Welcome to Accounting 211! Chapter 1: An Introduction Your Instructor: Larry Stout Hours: See syllabus

How to succeed in this course: Don’t Fall Behind. Do the homework ON TIME. Attend Class! Participate! Don’t try to memorize – most of the time, it won’t work! Use all available resources. Bring lecture notes to class.

Why Study Accounting? Manage your own business Understand financial information Get a job! Applications include: Management, marketing, finance, real estate and government. This course provides information which will be useful to you through your career and your life.

What you will learn in Chapter 1: What accounting is and why it is important The building blocks of accounting and how to use them An introduction to financial statements

Accounting: Identifies, records and communicates economic events to interested users. Involves ethical decisions Who are the users? Internal – managers, supervisors, officers External – investors, creditors, tax authorities, customers, planners What do they need to know (p.6)

Bookkeeping vs. Accounting Bookkeeping is the recording and maintenance of accounting information in a manual or computerized accounting system. Accounting is the identification, recording and communication of economic events to interested users. Accountants must also analyze and interpret reported information.

Ethics and Why They Are Important Ethics are standards of conduct by which we are judged. Example of Arthur Andersen and Enron How to solve an ethical problem: Recognize it Identify and analyze the components of the problem Identify the alternatives of each course of action

Generally Accepted Accounting Principles (GAAP) Accounting information should be: Relevant Reliable Timely

GAAP Principles are promulgated (put forward) by: Financial Accounting Standards Board (FASB) – profit and non-profit entities Government Accounting Standards Board (GASB) – state and local government Securities and Exchange Commission (SEC) Example of principle is the cost principle p. 10

Important Assumptions Monetary unit – accounting events can be expressed in terms of money, which is a (comparable) medium of exchange and a measure of value. Economic entity – its activities are recorded and kept separate from those of its owner(s).

How businesses are organized (p.11) Sole proprietorship – owned by one person. Examples: small service-type businesses. Limited life and owners have unlimited liability for debts Partnership – owned by two or more persons: Examples: retail/service companies: Limited life and owners have unlimited liability for debts Corporation – separate legal entity. Example: GM, Exxon-Mobil, Wal-Mart. Unlimited life and owners are protected from liability.

The Basic Accounting Equation Assets = Liabilities + Equity What do these terms mean?

Assets, Liabilities and Equity Assets are the resources owned by the business and expected to provide future services or benefits Liabilities are claims against assets or debts and obligations Equity is the residual, or owner’s claim, on assets

Increases in Owner’s Equity Investments by the owner Cash Furniture, computers, equipment Land and buildings Revenues Sales, fees, services, interest, royalties, rent, commissions

Decreases in Owner’s Equity Drawings or Withdrawals Owner pulls cash out of the business for personal use Expenses Cost of assets consumed in the process of earning revenue. Examples: wages, supplies, taxes, rent, interest

Net Income or Loss If revenue is greater than expenses, the difference is net income, which increases equity If revenue is less than expenses, the difference is net loss, which decreases equity

Expanded Accounting Equation Liabilities Equity Assets = + Revenues Expenses Owner Capital Owner Withdrawals _ +

Transaction Analysis Equation The accounting equation must remain in balance after each transaction. Liabilities Equity Assets = +

Transaction Analysis In each succeeding example, identify whether the account balance increases or decreases. J. Scott, the owner, contributed $20,000 cash to start the business. The accounts involved are: (1) Cash (asset) (2) J. Scott, Capital (equity) 21

J. Scott, the owner, contributed $20,000 cash to start the business. Transaction Analysis J. Scott, the owner, contributed $20,000 cash to start the business. 21

Purchased supplies paying $1,000 cash. Transaction Analysis Purchased supplies paying $1,000 cash. The accounts involved are: (1) Cash (asset) (2) Supplies (asset) 25

Purchased supplies paying $1,000 cash. Transaction Analysis Purchased supplies paying $1,000 cash. 25

Purchased equipment for $15,000 cash. Transaction Analysis Purchased equipment for $15,000 cash. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) 29

Purchased equipment for $15,000 cash. Transaction Analysis Purchased equipment for $15,000 cash. 29

Purchased Supplies of $200 and Equipment of $1,000 on account. Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account. The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability) 30

Purchased Supplies of $200 and Equipment of $1,000 on account. Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account. 30

Borrowed $4,000 from 1st American Bank. Transaction Analysis Borrowed $4,000 from 1st American Bank. The accounts involved are: (1) Cash (asset) (2) Notes payable (liability)

Borrowed $4,000 from 1st American Bank. Transaction Analysis Borrowed $4,000 from 1st American Bank.

Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Now let’s look at transactions involving revenue, expenses and withdrawals. 32

Rendered consulting services receiving $3,000 cash. Transaction Analysis Rendered consulting services receiving $3,000 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity) 32

Rendered consulting services receiving $3,000 cash. Transaction Analysis Rendered consulting services receiving $3,000 cash. 32

Paid salaries of $800 to employees. Transaction Analysis Paid salaries of $800 to employees. The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Remember that the balance in the salaries expense account actually increases. But, equity actually decreases because expenses reduce equity.

Transaction Analysis Paid salaries of $800 to employees. Remember that expenses decrease equity.

J. Scott withdrew $500 from the business for personal use. Transaction Analysis J. Scott withdrew $500 from the business for personal use. The accounts involved are: (1) Cash (asset) (2) J. Scott, Withdrawals (equity) Remember that the balance in the J. Scott, Withdrawals account actually increases. But, equity actually decreases because withdrawals reduce equity.

Transaction Analysis J. Scott withdrew $500 from the business for personal use. Remember that withdrawals decrease equity.

Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded. Income Statement Statement of Owner’s Equity Balance Sheet Statement of Cash Flows 34

Net income is the difference between Revenues and Expenses. The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.

The net income of $2,200 increases Scott’s capital by $2,200. The Statement of Owner’s Equity explains changes in equity from net income (or net loss) and from owner investments and withdrawals for a period of time.

The Balance Sheet describes a company’s financial position at a point in time.

The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.

Wow, this is a lot of stuff to remember!

Homework for Chapter 1 Register on Wiley Plus! Use the code provided with the new book or buy a code using the web address in the syllabus! Enter your information on the correct web site, then locate homework assignments! /