Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO1Describe the different users of accounting information. LO2Prepare a net worth statement and explain its purpose.

© 2014 Cengage Learning. All Rights Reserved. What Is Accounting? ●Accounting is the process of planning, recording, analyzing, and interpreting financial information. ●An accounting system is a planned process designed to compile financial data and summarize the results in accounting records and reports. (See “process”, think of the synonym “system”) ●Financial reports that summarize the financial condition and operations of a business are called financial statements. (See “reports”, think of the synonym “statements”) ●Remember: Financial statements provide detailed information about changes in owner’s equity. This information is needed by owners and managers to make sound business decisions. LO1 Lesson 1-1 SLIDE 2

© 2014 Cengage Learning. All Rights Reserved. Accounting in Personal Life ●A net worth statement allows the person extending the loan to see the financial position of a borrower on a specific date and make a lending decision. ●Anything of value that is owned is called an asset. ●An amount owed is called a liability. ●The difference between personal assets and personal liabilities is called personal net worth. ●In business, net worth is also called equity. LO2 Lesson 1-1 SLIDE 3

© 2014 Cengage Learning. All Rights Reserved. Personal Net Worth (Equity) Statement SLIDE 4 Total Assets (owned) Total Liabilities (owed) Net Worth (also known as Equity) −= Lesson 1-1 LO2 Equity is the difference between assets and liabilities. Assets – liability (debt) = equity

© 2014 Cengage Learning. All Rights Reserved. Ethics in Business ●The principles of right and wrong that guide an individual in making decisions are called ethics. ●The use of ethics in making business decisions is called business ethics. LO2 Lesson 1-1 SLIDE 5

© 2014 Cengage Learning. All Rights Reserved. Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO3Classify accounts as assets, liabilities, or owner’s equity and demonstrate their relationship in the accounting equation. LO4Analyze the effects of transactions on the accounting equation. LO5Distinguish between cash and on account transactions.

© 2014 Cengage Learning. All Rights Reserved. The Business—Delgado Web Services ●A business that performs an activity for a fee is called a service business. ●A proprietorship is a business owned by one person. ●A proprietorship is sometimes referred to as a sole proprietorship. ●A business plan is a formal written document that describes the nature of a business and how it will operate. Lesson 1-2 SLIDE 7

© 2014 Cengage Learning. All Rights Reserved. Accounting Standards and Rules ●The standards and rules that accountants follow while recording and reporting financial activities are commonly referred to as generally accepted accounting principles or GAAP. Lesson 1-2 SLIDE 8

© 2014 Cengage Learning. All Rights Reserved. The Accounting Equation ●Financial rights to the assets of a business are called equities. ●The amount remaining after the value of all liabilities is subtracted from the value of all assets is called owner’s equity. ●The equation showing the relationship among assets, liabilities, and owner’s equity is called the accounting equation. LO3 Lesson 1-2 SLIDE 9

© 2014 Cengage Learning. All Rights Reserved. The Accounting Equation LO3 Lesson 1-2 SLIDE 10 Notice that the equation can be stated different ways and still be accurate: Assets – Liabilities = Owners Equity OR Assets – Owners Equity = Liabilities Remember: The Accounting Equation is most commonly stated as: Assets = Liabilities + Owners Equity

© 2014 Cengage Learning. All Rights Reserved. Receiving Cash ●Accountants call any business activity that changes assets, liabilities, or owner’s equity a transaction. ●A record that summarizes all the transactions pertaining to a single item in the accounting equation is called an account. ●The name given to an account is called an account title. ●The difference between the increases and decreases in an account is called the account balance. ●An account used to summarize the owner’s equity in a business is called a capital account. LO4 Lesson 1-2 SLIDE 11

© 2014 Cengage Learning. All Rights Reserved. Receiving Cash as an Investment (Increases Owner’s Equity) LO4 Transaction 1 January 2. Received cash from owner as an investment, $2, Lesson 1-2 SLIDE 12

© 2014 Cengage Learning. All Rights Reserved. True or False? LO4 Lesson 1-2 SLIDE 13 A negative amount for net worth would reflect more debt than assets, something a creditor would favor. Owner’s equity refers to net worth. The liabilities are the debt owed. A creditor is someone to whom money is owed. So if we want to charge something on account, and the creditor sees that we already have more debt than assets, would they want to let us charge? We would already have too much debt and would be a bad credit risk. Or understand it this way: If there are more liabilities than assets, could the accounting equation even be in balance? (Only if there was a negative owner’s equity—something a creditor would not be impressed with.) Understand why this statement is false.

