Introducing Accounting in Business

ACG 2021: Chapter 1

Business

is an organization in which basic resources such as materials and labor are assembled and processed to provide goods and services to customers.

Profit: Are the difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide the goods or services.

Types of Businesses

Merchandising – sell products to customers.

Types of Businesses

Manufacturing - change basic inputs into products that are sold to individual customers.

Types of Businesses

Service – provide services rather than products to customers.

Types of Business Organization Proprietorship –

is owned by one individual Comprises 70% of business

organizations in US Cost of organizing is low Limited financial resources Used by small business

Types of Business Organizations Partnership –

Is owned by two or more individuals. Comprises 10% of business

organizations in the US Combines the skills and resources of

more than one person

Types of Business Organization Corporation – is organized

under state or federal statutes as a separate legal entity.

Generates 90% of the total dollars of business receipted

Comprises 20% of the business organizations

Includes ownership divided into shares of stock

Used by large businesses Ability to obtain large amounts of

capital

Types of Business Organization Limited liability corporation

(LLC) Combines the attributes of a

partnership and a corporation I that it is organized as a corporation.

Can elect to be taxed as a partnership

Popular alternative to a partnership Has tax and liability advantages to

the owners

Business Stakeholders

Is a person or entity that has an interest in the economics performance of the business. Owners who have invested resources

in the business clearly have an interest in how well the business performs.

Managers are those individuals who the owners have authorized to operate the business.

Employees provide services to the business in exchange for their pay.

Customers, government, and creditors also have a stake in the success of the business

Business Stakeholders

Capital market stakeholders provide the major financing for the business in order for the business to begin and continue its operations

Product or service market stakeholders – include customers who purchase the business’ products or services as well as the vendors who supply inputs to the business

Government stakeholders have an interest in the economic performance of the business.

Internal stakeholders include individuals employed by the business

Ethics

Are beliefs that distinguish right from wrong

Accepted standards of good and bad behavior

Code of Professional Conduct

Accounting

Is an information and measurement system that identifies, records, and communicates relevant, reliable and comparable information about an organization’s business activities

Language of business

The Process of Accounting

Identify the stakeholders

Assess stakeholders information needs

Design the accounting information system

Record economic data about business activities

Prepare accounting reports for stakeholders

Profession of Accounting

Financial Accounting Is the area of accounting

aimed at serving external users by providing then with financial statements.

External auditors attest to these financial statements

Profession of Accounting

Managerial Accounting - – uses both financial accounting and estimated data to aid management in running day-to-day operations and in planning future operations.

Internal uses.

Careers in Accounting

Private accounting

Public Accounting

Government accounting

Forensic Accounting

Intl Accounting

The Certified Forensic Accountant, Cr.FA

SM                             

Generally Accepted Accounting Principles (GAAP)

Governs financial accounting practice

Purpose is to make information in financial statements relevant, reliable, and comparable

Financial Accounting Standards Board (FASB) Private group

that sets both broad and specific principles

Securities and Exchange Commission (SEC)

Standard Setting

SEC: Is the

government group that establishes reporting requirements for companies that issue stock to the public

Public Company Accounting Oversight Board Rules all

publicly traded companies accounting practices

Principles of Accounting

General principles Are the basic assumptions,

concepts, and guidelines for preparing financial statements

Specific Principles Are detailed rules used in

reporting business transactions and events

Specific Principles

Objectivity principle Means that

accounting information is supported by independent unbiased evidence

Cost principle Means that

accounting information is based on actual cost

Specific Principles

Going concern principle Means that

accounting information reflects an assumption that the business will continue operating

Monetary unit principle Means that we

can express transactions and events in monetary units

Specific Principles

Revenue Recognition principle Provides

guidance on when a company must recognize revenue

Recognize means to record it

Three concepts Revenue is

recognized when earned

Proceeds from selling product and services need not be in cash

Revenue is measured by the cash received plus the cash value of any other items received.

Specific principles

Business entity principle Means that a business is accounted for

separately from other business entities.

Accounting Equation

Assets = Liabilities + Stockholder’s Equity

What the business owns!

What business owes!

What business is worth!

Assets

resources owned by the business

Such as: Cash Accounts receivable – amounts

owed by customers Prepaid expense – assets to be

used in the future {supplies, prepaid insurance}

Merchandise Inventory – merchandise for sale in the course of business

Equipment Land Building

Liabilities

rights of creditors or debts of the business

Accounts payable – amount owed to creditors

Dividends payable – amounts owed to shareholders

Accrued expenses Mortgage payable Notes payable

Stockholder’s Equity

Assets minus Liabilities Capital stock

investment by shareholders

Retained earnings earnings kept in the

business Dividends

distribution of income to shareholders

Revenues & Expenses

Revenue income from the

operation of the business

Sales Fees earned Commission

income Increase

retained earnings

Results from operations

Expenses cost of doing

business Salaries expense Rent expense Depreciation

expense Miscellaneous

expense Decrease

retained earnings

Cost of doing business

Financial Statements

Four financial statements are prepared for external and internal use

Prepared in specific order Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows

Income Statement

Income Statement – a summary of revenue and expenses for a specific period of time.

Formula: Revenue minus Expenses = Net income

(Net losses)

Income Statement

This amount is transferred to the Statement of Retained Earnings

Retained earnings statement a summary of the changes in the

earnings retained in the corporation for a specific period of time.

