory income? 3. Do we need to borrow in the near future? 4. Is cash sufficient to pay dividends to the stockholders? 5. What price for our product will maximize net income? 6. Will the company be able to pay its short-term debts?
Chapter 1-8
User Human Resources Investors Management Finance Marketing Creditors
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.
See notes page for discussion

Chapter 1-9
LO 3 Understand why ethics is a fundamental business concept.
The Building Blocks 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 1-10
Ethics 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 1-11
Ethics 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

Various users need financial information Financial Statements
Balance Sheet Income Statement Statement of Owners Equity Statement of Cash Flows Note Disclosure
The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.
Chapter 1-13
Generally Accepted Accounting Principles (GAAP)
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 http://www.iasb.org/ (IASB)

Chapter 1-14

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 1-15
Assumptions 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 1-16
Forms of Business Ownership

LO 5 Explain the monetary unit assumption and the economic entity assumption.
Forms of Business Ownership 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.
Partnership
Owned by two or more persons. Often retail and service-type businesses Generally unlimited personal liability Partnership agreement
Corporation
Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability
Chapter 1-17
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.
Chapter 1-18
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.
Chapter 1-19
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.
Chapter 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.
Chapter 1-21
The Basic Accounting Equation 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.
LO 6 State the accounting equation, and define assets, liabilities, and owners equity.
Chapter 1-22

Provides the underlying framework for recording and summarizing economic events. Assets Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc.
Chapter 1-23

Provides the underlying framework for recording and summarizing economic events. Liabilities Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc.
Chapter 1-24

Provides the underlying framework for recording and summarizing economic events. Owners Equity Ownership claim on total assets. Referred to as residual equity. Capital, Drawings, etc. (Proprietorship or Partnership).
Chapter 1-25
Owners Equity 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.
Chapter 1-26
Owners Equity 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.
Chapter 1-27
Using The Basic Accounting Equation 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 1-28
LO 7 Analyze the effects of business transactions on the accounting equation.
Transactions (Question?) 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 Record/ Dont Record

Chapter 1-29
Is the financial position (assets, liabilities, or owners equity) of the company changed?
Transactions Transactions
Discussion Question
Q18. In February 2008, Paula King invested an additional $10,000 in her business, Kings Pharmacy, which is organized as a proprietorship. Kings accountant, Lance Jones, recorded this receipt as an increase in cash and revenues. Is this treatment appropriate? Why or why not?
Chapter 1-30
Transactions (Problem) Transactions (Problem)

P1-1A: Barones 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 Cash 1. +10,000 Liabilities Equity Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital +10,000 Investment
Chapter 1-31

2. Purchased equipment for $5,000 cash.
Assets Cash 1. +10,000 2. -5,000 +5,000 Liabilities Equity Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital +10,000 Investment
Chapter 1-32

3. Paid $400 cash for May office rent.
Assets Cash 1. +10,000 2. 3. -5,000 -400 +5,000 -400 Expense Liabilities Equity Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital +10,000 Investment
Chapter 1-33

4. Received $5,100 from customers for repair service.
Assets Cash 1. +10,000 2. 3. 4. -5,000 -400 +5,100 +5,000 -400 +5,100 Expense Revenue Liabilities Equity Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital +10,000 Investment
Chapter 1-34

5. Withdrew $1,000 cash for personal use.
Assets Cash 1. +10,000 2. 3. 4. 5. -5,000 -400 +5,100 -1,000 +5,000 -400 +5,100 -1,000 Expense Revenue Drawings Liabilities Equity Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital +10,000 Investment
Chapter 1-35

6. Paid part-time employee salaries of $2,000.
Assets Cash 1. +10,000 2. 3. 4. 5. 6. -5,000 -400 +5,100 -1,000 -2,000 +5,000 -400 +5,100 -1,000 -2,000 Expense Revenue Drawings Expense Liabilities Equity Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital +10,000 Investment
Chapter 1-36

7. Incurred $250 of advertising costs, on account.
Assets Cash 1. +10,000 2. 3. 4. 5. 6. 7. -5,000 -400 +5,100 -1,000 -2,000 +250 +5,000 -400 +5,100 -1,000 -2,000 -250 Expense Revenue Drawings Expense Expense Liabilities Equity Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital +10,000 Investment
Chapter 1-37

8. Provided $750 of repair services on account.
Assets Cash 1. +10,000 2. 3. 4. 5. 6. 7. 8. -5,000 -400 +5,100 -1,000 -2,000 +250 +750 +5,000 -400 +5,100 -1,000 -2,000 -250 +750 Expense Revenue Drawings Expense Expense Revenue Liabilities Equity Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital +10,000 Investment
Chapter 1-38

