accounting

1. Chapter
1-1

2. CHAPTER 1
ACCOUNTING IN
ACTION
Accounting Principles, Eighth Edition
Chapter
1-2

3. Study Objectives
Study Objectives
1. Explain what accounting is.
2. Identify the users and uses of accounting.
3. Understand why ethics is a fundamental business concept.
4. Explain generally accepted accounting principles and the
cost principle.
5. Explain the monetary unit assumption and the economic
entity assumption.
6. State the accounting equation, and define assets, liabilities,
and owner’s equity.
7. Analyze the effects of business transactions on the
accounting equation.
8. Understand the four financial statements and how they are
prepared.
Chapter
1-3

4. Accounting in Action
Accounting in Action
Using the
Using the
The Building
The Building The Basic
The Basic
What is
What is Basic
Basic Financial
Financial
Blocks of
Blocks of Accounting
Accounting
Accounting?
Accounting? Accounting
Accounting Statements
Statements
Accounting
Accounting Equation
Equation Equation
Equation
Three Ethics in Assets Transaction Income
activities financial Liabilities analysis statement
Who uses reporting Summary of Owner’s
Owner’s
accounting Generally equity transactions equity
data accepted statement
accounting Balance
principles sheet
Assumptions Statement of
cash flows
Chapter
1-4

5. What is Accounting?
What is Accounting?
The purpose of accounting is to:
(1) identify, record, and communicate the
identify record
economic events of an
(2) organization to
(3) interested users.
Chapter
1-5 LO 1 Explain what accounting is.

6. What is Accounting?
What is Accounting?
Illustration 1-1
Three Activities Accounting process
The accounting process includes
the bookkeeping function.
Chapter
1-6 LO 1 Explain what accounting is.

7. Who Uses Accounting Data?
Who Uses Accounting Data?
Internal Users
Management IRS
Human Investors
Resources
There are two broad
groups of users of Labor
financial information: Unions
Finance
internal users and
external users. Creditors
Marketing
SEC
Customers External
Users
Chapter
1-7 LO 2 Identify the users and uses of accounting.

8. Who Uses Accounting Data?
Who Uses Accounting Data?
Common Questions Asked User
1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income? Investors
3. Do we need to borrow in the
near future? Management
4. Is cash sufficient to pay
dividends to the stockholders? Finance
5. What price for our product
will maximize net income? Marketing
6. Will the company be able to
pay its short-term debts? Creditors
Chapter
1-8 LO 2 Identify the users and uses of accounting.

9. Who Uses Accounting Data?
Who Uses Accounting Data?
Discussion Question
Q1. “Accounting is ingrained in our society and it is
vital to our economic system.” Do you agree? Explain.
See notes page for discussion
Chapter
1-9 LO 3 Understand why ethics is a fundamental business concept .

10. The Building Blocks of Accounting
The Building Blocks of Accounting
Ethics In Financial Reporting
Standards of conduct by which one’s actions are
judged as right or wrong, honest or dishonest, fair
or not fair, are Ethics.
Recent financial scandals include: Enron,
WorldCom, HealthSouth, AIG, and others.
Congress passedSarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound
ethical behavior.
Chapter
1-10 LO 3 Understand why ethics is a fundamental business concept .

11. Ethics
Ethics
Review Question
Ethics are the standards of conduct by which one's
actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.
Chapter
1-11 LO 3 Understand why ethics is a fundamental business concept .

12. Ethics
Ethics
Review Question
Ethics are the standards of conduct by which one's
actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.
Chapter
1-12 LO 3 Understand why ethics is a fundamental business concept .

13. The Building Blocks of Accounting
The Building Blocks of Accounting
Financial Statements
Various users Balance Sheet
need financial Income Statement
Statement of Owner’s Equity
information Statement of Cash Flows
Note Disclosure
The accounting profession
has attempted to develop Generally Accepted
a set of standards that
Accounting
are generally accepted
and universally practiced.
Principles (GAAP)
Chapter
1-13 LO 4 Explain generally accepted accounting principles and the cost principle.

14. The Building Blocks of Accounting
The Building Blocks of Accounting
Organizations Involved in Standard Setting:
Securities and Exchange Commission (SEC)
http://www.sec.gov/
Financial Accounting Standards Board (FASB)
http://www.fasb.org/
International Accounting Standards Board
(IASB) http://www.iasb.org/
Chapter
1-14 LO 4 Explain generally accepted accounting principles and the cost principle.

