1. Accounting Concepts and Procedures
Chapter 1
Accounting Concepts and Procedures
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

2. Learning Objective 1 Defining and listing the functions of accounting
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

3. Accounting Language of business Provides information to… Managers
Owners
Investors
Governmental agencies
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

4. Business Organizations
Sole proprietorship – one owner
Partnership – at least two owners
Corporation – owned by stockholders
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

5. Business Classifications
Service - businesses where actual services are provided for clients, i.e. consulting firms
Merchandising - businesses that either make their own products or sell products made by another supplier, i.e. J.C. Penney
Manufacturing - Companies that make their own products, i.e. Ford Motor Co.
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

6. Accounting is a process
Analyze
Record
Classify
Interpret
Report
Summarize
Communicate
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

7. 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
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

8. 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
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

9. Assets Assets - properties of value owned by the business
Examples include cash, supplies, accounts receivable, equipment
Often assets are financed
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

10. 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.
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

11. Learning Objective 2
Recording transactions in the basic accounting equation
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

12. Accounting Equation Assets = Equities Properties (resources)
of value owned by a firm
Financial claims
against the assets
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

13. Accounting Equation Assets = Liabilities + Owner’s Equity
Rights of creditors
Rights of owner
The accounting equation must always balance. If assets = $10,000 and liabilities were equal to $6,000, Owner’s Equity would be $4,000. If you have any 2 of the 3, you can solve for the 3rd.
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

14. Accounting Equation
3 ways the accounting equation can be stated are as follows:
Assets = Liabilities + Owner’s Equity
Assets – Liabilities = Owner’s Equity
Assets – Owner’s Equity = Liabilities
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

15. Shift in Assets
Indicates that the make-up of assets has changed, but the total of assets remains the same.
Example: If a company buys a piece of equipment with cash, equipment would increase and cash would decrease.
The total of assets would not change
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

16. Exercise 1-1 Assets = Liabilities + Owner’s Equity a. $19,000 ? $4,000
$6,000
$9,000 c.
$10,000
$15,000
$15,000
$6,000
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

17. Exercise 1-2 Assets = Liabilities + Owner’s Equity a. b. c. +$120,000
Equipment
+ $600
Cash
$600
+ $900
+$900
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

18. Balance Sheet
Reports financial position of a company as of a particular date
Presents ending balances in assets, liabilities, and owner’s equity
Assets must be equivalent to the sum of liabilities and owner’s capital account balance
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

19. Exercise 1-3 Assets - Liabilities = Owner’s Equity
Range Co. Cleaners
Balance Sheet
November 30, 200X
Assets
Cash $50,000
Equipment 7,000
Liabilities & Owner’s Equity
Liabilities
Accounts payable $14,000
Owner’s Equity
B. Range, capital
Assets - Liabilities = Owner’s Equity
$57,000 - $14,000 = ??
43,000
Total liabilities &
owner’s equity
Total Assets $57,000
$57,000
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

20. Learning Objective 3
Seeing how revenue, expenses, and withdrawals expand the basic accounting equation
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

21. Revenue
Amount earned by performing services for customers or selling goods to customers
Increases owner’s equity
Recorded when earned
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

22. Expense
Cost incurred in running a business by consuming goods or services in producing revenue
Decreases owner’s equity
Recorded when incurred
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

23. Net Income/Net Loss Revenues – Expenses
If revenues > expenses = net income
If expenses > revenues = net loss
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

24. Withdrawals
Money or other assets an owner withdraws from a business for personal use
Decreases owner’s equity
Not an expense
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

25. Expanded Accounting Equation
The expanded accounting equation lists the individual accounts that fall under each classification.
All assets are added together.
Liabilities + Owner’s Equity is expanded to Liabilities + Capital – Withdrawals + Revenue - Expenses
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

26. Exercise 1-4 Assets = $67,000 Equities = $67,000 LO-3 a. $60,000b.
$7,000
$7,000
$60,000
$7,000
$7,000
$60,000
Assets = $67,000
Equities = $67,000
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

27. Exercise 1-4 Assets = $80,800 Equities = $80,800 LO-3 $60,000 $7,000
- $200
-$200
$59,800
$7,000
$7,000
$60,000
- $200 d.
$14,000
$14,000
$73,800
$7,000
$7,000
$60,000
- $200
$14,000
Assets = $80,800
Equities = $80,800
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

28. Exercise 1-4 Assets = $106,800 Equities = $106,800 LO-3 $73,800 $7,000
$60,000
- $200
$14,000 e.
$30,000
$30,000
$73,800
$7,000
$7,000
$60,000
- $200
$30,000
$44,000
-$4,000 f.
-$ 4,000
$69,800
$30,000
$7,000
$7,000
$60,000
- $200
$44,000
-$4,000
Assets = $106,800
Equities = $106,800
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

29. Exercise 1-4 Assets = $105,300 Equities = $105,300 LO-3 $69,800
$30,000
$7,000
$7,000
$60,000
-$200
$44,000
- $4,000 g.
- 1,500
- 1,500
$68,300
$30,000
$7,000
$7,000
$60,000
-$200
$44,000
- $5,500
Assets = $105,300
Equities = $105,300
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

30. Withdrawals Let’s assume the owner withdrew $100 for personal use.
$68,300
$60,000
$7,000
- $5,500
$30,000
$44,000
-$ 100
-$100
$68,200
$30,000
$7,000
$7,000
$60,000
-$300
$44,000
- $5,500
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

31. Learning Objective 4
Preparing an income statement, a statement of owner’s equity, and a balance sheet
LO-4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

32. Financial Statements
Financial Statements MUST be done in the correct order
Income Statement
Statement of Owner’s Equity
Balance Sheet
LO-4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

33. Income Statement Shows business results
Revenues
Expenses
Net income/loss
Covers a certain period of time
LO-4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

34. Statement of Owner’s Equity
Reports changes to owner’s equity for a certain period of time
Beginning capital balance
+Owner investment
+Net Income
-Owner withdrawals
-Net loss
Ending capital balance
LO-4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

35. Exercise 1-5
French Realty Income Statement For Month Ended June 30, 200X Revenue Professional fees $2,900 Operating Expenses: Salaries Expense $500 Utilities Expense 360 Rent Expense 500 Total Operating Expenses 1,360 Net Income $1,540
Net Income
LO-4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

36. Exercise 1-5
French Realty Statement of Owner’s Equity For Month Ended June 30, 200X S. French, Capital, June 1, 200X $8,000 Net Income for June $1,540 Less Withdrawals for June 40 Increase in Capital 1,500 S. French, Capital, June 30, 200X $9,500
LO-4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

37. Exercise 1-5 French Realty Balance Sheet June 30, 200X
Assets Cash $3,310 Accounts Receivable 1,490 Office Equipment 6,700 Total Assets $11,500
Liabilities & Owner’s Equity
Liabilities
Accounts Payable $2,000
Owner’s Equity
S. French, Capital 9,500
Total Liabilities & Owners’ Equity $11,500
LO-4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

38. What Goes on Each Statement?
Income Statement
Statement of
Owner’s Equity
Balance Sheet
Capital (beg)
Revenues
Assets
Net Income
Expenses
Liabilities
Withdrawals
Net Income
Capital (end)
Capital (end)
LO-4
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

39. End of Chapter 1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater