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HFT 2401
Chapter 1
Introduction to Accounting
Accounting – A Means to an End
 Provides answers to questions
 How much cash do we have
 What was our payroll cost
 When did we buy a piece of equipment & at
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what cost
What is our food cost
What is our revenue
What are our expenses
What did we keep (net income)
American Accounting Association
defines accounting as
“The process of identifying,
measuring, and communicating
economic information to permit
informed judgments and decisions
by users of that information”
The Accounting Process
 1) Observe events in
order to identify the
events that are of a
financial nature –
monetary terms
 2) Requires the
recording, classifying,
and summarizing these
events.
 3) Produces various
financial statements for
internal & external users.
 4) Communication
Bookkeeping vs. Accounting
 Bookkeeping – records & classifies transactions
 Accounting – summarizes and interprets
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Branches of Accounting
 Financial Accounting – Revenues,
expenses, assets & liabilities
 Cost Accounting – Record, classify,
allocate & report current & prospective
costs. Used mainly in manufacturing
 Managerial Accounting – Analyzes &
provides information to management to
enhance controls
Branches of Accounting
 Tax Accounting – Prepare & file tax
returns
 Auditing – Reviews and evaluates
documents, records and control systems
 Accounting Systems – Information
systems
Organizations that Influence
Accounting
 AICPA
 FASB
 SEC
 IRS
Forms of Business Organizations
 Sole Proprietorship
 Partnerships
 Limited Partnerships
 Limited Liability
Companies (LLC)
 Corporations
Sole Proprietorship
 Easiest to organize / dissolve
 Legally not a separate business – liability
issues
 It is separate for accounting purposes, however
 Owner not paid a salary or wage - withdrawals
Partnerships
 Two or more people joined together in a non-
corporate manner for conducting business. Can
use a written or oral agreement
Partnerships
 Advantages
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Greater financial
strength
Does not pay taxes
Shares liability
Greater
management
strength
 Disadvantages
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Partners are taxed
on profits regardless
of cash distribution
Limits decision
making process
Unlimited legal
liability
Limited Partnerships
 Offers liability protection to limited
partners
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General Partner(s) – responsible for debts
of the partnership
Limited Partner(s) – may not actively
participate in the day to day operations of
the business
Agreement must be written
Limited partners liability is limited to the
amount of their investment
Corporations
 A legal entity created by
a state or other political
authority
 Characteristics
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An exclusive name
Continued existence
independent of
stockholders
Paid in capital
represented by shares
of stock
Overall control vested
in its directors
Corporations
 Advantages
 Shareholders liability
limited to amount of
investment
 Owners are taxed on
distributed profits
(dividends)
 Employee equity
participation (ESOP)
 Lower tax rates
 Corporation
continues on in
perpetuity
 Disadvantages
 Double taxation
 Ownership control
Other Forms Of Business
Organization
 S-Corp
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Eliminates double
taxation
Limited to 75
shareholders
Only one class of
stock
Shareholders pay
taxes
 Limited Liability
Company (LLC)
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May have unlimited
number of owners
May have a single
owner
Not restricted to one
class of stock
Principles of Accounting
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Cost
Business Entity
Continuity of the Business Unit
Unit of Measurement
Objective Evidence
Full Disclosure
Consistency
Matching
Conservatism
Materiality
Cost Principle
States that when a transaction is
recorded, the transaction price
(cost) establishes the accounting
value
Business Entity
Statements are based on the concept
that each business maintains its own
accounts, & that these accounts are
separate from other interests of the
owners
Continuity of the Business Unit
The assumption that the business
will continue indefinitely
Unit of Measurement
All transactions are expressed
in monetary terms
Objective Evidence
Accounting records are based on
objective evidence ( invoices,
checks, cash register receipts)
Full Disclosure
Financial statements must provide all
information pertinent to interpretation of
the financial statements
Consistency
The same accounting method from
time period to time period
Matching
Match revenues with expenses
Cash versus accrual
Conservatism
Recognize expenses as soon as
possible, but delay recognition of
revenues until they are sure
Materiality
Events or information must be
accounted for if they make a
difference to the financial
statements
Overview of Financial Statements
 Balance Sheet
 Income Statement
 Statement of Cash Flows
Fundamentals of Accounting
 Balance Sheet
Assets (Things Owned)
= Liabilities ( Obligations )
+ Equity
( Residual Claims on Assets )
Fundamentals of Accounting
 Income Statement
Revenues
- Expenses
= Net Income (Loss)
Temporary Accounts are Netted and Closed to Equity
(retained earnings)
Cash vs Accrual
 Cash Basis Accounting
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Recognize revenue or expense when cash
received or disbursed
 Accrual Basis Accounting
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Recognize revenue when earned
Recognize expense when incurred
Fundamental Equation
 Assets = Liabilities + Owners Equity
 Assets = Liabilities
+ Permanent OE
+ Temporary OE
 Assets = Liabilities
+ Permanent OE
+ Revenue
- Expenses
Assets
 Resources owned by a business
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Common characteristic – the capacity to
provide future benefit or service
Use for the purpose production,
consumption and exchange of goods or
services
Future economic benefits results in cash
inflows
Liabilities
 Claims against assets
 Creditors
 Existing debts and obligations
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Accounts payable
Notes payable
Wages payable
Sales, Real Estate and Income Taxes
payable
Equity
 Claims of the owners on the assets
 Corporations
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Paid in capital
Retained earnings
Revenues
Expenses
Dividends
 Revenues
> Expenses = Net Income
 Revenues < Expenses = (Net Loss)
Transactions
 Transactions defined: economic events of the
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enterprise recorded
Each transaction may be internal or external
Each transaction must identify the specific
items affected and the net change on each item
Each transaction has a dual effect on the
accounting equation
The two sides of the accounting equation must
always equal
Effects of Transactions on the
Accounting Equation
 Increase in an asset
 Decrease in another asset
 Increase in a liability
 Increase in owners equity
 Increase in a liability
 Increase in an asset
 Decrease in another liability
 Decrease in owners equity
 Increase in owners equity
 Increase in an asset
 Decrease in liability
Homework Assignment
 Problem 1
 Problem 4
 Problem 5
 Problem 9
 Problem 12