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Chapter 1

Introduction to Accounting
and Business

Objectives
Objectives
1. Describe the nature of a business.
After
After studying
studying this
this
2. Describe the role of accounting in business.
chapter,
chapter, you
you should
should
3. Describe the importance of business ethics and
be
able
to:
be
able
to:
the basic principles of proper ethical conduct.
4. Describe the profession of accounting.
5. Summarize the development of accounting
principles and relate them to practice.
6. State the accounting equation and define each
element of the equation.

Objectives
Objectives
7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
8. Describe the financial statements of a
proprietorship and explain how they interrelate.
9. Use the ratio of liabilities to owners equity to
analyze the ability of a business to withstand
poor business conditions.

STEP ONE
ANALYZING
LOOKING AT EVENTS THAT HAVE
TAKEN PLACE AND THINKING
ABOUT HOW THEY AFFECT THE
BUSINESS

STEP TWO
RECORDING
ENTERING FINANCIAL
INFORMATION ABOUT EVENTS INTO
THE ACCOUNTING SYSTEM

STEP THREE
CLASSIFYING
SORTING AND GROUPING SIMILAR
ITEMS TOGETHER

STEP FOUR
SUMMARIZING
BRINGING THE VARIOUS ITEMS OF
INFORMATION TOGETHER TO
DETERMINE A RESULT

STEP FIVE
REPORTING
TELLING THE RESULTS

STEP SIX
INTERPRETING
DECIDING THE MEANING AND
IMPORTANCE OF THE INFORMATION
IN VARIOUS REPORTS

Types of Businesses
Service
Service Business
Business
Product
Product

Triwasana
Triwasana
Garuda
Garuda Indonesia
Indonesia
Hilton
Hilton Hotels
Hotels
Bank
Bank BRI
BRI
Telkomsel
Telkomsel

Entertainment
Entertainment
Transportation
Transportation
Hospitality
Hospitality and
and lodging
lodging
Financial
Financial
Telecommunication
Telecommunication

Types of Businesses
Merchandising
Merchandising Business
Business
Product
Product

Matahari
Matahari
Toys
Toys City
City
Electronic
Electronic City
City
Amazon.com
Amazon.com

General
General merchandise
merchandise
Toys
Toys
Consumer
Consumer electronics
electronics
Internet
Internet books,
books, music,
music, video
video
retailer
retailer

Types of Businesses
Manufacturing
Manufacturing Business
Business
Product
Product

Toyota
ToyotaAstra
Astra Motor
Motor Cars,
Cars, trucks,
trucks, vans
vans
Intel
Computer
Intel
Computer chips
chips
Boeing
Jet
Boeing
Jet aircraft
aircraft
Adidas
Athletic
Adidas
Athletic shoes
shoes and
and apparel
apparel
Coca-Cola
Beverages
Coca-Cola
Beverages
Polytron
Stereos
Polytron
Stereos and
and television
television

There
There are
are three
three types
types of
of
business
business organizations
organizations
Proprietorship
Partnership
Corporation

A
Aproprietorship
proprietorship
isis owned
owned by
by one
one
individual.
individual.

Joes

Advantages
Ease in organizing
Low cost of
organizing
Disadvantage
Limited source of
financial resources
Unlimited liability

A
Apartnership
partnership isis
owned
owned by
by two
two or
or
more
more individuals.
individuals.

Joe and Martys

Advantages
More financial
resources than a
proprietorship.
Additional
management skills.
Disadvantage
Unlimited liability.

A
Acorporation
corporation isis
organized
organized under
under state
state
or
or federal
federal statutes
statutes as
as aa
separate
separate legal
legal entity.
entity.

J & M, Inc.

Advantage
The ability to obtain
large amounts of
resources by issuing
stocks.
Disadvantage
Double taxation.

Business
Business Strategies
Strategies
A business strategy is an integrated
set of plans and actions designed to
enable the business to gain an
advantage over its competitors, and
in doing so, to maximize its profits.

Business
Business Strategies
Strategies
Under a low-cost strategy, a business
designs and produces products or
services of acceptable quality at a cost
lower than that of its competitors.
Wal-Mart
Southwest Airlines

Business
Business Strategies
Strategies
Under a differential strategy, a business
designs and produces products or services
that possess unique attributes or
characteristics which customers are willing
to pay a premium price.
Maytag
Tommy Hilfiger

Value
Value Chain
Chain of
of aa Business
Business
A value chain is the way a
business adds value for its
customers by processing inputs
into product or service.
Inputs

Business
Processes

Products or
Services

Customer
Value

Business
Business Stakeholders
Stakeholders
A business stakeholder is a person or
entity having an interest in the
economic performance of the business.

The
The Process
Process of
of
Providing
Providing Information
Information

Identify
stakeholders.

STAKEHOLDERS
External:
Internal:
Customers,
Owners,
creditors,
managers,
government
employees

Assess
stakeholders
informational
needs.

