Accounting Concepts and Procedures: An Introduction Chapter 1 2

Defining and listing the functions of accounting. Learning Objective 1 Defining and listing the functions of accounting. 3

Accounting is the language of business. Managers Owners Insiders Investors Government Outsiders Bookkeeping 3

Categories of Business Organizations Sole Proprietorship Partnership Corporation

Types of Business Organizations Sole Propriertorship Ownership Business owned by one person. Formation Easy to form. Owner could lose personal assets to meet obligations of business. Liability Closing Ends with death of owner or closing of business. 7

Types of Business Organizations Partnership Ownership Business owned by more than one person. Easy to form. Formation Partners could lose personal assets to meet obligations of partnership. Liability Ends with death of partner or exit of a partner. Closing 7

Types of Business Organizations Corporation Ownership Business owned by stockholders. More difficult to form. Formation Limited personal risk. Stockholders’ loss is limited to their investment in the company. Liability Can continue indefinitely. Closing 7

Classifying Business Organizations Service businesses provide services. Merchandise businesses sell products. Manufacturing businesses make products.

Definition of Accounting Accounting is the process that... analyzes, records, classifies, summarizes, reports, and... interprets financial information.

Recording transactions in the basic accounting equation. Learning Objective 2 Recording transactions in the basic accounting equation. 3

Learning Unit 1-1 (The Accounting Equation) Assets = Equities Assets are the items owned by the business. Equities are the claims against the assets. 11

Learning Unit 1-1 (The Accounting Equation) Assets = Liabilities + Owner's Equity Liabilities are the creditor’s equity. Owner’s equity is the rights of ownership. 11

Learning Unit 1-1 (The Accounting Equation) Assets Liabilities – Owner’s Equity =

Learning Unit 1-1 (The Accounting Equation) Transactions: A. August 28: Cathy Hall invested $7,000 in cash and $800 of office equipment into the business. B. August 29: Law practice buys office equipment for cash $900. C. August 30: Buys additional office equipment on account $400.

Learning Unit 1-1 (The Accounting Equation) a) Cash + $7,000 + $7,800 a) Equipment + 800 b) Cash – 900 Equipment + 900 Equipment + 400 + 400 Assets = Liabilities + Owner’s Equity $8,200 = $8,200

Learning Unit 1-1 (Shift in Assets) The makeup of the assets has changed, but the total of the assets remains the same.

Learning Unit 1-2 (The Balance Sheet) The balance sheet shows the company’s financial position as of a particular date. Company name Name of the statement Date

Learning Unit 1-2 (The Balance Sheet) Cathy Hall, Attorney-at-Law Balance Sheet August 31, 200x Assets Cash $6,100 Equipment 2,100 Total $8,200 Liabilities and Owner’s Equity Accounts Payable $ 400 Owner’s Equity Cathy Hall, Capital 7,800 Total $8,200 15

Seeing how revenue, expenses, and withdrawals expand the Learning Objective 3 Seeing how revenue, expenses, and withdrawals expand the basic accounting equation. 3

Learning Unit 1-3 (The Accounting Equation Expanded) An expanded accounting equation includes the following: Revenues (cash, accounts receivable) Expenses Withdrawals

Learning Unit 1-3 (The Accounting Equation Expanded) Revenues – Expenses = Net income or Net loss

Learning Unit 1-3 (The Accounting Equation Expanded) Owner's Equity Beginning capital PLUS Additional investment + Net income – Withdrawals

Learning Unit 1-3 (The Accounting Equation Expanded) D. September 1-30: Cathy Hall provided legal services for cash, $3,000. E. September 1-30: Provided legal services on account, $4,000. F. September 1-30: Received $700 cash as partial payment from previous services performed on account. G. September 1-30 paid salaries expense, $600.

Learning Unit 1-3 (The Accounting Equation Expanded) H. September 1-30: Paid rent expense, $700. I. September 1-30: Incurred advertising expenses of $300, to be paid next month. J. September 1-30: Cathy withdrew $200 for personal use.

Learning Objective 4 Preparing an income statement, a statement of owner’s equity, and a balance sheet. 3

Learning Unit 1-4 (Preparing Financial Statements) Cathy Hall, Attorney-at-Law Income Statement For Month Ended September 30, 200x Revenue: Legal fees $7,000 Operating expenses: Salaries expense $600 Rent expense 700 Advertising expense 300 1,600 Net income $5,400 15

Learning Unit 1-4 (Preparing Financial Statements) Cathy Hall, Attorney-at-Law Statement of Owner’s Equity For Month Ended September 30, 200x Cathy Hall, Capital, Sept. 1, 200x $ 7,800 Net Income for Sept. $5,400 Less Withdrawals for Sept. 200 Increase in Capital 5,200 Cathy Hall, Capital, Sept. 30, 200x $13,000 15

Learning Unit 1-4 (Preparing Financial Statements) Cathy Hall, Attorney-at-Law Balance Sheet September 30, 200x Assets Cash $ 8,300 Accts. Rec. 3,300 Equipment 2,100 Total $13,700 Liabilities and Owner’s Equity Accounts Payable $ 700 Owner’s Equity Cathy Hall, Capital 13,000 Total $13,700 15

Generally Accepted Accounting Principles (GAAP) These are the procedures and guidelines that must be followed during the accounting process. 15

End of Chapter 1