9. Collected $120 cash for services previously billed.
Assets Cash 1. +10,000 2. 3. 4. 5. 6. 7. 8. 9.
Chapter 1-39
Liabilities
Equity
Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital +10,000 +5,000 -400 +5,100 -1,000 -2,000 +250 +750 -250 +750 12,200 Expense Revenue Drawings Expense Expense Revenue Investment
-5,000 -400 +5,100 -1,000 -2,000
+120 6,820 +
-120 630 +
5,000 =
250 +
Financial Statements Financial Statements

Companies prepare four financial statements from Companies prepare four financial statements from the summarized accounting data: the summarized accounting data:
Income Statement
Owners Equity Statement
Balance Sheet
Statement of Cash Flows
Chapter 1-40
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 1-41

Income Statement
Ba rones Repa ir Shop Incom e Sta tem ent
For th e M onth End ed M ay 31, 2008
Re venue s: Service revenue $ 5 ,8 5 0 E xpe nse s: Salary expense 2 ,0 0 0 Rent expense 400 Advertising expense 2 5 0 Total expenses 2 ,6 5 0 Net incom e $ 3 ,2 0 0
Reports the revenues and expenses for a specific period of time. Net income revenues exceed expenses. Net loss expenses exceed revenues.
Chapter 1-42

Income Statement
Barones Repa ir Shop Incom e Sta tem ent
For the M onth End ed M ay 31, 2008

B a ro n e s R e p a ir S h o p O w n e r's E q u it y S t a t e m e n t
F or t h e M ont h E nd e d M a y 3 1 , 2 0 0 8
Revenues: Service revenue Expenses: $ 5 ,8 5 0
B a ro n e 's, C a p it a l M a y 1$ A d d : I n ve stm en t N e t in c o m e
Salary expense 2 ,0 0 0 Rent expense 4 00 Advertising expense 2 50 Total expenses 2 ,6 5 0 Net incom e $ 3,2 00
1 0 ,0 0 0 3 ,2 0 0
1 3 ,2 0 0 Less: D ra w in gs 1 ,0 0 0 B a ro n e 's, C a p it a l M a y 3$1 2 ,2 0 0 1
Net income is needed to determine the ending balance in owners equity.

Chapter 1-43

Statement indicates the reasons why owners equity has increased or decreased during the period.
B a ro n e s R e p a ir S h o p O w n e r's E q u it y S t a t e m e n t
F or t h e M ont h E nde d M a y 3 1 , 2 0 0 8
B a ro n e 's, C a p it a l M a y 1 $ Ad d : In ve stm en t N e t in c o m e
1 0 ,0 0 0 3 ,2 0 0 1 3 ,2 0 0 Less: D ra w in g s 1 ,0 0 0 B a ro n e 's, C a p it a l M a y 3 1 2 ,2 0 0 $
Chapter 1-44

Balance Sheet
Ba rones Repa ir Shop Ba la nce Shee t M a y 3 1, 2 0 0 8 A ssets Cash $ 6 ,8 2 0 Accounts receivable 6 3 0 E quipm ent 5 ,0 0 0 Total assets $12 ,4 5 0 Lia bilitie s Accounts payable $ O w ne r's E quity 250

Barones Repair Shop Owner's Equity Statement
For the Month Ended May 31, 2008 Barone's, Capital May 1 $
Add: Investment Net income
10,000 3,200 13,200 Less: Drawings 1,000 Barone's, Capital May 31 $ 12,200
Barone's, capital 1 2 ,2 0 0 Total lia b. & equity12 ,4 5 0 $
The ending balance in owners equity is needed in preparing the balance sheet
Chapter 1-45

Balance Sheet
B a rone s R epa ir S hop B a la nc e S he e t M ay 31, 2008 A sse ts Ca sh $ 6 ,8 2 0 Ac counts rec eivable 6 3 0 E quipm ent 5 ,0 0 0 T ota l a ssets $12 ,4 5 0 Lia bilitie s Ac counts pa yable $ O w ne r's E qu ity 250
Reports the assets, liabilities, and owners equity at a specific date. Assets listed at the top, followed by liabilities and owners equity. Total assets must equal total liabilities and owners equity.
B a rone's, c apital 12 ,2 0 0 T ota l lia b. & equity 12 ,4 5 0 $
Chapter 1-46

Balance Sheet
Ba rone s Re pa ir Shop Bala nce She et M a y 3 1 , 2 0 08 A ssets Cash $ 6 ,8 2 0 Accounts receivable 6 3 0 E quipm ent 5 ,0 0 0 T otal assets $12 ,4 5 0 Lia bilitie s Accounts payable $ O w ne r's E quity 250

Ba rone s Repa ir Shop Sta tem e nt of Ca sh F lows
F or the M onth Ended M ay 31, 2008
Ca sh flow from opera ting a ctivities Cash receipts from revenues 5 ,2 2 0 $ Cash paid for expenses (2 ,4 0 0 ) Cash provided by operations 2 ,8 2 0 Ca sh flow from inve sting a ctivitite s Purchase of equipm ent (5 ,0 0 0 ) Ca sh flow from fina ncing a ctivities Investm ent by ow ners 10 ,0 0 0 D raw ings by ow ners (1,0 0 0 ) Cash provided by financing 9 ,0 0 0 Ne t incre a se in ca sh 6 ,8 2 0 Ca sh ba la nce , M a y 1 Ca sh ba la nce , M a y 3 1 $ 6 ,8 2 0
Barone's, capital 12 ,2 0 0 T otal lia b. & equity 12 ,4 5 0 $
Chapter 1-47

Information for a specific period of time. Answers the following:
1. Where did cash come

Ba rone s Re pa ir Shop S ta te m e nt of C a sh F lows F or the M onth Ende d M a y 3 1 , 2 0 0 8 Ca sh flow from ope ra ting a ctivities Cash receipts from custom ers ,2 2 0 $5 Cash paid for expenses (2 ,4 0 0 ) Cash provided by operations 2 ,8 2 0 Ca sh flow from inve sting a ctivitie s Purchase of equipm ent (5 ,0 0 0 ) Ca sh flow from fina ncing a ctivitie s Investm ent by ow ners 10 ,0 0 0 D raw ings by ow ners (1,0 0 0 ) Cash provided by financing 9 ,0 0 0 Ne t increa se in ca sh 6 ,8 2 0 Ca sh ba la nce , M ay 1 Ca sh ba la nce , M ay 3 1 $ 6 ,8 2 0
from? for?
2. What was cash used 3. What was the change
in the cash balance?
Chapter 1-48
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 1-49
Discussion Question
Q19. A companys net income appears directly on the income statement and the owners equity statement, and it is included indirectly in the companys balance sheet. Do you agree? Explain.

Chapter 1-50
Accounting Career Opportunities Accounting Career Opportunities

Public Accounting Careers in auditing and taxation serving the general public. Private Accounting Careers in industry working in cost accounting, budgeting, accounting information systems, and taxation. Opportunities in Government Careers with the IRS, the FBI, the SEC, and in public colleges and universities. Forensic Accounting Careers with insurance companies and law offices to conduct investigations into theft and fraud.
Chapter 1-51
LO 9 Explain the career opportunities in accounting.
Copyright Copyright
Copyright 2008 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 permission 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 1-52

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Chapter 1-1

Study Objectives Study Objectives

Accounting in Action Accounting in Action

What is Accounting? Accounting? Three activities Who uses accounting data

What is Accounting? What is Accounting?

(2) organization to (3) interested users.

LO 1 Explain what accounting is.

What is Accounting? What is Accounting?

The accounting process includes the bookkeeping function.

LO 1 Explain what accounting is.

Who Uses Accounting Data? Who Uses Accounting Data?

Labor Unions Creditors External Users

LO 2 Identify the users and uses of accounting.

Who Uses Accounting Data? Who Uses Accounting Data?

User Human Resources Investors Management Finance Marketing Creditors

LO 2 Identify the users and uses of accounting.

Who Uses Accounting Data? Who Uses Accounting Data?

See notes page for discussion

LO 3 Understand why ethics is a fundamental business concept.

The Building Blocks of Accounting The Building Blocks of Accounting

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 Building Blocks of Accounting The Building Blocks of Accounting

Generally Accepted Accounting Principles (GAAP)

LO 4 Explain generally accepted accounting principles and the cost principle.

The Building Blocks of Accounting The Building Blocks of Accounting

Financial Accounting Standards Board (FASB)

International Accounting Standards Board http://www.iasb.org/ (IASB)

LO 4 Explain generally accepted accounting principles and the cost principle.

The Building Blocks of Accounting The Building Blocks of Accounting

LO 4 Explain generally accepted accounting principles and the cost principle.

Economic Entity Assumption requires that

Forms of Business Ownership

Forms of Business Ownership Forms of Business Ownership

Forms of Business Ownership Forms of Business Ownership

Forms of Business Ownership Forms of Business Ownership

The Basic Accounting Equation The Basic Accounting Equation

The Basic Accounting Equation The Basic Accounting Equation

The Basic Accounting Equation The Basic Accounting Equation

The Basic Accounting Equation The Basic Accounting Equation

Owners Equity Owners Equity

Owners Equity Owners Equity

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

Transactions (Question?) Transactions (Question?)

withdraws cash for personal use.

Criterion Record/ Dont Record

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

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

Transactions (Problem) Transactions (Problem)

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

Transactions (Problem) Transactions (Problem)

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

Transactions (Problem) Transactions (Problem)

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

Transactions (Problem) Transactions (Problem)

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

Transactions (Problem) Transactions (Problem)

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

Transactions (Problem) Transactions (Problem)

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

Transactions (Problem) Transactions (Problem)