The
The Process
Process of
of
Providing
Providing Information
Information

Record
economic
data about
business
activities
and events.

Accounting
Information
System

Design the
accounting
information
system to meet
stakeholders
needs.

The
The Process
Process of
of
Providing
Providing Information
Information
STAKEHOLDERS

Internal:
Owners,
managers,
employees

Prepare
accounting
reports for
stakeholders.

Accounting
Information
System

External:
Customers,
creditors,
government

Business
Business Ethics
Ethics
Sound
Sound
Principles
Principles that
that
form
form the
the
foundation
foundation for
for
ethical
ethical
behavior
behavior

1. Avoid small ethical lapses.


2. Focus on your long-term
reputation.
3. You may expect to suffer
adverse personal
consequences for holding
to an ethical position.

Profession
Profession of
of Accounting
Accounting
Accountants
Accountants employed
employed by
by aa business
business firm
firm or
or
aa not-for-profit
not-for-profit organization
organization are
are said
said to
to be
be
engaged
engaged in
in private
private accounting.
accounting.
Accountants
Accountants and
and their
their staff
staff who
who provide
provide
services
services on
on aa fee
fee basis
basis are
are said
said to
to be
be
employed
employed in
in public
public accounting.
accounting.

Generally
Generally Accepted
Accepted
Accounting
Accounting
Principles
Principles (GAAP)
(GAAP)

The
The business
business entity
entity concept
concept
limits
limits the
the economic
economic data
data in
in
the
the accounting
accounting system
system to
to
data
data related
related directly
directly to
to the
the
activities
activities of
of the
the business.
business.
The
The cost
cost concept
concept isis the
the
basis
basis for
for entering
entering the
the
exchange
exchange price,
price, or
or cost
cost
of
of an
an acquisition
acquisition in
in the
the
accounting
accounting records.
records.

The
The objectivity
objectivity concept
concept
requires
requires that
that the
the accounting
accounting
records
records and
and reports
reports be
be based
based
upon
upon objective
objective evidence.
evidence.
The
The unit-of-measure
unit-of-measure
concept
concept requires
requires that
that
economic
economic data
data be
be
recorded
recorded in
in dollars.
dollars.

The
The Accounting
Accounting Equation
Equation
Assets = Liabilities + Owners Equity
The
The resources
resources
owned
owned by
byaa
business
business

The
The Accounting
Accounting Equation
Equation
Assets = Liabilities + Owners Equity
The
The rights
rights of
of the
the
creditors,
creditors, which
which
represent
represent debts
debts of
of
the
the business
business

The
The Accounting
Accounting Equation
Equation
Assets = Liabilities + Owners Equity
The
The rights
rights of
of the
the
owners
owners

What is a business
transaction?

A business transaction is an economic event or


condition that directly changes an entitys financial
condition or directly affects its results of operations.

On November 1,
2005, Chris
Clark begins a
business that will
be known as
NetSolutions.

a. Chris
Chris Clark
Clark deposits
deposits $25,000
$25,000 in
in aa bank
bank
a.
account in
in the
the name
name of
of NetSolutions.
NetSolutions.
account

a.

Assets

Cash
25,000

Owners Equity
Chris Clark, Capital
25,000 Investment
by Chris
Clark

b. NetSolutions
NetSolutions exchanged
exchanged $20,000
$20,000 for
for land.
land.
b.
Assets
Cash + Land
Bal. 25,000
b. 20,000
+20,000
Bal. 5,000
20,000

=
=

Owners Equity
Chris Clark, Capital
25,000
25,000

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

Cash + Supplies + Land


Bal. 5,000
c.
Bal. 5,000

20,000
+ 1,350
1,350

20,000

Owners
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital

25,000
+ 1,350
1,350

25,000

d. NetSolutions
NetSolutions provided
provided services
services to
to
d.
customers, earning
earning fees
fees of
of $7,500
$7,500 and
and
customers,
received the
the amount
amount in
in cash.
cash.
received
Assets
Cash + Supplies + Land
Bal. 5,000
1,350
20,000
d. + 7,500
Bal. 12,500
1,350
20,000

Owners
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
1,350
25,000
+ 7,500 Fees
earned
1,350
32,500

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

Cash + Supplies + Land


Bal. 12,500
1,350
20,000
e. 3,650

Bal.8,850

1,350

20,000

Owners
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
1,350
32,500
2,125 Wages
800 Rent
450 Util.
275 Misc.
1,350
28,850

NetSolutions paid
paid $950
$950 to
to
f.f. NetSolutions
creditors during
during the
the month.
month.
creditors
Assets
Cash + Supplies + Land
Bal. 8,850
1,350
20,000
f.
950
Bal. 7,900
1,350
20,000

