Introducing Accounting in Business ACG 2021: Chapter 1

Business is an organization in which basic resources such as materials and labor are assembled and processed to provide goods and services to customers. Profit: Are the difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide the goods or services.

Types of Businesses Merchandising – sell products to customers.

Types of Businesses Manufacturing - change basic inputs into products that are sold to individual customers.

Types of Businesses Service – provide services rather than products to customers.

Types of Business Organization Proprietorship – is owned by one individual Comprises 70% of business organizations in US Cost of organizing is low Limited financial resources Used by small business

Types of Business Organizations Partnership – Is owned by two or more individuals. Comprises 10% of business organizations in the US Combines the skills and resources of more than one person

Types of Business Organization Corporation – is organized under state or federal statutes as a separate legal entity. Generates 90% of the total dollars of business receipted Comprises 20% of the business organizations Includes ownership divided into shares of stock Used by large businesses Ability to obtain large amounts of capital

Types of Business Organization Limited liability corporation (LLC) Combines the attributes of a partnership and a corporation I that it is organized as a corporation. Can elect to be taxed as a partnership Popular alternative to a partnership Has tax and liability advantages to the owners

Business Stakeholders Is a person or entity that has an interest in the economics performance of the business. Owners who have invested resources in the business clearly have an interest in how well the business performs. Managers are those individuals who the owners have authorized to operate the business. Employees provide services to the business in exchange for their pay. Customers, government, and creditors also have a stake in the success of the business

Business Stakeholders Capital market stakeholders provide the major financing for the business in order for the business to begin and continue its operations Product or service market stakeholders – include customers who purchase the business’ products or services as well as the vendors who supply inputs to the business Government stakeholders have an interest in the economic performance of the business. Internal stakeholders include individuals employed by the business

Ethics Are beliefs that distinguish right from wrong Accepted standards of good and bad behavior Code of Professional Conduct

Accounting Is an information and measurement system that identifies, records, and communicates relevant, reliable and comparable information about an organization’s business activities Language of business

The Process of Accounting Identify the stakeholders Assess stakeholders information needs Design the accounting information system Record economic data about business activities Prepare accounting reports for stakeholders

Profession of Accounting Financial Accounting Is the area of accounting aimed at serving external users by providing then with financial statements. External auditors attest to these financial statements

Profession of Accounting Managerial Accounting - – uses both financial accounting and estimated data to aid management in running day-to-day operations and in planning future operations. Internal uses.

Careers in Accounting Private accounting Public Accounting Government accounting Forensic Accounting Intl Accounting The Certified Forensic Accountant, Cr.FA The Certified Forensic Accountant, Cr.FA SM

Generally Accepted Accounting Principles (GAAP) Governs financial accounting practice Purpose is to make information in financial statements relevant, reliable, and comparable Financial Accounting Standards Board (FASB) Private group that sets both broad and specific principles Securities and Exchange Commission (SEC)

Standard Setting SEC: Is the government group that establishes reporting requirements for companies that issue stock to the public Public Company Accounting Oversight Board Rules all publicly traded companies accounting practices

Principles of Accounting General principles Are the basic assumptions, concepts, and guidelines for preparing financial statements Specific Principles Are detailed rules used in reporting business transactions and events

Specific Principles Objectivity principle Means that accounting information is supported by independent unbiased evidence Cost principle Means that accounting information is based on actual cost

Specific Principles Going concern principle Means that accounting information reflects an assumption that the business will continue operating Monetary unit principle Means that we can express transactions and events in monetary units

Specific Principles Revenue Recognition principle Provides guidance on when a company must recognize revenue Recognize means to record it Three concepts Revenue is recognized when earned Proceeds from selling product and services need not be in cash Revenue is measured by the cash received plus the cash value of any other items received.

Specific principles Business entity principle Means that a business is accounted for separately from other business entities.

Accounting Equation Assets = Liabilities + Stockholder’s Equity What the business owns! What business owes! What business is worth!

Assets resources owned by the business Such as: Cash Accounts receivable – amounts owed by customers Prepaid expense – assets to be used in the future {supplies, prepaid insurance} Merchandise Inventory – merchandise for sale in the course of business Equipment Land Building

Liabilities rights of creditors or debts of the business Accounts payable – amount owed to creditors Dividends payable – amounts owed to shareholders Accrued expenses Mortgage payable Notes payable

Stockholder’s Equity Assets minus Liabilities Capital stock investment by shareholders Retained earnings earnings kept in the business Dividends distribution of income to shareholders

Revenues & Expenses Revenue income from the operation of the business Sales Fees earned Commission income Increase retained earnings Results from operations Expenses cost of doing business Salaries expense Rent expense Depreciation expense Miscellaneous expense Decrease retained earnings Cost of doing business

Financial Statements Four financial statements are prepared for external and internal use Prepared in specific order Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows

Income Statement Income Statement – a summary of revenue and expenses for a specific period of time. Formula: Revenue minus Expenses = Net income (Net losses)

