The document provides an overview of accounting history and concepts. It discusses how accounting originated with early civilizations keeping records of agricultural products. It then focuses on Luca Pacioli, called the "Father of Accounting", who in 1494 published the first description of the double-entry accounting system still used today. The document also defines key accounting terms like assets, liabilities, owner's equity, and the accounting equation. It explains how business transactions impact the accounting equation and provides an example transaction analysis.

1. Chapter
1-1
CHAPTER 1
ACCOUNTING IN
ACTION

2. Chapter
1-2
History of Accounting
Ancient history :
o Accountancy is a very old concept. Its inception was
during the age of human agriculture and civilization.
(the Sumerians* in Mesopotamia, and the Egyptian Old
Kingdom) Ancient economic thinking facilitated the
creation of accurate records of the quantities and
relative values of agricultural products, methods that
were formalized in trading and monetary systems by
2000 BC.
* (late 6th millennium BC to 4th millennium BC))

3. Chapter
1-3
Painting of Luca Pacioli (The father of Accounting)

4. Chapter
1-4
History of Accounting
 Luca Pacioli (1445 - 1517), also known as Friar Luca dal
Borgo, is credited for the "birth" of accounting.
His Summa de arithmetica, geometrica, proportioni et
proportionalita (Summa on arithmetic, geometry,
proportions and proportionality, Venice 1494), was a
textbook for use in the abbaco schools of northern Italy,
where the sons of merchants and craftsmen were
educated.

5. Chapter
1-5
History of Accounting
 It includes the first printed description of the method of
keeping accounts that merchants used at that time,
known as the double-entry accounting system.
 Pacioli actually codified rather than invented this system.
As The system he published included most of the
accounting cycle as we know it today, so he is widely
regarded as the "Father of Accounting".
 He described the use of journals and ledgers, and
warned that a person should not go to sleep at night until
the debits equal the credits!

6. Chapter
1-6
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.

7. Accounting in Action
Chapter
1-7
Ethics in
financial
reporting
Generally
accepted
accounting
principles
Assumptions
What is
Accounting?
The Building
Blocks of
Accounting
The Basic
Accounting
Equation
Using the
Basic
Accounting
Equation
Financial
Statements
Three
activities
Who uses
accounting
data
Assets
Liabilities
Owner’s
equity
Transaction
analysis
Summary of
transactions
Income
statement
Owner’s
equity
statement
Balance
sheet
Statement of
cash flows

8. What is Accounting?
Three Activities
Chapter
1-8
LO 1 Explain what accounting is.
Illustration 1-1
Accounting process
The accounting process includes
the bookkeeping function.

9. Who Uses Accounting Data?
Finance
Chapter
1-9
There are two broad
groups of users of
financial information:
internal users and
external users.
LO 2 Identify the users and uses of accounting.
Internal Users
External
Users
Management
Human Resources
Labor Unions
SEC
Marketing
Investors
Creditors
Customers

10. Who Uses Accounting Data?
Common Questions Asked User
1. Can we afford to give our
6. Will the company be able to
Chapter
1-10
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income?
3. Do we need to borrow in the
near future?
4. Is cash sufficient to pay
dividends to the stockholders?
5. What price for our product
will maximize net income?
LO 2 Identify the users and uses of accounting.
pay its short-term debts?
Investors
Management
Finance
Marketing
Creditors

11. 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.
Chapter
1-11
Recent financial scandals include: Enron, WorldCom,
HealthSouth, AIG, and others.
Effective financial reporting depends on sound ethical behavior.
LO 3 Understand why ethics is a fundamental business concept.

12. Chapter
1-12
GAAP
 The common set of accounting principles,
standards and procedures that companies use
to compile their financial statements. GAAP
are a combination of authoritative standards
(set by policy boards) and simply the
commonly accepted ways of recording and
reporting accounting information.
Source: [http://www.investopedia.com/terms/g/gaap.asp]

13. The Building Blocks of Accounting
Organizations Involved in Standard Setting:
Chapter
1-13
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/
LO 4 Explain generally accepted accounting principles and the cost principle.