15. The Building Blocks of Accounting
The Building Blocks of Accounting
Cost Principle (Historical) – dictates that companies
record assets at their cost.
Issues:
Reported at cost when purchased and also over the
time the asset is held.
Cost easily verified, whereas market value is often
subjective.
Fair value information may be more useful.
Chapter
1-15 LO 4 Explain generally accepted accounting principles and the cost principle.

16. Assumptions
Assumptions
Monetary Unit Assumption – include in the
accounting records only transaction data that can be
expressed in terms of money.
Economic Entity Assumption – requires that
activities of the entity be kept separate and distinct
from the activities of its owner and all other economic
entities.
Proprietorship.
Forms of
Partnership. Business Ownership
Corporation.
Chapter LO 5 Explain the monetary unit assumption
1-16
and the economic entity assumption.

17. Forms of Business Ownership
Forms of Business Ownership
Proprietorship Partnership Corporation
Generally owned Owned by two or Ownership
by one person. more persons. divided into
Often small shares of stock
Often retail and
service-type service-type Separate legal
businesses businesses entity organized
Owner receives under state
Generally
any profits, corporation law
unlimited
suffers any personal liability Limited liability
losses, and is
Partnership
personally liable
agreement
for all debts.
Chapter LO 5 Explain the monetary unit assumption
1-17
and the economic entity assumption.

18. Assumptions
Assumptions
Review Question
Combining the activities of Kellogg and General
Mills would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
Chapter LO 5 Explain the monetary unit assumption
1-18
and the economic entity assumption.

19. Assumptions
Assumptions
Review Question
Combining the activities of Kellogg and General
Mills would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
Chapter LO 5 Explain the monetary unit assumption
1-19
and the economic entity assumption.

20. Forms of Business Ownership
Forms of Business Ownership
Review Question
A business organized as a separate legal entity
under state law having ownership divided into
shares of stock is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
Chapter LO 5 Explain the monetary unit assumption
1-20
and the economic entity assumption.

21. Forms of Business Ownership
Forms of Business Ownership
Review Question
A business organized as a separate legal entity
under state law having ownership divided into
shares of stock is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
Chapter LO 5 Explain the monetary unit assumption
1-21
and the economic entity assumption.

22. The Basic Accounting Equation
The Basic Accounting Equation
Owner’s
Assets = Liabilities +
Equity
Provides the underlying framework for recording and
summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership
claims.
Chapter LO 6 State the accounting equation, and define
1-22
assets, liabilities, and owner’s equity.

23. The Basic Accounting Equation
The Basic Accounting Equation
Owner’s
Assets = Liabilities +
Equity
Provides the underlying framework for recording and
summarizing economic events.
Assets
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Chapter LO 6 State the accounting equation, and define
1-23
assets, liabilities, and owner’s equity.

24. The Basic Accounting Equation
The Basic Accounting Equation
Owner’s
Assets = Liabilities +
Equity
Provides the underlying framework for recording and
summarizing economic events.
Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
Chapter LO 6 State the accounting equation, and define
1-24
assets, liabilities, and owner’s equity.

25. The Basic Accounting Equation
The Basic Accounting Equation
Owner’s
Assets = Liabilities +
Equity
Provides the underlying framework for recording and
summarizing economic events.
Owner’s Equity
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or
Partnership).
Chapter LO 6 State the accounting equation, and define
1-25
assets, liabilities, and owner’s equity.

26. Owners’ Equity
Owners’ Equity
Illustration 1-6
Revenues result from business activities entered into for
the purpose of earning income.
Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
Chapter LO 6 State the accounting equation, and define
1-26
assets, liabilities, and owner’s equity.

27. Owners’ Equity
Owners’ Equity
Illustration 1-6
Expenses are the cost of assets consumed or services
used in the process of earning revenue.
Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.
Chapter LO 6 State the accounting equation, and define
1-27
assets, liabilities, and owner’s equity.

28. Using The Basic Accounting Equation
Using The Basic Accounting Equation
Transactions are a business’s economic events
recorded by accountants.
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the
accounting equation.
Chapter LO 7 Analyze the effects of business transactions
1-28
on the accounting equation.

29. Transactions (Question?)
Transactions (Question?)
Q1-15: Are the following events recorded in the
accounting records? Owner
Supplies are An employee withdraws
Event purchased is hired. cash for
on account. personal use.
Criterion Is the financial position (assets, liabilities, or
owner’s equity) of the company changed?
Record/
Don’t Record
Chapter LO 7 Analyze the effects of business transactions
1-29
on the accounting equation.

