Introducing Accounting in BusinessACG 2021: Chapter 1

Businessis 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 BusinessesMerchandising sell products to customers.

Types of BusinessesManufacturing - change basic inputs into products that are sold to individual customers.

Types of BusinessesService provide services rather than products to customers.

Types of Business Organization Proprietorship is owned by one individualComprises 70% of business organizations in USCost of organizing is lowLimited financial resourcesUsed by small business

Types of Business OrganizationsPartnership Is owned by two or more individuals.Comprises 10% of business organizations in the USCombines the skills and resources of more than one person

Types of Business OrganizationCorporation is organized under state or federal statutes as a separate legal entity.Generates 90% of the total dollars of business receiptedComprises 20% of the business organizationsIncludes ownership divided into shares of stockUsed by large businessesAbility to obtain large amounts of capital

Types of Business OrganizationLimited 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 partnershipPopular alternative to a partnershipHas tax and liability advantages to the owners

Business StakeholdersIs 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 StakeholdersCapital market stakeholders provide the major financing for the business in order for the business to begin and continue its operationsProduct or service market stakeholders include customers who purchase the business products or services as well as the vendors who supply inputs to the businessGovernment stakeholders have an interest in the economic performance of the business.Internal stakeholders include individuals employed by the business

EthicsAre beliefs that distinguish right from wrongAccepted standards of good and bad behaviorCode of Professional Conduct

AccountingIs an information and measurement system that identifies, records, and communicates relevant, reliable and comparable information about an organizations business activitiesLanguage of business

The Process of AccountingIdentify the stakeholdersAssess stakeholders information needsDesign the accounting information systemRecord economic data about business activitiesPrepare accounting reports for stakeholders

Profession of AccountingFinancial AccountingIs the area of accounting aimed at serving external users by providing then with financial statements.External auditors attest to these financial statements

Profession of AccountingManagerial 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 AccountingPrivate accountingPublic AccountingGovernment accountingForensic AccountingIntl Accounting

Generally Accepted Accounting Principles (GAAP)Governs financial accounting practicePurpose is to make information in financial statements relevant, reliable, and comparable

Financial Accounting Standards Board (FASB)Private group that sets both broad and specific principlesSecurities and Exchange Commission (SEC)

Standard SettingSEC:Is the government group that establishes reporting requirements for companies that issue stock to the public

Public Company Accounting Oversight BoardRules all publicly traded companies accounting practices

Principles of AccountingGeneral principlesAre the basic assumptions, concepts, and guidelines for preparing financial statementsSpecific PrinciplesAre detailed rules used in reporting business transactions and events

Specific PrinciplesObjectivity principleMeans that accounting information is supported by independent unbiased evidence

Cost principleMeans that accounting information is based on actual cost

Specific PrinciplesGoing concern principleMeans that accounting information reflects an assumption that the business will continue operating

Monetary unit principleMeans that we can express transactions and events in monetary units

Specific PrinciplesRevenue Recognition principleProvides guidance on when a company must recognize revenueRecognize means to record it

Three conceptsRevenue is recognized when earnedProceeds from selling product and services need not be in cashRevenue is measured by the cash received plus the cash value of any other items received.

Specific principlesBusiness entity principleMeans that a business is accounted for separately from other business entities.

Accounting Equation

Assets = Liabilities + Stockholders Equity

What the business owns!

What business owes!

What business is worth!

Assetsresources owned by the businessSuch as:CashAccounts receivable amounts owed by customersPrepaid expense assets to be used in the future {supplies, prepaid insurance}Merchandise Inventory merchandise for sale in the course of businessEquipmentLandBuilding

Liabilitiesrights of creditors or debts of the businessAccounts payable amount owed to creditorsDividends payable amounts owed to shareholdersAccrued expensesMortgage payableNotes payable

Stockholders EquityAssets minus LiabilitiesCapital stockinvestment by shareholdersRetained earningsearnings kept in the businessDividends distribution of income to shareholders

Revenues & ExpensesRevenue income from the operation of the businessSalesFees earnedCommission incomeIncrease retained earningsResults from operations

Expensescost of doing businessSalaries expenseRent expenseDepreciation expenseMiscellaneous expenseDecrease retained earningsCost of doing business

Financial StatementsFour financial statements are prepared for external and internal usePrepared in specific orderIncome StatementStatement of Retained EarningsBalance SheetStatement of Cash Flows

Income StatementIncome 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 statementa 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 statementTransferred to Balance Sheet

Balance Sheeta list of assets, liabilities, stockholders equity for a specific dateAssets = Liabilities + Stockholders Equity

Balance SheetSame as net cash flows

Statement of Cash FlowsStatement 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.

1-40

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 Stock25,00041

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1-4Stock issued to owners (stockholders), such as Chris Clark, is referred to as capital stock. The owners 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+20,000

43

1-4

Accounts Capital Cash + Supplies + Land Payable + StockAssetsc. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account). Liabilities + Equity= 5,00020,00025,000

=

Bal.44

1-4Stockholders

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 + LandAssets5,0001,35020,000

d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash.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 25,000Bal. +

1-4The 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 + LandAssetse. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.Bal.12,5001,35020,000

e.3,65049

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Accounts Capital Fees Wages Rent Utilities Misc. Payable + Stock + Earned Exp. Exp. Exp. Exp. Liabilities + Stockholders Equity 1,35025,0007,50050e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

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

Cash + Supplies + LandAssetsBal.8,8501,35020,000

f.95051

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Accounts Capital Fees Wages Rent Utilities Misc. Payable + Stock + Earned + Expense + Expense + Expense + Expense Liabilities + Stockholders Equity 1,35025,0007,5002,125800450 275 f. NetSolutions paid $950 to creditors during the month.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 + LandAssetsBal.7,9001,35020,000

g.80053

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Accounts Capital Fees Wages Rent Supplies Util. Misc. Payable + Stock + Earned + Exp. + Exp. + Exp. + Exp. + Exp.Liabilities + Stockholders Equity 40025,0007,500 2,125800450 275 g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used.54

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Cash + Supplies + LandAssetsBal.7,90055020,000

h.2,000h. At the end of the month, NetSolutions pays $2,000 to stockholder (Chris Clark) as dividends.55

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1-4Dividends 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 40025,0007,500 2,125800800450 275 57

1-4h. At the end of the month, NetSolutions pays $2,000 to stockholder (Chris Clark) as dividends.

Stockholders Equity58

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1-4Retained EarningsRetained earnings represent stockholders equity created from business operations through revenue, expense, and dividend transactions.

1-460NetSolutionsRetained EarningsNovember Operations(Revenue and Expense Transactions)FeesWagesRentSuppliesUtilitiesMisc.Earned Expense ExpenseExpenseExpenseExpense

+7,5002,1258004502757,5002,1258004502758007,5002,125800800450275

7,5002,125800800450275

$3,050

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