Formula:Beginning Retained Earnings+ Net income - Dividends

= Ending Retained earnings

Retained earnings statement

Transferred to Balance Sheet

Balance Sheet

a list of assets, liabilities, stockholder’s equity for a specific date

Assets = Liabilities + Stockholder’s Equity

Balance Sheet

Same as net cash flows

Statement of Cash Flows Statement of cash flows – a

summary of the cash receipts and cash payments for a specific period of time.

Operations + Investing +Financing

Statement of Cash Flows

On November 1, 2007, Chris Clark organizes a corporation

that will be known as NetSolutions.

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a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation.

Capital Stock25,000

Cash25,000 a.

=

41

1-4

AssetsStockholders’

Equity=

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Stock issued to owners (stockholders), such as Chris

Clark, is referred to as capital stock. The owner’s equity in a corporation is

called stockholders’ equity.

b. NetSolutions exchanged $20,000 for land.

Capital Stock25,000

Cash + Land 25,000 Bal.

AssetsStockholders’

Equity=

=b. –20,000 +20,000Bal. 5,000 20,000 25,000

43

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Accounts Capital Cash + Supplies + Land Payable + Stock

Assets

c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account).

Liabilities + Equity=

5,000 20,000 25,000=

+1,350 +1,350c.Bal.

5,000 1,350 20,000 1,350 25,000Bal.

44

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Stockholders’

Beginning with transaction (d) the asset section will be shown

first, then the liabilities and stockholders’ equity will be

shown in the following slide.

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Cash + Supplies + Land

Assets

5,000 1,350 20,000

d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash.

Bal.

12,500 1,350 20,000+7,500d.

Bal.

46

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d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash.

47

1-4

Liabilities + Stockholders’ Equity Accounts Capital Fees

Payable Stock + Earned 1,350 25,000 Bal.

+7,500 d.

+

25,000 7,500 Bal.1,350

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The amounts used in earning revenue are called expenses. Expenses are assets that have been used up, consumed, or expired.

Adding expenses to the stockholders’ equity section results in a space problem. To adjust for these added headings, the word “Bal.” has been omitted from Slides 50, 52, 54, and 56. The bottom row in these four slides provides

the balances after each transaction.

Expenses

Cash + Supplies + Land

Assets

e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

Bal. 12,500 1,350 20,000

Bal. 8,850 1,350 20,000 e. –3,650

49

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Accounts Capital Fees Wages Rent Utilities Misc. Payable + Stock + Earned Exp. Exp. Exp. Exp.

Liabilities + Stockholders’ Equity

1,350 25,000 7,500

–2,125 –800 –450 –275 e.

1,350 25,000 7,500 –2,125 –800 –450 –275

50

e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

1-4

+ + + +

f. NetSolutions paid $950 to creditors during the month.

Cash + Supplies + Land

Assets

Bal. 8,850 1,350 20,000

Bal. 7,900 1,350 20,000 f. –950

51

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Accounts Capital Fees Wages Rent Utilities Misc. Payable + Stock + Earned + Expense + Expense + Expense + Expense

Liabilities + Stockholders’ Equity

1,350 25,000 7,500 –2,125 –800 –450 –275

400 25,000 7,500 –2,125 –800 –450 –275

f. NetSolutions paid $950 to creditors during the month.

f.–950

52

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g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used.

Cash + Supplies + Land

Assets

Bal. 7,900 1,350 20,000

Bal. 7,900 550 20,000 g. –800

53

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Accounts Capital Fees Wages Rent Supplies Util. Misc. Payable + Stock + Earned + Exp. + Exp. + Exp. + Exp. + Exp.

Liabilities + Stockholders’ Equity

400 25,000 7,500 –2,125 –800 –450 –275

g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used.

g. –800

400 25,000 7,500 –2,125 –800 –800 –450 –275

54

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Cash + Supplies + Land

Assets

Bal. 7,900 550 20,000

Bal. 5,900 550 20,000 h. –2,000

h. At the end of the month, NetSolutions pays $2,000 to stockholder (Chris Clark) as dividends.

55

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Dividends are distributions of earnings to stockholders. You

should be careful not to confuse dividends with expenses.

Dividends do not represent assets or services used in the process of

earning revenues.

Accounts Capital Fees Wages Rent Supplies Util. Misc. Payable + Stock + Dividends Earned + Exp. + Exp.+ Exp. + Exp. + Exp.

Liabilities + Stockholders’ Equity

400 25,000 7,500 –2,125 –800 –800 –450 –275 h. –2,000

400 25,000 –2,000 7,500 –2,125 –800 –800 –450 –275

57

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h. At the end of the month, NetSolutions pays $2,000 to stockholder (Chris Clark) as dividends.

Dividends paid to stockholders

Expenses

Decreased byDecreased by

Stockholders’ Equity

Increased byIncreased by

Investments by stockholders

Revenues

58

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1-4Retained Earnings

Retained earnings represent stockholders’ equity created

from business operations through revenue, expense, and dividend transactions.

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60

NetSolutionsRetained Earnings

November Operations(Revenue and Expense Transactions)

Fees Wages Rent Supplies Utilities Misc.Earned Expense Expense Expense Expense Expense– – – – –+7,500

–2,125 –800 –450 –2757,500 –2,125 –800 –450 –275

–8007,500 –2,125 –800 –800 –450 –275

7,500 –2,125 –800 –800 –450 –275

$3,050