30. Transactions
Transactions
Discussion Question
Q18. In February 2008, Paula King invested an
additional $10,000 in her business, King’s
Pharmacy, which is organized as a proprietorship.
King’s accountant, Lance Jones, recorded this
receipt as an increase in cash and revenues. Is
this treatment appropriate? Why or why not?
See notes page for discussion
Chapter LO 7 Analyze the effects of business transactions
1-30
on the accounting equation.

31. Transactions (Problem)
Transactions (Problem)
P1-1A: Barone’s Repair Shop was started on May 1 by
Nancy. Prepare a tabular analysis of the following
transactions for the month of May.
1. Invested $10,000 cash to start the repair shop.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
Chapter LO 7 Analyze the effects of business transactions
1-31
on the accounting equation.

32. Transactions (Problem)
Transactions (Problem)
2. Purchased equipment for $5,000 cash.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
Chapter LO 7 Analyze the effects of business transactions
1-32
on the accounting equation.

33. Transactions (Problem)
Transactions (Problem)
3. Paid $400 cash for May office rent.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
Chapter LO 7 Analyze the effects of business transactions
1-33
on the accounting equation.

34. Transactions (Problem)
Transactions (Problem)
4. Received $5,100 from customers for repair service.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
Chapter LO 7 Analyze the effects of business transactions
1-34
on the accounting equation.

35. Transactions (Problem)
Transactions (Problem)
5. Withdrew $1,000 cash for personal use.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
Chapter LO 7 Analyze the effects of business transactions
1-35
on the accounting equation.

36. Transactions (Problem)
Transactions (Problem)
6. Paid part-time employee salaries of $2,000.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
Chapter LO 7 Analyze the effects of business transactions
1-36
on the accounting equation.

37. Transactions (Problem)
Transactions (Problem)
7. Incurred $250 of advertising costs, on account.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
Chapter LO 7 Analyze the effects of business transactions
1-37
on the accounting equation.

38. Transactions (Problem)
Transactions (Problem)
8. Provided $750 of repair services on account.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. +750 +750 Revenue
Chapter LO 7 Analyze the effects of business transactions
1-38
on the accounting equation.

39. Transactions (Problem)
Transactions (Problem)
9. Collected $120 cash for services previously billed.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. +750 +750 Revenue
9. +120 -120
6,820 + 630 + 5,000 = 250 + 12,200
Chapter LO 7 Analyze the effects of business transactions
1-39
on the accounting equation.

40. Financial Statements
Financial Statements
Companies prepare four financial statements from
Companies prepare four financial statements from
the summarized accounting data:
the summarized accounting data:
Owner’s Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows
Chapter
1-40 LO 8 Understand the four financial statements and how they are prepared.

41. Financial Statements
Financial Statements
Review Question
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
Chapter
1-41 LO 8 Understand the four financial statements and how they are prepared.

42. Financial Statements
Financial Statements
Income Statement
Barone’s Repair Shop
Reports the revenues
Income Statement
For the Month Ended May 31, 2008 and expenses for a
Revenues: specific period of time.
Service revenue $ 5,850
Expenses: Net income – revenues
Salary expense 2,000
exceed expenses.
Rent expense 400
Advertising expense 250
Total expenses 2,650
Net loss – expenses
Net income $ 3,200 exceed revenues.
Chapter
1-42 LO 8 Understand the four financial statements and how they are prepared.

43. Financial Statements
Financial Statements
Owner’s Equity
Income Statement Statement
Barone’s Repair Shop Barone’s Repair Shop
Income Statement Owner's Equity Statement
For the Month Ended May 31, 2008 For the Month Ended May 31, 2008
Revenues: Barone's, Capital May 1 $ -
Service revenue $ 5,850 Add: Investment 10,000
Expenses: Net income 3,200
Salary expense 2,000 13,200
Rent expense 400 Less: Drawings 1,000
Advertising expense 250 Barone's, Capital May 31 $12,200
Total expenses 2,650
Net income $ 3,200
Net income is needed to determine
the ending balance in owner’s equity.
Chapter
1-43 LO 8 Understand the four financial statements and how they are prepared.

44. Financial Statements
Financial Statements
Owner’s Equity
Statement
Statement indicates the Barone’s Repair Shop
Owner's Equity Statement
reasons why owner’s
For the Month Ended May 31, 2008
equity has increased or
Barone's, Capital May 1 $ -
decreased during the Add: Investment 10,000
period. Net income 3,200
13,200
Less: Drawings 1,000
Barone's, Capital May 31 $12,200
Chapter
1-44 LO 8 Understand the four financial statements and how they are prepared.

