CH 01

Accounting in
Action
Chapter
1-1
Accounting Principles, Ninth Edition
Study
Study Objectives
Objectives
1.
Explain what accounting is.
2.
Identify the users and uses of accounting.
3.
Understand why ethics is a fundamental business concept.
4.
Explain generally accepted accounting principles and the cost

principle.
5.
Explain the monetary unit assumption and the economic entity

assumption.
6.
State the accounting equation, and define its components.
7.
Analyze the effects of business transactions on the

accounting equation.
8.
Understand the four financial statements and how they are

prepared.
Chapter
1-2
Accounting
Accounting in
in Action
Action
What is
Accounting?
Three
activities
Who uses
accounting
data
Chapter
1-3
The Building
Blocks of
Accounting
Ethics in
financial
reporting
Generally
accepted
accounting
principles
Assumptions
The Basic
Accounting
Equation
Assets
Liabilities
Owners
equity
Using the
Basic
Accounting
Equation
Transaction
analysis
Summary of
transactions
Financial
Statements
Income
statement
Owners
equity
statement
Balance
sheet
Statement of
cash flows
What
What is
is Accounting?
Accounting?
The purpose of accounting is to:
(1) identify,
identify record,
record and communicate the
economic events of an
(2) organization to
(3) interested users.
Chapter
1-4
SO 1 Explain what accounting is.
What
What is
is Accounting?
Accounting?
Three Activities
Illustration 1-1
Accounting process
The accounting process includes

the bookkeeping function.
Chapter
1-5
SO 1 Explain what accounting is.
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Internal Users
Human
Resources
Finance
Management
IRS
Investors
There are two broad

groups of users of
financial information:
internal users and
external users.
Marketing
Customers
Chapter
1-6
SEC
Labor
Unions
Creditors
External
Users
SO 2 Identify the users and uses of accounting.
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Common Questions Asked
1. Can we afford to give our
employees a pay raise?
User
Human Resources
2. Did the company earn a

satisfactory income?
Investors
3. Do we need to borrow in the

near future?
4. Is cash sufficient to pay
dividends to the stockholders?
Management
Finance
5. What price for our product

will maximize net income?
Marketing
6. Will the company be able to

pay its short-term debts?
Creditors
Chapter
1-7
SO 2 Identify the users and uses of accounting.
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Discussion Question
Q1. Accounting is ingrained in our society and it is
vital to our economic system. Do you agree? Explain.
See notes page for discussion

Chapter
1-8
SO 3 Understand why ethics is a fundamental business concept .
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Ethics In Financial Reporting
Standards of conduct by which ones actions are
judged as right or wrong, honest or dishonest, fair
or not fair, are Ethics.
Recent financial scandals include: Enron,
WorldCom, HealthSouth, AIG, and others.
Congress passed Sarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound
ethical behavior.
Chapter
1-9
Ethics
Ethics
Review Question
Ethics are the standards of conduct by which one's
actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.
Chapter
1-10
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Various users
need financial
information
The accounting profession

has attempted to develop
a set of standards that
are generally accepted
and universally practiced.
Chapter
1-11
Financial Statements
Balance Sheet
Income Statement
Statement of Owners Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting
Principles (GAAP)
SO 4 Explain generally accepted accounting principles and the cost principle.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Organizations Involved in Standard Setting:
Securities and Exchange Commission (SEC)
http://www.sec.gov/
Financial Accounting Standards Board (FASB)

http://www.fasb.org/
International Accounting Standards Board

(IASB)
http://www.iasb.org/
Chapter
1-12
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Cost Principle (Historical) dictates that companies
record assets at their cost.
Issues:
Reported at cost when purchased and also over the
time the asset is held.
Cost easily verified, whereas market value is often
subjective.
Fair value information may be more useful.
Chapter
1-13
Assumptions
Assumptions
Monetary Unit Assumption include in the
accounting records only transaction data that can be

expressed in terms of money.
Economic Entity Assumption requires that
activities of the entity be kept separate and distinct

from the activities of its owner and all other economic
entities.
Proprietorship.
Partnership.
Forms of
Business Ownership
Corporation.
Chapter
1-14
SO 5 Explain the monetary unit assumption