Owners
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
1,350
28,850
950
400
28,850

g. At
At the
the end
end of
of the
the month,
month, the
the cost
cost
g.
of supplies
supplies on
on hand
hand isis $550,
$550, so
so
of
$800 of
of supplies
supplies were
were used.
used.
$800
Assets
Cash + Supplies + Land
Bal. 7,900
1,350
20,000
g.
800
Bal. 7,900
550
20,000

Owners
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
400
28,850
800 Supplies
expense
400
28,050

h. At
At the
the end
end of
of the
the month,
month, Chris
Chris
h.
withdrew $2,000
$2,000 in
in cash
cash from
from the
the
withdrew
business for
for personal
personal use.
use.
business
Assets
Cash + Supplies + Land
Bal. 7,900
550
20,000
h. 2,000
Bal. 5,900
550
20,000

Owners
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
400
28,050
2,000 Withdrawal
400
26,050

Effects
Effects of
of Transactions
Transactions on
on Owners
Owners Equity
Equity
Owners Equity
Decreased by

Increased by

Owners
withdrawals

Owners
investments

Expenses

Revenues
Net
income

Accounting
Accounting reports,
reports, called
called
financial
financial statements,
statements,
provide
provide summarized
summarized
information
information to
to the
the owner.
owner.

Financial
Financial Statements
Statements
Income statementA summary of the revenue and
expenses for a specific period of time.
Statement of owners equityA summary of the
changes in the owners equity that have occurred during
a specific period of time.
Balance sheetA list of the assets, liabilities, and
owners equity as of a specific date.
Statement of cash flowsA summary of the cash
receipts and disbursements for a specific period of time.

NetSolutions
Income Statement
For the Month Ended November 30, 2005
Fees earned

$7 500 00

Operating expenses:
Wages expense
Rent expense
Supplies expense
Utilities expense
Miscellaneous expense
Total operating expenses
Net income

$2 125 00
800 00
800 00
450 00

To
Tothe
the statement
statement
of
of owners
ownersequity
equity

275 00
1 135 00
$3 050 00

NetSolutions
Statement of Owners Equity
For the Month Ended November 30, 2005
Chris Clark, capital, November 1, 2005
Investment on November 1
From
the
income
From
the
Net income for November income

statement
statement

$25 000 00
3 050 00
$28 050 00
2 000 00

Less withdrawals
Increase in owners equity
To
Tothe
the
Chris Clark, capital, November 30, 2005

balance
balance sheet
sheet

26 050 00
$26 050 00

NetSolutions
Balance Sheet
November 30, 2005

From
Fromthe
the
statement
statement of
of
Liabilities owners
ownersequity
equity

Assets
Cash
Supplies
Land

$ 5 900 00 Accounts Payable


550 00

400 00

Owners Equity

20 000 00 Chris Clark, cap.

26 050 00

Total liabilities and


Total assets

$26 450 00

owners equity

This balance sheet presented


using the account form

$26 450 00

When
When the
the balance
balance sheet
sheet displays
displays
the
the liabilities
liabilities and
and owners
owners equity
equity
below
below the
the assets,
assets, the
the report
report form
form
isis being
being used.
used.

NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
Cash flows from operating activities:
Cash received from customers
$ 7 500 00
Deduct cash payments for expenses
and payments to creditors
4 600 00
Net cash flow from operating activities
2 900 00
Cash flows from investing activities:
Cash payment for acquisition of land
(20 000 00 )
Cash flows from financing activities:
Cash received as owners investment
$25 000 00
Deduct cash withdrawal by owner
2 000 00
Net cash flow from financing activities
23 000 00
Net cashShould
flow and
Nov.
30, 2005
bal. sheet
$ 5 900 00
match
Cash
on
balance
Should
match
Cash
onthe
thecash
balance
sheet

Statement
Statement of
of Cash
Cash Flows
Flows
Cash Flows from Operating ActivitiesThis section
reports a summary of cash receipts and cash payments
from operations.
Cash Flows from Investing ActivitiesThis section
reports the cash transactions for the acquisition and sale
of relatively permanent assets.
Cash Flows from Financing ActivitiesThis section
reports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.

Tools
Tools for
for Financial
Financial
Analysis
Analysis and
and Interpretation
Interpretation
The
The ratio
ratio of
of liabilities
liabilities to
to owners
owners equity
equity
allows
allows owners
owners like
like Chris
Chris Clark
Clark to
to analyze
analyze
the
the firms
firms ability
ability to
to withstand
withstand poor
poor
business
business conditions.
conditions.
Total Liabilities
Ratio of liabilities
=
to owners equity
Total owners equity (or total
stockholders equity)

Tools
Tools for
for Financial
Financial
Analysis
Analysis and
and Interpretation
Interpretation
Ratio of
$400
liabilities to =
$26,050
owners equity
Ratio of
liabilities to = 0.015
owners equity

Chapter 1
The
The End
End

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