14. Chapter
1-14
FASB
 Since 1973 the FASB has been the
organization designated to establish
authoritative financial accounting and
reporting standards (Statements of Financial
Accounting Standards, SFAS) for business
and other private-sector entities. Its mission
is to be responsive to the entire economic
community and to operate in full view of the
entire community through a due-process
system.

15. Chapter
1-15
IASB
 Formed in January 2001. IASB is structured similarly
to the FASB. It is currently the focus of the IASB,
in collaboration with the FASB and other accounting
focused organizations, to "meet" standards and
develop a single, universally accepted set of biding
international accounting standards. The IASC, and
now IASB, issue a series of standards known as
International Financial Reporting Standards (IFRS),
formerly called International Accounting Standards
(IAS).

16. The Building Blocks of Accounting
Chapter
1-16
Various users
need financial
information
The accounting profession
has attempted to develop
a set of standards that
are generally accepted
and universally practiced.
Financial Statements
Balance Sheet
Income Statement
Statement of Owner’s Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting Principles
(GAAP)
LO 4 Explain generally accepted accounting principles and the cost principle.

17. The Building Blocks of Accounting
Cost Principle (Historical) – dictates that companies record
assets at their cost.
Issues:
Chapter
1-17
Reported at cost when purchased and also over the time the asset is
held.
Cost easily verified, whereas market value is often subjective.
e.g. XYZ corp. purchased a car for $200,000 in the year of 2006. But, the car’s
current market price is $150,000. Still, the historic cost principle says that
the book value (recorded value) of the asset should portray the historic
cost meaning $200,000 for the car.
LO 4 Explain generally accepted accounting principles and the cost principle.

18. 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.
Chapter
1-18
Proprietorship.
Partnership.
Corporation.
Forms of
Business Ownership
LO 5 Explain the monetary unit assumption
and the economic entity assumption.

19. Forms of Business Ownership
Proprietorship Partnership Corporation
Chapter
1-19
Owned by two or
more persons.
Often retail and
service-type
businesses
Generally
unlimited
personal liability
Partnership
agreement
Ownership
divided into
shares of stock
Separate legal
entity organized
under state
corporation law
Limited liability
Generally owned
by one person.
Often small
service-type
businesses
Owner receives
any profits,
suffers any
losses, and is
personally liable
for all debts.
LO 5 Explain the monetary unit assumption
and the economic entity assumption.

20. The Basic Accounting Equation
Chapter
1-20
Assets Liabilities
Owner’s 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.
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.

21. The Basic Accounting Equation
Chapter
1-21
Assets Liabilities
Owner’s Equity
= +
Provides the underlying framework for recording and summarizing
economic events.
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, inventory, Car, trucks, machines, etc.
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
Assets

22. The Basic Accounting Equation
Chapter
1-22
Assets Liabilities
Owner’s Equity
= +
Provides the underlying framework for recording and summarizing
economic events.
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
Liabilities

23. The Basic Accounting Equation
Chapter
1-23
Assets Liabilities
Owner’s Equity
= +
Provides the underlying framework for recording and summarizing
economic events.
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or Partnership).
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
Owner’s Equity

24. Owners’ Equity
Revenues result from business activities entered into for the purpose of
Chapter
1-24
earning income.
Common sources of revenue are: sales, fees, services, commissions, interest,
dividends, royalties, and rent.
Illustration 1-6
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.

25. Owners’ Equity
Expenses are the cost of assets consumed or services used in the process of
Chapter
1-25
earning revenue.
Common expenses are: salaries expense, rent expense, utilities expense, tax
expense, etc.
Illustration 1-6
LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.

26. Using The Basic Accounting Equation
Transactions are a business’s economic events recorded by
accountants.
Chapter
1-26
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the accounting equation.
LO 7 Analyze the effects of business transactions
on the accounting equation.