and the economic entity assumption.
Forms
Forms of
of Business
Business Ownership
Ownership
Proprietorship
Chapter
1-15
Partnership
Corporation
Generally owned
by one person.
Owned by two or
more persons.
Often small
service-type
businesses
Often retail and

service-type
businesses
Ownership
divided into
shares of stock
Owner receives
any profits,
suffers any
losses, and is
personally liable
for all debts.
Generally
unlimited
personal liability
Separate legal
entity organized
under state
corporation law
Limited liability
Partnership
agreement
Chapter
1-16
SO 5 Explain the monetary unit assumption and the economic entity assumption.
Assumptions
Assumptions
Review Question
Combining the activities of Kellogg and General
Mills would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
Chapter
1-17

Forms
Forms of
of Business
Business Ownership
Ownership
Review Question
A business organized as a separate legal entity
under state law having ownership divided into
shares of stock is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
Chapter
1-18

The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Owners
Equity
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.
Chapter
1-19
SO 6 State the accounting equation, and define

its components.
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Owners
Equity

Assets
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Chapter
1-20

its components.
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Owners
Equity

Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
Chapter
1-21

its components.
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Owners
Equity

Owners Equity
Ownership claim on total assets.
Referred to as residual equity.
Chapter
1-22
Capital, Drawings, etc. (Proprietorship or

Partnership).

its components.
Owners
Owners Equity
Equity
Illustration 1-6
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.
Chapter
1-23

its components.
Owners
Owners Equity
Equity
Illustration 1-6
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.
Chapter
1-24

its components.
Using
Using The
The Basic
Basic Accounting
Accounting Equation
Equation
Transactions are a businesss 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.
Chapter
1-25
SO 7 Analyze the effects of business transactions

on the accounting equation.
Transactions
Transactions (Question?)
(Question?)
Q1-15: Are the following events recorded in the
accounting records?
Owner
An employee
is hired.
withdraws
cash for
personal use.
Event
Supplies are
purchased
on account.
Criterion
Is the financial position (assets, liabilities, or

owners equity) of the company changed?
Record/
Dont Record
Chapter
1-26

Transactions
Transactions
Discussion Question
Q1-18. In February 2010, Paula King invested
an additional $10,000 in her business, Kings
Pharmacy, which is organized as a proprietorship.
Kings accountant, Lance Jones, recorded this
receipt as an increase in cash and revenues. Is
this treatment appropriate? Why or why not?
Chapter
1-27

Transactions
Transactions (Problem)
(Problem)
P1-1A: Barones Repair Shop was started on May 1 by Nancy
Barone. Prepare a tabular analysis of the following
transactions for the month of May.
1. Invested $10,000 cash to start the repair shop.
Cash
1.
+10,000
Chapter
1-28
Assets
Accounts
+ Receivable +
= Liabilities +
Equipment
Accounts
Payable
Owners Equity
Barone,
Capital
Barone,
Drawing
Revenues
Expenses
+10,000

Transactions
(Problem)
2. Purchased equipment for $5,000 cash.
Cash
1.
+10,000
2.
-5,000
Assets
Accounts
+ Receivable +
= Liabilities +
Equipment
Accounts
Payable
Owners Equity
Barone,
Capital
Barone,
Drawing
Revenues
Expenses
+10,000
+5,000
3.
4.
5.
6.
7.
8.
9.
10.
Chapter
1-29

Transactions
(Problem)
3. Paid $400 cash for May office rent.
Cash
1.
+10,000
2.
-5,000
3.
-400
Assets
Accounts
+ Receivable +
= Liabilities +
Equipment
Accounts
Payable
Owners Equity
Barone,
Capital
Barone,
Drawing
Revenues
Expenses
+10,000
+5,000
-400
4.
5.
6.
7.
8.
9.
10.
Chapter
1-30

Transactions
(Problem)
4. Incurred $250 of advertising costs, on account.
Cash
1.
+10,000
2.
-5,000
3.
-400
4.
Assets
Accounts
+ Receivable +
= Liabilities +
Equipment
Accounts
Payable
Owners Equity
Barone,
Capital
Barone,
Drawing
Revenues
Expenses
+10,000
+5,000
-400
+250
-250
5.
6.
7.
8.
9.
10.
Chapter
1-31

Transactions
(Problem)
5. Received $5,100 from customers for repair service.
Cash
1.
+10,000
2.
-5,000
3.
-400
4.
5.
Assets
Accounts
+ Receivable +
= Liabilities +
Equipment
Accounts
Payable
Owners Equity
Barone,
Capital
Barone,
Drawing
Revenues
Expenses
+10,000
+5,000
-400
+250
+5,100
-250
+5,100
6.
7.
8.
9.
10.
Chapter
1-32

Transactions
(Problem)
6. Withdrew $1,000 cash for personal use.
Cash
1.
+10,000
2.
-5,000
3.
-400
4.
Assets
Accounts
+ Receivable +
= Liabilities +
Equipment
Accounts
Payable
Owners Equity
Barone,
Capital
Barone,
Drawing
Revenues
+5,100
6.
-1,000
Expenses
+10,000
+5,000
-400
+250
5.
-250
+5,100
-1,000
7.
8.
9.
10.
Chapter
1-33

Transactions
(Problem)
7. Paid part-time employee salaries of $2,000.
Cash
1.
+10,000
2.
-5,000
3.
-400
4.
Assets
Accounts
+ Receivable +
= Liabilities +
Equipment
Accounts
Payable
Owners Equity
Barone,
Capital
Barone,
Drawing
Revenues
+5,100
6.
-1,000
7.
-2,000
Expenses
+10,000
+5,000
-400
+250
5.
-250
+5,100
-1,000
-2,000
8.
9.
10.
Chapter
1-34

Transactions
(Problem)
8. Paid utility bills $140.
Cash
1.
+10,000
2.
-5,000
3.
-400
4.
Assets
Accounts
+ Receivable +
= Liabilities +
Equipment
Accounts
Payable
Owners Equity
Barone,
Capital
Barone,
Drawing
Revenues
Expenses
+10,000
+5,000
-400
+250
-250
5.
+5,100
+5,100
6.
-1,000
7.
-2,000
-2,000
8.
-140
-140
-1,000
9.
10.
Chapter
1-35

Transactions
(Problem)
9. Provided $750 of repair services on account.
Cash
1.
+10,000
2.
-5,000
3.
-400
Assets
Accounts
+ Receivable +
= Liabilities +
Equipment
Accounts
Payable
Owners Equity
Barone,
Capital
Barone,
Drawing
Revenues
Expenses
+10,000
+5,000
-400
4.
+250
-250
5.
+5,100
6.
-1,000
7.
-2,000
-2,000
8.
-140
-140
9.
+5,100
-1,000
+750
+750
10.
Chapter
1-36

Transactions
(Problem)
10. Collected $120 cash for services previously billed.
Cash
1.
+10,000
2.
-5,000
3.
-400
Assets
Accounts
+ Receivable +
= Liabilities +
Equipment
Accounts
Payable
Owners Equity
Barone,
Capital
Barone,
Drawing
Revenues - Expenses
+10,000
+5,000
-400
4.
+250
-250
5.
+5,100
6.
-1,000
7.
-2,000
-2,000
8.
-140
-140
9.
10.
Chapter
1-37
+5,100
-1,000
+750
+120
-120
+750
Transactions
(Problem)
10. Collected $120 cash for services previously billed.
Cash
1.
+10,000
2.
-5,000
3.
-400
Assets
Accounts
+ Receivable +
= Liabilities +
Equipment
Accounts
Payable
Owners Equity
Barone,
Capital
Barone,
Drawing
Revenues - Expenses
+10,000
+5,000
-400
4.
+250
-250
5.
+5,100
6.
-1,000
7.
-2,000
-2,000
8.
-140
-140
9.
+5,100
-1,000
+750
10.
+120
-120
+6,680
+630
Chapter
1-38
$12,310
+750
+5,000
= +250
+10,000
-1,000
$12,310
+5,850
-2,790
Financial
Statements
Companies
Companies prepare
prepare four
four financial
financial statements
statements from
from
the
the summarized
summarized accounting
accounting data:
data:
Income
Statement
Chapter
1-39
Owners
Equity
Statement
Balance
Sheet
Statement
of Cash
Flows
SO 8 Understand the four financial statements and how they are prepared.
Financial
Statements
Review Question
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
Chapter
1-40
Financial
Statements
Income Statement
Reports the revenues
and expenses for a
specific period of time.
Net income revenues
exceed expenses.
Net loss expenses
exceed revenues.
Chapter
1-41
Financial
Statements
Income Statement
Owners Equity Statement
Net income is needed to determine

