1 Introduction to Accounting and Business 1 Student Version

Describe the nature of a business, the role of accounting, and ethics in business. 1-2

1-3 3 Types of Businesses Delta Air Lines Transportation services Service Business Service 1 Merchandising Business Product Wal-Mart General merchandise Manufacturing Business Product General Motors Corp. Cars, trucks, vans

1-4 4 The Role of Accounting in Business Accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business. 1

1-5 5 The area of accounting that provides internal users with information is called managerial accounting. Managerial Accounting The objective of managerial accounting is to provide relevant and timely information for managers’ and employees’ decision-making needs. 1

1-6 6 The area of accounting that provides external users with information is called financial accounting. Financial Accounting The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business. 1

1-7 7 Summarize the development of accounting principles and relate them to practice

1-8 8 Under the the activities of a business are recorded separately from the activities of its owners, creditors, or other businesses. Under the business entity concept, the activities of a business are recorded separately from the activities of its owners, creditors, or other businesses. Business Entity Concept 2

1-9 9 A proprietorship is owned by one individual. A partnership is similar to proprietorship except that it is owned by two or more individuals. A corporation is organized under state or federal statutes as a separate legal taxable entity. A limited liability company (LLC) combines attributes of a partnership and a corporation. 2 Forms of Business Entity

Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price. 2 Cost Concept

The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence. For Practice: PE 1-2A, PE 1-2B 2 Objectivity Concept

The unit of measure concept requires that economic data be recorded in dollars. 2 Unit of Measure Concept

State the accounting equation and define each element of the equation

Assets = Liabilities + Owner’s Equity The Accounting Equation 3 The resources owned by a business The rights of the creditors are the debts of the business The rights of the owners

Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation. 1-15

A business transaction is an economic event or condition that directly changes an entity’s financial condition or its results of operations. 4 Business Transaction For Practice: PE 1-2A, PE 1-2B

On November 1, 2009, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions. Transaction A 4

CHRIS CLARK, CAPITAL 25,000 Investment by Chris Clark CASH 25,000 a. = Assets Owner’s Equity = Transaction A (continued) 4

Transaction B On November 5, 2009, NetSolutions paid $20,000 for the purchase of land as a future building site. 4

CASH + LAND 25,000 Bal. Assets = = Bal. 5,00020,000 25,000 b. –20, ,000 CHRIS CLARK, CAPITAL 25,000 Owner’s Equity Transaction B (continued) 4

On November 10, 2009, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future. 4 Transaction C

CASH + SUPPLIES + LAND 5,000 20,000 25,000 Bal. Assets = = ACCOUNTS CHRIS CLARK, PAYABLE + CAPITAL Liabilities + Owner’s Equity Transaction C (continued) c. +1,350 +1,350 Bal. 5,000 1,350 20,000 1,350 25,000 4

On November 18, 2009, NetSolutions received cash of $7,500 for providing services to customers. A business earns money by selling goods or services to its customers. This amount is called Revenue. Transaction D 4

CASH + SUPPLIES + LAND 5,000 1,350 20,000 Bal. Assets Transaction D (continued) d. +7,500 Bal. 12, ,000 4

Transaction D (continued) ACCOUNTS CHRIS CLARK, FEES PAYABLE + CAPITAL + EARNED 1,350 25,000 Bal. Liabilities + Owner’s Equity d. +7,500 Bal. 1,350 25,000 7,500 4

On November 30, 2009, NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Transaction E 4

CASH + SUPPLIES + LAND 12,500 1,350 20,000 Bal. Assets Transaction E (continued) e. –3,650 Bal. 8, ,000 4

Transaction E (continued) ACCOUNTS CHRIS CLARK, FEES WAGES RENT UTIL. MISC. PAYABLE + CAPITAL + EARNED – EXP. – EXP. – EXP. – EXP. 1,350 25,000 7,500 Bal. Liabilities + Owner’s Equity e. –2,125 –800 –450 –275 Bal. 1,350 25,000 7,500 –2,125 –800 –450 –275 4

On November 30, 2009, NetSolutions paid creditors on account, $950. Transaction F 4

CASH + SUPPLIES + LAND 8,850 1,350 20,000 Bal. Assets Transaction F (continued) f. –950 Bal. 7, ,000 4

ACCOUNTS CHRIS CLARK, FEES WAGES RENT UTIL. MISC. PAYABLE + CAPITAL + EARNED – EXP. – EXP. – EXP. – EXP. 1,350 25,000 7,500 –2,125 –800 –450 –275 Bal. Liabilities + Owner’s Equity f. –950 Bal ,000 7,500 –2,125 –800 –450 –275 Transaction F (continued) 4

On November 30, 2009, Chris Clark determined that the cost of supplies on hand at the end of the period was $550. Transaction G 4

CASH + SUPPLIES + LAND 7,900 1,350 20,000 Bal. Assets Transaction G (continued) g. –800 Bal. 7, ,000 4

ACCOUNTS CHRIS CLARK, FEES WAGES RENT SUP. UTIL. MISC. PAYABLE + CAPITAL + EARNED – EXP. – EXP. – EXP. – EXP. – EXP ,000 7,500 –2,125 –800 –450 –275 Bal. Liabilities + Owner’s Equity g. –800 Bal ,000 7,500 –2,125 –800 –800 –450 –275 Transaction G (continued) 4

On November 30, 2009, Chris Clark withdrew $2,000 from NetSolutions for personal use. Transaction H 4

CASH + SUPPLIES + LAND 7, ,000 Bal. Assets Transaction H (continued) h. –2,000 Bal. 5, ,000 4

Transaction H (continued) ACCTS. CLARK, CLARK, FEES WAGES RENT SUP. UTIL. MISC. PAY. + CAPITAL – DRAW. + EARNED – EXP. – EXP. – EXP. – EXP. – EXP ,000 7,500 –2,125 –800 –800 –450 –275 Bal. Liabilities + Owner’s Equity h. –2,000 Bal ,000 –2,000 7,500 –2,125 –800 –800 –450 –275 4 For Practice: PE 1-3A, PE 1-3B

Describe the financial statements of a proprietorship and explain how they interrelate. 1-38

The income statement reports the revenues and expenses for a period of time, based on the matching concept. 5 Income Statement

The matching concept is applied by matching the expenses with the revenue generated during a period by those expenses. 5 Matching Concept

The excess of revenue over the expenses is called net income or net profit. If the expenses exceed the revenue, the excess is a net loss. 5 For Practice: PE 1-4A, PE 1-4B

Net income is carried to the statement of owner’s equity. 5 Exhibit 6Financial Statements for NetSolutions For Practice: PE 1-4A, PE 1-4B

From the income statement To the balance sheet 5 Exhibit 6 Financial Statements for NetSolutions (continued) For Practice: PE 1-5A, PE 1-5B

This amount is compared to the net cash flow on the statement of cash flows. From the statement of owner’s equity 5 Exhibit 6 Financial Statements for NetSolutions (continued) For Practice: PE 1-6A, PE 1-6B

This amount should match Cash on the balance sheet. 5 Financial Statements for NetSolutions (continued) Exhibit 6 For Practice: PE 1-7A, PE 1-7B