45. Financial Statements
Financial Statements
Owners’ Equity
Balance Sheet Statement
Barone’s Repair Shop
Barone’s Repair Shop
Balance Sheet
Owner's Equity Statement
May 31, 2008
For the Month Ended May 31, 2008
Assets
Cash $ 6,820 Barone's, Capital May 1 $ -
Accounts receivable 630 Add: Investment 10,000
Equipment 5,000 Net income 3,200
Total assets $12,450 13,200
Liabilities Less: Drawings 1,000
Accounts payable $ 250 Barone's, Capital May 31 $ 12,200
Owner's Equity
Barone's, capital 12,200
Total liab. & equity $12,450 The ending balance in owner’s equity is
needed in preparing the balance sheet
Chapter
1-45 LO 8 Understand the four financial statements and how they are prepared.

46. Financial Statements
Financial Statements
Balance Sheet
Barone’s Repair Shop Reports the assets,
Balance Sheet liabilities, and owner’s
May 31, 2008
equity at a specific date.
Assets
Cash $ 6,820
Accounts receivable 630 Assets listed at the top,
Equipment 5,000 followed by liabilities
Total assets $12,450
and owner’s equity.
Liabilities
Accounts payable $ 250
Owner's Equity Total assets must equal
Barone's, capital 12,200 total liabilities and
Total liab. & equity $12,450
owner’s equity.
Chapter
1-46 LO 8 Understand the four financial statements and how they are prepared.

47. Financial Statements
Financial Statements
Statement of Cash Flows
Balance Sheet Barone’s Repair Shop
Statement of Cash Flows
Barone’s Repair Shop
For the Month Ended May 31, 2008
Balance Sheet
Cash flow from operating activities
May 31, 2008
Cash receipts from revenues $ 5,220
Assets
Cash paid for expenses (2,400)
Cash $ 6,820
Cash provided by operations 2,820
Accounts receivable 630 Cash flow from investing activitites
Equipment 5,000 Purchase of equipment (5,000)
Total assets $12,450 Cash flow from financing activities
Liabilities Investment by owners 10,000
Accounts payable $ 250 Drawings by owners (1,000)
Owner's Equity Cash provided by financing 9,000
Barone's, capital 12,200 Net increase in cash 6,820
Total liab. & equity $12,450 Cash balance, May 1 -
Cash balance, May 31 $ 6,820
Chapter
1-47 LO 8 Understand the four financial statements and how they are prepared.

48. Financial Statements
Financial Statements
Statement of Cash Flows
Information for a Barone’s Repair Shop
specific period of time. Statement of Cash Flows
For the Month Ended May 31, 2008
Answers the following: Cash flow from operating activities
Cash receipts from customers $ 5,220
1. Where did cash come Cash paid for expenses (2,400)
from? Cash provided by operations 2,820
Cash flow from investing activities
2. What was cash used Purchase of equipment (5,000)
Cash flow from financing activities
for? Investment by owners 10,000
Drawings by owners (1,000)
3. What was the change Cash provided by financing 9,000
in the cash balance? Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 $ 6,820
Chapter
1-48 LO 8 Understand the four financial statements and how they are prepared.

49. Financial Statements
Financial Statements
Review Question
Which of the following financial statements is
prepared as of a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.
Chapter
1-49 LO 8 Understand the four financial statements and how they are prepared.

50. Financial Statements
Financial Statements
Discussion Question
Q19. “A company’s net income appears directly
on the income statement and the owner’s equity
statement, and it is included indirectly in the
company’s balance sheet.” Do you agree? Explain.
See notes page for discussion
Chapter
1-50 LO 8 Understand the four financial statements and how they are prepared.

51. Accounting Career Opportunities
Accounting Career Opportunities
Public Accounting
Careers in auditing and taxation serving the general public.
Private Accounting
Careers in industry working in cost accounting, budgeting,
accounting information systems, and taxation.
Opportunities in Government
Careers with the IRS, the FBI, the SEC, and in public
colleges and universities.
Forensic Accounting
Careers with insurance companies and law offices to conduct
investigations into theft and fraud.
Chapter
1-51 LO 9 Explain the career opportunities in accounting.

52. Copyright
Copyright
Copyright © 2008 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act
without the express written permission of the copyright owner
is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for his/her own
use only and not for distribution or resale. The Publisher
assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the
information contained herein.
Chapter
1-52