the ending balance in owners equity.
Chapter
1-42
Financial
Statements
Statement indicates the
reasons why owners
equity has increased or
decreased during the
period.
Chapter
1-43
Financial
Statements
Balance Sheet
The ending balance in owners equity is

needed in preparing the balance sheet
Chapter
1-44
Financial
Statements
Balance Sheet
Reports the assets,
liabilities, and owners
equity at a specific date.
Assets listed at the top,
followed by liabilities
and owners equity.
Total assets must equal
total liabilities and
owners equity.
Chapter
1-45
Financial
Statements
Balance Sheet
Chapter
1-46
Financial
Statements
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?
Chapter
1-47
Chapter
1-48
Financial
Statements
Review Question
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.
Chapter
1-49
Financial
Statements
Discussion Question
Q1-19. A companys net income appears
directly on the income statement and the
owners equity statement, and it is included
indirectly in the companys balance sheet. Do
you agree? Explain.
Chapter
1-50
Accounting
Accounting Career
Career Opportunities
Opportunities
Public Accounting
Careers in auditing and taxation serving the general public.
Private Accounting
Careers in industry working in cost accounting, budgeting,
accounting information systems, and taxation.
Opportunities in Government
Careers with the IRS, the FBI, the SEC, and in public
colleges and universities.
Forensic Accounting
Careers with insurance companies and law offices to conduct
investigations into theft and fraud.
Chapter
1-51
SO 9 Explain the career opportunities in accounting.
Copyright
Copyright
Copyright 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act
without the express written permission of the copyright owner
is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for his/her own
use only and not for distribution or resale. The Publisher
assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the
information contained herein.
Chapter
1-52

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Accounting in

Accounting Principles, Ninth Edition

Explain what accounting is.

Identify the users and uses of accounting.

Understand why ethics is a fundamental business concept.

Explain generally accepted accounting principles and the cost

Explain the monetary unit assumption and the economic entity

State the accounting equation, and define its components.

Analyze the effects of business transactions on the

Understand the four financial statements and how they are

SO 1 Explain what accounting is.

The accounting process includes

SO 1 Explain what accounting is.

There are two broad

SO 2 Identify the users and uses of accounting.

2. Did the company earn a

3. Do we need to borrow in the

5. What price for our product

6. Will the company be able to

SO 2 Identify the users and uses of accounting.

See notes page for discussion

SO 3 Understand why ethics is a fundamental business concept .

SO 3 Understand why ethics is a fundamental business concept .

SO 3 Understand why ethics is a fundamental business concept .

The accounting profession

SO 4 Explain generally accepted accounting principles and the cost principle.

Financial Accounting Standards Board (FASB)

International Accounting Standards Board

SO 4 Explain generally accepted accounting principles and the cost principle.

SO 4 Explain generally accepted accounting principles and the cost principle.

accounting records only transaction data that can be

Economic Entity Assumption requires that

activities of the entity be kept separate and distinct

SO 5 Explain the monetary unit assumption

Often retail and

SO 5 Explain the monetary unit assumption

SO 5 Explain the monetary unit assumption

Provides the underlying framework for recording and

SO 6 State the accounting equation, and define

Provides the underlying framework for recording and

SO 6 State the accounting equation, and define

Provides the underlying framework for recording and

SO 6 State the accounting equation, and define

Provides the underlying framework for recording and

Capital, Drawings, etc. (Proprietorship or

SO 6 State the accounting equation, and define

Revenues result from business activities entered into for

SO 6 State the accounting equation, and define

Expenses are the cost of assets consumed or services

SO 6 State the accounting equation, and define

May be external or internal.

SO 7 Analyze the effects of business transactions

Is the financial position (assets, liabilities, or

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions