1. Chapter 1 Accounting Concepts and Procedures

2. Learning Objectives
Explain Accounting, Business, and the Accounting Equation
Prepare a Balance Sheet
Record Transactions into the Expanded Accounting Equation
Prepare the Three Financial Statements

3. Learning Objective 1
Explain Accounting, Business, and the Accounting Equation

4. Accounting Language of business Provides information to: Managers
Owners
Investors
Governmental agencies
Others inside and outside the organization

5. The accounting process:
Accounting System
The accounting process:
Analyzes - Looking at what happened
Records - Putting information into system
Classifies - Grouping similar activities
Summarizes - Totaling the results
Reports - Issuing the statements
Interprets - Examining the statements
Communicates - Provides reports

6. Accounting Provides financial information for decision makers:
Individuals
Small businesses
Large corporations
Governmental agencies
In a timely fashion

7. Business Organizations
Sole proprietorship – one owner
The owner makes all the decisions for the business
Partnership – at least two owners
Partners share the decision making and risks of the business
Corporation – owned by stockholders
A business owned by stockholders
Liability Corporation (LLC) – owned by a few stockholders
Liable only to the extent of their investment

8. Table 1.1 Types of Business Organizations

9. Business Classifications
Service - actual services are provided for clients (e.g. consulting firms)
Merchandising - make their own products or sell products made by another supplier (e.g. JCPenney)
Manufacturing - Companies that make their own products (e.g. Ford Motor Co.)

10. Table 1.2 Examples of Service, Merchandise, and Manufacturing Businesses

11. GAAP Generally Accepted Accounting Principles
Procedures and guidelines that must be followed during the accounting process
Used to ensure everyone prepares and interprets financial reports the same way
International Financial Reporting Standards (IFRS)
Guidelines developed by the International Accounting Standards Board
US is considering a change from GAAP to IFRS.

12. Difference between Bookkeeping and Accounting
Is the recording function of the accounting process
Enters accounting information in the company’s books
Accounting
Prepares the financial statements
Involves many complex activities

13. The Accounting Equation
A business is considered a separate business entity
Finances are kept separate and distinct from personal finances
All transactions use the accounting equation
Assets = Liabilities + Owner’s Equity

14. Assets = Liabilities + Owner’s Equity
Assets - properties of value owned by a business
Cash, land, supplies, office equipment, buildings, and other properties of value
Equities - rights of financial claim to the assets

15. Liabilities Liabilities - Obligations that come due in the future.
Result in increasing the financial rights or claims of creditors to assets.
Examples include accounts payable
Companies that are owed money are called creditors.
They have a claim to assets.

16. Assets = Liabilities + Owner’s Equity
Liability – future obligation
Total claims against the assets – Equities
Accountants divide equities into two parts
The claims of creditors
The claims of owners

17. The Capital Account Capital - the owner’s investment in a company
Does not always mean cash
Includes any assets the owner has put into the business

18. Accounting Transactions
Transaction A
Aug. 28: Mia invests $6,000 in cash and $200 of office equipment into the business

19. Accounting Transactions
Transaction B
Aug. 29: Law practice buys office equipment for cash, $500
Shift in assets - the makeup of the assets has changed, but the total remains the same

20. Accounting Transactions
Transaction C
Aug. 30: Buys additional office equipment on account, $300.
Accounts payable - unwritten promise to pay the creditor

21. Learning Objective 2
Prepare a Balance Sheet

22. Balance Sheet Shows the history of a company
Reports financial position as of a particular date
Presents ending balances in assets, liabilities, and owner’s equity
Assets appear on the left side
Liabilities and Equity appear on the right side

23. Figure 1.1 The Balance Sheet

24. Preparing a Balance Sheet
The heading of the balance sheet provides the following information:
The company name
The name of the statement
The date for which the report is prepared
Use of the Dollar Sign
Placed to the left of each column’s top figure and to the left of the column’s total

25. Learning Objective 3
Record Transactions into the Expanded Accounting Equation

26. The Accounting Equation Expanded: Revenue, Expenses, and Withdrawals
Amount earned by performing services or selling goods to customers
Increases owner’s equity
Recorded when earned
Assets increase
Cash if the client pays right away
Accounts receivable - client promises to pay in the future

27. The Accounting Equation Expanded: Revenue, Expenses, and Withdrawals
Cost incurred in its efforts to create revenue
Decreases owner’s equity
Recorded when incurred
Paid in cash or can be charged

28. Net Income/Net Loss Revenues – Expenses =
If revenues > expenses = net income
Increases equity
If expenses > revenues = net loss
Decreases equity

29. Withdrawals
Cash or other assets removed from the business to pay personal expenses
Decreases owner’s equity
Not related to the business
Not an expense

30. Figure 1.3 Owner’s Equity

31. Expanded Accounting Equation
Transaction D
Sept. 1–30: Provided legal services for cash, $2,000.
INSERT TABLE ON p. 10

32. Expanded Accounting Equation
Transaction E
Sept. 1–30: Provided legal services on account, $3,000.
INSERT FIRST TABLE ON p. 11

33. Expanded Accounting Equation
Transaction F
Sept. 1–30: Received $900 cash as partial payment from previous services performed on account.

34. Expanded Accounting Equation
Transaction G
Sept. 1–30: Paid salaries expense, $700.

35. Expanded Accounting Equation
Transaction H
Sept. 1–30: Paid rent expense, $400.

36. Expanded Accounting Equation
Transaction I
Sept. 1–30: Incurred advertising expenses of $200, to be paid next month.

37. Expanded Accounting Equation
Transaction J
Sept. 1–30: Mia withdrew $100 for personal use.

39. Learning Objective 4
Prepare the Three Financial Statements

40. Income Statement Shows business results
Revenues
Expenses
Net income/loss
Covers a certain period of time
A month, a quarter, a year

41. Income Statement Preparing Statements The company name
The name of the statement
The period of time the statement covers

42. Figure 1.4 The Income Statement

43. Statement of Owner’s Equity
Increased by:
Owner Investment
Net Income (Revenue - Expenses) and Revenue Greater Than Expenses
Decreased by:
Owner Withdrawals
Net Loss (Revenue - Expenses) and Expenses Greater Than Revenue

44. Figure 1.5 Statement of Owner’s Equity—Net Income

45. Figure 1.6 Statement of Owner’s Equity—Net Loss

46. Figure 1.7 The Accounting Equation and the Balance Sheet

47. Table 1.3 What Goes on Each Financial Statement

48. Main Elements of the Income Statement, the Statement of Owner’s Equity, and the Balance Sheet
The income statement is prepared first.
Net income or loss is needed for the statement of owner’s equity.
The statement of owner’s equity is prepared second.
The net income or net loss comes from the income statement.
The balance sheet is prepared last.
The balance in Capital comes from the statement of owner’s equity.

49. Summary of the Chapter
Defining and listing the functions of accounting.
The functions of accounting involve analyzing, recording, classifying, summarizing, reporting, and interpreting financial information.
Forms of business organization:
A sole proprietorship is a business owned by one person.
A partnership is a business owned by two or more persons.
A corporation is a business owned by stockholders.
An LLC is owned by a limited number of stockholders.
The Sarbanes-Oxley Act helps prevent fraud at trading companies.
GAAP and IFRS are guidelines established by U.S. (GAAP) and international (IFRS) accounting standard boards.

50. Summary of the Chapter
Recording transactions in the basic accounting equation.
Assets = Liabilities + Owner’s Equity is the basic accounting equation.
Liabilities represent amounts owed to creditors.
Capital does not mean cash.
In a shift of assets the composition of assets changes but the total of assets does not change.
Seeing how revenue, expenses, and withdrawals expand the basic accounting equation.
Revenue generates an inward flow of assets. Expenses generate an outward flow of assets or a potential outward flow.

51. Summary of the Chapter
When revenue totals more than expenses, net income is the result; when expenses total more than revenue, there is a net loss.
Owner’s equity can be subdivided into four elements: capital, withdrawals, revenue, and expenses.
Withdrawals and expenses will decrease owner’s equity.
Preparing an income statement, a statement of owner’s equity, and a balance sheet.
The income statement is a statement written for a specific period of time that lists earned revenue and expenses incurred to produce the earned revenue.

52. Summary of the Chapter
The statement of owner’s equity is a statement written for a specific period of time that reveals the causes of a change in capital. The ending figure for capital will be used on the balance sheet.
The balance sheet is a statement written for a specific point of time that uses the ending balances of assets and liabilities from the accounting equation and the capital from the statement of owner’s equity.
The income statement should be prepared first because the information on it about net income or net loss is used to prepare the statement of owner’s equity, which in turn provides information about capital for the balance sheet.

53. Questions?

54. Figure 1.2 Partial Balance Sheet

55. Figure 1.8 Michael Brown’s Income Statement and Statement of Owner’s Equity

56. Figure 1.9 Michael Brown’s Balance Sheet