27. Transactions (Question?)
Q1-15: Are the following events recorded in the accounting records?
Event
Chapter
1-27
Supplies are
purchased
for cash.
An employee
is hired.
Owner
withdraws
cash for
personal use.
Criterion Is the financial position (assets, liabilities, or
owner’s equity) of the company changed?
LO 7 Analyze the effects of business transactions
on the accounting equation.
Record/ Don’t
Record

28. Chapter
1-28
Accrual Basis Accounting – An intro
Accrual Basis accounting is one of the most important accounting
concept that is being followed by most of the organizations. As per the
“Matching principle” it is binding that the revenues and the expenses of
any specific period must be reported in that period. So, sometimes this
very criterion pushes the firms to follow the accrual basis accounting.

29. Accounts Payable
 To run the business sometimes it is required to purchase
Chapter
1-29
several products or to receive services on credit. This is
an obligation that the company needs to pay and these
obligations are called as Accounts Payables.
 In a similar manner if any company borrows any amount
of money with formal instruments as proof of debt, then it
is an obligation that is needed to be paid. Then it is
called Notes Payable.
 All these PAYABLES are LIABILITIES.

30. 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?
Chapter
1-30
LO 7 Analyze the effects of business transactions
on the accounting equation.

31. Chapter
1-31
Answer
 Question 18 (Chapter 1) No, this treatment is not
proper. While the transactions does involve a receipt
of cash, it does not represent revenues. Revenues are
the gross increase in owner’s equity resulting from
business activities entered into for the purpose of
earning income. This transactions is simply an
additional investment made by the owner in the
business.

32. 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.
Cash
+ + = +
1. +10,000 +10,000
Chapter
1-32
Accounts
Receivable Equipment
Accounts
Payable
Barone,
Capital
LO 7 Analyze the effects of business transactions
on the accounting equation.
Investment
Assets Liabilities Equity

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

34. Transactions (Problem)
3. Paid $400 cash for May office rent.
Cash
+ + = +
Barone,
Capital
1. +10,000 +10,000
2. -5,000 +5,000
3. -400 -400 Expense
Chapter
1-34
Accounts
Receivable Equipment
Accounts
Payable
LO 7 Analyze the effects of business transactions
on the accounting equation.
Investment
Assets Liabilities Equity

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

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

37. Transactions (Problem)
6. Paid part-time employee salaries of $2,000.
Cash
+ + = +
Barone,
Capital
1. +10,000 +10,000
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
1-37
Accounts
Receivable Equipment
Accounts
Payable
LO 7 Analyze the effects of business transactions
on the accounting equation.
Investment
Assets Liabilities Equity

38. Transactions (Problem)
7. Incurred $250 of advertising costs, on account.
Cash
+ + = +
Barone,
Capital
1. +10,000 +10,000
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
1-38
Accounts
Receivable Equipment
Accounts
Payable
LO 7 Analyze the effects of business transactions
on the accounting equation.
Investment
Assets Liabilities Equity

39. Chapter
1-39
Receivables
 The term receivables refers to amount due from
individuals and other companies. Receivables are
claims that are expected to be collected in cash.
Examples can be 1) Accounts receivables, 2) Notes
Receivables , etc.
1) Accounts receivables: Amount owed by customers
on account. They result from sale of goods and
services. Companies generally expects to collect these
receivables within 30 to 60 days.
2) Notes receivables: Claims for which formal instrument
of credit are issued as proof of debt. It requires the
debtor to pay interest.
All these Receivables are ASSETS.

40. Transactions (Problem)
8. Provided $750 of repair services on account.
Cash
+ + = +
Barone,
Capital
1. +10,000 +10,000
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
1-40
Accounts
Receivable Equipment
Accounts
Payable
LO 7 Analyze the effects of business transactions
on the accounting equation.
Investment
Assets Liabilities Equity

41. Transactions (Problem)
9. Collected $120 cash for services previously billed.
Cash
+ + = +
Barone,
Capital
1. +10,000 +10,000
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
Chapter
1-41
Accounts
Receivable Equipment
Accounts
Payable
LO 7 Analyze the effects of business transactions
on the accounting equation.
Investment
Assets Liabilities Equity
6,820 + 630 + 5,000 = 250 + 12,200

