chapter1 accounting in action. chapter 1: accounting in action what is accounting?the building...
Post on 05-Jan-2016
221 Views
Preview:
TRANSCRIPT
CHAPTER1Accounting in
Action
Chapter 1: Accounting in Chapter 1: Accounting in actionaction
SO 1 Explain what accounting is.
Purpose of accounting is to:
1. identify, record, and communicate the economic events of an
2. organization to
3. interested users.
What is Accounting?
What is accounting?What is accounting?
Relevant to business
Bookkeeping Financial Statements
What is accounting?What is accounting?
Three ActivitiesIllustration 1-1Accounting process
The accounting process includes the bookkeeping function.
Who Uses Accounting Who Uses Accounting Data?Data?
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?
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?
Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?
6. Will the company be able to pay its short-term debts?
Investors
Management
Finance
Marketing
Creditors
Building blocks of Building blocks of accountingaccounting
Building blocks of Building blocks of accountingaccounting
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.
Congress passed Sarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound ethical behavior.
Building blocks of Building blocks of accountingaccountingSarbanes-Oxley Act 2002Reduce unethical behavior
Top management has to certify accuracy of financial information
Severe penalties for fraud
Increased independence of outside auditors
Building blocks of Building blocks of accountingaccounting
Generally Accepted Accounting Principles (GAAP) - A set of
rules and practices, having substantial authoritative support, that
the accounting profession recognizes as a general guide for
financial reporting purposes.
Standard-setting bodies determine these guidelines:
► Securities and Exchange Commission (SEC)
► Financial Accounting Standards Board (FASB)
► International Accounting Standards Board (IASB)
Building blocks of Building blocks of accountingaccounting
Cost Principle – Or historical cost principle, dictates that
companies record assets at their cost.
Fair Value Principle – Indicates that assets and liabilities
should be reported at fair value (the price received to sell an
asset or settle a liability).
Measurement Principles
Building blocks of Building blocks of accountingaccounting
Monetary Unit – include in the accounting records only
transaction data that can be expressed in terms of money.
Economic Entity – 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.
Forms of Business Ownership
Assumptions
Building blocks of Building blocks of accountingaccountingForms of business ownership
Proprietorship Partnership Corporation
Owned by two or more persons.
Often retail and service-type businesses
Generally unlimited personal liability
Partnership agreement
Ownership divided into shares of stock
Separate legal entity organized under state corporation law
Limited liability
Generally owned by one person.
Often small service-type businesses
Owner receives any profits, suffers any losses, and is personally liable for all debts.
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquityOwner’s Owner’s EquityEquity= +
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.
Basic accounting EquationBasic accounting EquationBasic accounting EquationBasic accounting Equation
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquityOwner’s Owner’s EquityEquity= +
Provides the underlying framework for recording and summarizing economic events.
Basic accounting EquationBasic accounting EquationBasic accounting EquationBasic accounting Equation
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
AssetsAssetsAssetsAssets
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquityOwner’s Owner’s EquityEquity= +
Provides the underlying framework for recording and summarizing economic events.
Basic accounting EquationBasic accounting EquationBasic accounting EquationBasic accounting Equation
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
LiabilitiesLiabilitiesLiabilitiesLiabilities
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquityOwner’s Owner’s EquityEquity= +
Provides the underlying framework for recording and summarizing economic events.
Basic accounting EquationBasic accounting EquationBasic accounting EquationBasic accounting Equation
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or Partnership).
Owner’s EquityOwner’s EquityOwner’s EquityOwner’s Equity
Basic accounting EquationBasic accounting Equation
Basic accounting equationBasic accounting equationOwner’s Equity increases with
◦Investment (Capital): When owner puts in cash in the business
◦Revenues: Anything coming into the business due to business activity.
Owner’s Equity decreases with◦Drawings: When owners withdraw
cash from business◦Expenses: Costs of assets and
services consumed or used
Owners’ EquityOwners’ EquityOwners’ EquityOwners’ Equity
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.
