Chapter 1 Introduction to Accounting and Business Accounting, 21 st Edition Author: Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

Manufacturing Business Product Product General MotorsCars, trucks, vans IntelComputer chips BoeingJet aircraft NikeAthletic shoes and apparel Coca-ColaBeverages SonyStereos and television General MotorsCars, trucks, vans IntelComputer chips BoeingJet aircraft NikeAthletic shoes and apparel Coca-ColaBeverages SonyStereos and television Types of Businesses

Merchandising Business Product Product Wal-MartGeneral merchandise Toys “R” UsToys Circuit CityConsumer electronics Lands’ EndApparel Amazon.comInternet books, music, video retailer Wal-MartGeneral merchandise Toys “R” UsToys Circuit CityConsumer electronics Lands’ EndApparel Amazon.comInternet books, music, video retailer Types of Businesses

Service Business Product Product DisneyEntertainment Delta Air LinesTransportation Marriott HotelsHospitality and lodging Merrill LynchFinancial advice SprintTelecommunication DisneyEntertainment Delta Air LinesTransportation Marriott HotelsHospitality and lodging Merrill LynchFinancial advice SprintTelecommunication Types of Businesses

There are three types of business organizations: Proprietorship Partnership Corporation

A proprietorship is owned by one individual. Advantages Ease in organizing Low cost of organizing Disadvantage Limited source of financial resources Unlimited liability

A partnership is owned by two or more individuals. Advantages More financial resources than a proprietorship. Additional management skills. Disadvantage Unlimited liability.

A corporation is organized under state or federal statutes as a separate legal entity. Advantage The ability to obtain large amounts of resources by issuing stocks. Disadvantage Double taxation.

A business stakeholder is a person or entity having an interest in the economic performance of the business. Business Stakeholders

STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government

Accounting provides information for managers to use in operating the business. In addition, accounting provides information to other stakeholders to use in assessing the economic performance and condition of the business. The Role of Accounting in Business

Accounting can be defined as an information system that provides reports to stakeholders about the economic activities and condition of a business. You may think of accounting as the “Language of business” this is because accounting is the means by which business information is communicated to the stakeholders. Definition of Accounting

Profession of Accounting Accountants employed by a business firm or a not-for-profit organization are said to be engaged in private accounting. Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.

Generally Accepted Accounting Principles (GAAP) Financial accountants follow Generally Accepted Accounting Principles (GAAP) in preparing reports. These reports allow investors and other stakeholders to compare one company to another.

The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business

The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business

The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners

What is a business transaction? A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

On November 1, 2005, Hassan Mohamed begins a business that will be known as Talasan Business Transactions and the Accounting Equation

a. Hassan deposits $25,000 in a bank account in the name of Talasan. Hassan M, Capital 25,000Investment by Hassan Cash 25,000 a. Assets Owner’s Equity = =

b. Talasan exchanged $20,000 for land. Hassan M, Capital 25,000 Cash + Land 25,000 Bal. Assets Owner’s Equity = = b. –20,000+20,000 Bal. 5,00020,00025,000

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

d. Talasan provided services to customers, earning fees of $7,500 and received the amount in cash. Bal.12,5001,35020,0001,35032,500 d. + 7,500+ 7,500 Accounts Hassan M, Cash + Supplies + Land Payable Capital Assets Owner’s Liabilities + Equity Bal.5,0001,35020,0001,35025,000 Fees earned = =

e. – 3,650–2,125 – 800 – 450 – 275 Wages Rent Util. Misc. Accounts Hassan M, Cash + Supplies + Land Payable Capital Assets e. Talasan paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Owner’s Liabilities + Equity = Bal.12,5001,35020,0001,35032,500 = Bal.8,8501,35020,0001,35028,850

Accounts Hassan M, Cash + Supplies + Land Payable Capital Assets f. Talasan paid $950 to creditors during the month. Owner’s Liabilities + Equity = Bal.8,8501,35020,0001,35028,850 f. – 950– 950 = Bal.7,9001,35020, ,850

Accounts Hassan M, Cash + Supplies + Land Payable Capital Assets g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used. Owner’s Liabilities + Equity = Bal.7,9001,35020, ,850 g. – 800– 800 = Bal.7, , ,050 Supplies expense

Accounts Hassan M, Cash + Supplies + Land Payable Capital Assets h. At the end of the month, Hassan withdrew $2,000 in cash from the business for personal use. Owner’s Liabilities + Equity Bal.7, , ,050 h. –2,000–2,000 Bal.5, , ,050 With- drawal = =

Owner’s withdrawals Expenses Decreased by Owner’s Equity Effects of Transactions on Owner’s Equity Increased by Owner’s investments Revenues Net income

Accounting reports, called financial statements, provide summarized information to the owner.

Financial Statements Income statement—A summary of the revenue and expenses for a specific period of time. Statement of owner’s equity—A summary of the changes in the owner’s equity that have occurred during a specific period of time. Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date. Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.

Fees earned$ Operating expenses: Rent expense $ Wages expense Supplies expense Utilities expense Miscellaneous expense Total operating expenses Talasan Income Statement For the Month Ended November 30, Net income$

Hassan M, capital, November 1, 2005$ 0 Talasan Statement of Owner’s Equity For the Month Ended November 30, 2005 Investment on November 1$ Net income for November $ Less withdrawals Increase in owner’s equity Hassan M, capital, November 30, 2005$

Assets Liabilities Talasan Balance Sheet November 30, 2005 Cash$ Accounts Payable$ Supplies Owner’s Equity Land Hassan M, cap Total liabilities and Total assets$ owner’s equity$ This balance sheet presented using the account form

When the balance sheet displays the liabilities and owner’s equity below the assets, the report form is being used.

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