42. .
List of Transactions for the months of December 2005 &
January 2006
1. Marie Collins invested $100,000 of her own money
Chapter
1-42
into her new pet shop on December 01, 2005. The
store will be named “Love thy Pet.”
2. On January 1, 2006, Marie paid $1,350 rent on the pet
shop which is the rent of December.
3. For January 2, 2006, Marie borrowed $50,000 by
signing a 4-month, 10% note payable.
4. For January 5, 2006, Marie purchased pet store
equipment for $7,500 in cash.
5. For January 6, 2006, Marie hired two salespeople to
begin work on the 9th of January in the store for a bi-weekly
wage of $800 each.
6. For January 8, 2006, Marie receives a cash advance
of $1,200 from a customer for an Irish sheep dog that
will not arrive from the breeder until March 7, 2006.

43. Chapter
1-43
List of Transactions for the months of December
2005 & January 2006
7. For January 10, 2006, Marie received $5,500 in
cash for two bulldogs sold to a customer.
8. For January 14, 2006, Marie purchased 2-months
of pet supplies on account at a cost of $500 from
Morrison pet supply store.
9. For January 15, 2006, Marie declared and paid a
dividend to stockholders of $400.
10. For January 31, 2006 Marie purchased a 2-year
insurance policy costing $2,400 that will expire on
January 31 of 2008.
11. For January 31, 2006, Marie paid the
salespersons bi-weekly wages.

44. Marie Collins invested $100,000 of her own
money into her new pet shop on January 1,
2006. The store will be named “Love thy
Pet.”
Chapter
1-44

45. On January 1, 2006, Marie paid $1,350 rent
on the pet shop. (For December last year)
Chapter
1-45

46. For January 2, 2006, Marie borrowed
$50,000 by signing a 4-month, 10% note
payable.
Chapter
1-46

47. For January 5, 2006, Marie purchased pet
store equipment for $7,500 in cash.
Chapter
1-47

48. For January 6, 2006, Marie hired two salespeople
to begin work on the 9th of January in the shop for
a bi-weekly wage of $800 each.
This was not a transaction; therefore, it requires no journal
entries because assets were not exchanged at the time of
this event.
Chapter
1-48

49. For January 8, 2006, Marie receives a cash
advance of $1,200 from a customer for an Irish
sheep dog that will not arrive from the breeder
until March 7, 2006.
Chapter
1-49

50. For January 10, 2006, Marie received $5,500
in cash for two bulldogs sold to a customer.
Chapter
1-50

51. For January 14, 2006, Marie purchased 2-
months of pet supplies on account from
Morrison pet supply store for $500.
Chapter
1-51

52. For January 15,2006, Marie declared and
paid a dividend to stockholders of $400.
Chapter
1-52

53. For January 31, 2006 Marie purchased a 2-
year insurance policy costing $2,400 that will
expire on January 31 of 2008.
Chapter
1-53

54. Chapter
1-54
For January 31, 2006, Marie paid the
salespeople their bi-weekly wages.

55. Chapter
1-55

56. Financial Statements
Companies prepare four financial statements from the summarized
accounting data:
Chapter
1-56
Balance Sheet
Income
Statement
Statement of
Cash Flows
Owner’s
Equity
Statement
LO 8 Understand the four financial statements and how they are prepared.

57. Financial Statements
Income Statement
Chapter
1-57
Reports the revenues and
expenses for a specific period of
time.
Net income – revenues exceed
expenses.
Net loss – expenses exceed
revenues.
Barone’s Repair Shop
Income Statement
For the Month Ended May 31, 2008
Revenues:
Service revenue $ 5,850
Expenses:
Salary expense 2,000
Rent expense 400
Advertising expense 250
Total expenses 2,650
Net income $ 3,200
LO 8 Understand the four financial statements and how they are prepared.

58. Financial Statements
Income Statement
Chapter
1-58
Barone’s Repair Shop
Income Statement
For the Month Ended May 31, 2008
Revenues:
Service revenue $ 5,850
Expenses:
Salary expense 2,000
Rent expense 400
Advertising expense 250
Total expenses 2,650
Net income $ 3,200
Owner’s Equity
Statement
Barone’s Repair Shop
Owner's Equity Statement
For the Month Ended May 31, 2008
Barone's, Capital May 1 $ -
Add: Investment 10,000
Net income 3,200
13,200
Less: Drawings 1,000
Barone's, Capital May 31 $ 12,200
Net income is needed to determine
the ending balance in owner’s equity.
LO 8 Understand the four financial statements and how they are prepared.

59. Financial Statements
Chapter
1-59
Owner’s Equity
Statement
Barone’s Repair Shop
Owner's Equity Statement
For the Month Ended May 31, 2008
Barone's, Capital May 1 $ -
Add: Investment 10,000
Net income 3,200
13,200
Less: Drawings 1,000
Barone's, Capital May 31 $ 12,200
Statement indicates the reasons
why owner’s equity has increased
or decreased during the period.
LO 8 Understand the four financial statements and how they are prepared.

60. Financial Statements
Balance Sheet
Chapter
1-60
Owners’ Equity
Statement
Barone’s Repair Shop
Owner's Equity Statement
For the Month Ended May 31, 2008
Barone's, Capital May 1 $ -
Add: Investment 10,000
Net income 3,200
13,200
Less: Drawings 1,000
Barone's, Capital May 31 $ 12,200
Barone’s Repair Shop
Balance Sheet
May 31, 2008
Assets
Cash $ 6,820
Accounts receivable 630
Equipment 5,000
Total assets $ 12,450
Liabilities
Accounts payable $ 250
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
LO 8 Understand the four financial statements and how they are prepared.

61. Financial Statements
Balance Sheet
Chapter
1-61
Reports the assets, liabilities,
and owner’s equity at a specific
date.
Assets listed at the top, followed
by liabilities and owner’s equity.
Total assets must equal total
liabilities and owner’s equity.
Barone’s Repair Shop
Balance Sheet
May 31, 2008
Assets
Cash $ 6,820
Accounts receivable 630
Equipment 5,000
Total assets $ 12,450
Liabilities
Accounts payable $ 250
Owner's Equity
Barone's, capital 12,200
Total liab. & equity $ 12,450
LO 8 Understand the four financial statements and how they are prepared.

62. Financial Statements
Balance Sheet
Chapter
1-62
Barone’s Repair Shop
Balance Sheet
May 31, 2008
Assets
Cash $ 6,820
Accounts receivable 630
Equipment 5,000
Total assets $ 12,450
Liabilities
Accounts payable $ 250
Owner's Equity
Barone's, capital 12,200
Total liab. & equity $ 12,450
Statement of Cash Flows
Barone’s Repair Shop
Statement of Cash Flows
For the Month Ended May 31, 2008
Cash flow from operating activities
Cash receipts from revenues $ 5,220
Cash paid for expenses (2,400)
Cash provided by operations 2,820
Cash flow from investing activitites
Purchase of equipment (5,000)
Cash flow from financing activities
Investment by owners 10,000
Drawings by owners (1,000)
Cash provided by financing 9,000
Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 $ 6,820
LO 8 Understand the four financial statements and how they are prepared.

63. Financial Statements
Chapter
1-63
Statement of Cash Flows Information for a specific
period of time.
Barone’s Repair Shop
Statement of Cash Flows
Answers the following:
For the Month Ended May 31, 2008
Cash flow from operating activities
Cash receipts from customers $ 5,220
Cash paid for expenses (2,400)
Cash provided by operations 2,820
Cash flow from investing activities
Purchase of equipment (5,000)
Cash flow from financing activities
Investment by owners 10,000
Drawings by owners (1,000)
Cash provided by financing 9,000
Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 $ 6,820
1. Where did cash come
from?
2. What was cash used
for?
3. What was the change
in the cash balance?
LO 8 Understand the four financial statements and how they are prepared.

64. Chapter
1-64
End of the Chapter!