Illustration 1-6
Owners’ EquityOwners’ EquityOwners’ EquityOwners’ Equity
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.
Illustration 1-6
Using the accounting Using the accounting equationequation
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.
Q1-15Q1-15:: Are the following events recorded in the accounting records?
EventSupplies are purchased on account.
Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed?
An employee is hired.
Owner withdraws cash for personal use.
Record/ Don’t Record
Transactions (Question?)Transactions (Question?)Transactions (Question?)Transactions (Question?)
Transaction (1): Ray Neal decides to open a computer programming service which he names Softbyte. On September 1, 2012, Ray Neal invests $15,000 cash in the business.
Using the accounting Using the accounting equationequation
Transaction (2): Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash.
Using the accounting Using the accounting equationequation
Transaction (3): Softbyte purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months. The purchase is made on account.
Using the accounting Using the accounting equationequation
Transaction (4): Softbyte receives $1,200 cash from customers for programming services it has provided.
Using the accounting Using the accounting equationequation
Transaction (5): Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.
Using the accounting Using the accounting equationequation
Transaction (6): Softbyte provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.
Using the accounting Using the accounting equationequation
Transaction (7): Softbyte pays the following expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.
Using the accounting Using the accounting equationequation
Transaction (8): Softbyte pays its $250 Daily News bill in cash.
Using the accounting Using the accounting equationequation
Transaction (9): Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].
Using the accounting Using the accounting equationequation
Transaction (10): Ray Neal withdraws $1,300 in cash from the business for his personal use.
Using the accounting Using the accounting equationequation
Illustration 1-8Tabular summary ofSoftbyte transactions
Using the accounting Using the accounting equationequation
Financial StatementsFinancial Statements
Companies prepare four financial statements :
Balance SheetIncome Statement
Statement of Cash Flows
Owner’s Equity Statement
Financial StatementsFinancial Statements• Income Statement: Presents the revenues and expenses and resulting net income or net loss for a specific period of time.• Owner’s Equity Statement: Summarizes the changes in the owner’s equity for a specific period of time.
Financial StatementsFinancial Statements• Balance Sheet: Reports the assets, liabilities, and owner’s equity at a specific date. It ensures that the accounting equation is maintained.
Financial StatementsFinancial Statements
Answers the following:
1. Where did cash come from?
2. What was cash used for?
3. What was the change in the cash balance?
Statement of Cash Flows: Summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time
Balance Sheet
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Assets
Cash 6,820$
Accounts receivable 630
Equipment 5,000
T otal assets 12,450$
Liabilities
Accounts payable 250$
Owner' s Equity
Barone' s, capital 12,200
T otal liab. & equity 12,450$
Balance Sheet
Barone’s Repair Shop
May 31, 2008Cash fl ow f rom operating activities
Cash receipts f rom revenues 5,220$
Cash paid f or expenses (2,400)
Cash provided by operations 2,820
Cash fl ow f rom investing activitites
Purchase of equipment (5,000)
Cash fl ow f rom fi nancing activities
I nvestment by owners 10,000
Drawings by owners (1,000)
Cash provided by fi nancing 9,000
Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 6,820$
Statement of Cash Flows
Barone’s Repair Shop
For the Month Ended May 31, 2008
Statement of Cash Flows
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Cash fl ow f rom operating activities
Cash receipts f rom customers 5,220$
Cash paid f or expenses (2,400)
Cash provided by operations 2,820
Cash fl ow f rom investing activities
Purchase of equipment (5,000)
Cash fl ow f rom fi nancing activities
I nvestment by owners 10,000
Drawings by owners (1,000)
Cash provided by fi nancing 9,000
Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 6,820$
Statement of Cash Flows
Barone’s Repair Shop
For the Month Ended May 31, 2008
Statement of Cash Flows
Information for a specific period of time.
Answers the following:
1. Where did cash come from?
2. What was cash used for?
3. What was the change in the cash balance?
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.
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Review QuestionReview Question
top related