1-1 The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Financial Statements  Income Statement  Balance Sheet  Statement of Owners / Stockholders’ Equity  Statement of Cash Flows Financial Statements  Income Statement  Balance Sheet  Statement of Owners / Stockholders’ Equity  Statement of Cash Flows Generally Accepted Accounting Principles (GAAP) Generally Accepted Accounting Principles

1-2 G enerally Accepted Accounting Principles (GAAP) – Standards that are generally accepted and universally practiced. These standards indicate how to report economic events. Standard-setting bodies determine these guidelines: ► S ecurities and E xchange C ommission ( SEC ) ► F inancial A ccounting S tandards B oard ( FASB ) ► I nternational A ccounting S tandards B oard ( IASB ) G enerally A ccepted A ccounting P rinciples

1-3 Economic Entity – requires business activities be kept separate and distinct from the activities of its owner personal activities and all other economic entities. Some Generally Accepted Accounting Principles Cost Principle: – dictates that companies record assets at their cost.

1-4 Proprietorship  Generally owned by one person.  Often small service- type businesses  Owner receives any profits, suffers any losses, personally liable for all debts. Forms of Business Ownership:

1-5 Proprietorship Partnership  Owned by two or more persons.  Often retail or service businesses  Generally unlimited personal liability  Generally owned by one person.  Often small service-type businesses  Owner receives any profits, suffers any losses, and is personally liable for all debts. Forms of Business Ownership:

1-6 Proprietorship PartnershipCorporation  Owned by two or more persons.  Often retail and service-type businesses  Generally unlimited personal liability  Partnership agreement  Ownership divided into shares of stock  Separate legal entity organized under state corporation law  Limited liability  Generally owned by one person.  Often small service-type businesses  Owner receives any profits, suffers any losses, and is personally liable for all debts. Forms of Business Ownership

1-7 Proprietorship Partnership Corporation Owners Equity: Capital Withdrawal Balance Sheet: Owners Equity: Capital Withdrawal (Separate Capital and Withdrawal accounts ones for EACH partner) Stockholders Equity: Paid-In Capital Retained Earnings Dividends Common Stock

1-8 AssetsAssets Liabilities Owners Equity or (Stockholder’s Equity) = + The Basic Accounting Equation  Resources a business owns.  Provide future services or benefits.  Cash, Supplies, Equipment, etc. Assets

1-9 AssetsAssetsLiabilitiesLiabilities = + The Basic Accounting Equation  Claims against assets (debts and obligations).  Creditors - party to whom money is owed.  Accounts payable, Notes payable, etc. Liabilities Owners Equity or (Stockholder’s Equity)

1-10  Ownership claim on total assets.  Referred to as residual equity.  Common stock (Paid-In-Capital) and Retained Earnings. Stockholders’ Equity AssetsAssetsLiabilitiesLiabilities = + The Basic Accounting Equation Owners Equity or (Stockholder’s Equity)

1-11 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. The Basic Accounting Equation Illustration 1-6 Owners or

1-12 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. The Basic Accounting Equation Illustration 1-6 Owners or

1-13 Dividends a distribution of cash (or other assets) to owners. Dividends reduce retained earnings. However, dividends are not an expense. The Basic Accounting Equation Illustration 1-6