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Accounting and the

Business Environment
Chapter 1

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Objective 1

Use accounting vocabulary


for decision making.

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Accounting...
isis an
an information
information system
system that...
that...
measures
measures business
business activities,
activities,
processes
processes information,
information, and...
and...
communicates
communicates financial
financial information.
information.
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Accounting...

isis called
called the
the language
language of
of business.
business.

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Users of Accounting Information

External
External users
users
make
make decisions
decisions
about
about the
the entity.
entity.

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Internal
Internal users
users
make
make decisions
decisions
for
for the
the entity.
entity.

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Fields of Accounting

Financial
Financial Accounting
Accounting

Management
Management Accounting
Accounting
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The Authority Underlying Accounting


Public
Public Sector
Sector
(SEC)
(SEC)
Private
Private Sector
Sector
(AICPA)
(AICPA) (IMA)
(IMA)

Private
Private Sector
Sector
(FASB)
(FASB)
GAAP
GAAP

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Standards of Professional
Conduct

AICPAs
AICPAs Code
Code of
of
Professional
Professional
Conduct
Conduct

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Standards
Standards of
of
Ethical
Ethical
Conduct
Conduct of
of the
the
Institute
Institute of
of
Management
Management
Accountants
Accountants
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Types of Business Organizations


Proprietorships
Proprietorships
Partnerships
Partnerships
Corporations
Corporations
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Proprietorships
What are some advantages?
total undivided authority
no restrictions on type of business must
be legal
What are some disadvantages?
unlimited liability
limitation on size fund raising power

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Partnerships
What are some advantages?
better credit standing possibly
more brain power, but consultation with
partners required
What are some disadvantages?
unlimited personal liability for general partners
need for written partnership agreement

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Corporations
What are some advantages?
separate legal existence
limited liability of stockholders
transferability of ownership relatively easy
What are some disadvantages?
taxes possible double taxation
extensive governmental regulation

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Objective 2
Apply accounting
concepts and principles
to business situations.

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Generally Accepted
Accounting Principles

What is the primary objective of financial


reporting?
To
Toprovide
provide information
information useful
useful
for
for making
making investment
investment and
and
lending
lending decisions
decisions

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The Entity Concept Example


Assume that John decides to open up a
gas station and coffee shop.
The gas station made $250,000 in profits,
while the coffee shop lost $50,000.

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The Entity Concept Example


How much money did John make?
At a first glance, we would assume that
John made $200,000.
However, by applying the entity concept we
realize that the gas station made $250,000
while the coffee shop lost $50,000.

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The Reliability (Objectivity)


Principle
Information
Information must
must
be
be reasonably
reasonably
accurate.
accurate.

Information
Information must
must
be
be free
free from
from bias.
bias.

Information
Information must
must
report
report what
what
actually
actually
happened.
happened.

Individuals
Individuals would
would
arrive
arrive at
at similar
similar
conclusions
conclusions using
using
same
same data.
data.

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The Cost Principle

Assets
Assets and
and services
services
acquired
acquired
should
should be
be recorded
recorded
at
at their
their actual
actual cost.
cost.

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The Going Concern Concept

The
The entity
entity will
will continue
continue
to
to operate
operate in
in the
the future.
future.

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The Stable-Monetary-Unit
Concept

The
The dollars
dollars purchasing
purchasing
power
power isis relatively
relatively
stable.
stable.

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Objective 3
Use the accounting equation
to describe an organizations
financial position.

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The Accounting Equation

Assets

Liabilities + Owners Equity

Economic
Resources

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Economic
Resources
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Assets
What is an asset?
It is something a company owns which
has future economic value.
land
building
equipment
goodwill

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Liability
What is a liability?
It is something a company owes.
money
service legal retainers
product magazines

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Owners Equity
What is owners equity?
It is whats left of the assets after liabilities
have been deducted.
the same as net assets
the owners claim on the entitys assets

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Transactions that Affect


Owners Equity
OWNERS EQUITY
INCREASES

OWNERS EQUITY
DECREASES
Owner Withdrawals
from the Business

Owner Investments
in the Business
Owners Equity

Revenues
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Expenses
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Revenues
What are revenues?
They are amounts received or to be received
from customers for sales of products or services.
sales
performance of services
rent
interest

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Expenses
What are expenses?
They are amounts that have been paid or will be
paid later for costs that have been incurred to
earn revenue.
salaries and wages
utilities
supplies used
advertising

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Objective 4
Use the accounting equation to
analyze business transactions.