Income Statement This amount is transferred to the Statement of Retained Earnings

Retained earnings statement a summary of the changes in the earnings retained in the corporation for a specific period of time. Formula: Beginning Retained Earnings + Net income - Dividends = Ending Retained earnings

Retained earnings statement Transferred to Balance Sheet

Balance Sheet a list of assets, liabilities, stockholder’s equity for a specific date Assets = Liabilities + Stockholder’s Equity

Balance Sheet Same as net cash flows

Statement of Cash Flows Statement of cash flows – a summary of the cash receipts and cash payments for a specific period of time. Operations + Investing +Financing

Statement of Cash Flows

On November 1, 2007, Chris Clark organizes a corporation that will be known as NetSolutions. 1-4

a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation. Capital Stock 25,000 Cash 25,000 a. = Assets Stockholders’ Equity =

1-4 Stock issued to owners (stockholders), such as Chris Clark, is referred to as capital stock. The owner’s equity in a corporation is called stockholders’ equity.

b. NetSolutions exchanged $20,000 for land. Capital Stock 25,000 Cash + Land 25,000 Bal. Assets Stockholders’ Equity = = b. –20,000+20,000 Bal. 5,00020,00025,

Accounts Capital Cash + Supplies + Land Payable + Stock Assets c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account). Liabilities + Equity = 5,00020,00025,000 =+1,350c. Bal. 5,0001,35020,0001,35025,000 Bal Stockholders’

Beginning with transaction (d) the asset section will be shown first, then the liabilities and stockholders’ equity will be shown in the following slide. 1-4

Cash + Supplies + Land Assets 5,0001,35020,000 d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash. Bal. 12,5001,35020,000 +7,500 d.d. Bal

d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash Liabilities + Stockholders’ Equity Accounts Capital Fees Payable Stock + Earned 1,350 25,000 Bal. +7,500 d. + 25,000 7,500 Bal. 1,350

1-4 The amounts used in earning revenue are called expenses. Expenses are assets that have been used up, consumed, or expired. Adding expenses to the stockholders’ equity section results in a space problem. To adjust for these added headings, the word “Bal.” has been omitted from Slides 50, 52, 54, and 56. The bottom row in these four slides provides the balances after each transaction. Expenses

Cash + Supplies + Land Assets e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Bal.12,5001,35020,000 Bal.8,8501,35020,000 e.–3,

Accounts Capital Fees Wages Rent Utilities Misc. Payable + Stock + Earned Exp. Exp. Exp. Exp. Liabilities + Stockholders’ Equity 1,35025,0007,500 –2,125–800–450 –275 e. 1,35025,0007,500–2,125–800–450– e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $

f. NetSolutions paid $950 to creditors during the month. Cash + Supplies + Land Assets Bal.8,8501,35020,000 Bal.7,9001,35020,000 f.–

Accounts Capital Fees Wages Rent Utilities Misc. Payable + Stock + Earned + Expense + Expense + Expense + Expense Liabilities + Stockholders’ Equity 1,35025,0007,500 –2,125–800–450 – ,0007,500–2,125–800–450–275 f. NetSolutions paid $950 to creditors during the month. f. –

g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used. Cash + Supplies + Land Assets Bal.7,9001,35020,000 Bal.7, ,000 g.–

Accounts Capital Fees Wages Rent Supplies Util. Misc. Payable + Stock + Earned + Exp. + Exp. + Exp. + Exp. + Exp. Liabilities + Stockholders’ Equity 40025,0007,500 –2,125–800–450 –275 g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used. g. – ,0007,500–2,125–800–800–450–

Cash + Supplies + Land Assets Bal.7, ,000 Bal.5, ,000 h.–2,000 h. At the end of the month, NetSolutions pays $2,000 to stockholder (Chris Clark) as dividends

Dividends are distributions of earnings to stockholders. You should be careful not to confuse dividends with expenses. Dividends do not represent assets or services used in the process of earning revenues.

Accounts Capital Fees Wages Rent Supplies Util. Misc. Payable + Stock + Dividends Earned + Exp. + Exp.+ Exp. + Exp. + Exp. Liabilities + Stockholders’ Equity 40025,0007,500 –2,125–800–800–450 –275 h. –2, ,000–2,0007,500–2,125–800–800–450– h. At the end of the month, NetSolutions pays $2,000 to stockholder (Chris Clark) as dividends.

Dividends paid to stockholders Expenses Decreased by Stockholders’ Equity Increased by Investments by stockholders Revenues

Retained Earnings Retained earnings represent stockholders’ equity created from business operations through revenue, expense, and dividend transactions.

NetSolutions Retained Earnings November Operations (Revenue and Expense Transactions) FeesWagesRentSuppliesUtilitiesMisc. Earned Expense ExpenseExpenseExpenseExpense – – – – – +7,500 –2,125–800–450–275 7,500–2,125–800–450–275 –800 7,500–2,125–800–800–450–275 $3,050