© 2014 Cengage Learning. All Rights Reserved. When only assets are affected in a transaction… LO4 Lesson 1-2 SLIDE 14 When two assets are changed in a transaction, one asset must increase and another must decrease to keep the accounting equation in balance.

© 2014 Cengage Learning. All Rights Reserved. Transactions on Account ●A person or business to whom a liability is owed is called a creditor. LO5 Lesson 1-2 SLIDE 15

© 2014 Cengage Learning. All Rights Reserved. Transactions on Account “On Account” means buying something and paying later (Liabilities are affected) LO5 Transaction 5 January 9. Paid cash on account to Canyon Office Supplies, $ Transaction 4 January 5. Bought supplies on account from Canyon Office Supplies, $ Lesson 1-2 SLIDE 16

© 2014 Cengage Learning. All Rights Reserved. Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO6Compare and contrast the types of transactions that increase and decrease owner’s equity. LO7Explain the difference between expenses and liabilities.

© 2014 Cengage Learning. All Rights Reserved. Transactions Affecting Owner’s Equity ●An increase in equity resulting from the sale of goods or services is called revenue. ● Sales of goods or services always increases Owner’s Equity. ●A sale for which payment will be received at a later date is called a sale on account. LO6 Lesson 1-3 SLIDE 18

© 2014 Cengage Learning. All Rights Reserved. Transactions Increasing Owner’s Equity LO6 Transaction 7 January 12. Sold services on account to Main Street Services, $ Transaction 6 January 10. Received cash from sales, $1, Lesson 1-3 SLIDE 19

© 2014 Cengage Learning. All Rights Reserved. Expense Transactions ●Unlike a liability, which is an amount that is owed, the cost of goods or services used to operate a business is called an expense. LO7 Lesson 1-3 SLIDE 20

© 2014 Cengage Learning. All Rights Reserved. Expense Transactions (Reduce Owner’s Equity) LO7 Transaction 8 January 12. Paid cash for communications bill for cell phone and Internet service, $ Lesson 1-3 SLIDE 21 Note: Expense transactions do not affect Liabilities

© 2014 Cengage Learning. All Rights Reserved. Other Cash Transactions ●Assets (like cash or supplies) taken from the business for the owner’s personal use are called withdrawals. ● Expenses and Withdrawals both reduce Owner’s Equity. ●Payments for advertising, equipment repairs, utilities, and rent are expenses. ●Taking cash (most common withdrawal) or supplies out of the business are withdrawals. ● When you pay creditors on account, you are paying your liabilities. ● Sales and Investments both increase Owner’s Equity. Lesson 1-3 SLIDE 22

© 2014 Cengage Learning. All Rights Reserved. Understand the Business Entity Concept Business Entity Concept: Keeping separate financial records for a business and for its owner’s personal belongings Why it’s important: A business owner pays taxes based on the amount of money (income) the company makes. If an owner has the company pay for their personal expenses like home insurance, groceries, and utility bills, the business would have more expenses and a reduction in income. Hence, less taxes would have to be paid. Uncle Sam would not be happy with this. Also, how can the owner know if the company is making money if personal transactions are included in the financial reports? Lesson 1-3 SLIDE 23

© 2014 Cengage Learning. All Rights Reserved. Changes in Owner’s Equity Kind of Transaction Change in Owner’s Equity Revenue (cash sale)+1, Revenue (sale on account) Expense (rent expense)–80.00 Expense (equipment rental expense)– Withdrawal of equity (withdrew cash)– Net change in owner’s equity Lesson 1-3 SLIDE 24