1. Chapter 1 The Nature of Accounting 1© Paradigm Publishing, Inc.

2. 1.Define accounting and related terms. Define accounting and related terms.Define accounting and related terms. 2.Explain who uses accounting information. Explain who uses accounting information.Explain who uses accounting information. 3.Identify four forms of business organizations and three types of business operations. Identify four forms of business organizations and three types of business operations.Identify four forms of business organizations and three types of business operations. © Paradigm Publishing, Inc.2 Learning Objectives

3. 4.Define and describe the elements of accounting. Define and describe the elements of accounting.Define and describe the elements of accounting. 5.State the accounting equation. State the accounting equation.State the accounting equation. 6.Define business transaction. Define business transaction.Define business transaction. 7.Record business transactions in equation form. Record business transactions in equation form.Record business transactions in equation form. © Paradigm Publishing, Inc.3 Learning Objectives

4. 8.Identify four types of transactions that affect owner’s equity. Identify four types of transactions that affect owner’s equity.Identify four types of transactions that affect owner’s equity. 9.Define ethics and explain the importance of ethical behavior in modern business. Define ethics and explain the importance of ethical behavior in modern business.Define ethics and explain the importance of ethical behavior in modern business. © Paradigm Publishing, Inc.4 Learning Objectives

5. Learning Objective 1 © Paradigm Publishing, Inc.5 Define accounting and related terms

6. Accounting is the process of recording, summarizing, analyzing, and interpreting financial activities to permit individuals and organizations to make informed judgments and decisions. Accounting combines recording, summarizing, analyzing, and interpreting into a single process and applies this process to financial activities. © Paradigm Publishing, Inc.6

7. Learning Objective 2 © Paradigm Publishing, Inc.7 Explain who uses accounting information

8. IndividualsOwnersManagersInvestors Banks and other lending institutions Governments Tax authorities © Paradigm Publishing, Inc.8

9. 9

10. 10

11. © Paradigm Publishing, Inc.11

12. Identify four forms of business organizations and three types of business operations Learning Objective 3 © Paradigm Publishing, Inc.12

13. Sole Proprietorship A business owned by one person Partnership A business co-owned by two or more persons © Paradigm Publishing, Inc.13

14. Corporation A business that is owned by investors called stockholders Limited Liability Company (LLC) A business that combines features of a corporation and those of proprietorships and partnerships © Paradigm Publishing, Inc.14

15. Service Business Performs services for customers to earn a profit Merchandising Business Purchases goods produced by others and then sells these goods to customers Manufacturing Business Produces a product to sell to its customers © Paradigm Publishing, Inc.15

16. Learning Objective 4 © Paradigm Publishing, Inc.16 Define and describe the elements of accounting

17. Assets An item with money value that is owned by a businessLiability A debt owed by a business Owner’s Equity The excess of assets over liabilities © Paradigm Publishing, Inc.17

18. © Paradigm Publishing, Inc.18 Another name for owner’s equity is Quick Check a.note payable. b.accounts receivable. c.capital. d.accounts payable. e.notes receivable.

19. Learning Objective 5 © Paradigm Publishing, Inc.19 State the accounting equation

20. For example, on December 31, 20X2, Jeanette Deese has business assets of $30,000, business liabilities of $10,000, and owner’s equity of $20,000. Her accounting equation is: © Paradigm Publishing, Inc.20 Assets (A) = Liabilities (L) + Owner’s Equity (OE) $30,000=$10,000+$20,000 or $30,000=$30,000 Assets = Liabilities + Owner’s Equity

21. Example 1.If assets are $30,000 and liabilities are $15,000, owner’s equity must be ____? 2.If owner’s equity is $9,000 and assets are $25,000, liabilities must be ____? 3.If liabilities are $5,500 and owner’s equity is $8,000, assets must be ____? © Paradigm Publishing, Inc.21 Answer : 1.$15,000 2.$16,000 3.$13,500

22. Review Quiz 1-1 Find the missing element in each of the following. © Paradigm Publishing, Inc.22A=L+OE(a)$40,000$25,000 (b)$38,000$52,000 (c)$70,000$48,000 (d)$75,000 $0 $0 $15,000 $90,000 $22,000 $75,000 $? $? $? $?

23. Learning Objective 6 © Paradigm Publishing, Inc.23 Define business transaction

24. Any activity that changes the value of a firm’s assets, liabilities, or owner’s equity is called a transaction. © Paradigm Publishing, Inc.24

25. Purchase of equipment on credit Cash payment to a creditor Receipt of cash for services rendered to a customer Purchase of supplies for cash Payment of rent for the month © Paradigm Publishing, Inc.25

26. Payment of utility bill Receipt of a bill to be paid later Payment to employees for the payroll Owner investment of cash in the business © Paradigm Publishing, Inc.26

27. Total assets must always equal liabilities plus owner’s equity. To maintain this balance, transactions are recorded as having a dual effect on the basic accounting elements. Every business transaction has at least two effects on the accounting equation. © Paradigm Publishing, Inc.27

28. Learning Objective 7 © Paradigm Publishing, Inc.28 Record business transactions in equation form

29. Example Susan Gilbert invests $30,000 to start Susan’s Gifts and Candies. How will this transaction affect the accounting equation? © Paradigm Publishing, Inc.29

30. Example Answer © Paradigm Publishing, Inc.30 Susan Gilbert invests $30,000 to start Susan’s Gifts and Candies. How will this transaction affect the accounting equation?Assets=Liabilities+ Owner’s Equity CashEquip.Supplies Acc. Payable Susan Gilbert, Capital RevenueExpenses = +$30,000+$30,000

31. Example Susan Gilbert purchases equipment costing $1,200 on account. How will this transaction affect the accounting equation? © Paradigm Publishing, Inc.31

32. Example Answer © Paradigm Publishing, Inc.32 Susan Gilbert purchases equipment costing $1,200 on account. How will this transaction affect the accounting equation?Assets=Liabilities+ Owner’s Equity CashEquip.Supplies Acc. Payable Susan Gilbert, Capital RevenueExpenses = +$1,200 +$1,200

33. Example Susan Gilbert generates $500 of cash sales. How will this transaction affect the accounting equation? © Paradigm Publishing, Inc.33

34. Assets=Liabilities+ Owner’s Equity CashEquip.Supplies Acc. Payable Susan Gilbert, Capital RevenueExpenses = Example Answer © Paradigm Publishing, Inc.34 Susan Gilbert generates $500 of cash sales. How will this transaction affect the accounting equation? +$500 +$500

35. Learning Objective 8 © Paradigm Publishing, Inc.35 Identify four types of transactions that affect owner’s equity

36. Owner investments increase owner’s equity. Revenue increases owner’s equity. Expenses decrease owner’s equity. Owner withdrawals decrease owner’s equity. © Paradigm Publishing, Inc.36

37. Review Quiz 1-2 Record the following transactions for Susan Wright in an expanded accounting equation with these headings: Cash + Accounts Receivable + Supplies = Accounts Payable + Susan Wright, Capital + Revenue – Expenses. Include a Description column. After recording the last transaction, prove that the equation is in balance. © Paradigm Publishing, Inc.37

38. Review Quiz 1-2 (a) Susan invested $10,000 cash in the business. (b) Invested supplies valued at $2,000 in the business. (c) Paid rent for the month, $600. (d) Performed services and received cash, $800. (e) Purchased supplies on credit, $200. (f) Performed services on credit, $625. (g) Withdrew cash for personal use, $500. (h) Received $250 cash as partial payment for services performed on account. performed on account. © Paradigm Publishing, Inc.38

39. Review Quiz 1-2 © Paradigm Publishing, Inc.39

40. © Paradigm Publishing, Inc.40 A business owner generates $2,000 of revenue on account. This transaction Quick Check a.increases assets and decreases liabilities. b.increases assets and increases owner’s equity. c.increases liabilities and increases owner’s equity. d.decreases assets and increases liabilities. e.decreases assets and increases owner’s equity.

41. Learning Objective 9 © Paradigm Publishing, Inc.41 Define ethics and explain the importance of ethical behavior in modern business

42. Sarbanes-Oxley Act of 2002 A law, passed by Congress, requiring companies to certify the accuracy of their financial information Ethics Principles of moral conduct that guide the behavior of individuals and businesses © Paradigm Publishing, Inc.42

43. © Paradigm Publishing, Inc.43 Do you agree with the U.S. government bailout of Fannie Mae and Freddie Mac? Focus on Ethics

44. © Paradigm Publishing, Inc.44 Joining the Pieces The Expanded Accounting Equation