1. Introduction to Accounting and Business1
Introduction to Accounting and Business

2. State the accounting equation and define each element of the equation.
After studying this chapter, you should be able to:
Describe the nature of a business and the role of ethics and accounting in business.
Summarize the development of accounting principles and relate them to practice.
State the accounting equation and define each element of the equation.

3. After studying this chapter, you should be able to:
Describe and illustrate how business transactions can be recorded in terms of the resulting change in the basic elements of the accounting equation.
Describe the financial statements of a proprietorship and explain how they interrelate.

4. 1-1
Objective 1
Describe the nature of a business and the role of ethics and accounting in business.

5. Service Business Service
1-1
Types of Businesses
Service Business Service
Plaza Indonesia Realty Tbk. Shopping mall
Hotel Sahid Jaya Tbk. Hospitality and lodging
Bank Mandiri Tbk. Financial services
Garuda Indonesia Transportation
Indosat Tbk. Telecommunication

6. Merchandising Business Product
1-1
Types of Businesses
Merchandising Business Product
Matahari Putra Prima Tbk. Clothes and apparel
Hero Supermarket Tbk. Food and groceries
Toko Gunung Agung Tbk. Books and stationeries
Ace Hardware Indonesia Tbk. Consumer electronics
Alfa Retailindo Tbk. Consumer goods

7. Manufacturing Business Product
1-1
Types of Businesses
Manufacturing Business Product
Sepatu Bata Tbk. Shoes
Mustika Ratu Tbk. Cosmetics
Gudang Garam Tbk. Cigarettes
Mayora Indah Tbk. Food and beverages
Kalbe Farma Tbk. Pharmaceutical

8. Proprietorship Partnership Corporation Cooperatives 1-1
1-1
Common Forms of Business Organizations
Proprietorship
Partnership
Corporation
Cooperatives

9. Most of Business entities in Indonesia is proprietorship
1-1
A proprietorship (perusahaan perseorangan) is owned by one individual and—
Most of Business entities in Indonesia is proprietorship
Cost of organizing is low
Is limited to financial resources of the owner.
Is used by small businesses.

10. Combines the skills and resources of more than one person.
1-1
A partnership is similar to a proprietorship except that it is owned by two or more individuals and—
In Indonesia we know firma and CV as two types of partnership. Firma and CV will be discussed more in chapter 12.
Combines the skills and resources of more than one person.

11. 1-1
A corporation is organized under government statues as a separate legal taxable entity and—
Continued

12. Is able to obtain large amounts of resources by issuing stock.
1-1
Includes ownership divided into shares of stock, sold to shareholders (stockholders).
Is able to obtain large amounts of resources by issuing stock.
Is used by large businesses.

13. Cooperatives (Koperasi)
1-1
Cooperatives (Koperasi)
Is owned by a group of people (named as member). Cooperatives mainly are organized by and for member only. For example Employee Cooperatives (Koperasi Karyawan), Milk Farmer Cooperatives (Koperasi Pengrajin Susu), Batik Business Owner Cooperatives (Koperasi Pengusaha Batik), and many more

14. 1-1
A business stakeholder is a person or entity having an interest in the economic performance and well-being of a business.

15. 1-1
Capital market stakeholders provide the major financing for the business in order for the business to begin and continue its operations.

16. 1-1
Product or service market stakeholders include customers who purchase the business’s products or services as well as the vendors who supply inputs to the business.

17. 1-1
Government stakeholders have an interest in the economic performance of a business. Provincial governments collect taxes from businesses within their jurisdiction.

18. 1-1
Internal stakeholders include individuals employed by the business. Managers have an incentive to maximize the economic value of the business. Employees have an interest because their jobs depend on it.

19. 1-1
The moral principles that guide the conduct of individuals are called ethics.

20. 1-1
The answer to “What went wrong for these companies?” (Exhibit 2) involves three factors.
1. Individual character
2. Firm culture
3. Laws and enforcement

21. 1-1
Accounting can be defined as an information system that provides reports to stakeholders about the economic activities and condition of a business.

22. Identify stakeholders. Assess stakeholders’ information needs.
1-1
The process by which accounting provides information to business stakeholders is as follows:
Identify stakeholders.
Assess stakeholders’ information needs.
Design the accounting information system to meet stakeholders’ needs.
Record economic data about business activities and events.
Prepare accounting reports for stakeholders.

23. 1-1 23

24. 1-1
Financial accounting is primarily concerned with the recording and reporting of economic data and activities for a business.
Managerial accounting uses both financial accounting and estimated data to aid management in running day-to-day operations and in planning future operations.

25. 1-1
Accountants employed by a business firm or a not-for-profit organization are said to be employed in private accounting.
Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.

26. 1-2
Objective 2
Summarize the development of accounting principles and relate them to practice.

27. 1-2
The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business.

28. 1-2
The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.

29. 1-2
The objectivity concept requires that the accounting records and reports be based upon objective evidence.

30. 1-2
The unit of measure concept requires that economic data be recorded in rupiah.

31. 1-2 Example Exercise 1-1 Follow My Example 1-1
1-2
Example Exercise 1-1
On August 25, Bengkel Agung Jaya extended an offer of Rp125,000,000 for land that had been priced for sale at Rp150,000,000. On September 3, Bengkel Agung Jaya accepted the seller’s counteroffer of Rp137,000,000. On October 20, the land was assessed at a value of Rp98,000,000 for property tax purposes. On December 4, Bengkel Agung Jaya was offered Rp160,000,000 for the land by a national retail chain. At what value should the land be recorded in Bengkel Agung Jaya’s records?
Follow My Example 1-1
Rp137,000,000. Under the cost concept, the land should be recorded at the cost to Bengkel Agung Jaya. 31

32. State the accounting equation and define each element of the equation.
1-3
Objective 3
State the accounting equation and define each element of the equation.

33. Assets = Liabilities + Owner’s Equity
1-3
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources owned by a business

34. Assets = Liabilities + Owner’s Equity
1-3
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the creditors, which represent debts of the business

35. Assets = Liabilities + Owner’s Equity
1-3
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the owners

36. 1-3 Example Exercise 1-2 Follow My Example 1-2
1-3
Example Exercise 1-2
Asep Sunarya is the owner and operator of Pasti Sukses, a motivational consulting business. At the end of its accounting period, December 31, 2007, Pasti Sukses has assets of Rp800,000,000 and liabilities of Rp350,000,000. Using the accounting equation, determine the following amounts:
The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2007, balance sheet of Hindsight Consulting.
Owner’s equity, as of December 31, 2007.
b. Owner’s equity, as of December 31, 2008, assuming that assets increased by Rp130,000,000 and liabilities decreased by Rp25,000,000 during 2008.
Follow My Example 1-2
A = L + OE
Rp800,000,000 = Rp350,000,000 + OE
OE = Rp450,000,000
A = L + OE
Rp130,000,000 = –Rp25,000,000 + OE OE = Rp155,000,000
OE on Dec. 31, 2008:
Rp605,000,000 (Rp450,000,000+Rp155,000,000) 36

37. 1-4
Objective 4
Describe and illustrate how business transactions can be recorded in terms of the resulting change in the basic elements of the accounting equation.

38. 1-4
A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

39. 1-4
@solusinet
On November 1, 2007, Cinta Cita begins a business that will be known as SolusiNet.

40. 1-4
Assets
Owner’s Equity = =
Cinta Cita, Capital
25,000,000
Investment by Cinta Cita
Cash
25,000,000 a.
a. Cinta Cita deposits Rp25,000,000 in a bank account in the name of SolusiNet 40

41. b. SolusiNet exchanged Rp20,000,000 for land.
1-4
(in Rp000)
Assets =
Owner’s Equity
Cash Land
25,000
Cinta Cita, Capital
25,000
Bal. =
b. –20, ,000
Bal. 5,000 20,000 25,000
b. SolusiNet exchanged Rp20,000,000 for land. 41

42. 1-4
(in Rp000)
Owner’s
Liabilities Equity
Assets =
Accounts Cinta Cita,
Cash + Supplies + Land Payable Capital =
Bal.
5, , ,000
+1,350 +1,350 c.
5,000 1,350 20,000 1,350 25,000
Bal.
c. During the month, SolusiNet purchased supplies for Rp1,350,000 and agreed to pay the supplier in the near future (on account). 42

43. 1-4
Beginning with entry (d) the asset section will be shown first, then the liabilities and owner’s equity will be shown in the following slide.

44. 1-4
(in Rp000)
Assets
Cash Supplies + Land
Bal.
5,000 1,350 20,000
12,500 1,350 20,000
+7,500 d.
Bal.
d. SolusiNet provided services to customers, earning fees of Rp7,500,000 and received the amount in cash. 44

45. 1-4
(in Rp000)
Liabilities Owner’s Equity
Accounts Cinta Cita, Fees
Payable Capital Earned +
1, ,000
Bal.
+7,500 d.
25, ,500
Bal.
1,350
d. SolusiNet provided services to customers, earning fees of Rp7,500,000 and received the amount in cash. 45

46. Expenses
1-4
The amounts used in earning revenue are called expenses. Adding expenses to the owner’s equity section results in a space problem. To adjust for these added headings, the word “Bal.” has been omitted from Slides 48, 50, 52, and 54. The bottom row in these four slides provides the balances after each transaction.

47. 1-4
(in Rp000)
Assets
Cash Supplies + Land
Bal. 12,500 1,350 20,000
e. –3,650
Bal. 8,850 1,350 20,000
e. SolusiNet paid the following expenses: wages, Rp2,125,000; rent, Rp800,000; utilities, Rp450,000; and miscellaneous, Rp275,000. 47

48. 1-4
(in Rp000)
Liabilities Owner’s Equity
Accounts Cinta Cita, Fees Wages Rent Utilities Misc.
Payable Capital Earned Expense Expense Expense Expense
1, ,000 7,500
–2,125 –800 –450 –275 e.
1,350 25,000 7,500 –2,125 –800 –450 –275
e. SolusiNet paid the following expenses: wages, Rp2,125,000; rent, Rp800,000; utilities, Rp450,000; and miscellaneous, Rp275,000. 48

49. f. SolusiNet paid Rp950,000 to creditors during the month.
1-4
(in Rp000)
Assets
Cash Supplies + Land
Bal. 8,850 1,350 20,000
f. –950
Bal. 7,900 1,350 20,000
f. SolusiNet paid Rp950,000 to creditors during the month. 49

50. f. NetSolutions paid Rp950,000 to creditors during the month.
1-4
(in Rp000)
Liabilities Owner’s Equity
Accounts Cinta Cita, Fees Wages Rent Utilities Misc.
Payable Capital Earned Expense Expense Expense Expense
1, ,000 7,500
–2,125 –800 –450 –275 f.
–950
400 25,000 7,500 –2,125 –800 –450 –275
f. NetSolutions paid Rp950,000 to creditors during the month. 50

51. 1-4
(in Rp000)
Assets
Cash Supplies + Land
Bal. 7,900 1,350 20,000
g. –800
Bal. 7, ,000
g. At the end of the month, the cost of supplies on hand is Rp550,000, so Rp800,000 of supplies were used. 51

52. 1-4
(in Rp000)
Liabilities Owner’s Equity
Accounts Cinta Cita, Fees Wages Rent Supplies Util. Misc.
Payable + Capital Earned Exp Exp Exp Exp. Exp.
400 25,000 7,500 –2,125 –800 –450 –275 g.
–800
400 25,000 7,500 –2,125 –800 –800 –450 –275
g. At the end of the month, the cost of supplies on hand is Rp550,000, so Rp800,000 of supplies were used. 52

53. 1-4
(in Rp000)
Assets
Cash Supplies + Land
Bal. 7, ,000
h. –2,000
Bal. 5, ,000
h. At the end of the month, Cinta withdrew Rp2,000,000 in cash from the business for personal use. 53

54. 1-4
(in Rp000)
Liabilities Owner’s Equity
Accounts Cinta Cita, Cinta Cita Fees Wages Rent Supplies Util. Misc.
Payable + Capital Drawing Earned Exp Exp Exp Exp. Exp.
400 25,000 7,500 –2,125 –800 –800 –450 –275 h.
–2,000
400 25,000 –2,000 7,500 –2,125 –800 –800 –450 –275
h. At the end of the month, Cinta withdrew Rp2,000,000 in cash from the business for personal use. 54

55. Owner’s Equity Increased by Decreased by 1-4 Owner’s investments
1-4
Owner’s Equity
Increased by
Owner’s investments
Revenues
Owner’s withdrawals
Expenses
Decreased by 55

56. Received cash from owner as additional investment, Rp35,000,00.
1-4
Example Exercise 1-3
Simatupang Express is owned and operated by Bonar Simatupang. The following selected transactions were completed by Simatupang Express during February:
Received cash from owner as additional investment, Rp35,000,00.
Paid creditors on account, Rp1,800,000.
Billed customers for delivery services on account, Rp11,250,000.
Received cash from customers on account, Rp6,740,000.
Paid cash to owners for personal use, Rp1,000,000.
Continued 56

57. 1-4
Example Exercise 1-3
Indicate the effect of each transaction on the accounting equation elements (Assets, Liabilities, Owner’s Equity, Drawing, Revenue, and Expense) by listing the numbers identifying the transactions, (1) through (5). Also, indicate the specific item within the accounting equation element that is affected. To illustrate, the answer to (1) is shown below.
(1) Asset (Cash) increases by Rp35,000,000; Owner’s Equity (Bonar Simatupang, Capital) increases by Rp35,000,000. 57

58. For Practice: PE 1-3A, PE 1-3B
1-4
Follow My Example 1-3
Asset (Cash) decreases by Rp1,800,000; Liability (Accounts Payable) decreases by Rp1,800,000.
Asset (Accounts Receivable) increases by Rp11,250,000; Revenue (Simatupang Express) increases by Rp11,250,000.
Asset (Cash) increases by Rp6,740,000; Asset (Accounts Receivable) decreases by Rp6,740,000.
Asset (Cash) decreases by Rp1,000,000; Owner’s Equity (Bonar Simatupang, Drawing) increases by Rp1,000,000. 58
For Practice: PE 1-3A, PE 1-3B

59. 1-5
Objective 5
Describe the financial statements of a proprietorship and explain how they interrelate.

60. 1-5
Accounting reports, called financial statements, provide summarized information to the owner.

61. 1-5
The income statement is a summary of the revenue and expenses for a specific period of time, such as a month or a year.

62. Net income is carried to the statement of owner’s equity
Income Statement
1-5
Net income is carried to the statement of owner’s equity

63. 1-5
A statement of owner’s equity is a summary of the changes in the owner’s equity that have occurred during a specific period of time.

64. From the income statement
Statement of Owner’s Equity
1-5
From the income statement
To the balance sheet

65. 1-5
A balance sheet is a list of the assets, liabilities, and owner’s equity as of a specific date.

66. From the statement of owner’s equity
Balance Sheet
1-5
This amount is compared to the net cash flow on the statement of cash flows
From the statement of owner’s equity

67. 1-5
A statement of cash flows is a summary of the cash receipts and payments for a specific period of time.

68. This amount should match Cash on the balance sheet.
Statement of Cash Flows
1-5
This amount should match Cash on the balance sheet.

69. Income Statement
1-5
The income statement reports the revenues and expenses for a period of time based on the matching concept. This concept is applied by matching the expenses with the revenue generated during a period by those expenses.

70. 1-5
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.

71. 1-5
Example Exercise 1-4
The assets and liabilities of Cimande Travel Service at April 30, 2008, the end of the current year, and its revenue and expenses for the year are listed below. The capital of the owner, Adam Kuncoro, was Rp80,000,000 at May 1, 2007, the beginning of the current year.
Accounts payable Rp 12,200,000 Miscellaneous expense Rp 12,950,000
Accounts receivable 31,350,000 Office expense 63,000,000
Cash 53,050,000 Supplies 3,350,000
Fees earned 263,200,000 Wages expense 131,700,000
Land 80,000,000
Prepare an income statement for the current year ended April 30, 2008. 71

72. CIMANDE TRAVEL SERVICE
1-5
Follow My Example 1-4
CIMANDE TRAVEL SERVICE
INCOME STATEMENT
For the Year Ended April 30, 2008
Fees earned Rp263,200,000
Expenses:
Wages expense Rp131,700,000
Office expense 63,000,000
Miscellaneous expense 12,950,000
Total expenses ,650,000
Net income Rp 55,550,000 72
For practice: PE 1-4A, PE 1-4B

73. Statement of Owner’s Equity
1-5
The statement of owner’s equity reports the changes in the owner’s equity for a period of time. It is prepared after the income statement.

74. 1-5
Example Exercise 1-5
Using the data for Cimande Travel Service shown in Example Exercise 1-4, prepare a statement of owner’s equity for the current year ended April 30, Adam Kuncoro invested an additional Rp50,000,000 in the business during the year and withdrew cash of Rp30,000,000 for personal use. 74

75. CIMANDE TRAVEL SERVICE
1-5
Follow My Example 1-5
CIMANDE TRAVEL SERVICE
STATEMENT OF OWNER’S EQUITY
For the Year Ended April 30, 2008
Adam Kuncoro, capital, May 1, Rp 80,000,000
Additional investment by owner during year Rp 50,000,000
Net income for the year ,550,000
Rp 105,550,000
Less withdrawals ,000,000
Increase in owner’s equity ,550,000
Adam Kuncoro, capital, April 30, Rp 155,550,000 75
For Practice: PE 1-5A, PE 1-5B

76. Balance Sheet
1-5
The balance sheet reports the amounts of a firm’s assets, liabilities, and owner’s equity at the end of a specific period.

77. 1-5
The account form of balance sheet lists the assets on the left and the liabilities and owner’s equity on the right—similar to design of an account.

78. 1-5
The report form of balance sheet presents the liabilities and owner’s equity sections below the assets section.

79. CIMANDE TRAVEL SERVICE
1-5
Example Exercise 1-6
Using the data for Cimande Travel Service shown in Example Exercise 1-4 and 1-5, prepare the balance sheet as of April 30, 2008.
Follow My Example 1-6
CIMANDE TRAVEL SERVICE
BALANCE SHEET
April 30, 2008
Assets Liabilities
Cash Rp 53,050,000 Accounts payable Rp 12,200,000
Accounts receivable 31,350,000
Supplies 3,350, Owner’s Equity
Land 80,000,000 Adam Kuncoro, capital 155,550,000
Total assets Rp167,750,000 Total liab. & owner’s eq. Rp 167,750,000
For Practice: PE 1-6A, PE 1-6B 79

80. The statement of cash flows consists of three sections:
Statement of Cash Flows
1-5
The statement of cash flows consists of three sections:
Operating activities
Investing activities
Financing activities

81. 1-5
The cash flows from operating activities section reports a summary of cash receipts and cash payments from operations.

82. 1-5
The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively permanent assets.

83. 1-5
The cash flows from financing activities section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.

84. The cash balance as of May 1, 2007, was Rp72,050,000.
1-5
Example Exercise 1-7
A summary of cash flows for Cimande Travel Service for the year ended April 30, 2008, is shown below.
Cash receipts:
Cash received from customers Rp 251,000,000
Cash received from additional
investment of owner 50,000,000
Cash payments:
Cash paid for expenses 210,000,000
Cash paid for land 80,000,000
Cash paid to owner for personal use 30,000,000
The cash balance as of May 1, 2007, was Rp72,050,000.
Prepare a statement of cash flows for Cimande Travel Service for the year ended April 84

85. CIMANDE TRAVEL SERVICE
1-5
Follow My Example 1-7
CIMANDE TRAVEL SERVICE
STATEMENT OF CASH FLOWS
For the Year Ended April 30, 2008
Cash flows from operating activities:
Cash received from customers Rp251,000,000
Deduct cash payments for expenses 210,000,000
Net cash flows from operating activities Rp 41,000,000
Cash flows from investing activities:
Cash payments for purchase of land (80,000,000)
Cash flows from financing activities:
Cash received from owner as investment Rp 50,000,000
Deduct cash withdrawals by owner 30,000,000
Net cash flows from financing activities ,000,000
Net decrease in cash during year Rp (19,000,000)
Cash as of May 1, ,050,000
Cash as of April 30, Rp 53,050,000 85
For Practice: PE 1-7A, PE 1-7B

86. Net income or net loss appears on both statements.
Interrelationships Among Financial Statements
1-5
The income statement and the statement of owner’s equity are interrelated.
Net income or net loss appears on both statements.

87. 1-5
The statement of owner’s equity and the balance sheet are interrelated.
The owner’s capital at the end of the period on the statement of owner’s equity also appears on the balance sheet as owner’s capital.

88. The balance sheet and the statement of cash flows are interrelated.
1-5
The balance sheet and the statement of cash flows are interrelated.
The cash on the balance sheet also appears as the end-of-period cash on the statement of cash flows.