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Accounting for Business


Transactions
What is a transaction?
It is any event that both affects the financial
position of the business and can be reliably
recorded.

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Accounting for Business


Transactions
1
2
3
4

Gay Gillen invests $30,000 to begin Gay


Gillen eTravel.
Gillen purchases an office location, paying
$20,000 in cash.
She buys office supplies, agreeing to pay
$500 in 30 days.
She earns and collects $5,500 revenues.

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Accounting for Business


Transactions
Gillen performs services, and the client agrees
to pay $3,000 within one month.
6 During the month, she pays $3,100 for
expenses incurred.
7 Gillen pays $300 to the store from which she
purchased $500 worth of supplies.
What is the effect of these transactions on the
accounting equation?
5

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Accounting for Business


Transactions
Owners
Assets = Liabilities + Equity
1) Cash
+ $30,000
+ $30,000
2) Cash
20,000
Land
+ 20,000
3) Supplies
+
500
+ 500
4) Cash
+ 5,500
+ 5,500
5) Receivable + 3,000
+ 3,000
6) Cash
3,100
3,100
7) Cash

300
300
Totals
+ $35,600
+ 200
+ $35,400
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Accounting for Business


Transactions
Notice that the equation always stays in
balance.
Each transaction affects at least two
accounts, sometimes more.
Some transactions affect only one side of
the equation; some affect both sides.

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Accounting for Business


Transactions
Other transactions that took place were
as follows:
The business collected $1,000 from the
client.
She sold some land at cost for $9,000.
She withdrew $2,100 from the business.

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Objective 5
Prepare and use
financial statements.

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Financial Statements...
are
are the
the final
final
product
product of
of the
the
accounting
accounting process.
process.
tell
tell how
how the
the
business
business isis performing
performing
and
and where
where itit stands.
stands.
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Financial Statements

income statement
statement of owners equity or retained
earnings
balance sheet
statement of cash flows

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Objective 6

Evaluate the performance


of business.

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Relationships Among the


Statements:
Income Statement
Revenue:
Fees earned $8,500
Expenses:
Salary expense $1,200
Utilities and telephone expense 400
Equipment rental expense
400
Office rent expense 1,100 3,100
Net income $5,400
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Relationships Among the


Statements:
Statement of Owners Equity
G. Gillen, capital, April 1, 20xx
Contribution of capital
Net income
Cash distributions
G. Gillen, capital, April 30, 20xx

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0
30,000
$ 5,400
2,100
$33,300

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Relationships Among the


Statements:
Balance Sheet
Assets

Liabilities

Cash

$ 20,000

Accounts payable

Accounts receivable

2,000

Owners equity,

Supplies
Land
Total assets

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500
11,000
$ 33,500

Business Publishing

G. Gillen, capital

200
33,300

Total liabilities and


owners equity

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$33,500

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Relationships Among the


Statements:
Statement
Of
Cash
Flows
Cash flows from operating activities:
Cash receipts from services rendered $6,500
Cash payments:
Supplies $ 300
Operating expenses 3,100 3,400
Net cash flows from
Operating activities $3,100
Cash flows from investing activities
Purchase and sale of land
($11,000)
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Relationships Among the


Statements:
Statement Of Cash Flows
Cash Flows from Financing Activities:
Beginning Balance
0
Investment by Owner $30,000
Withdrawals
2,100
Net Cash Flows from Financing Activities $27,900
Cash at Beginning of Year 0
Cash at End of the Year
$20,000
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End of Chapter 1

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