Download Accounting and the Business Environment

Accounting and
the Business
Environment
Chapter 1
Why Is Accounting Important?
Accounting is the
information system that
measures business
activities, processes the
information into
reports, and
communicates the
results to decision
makers.
Financial
Accounting
Managerial
Accounting
Financial vs. Managerial

Financial accounting:
◦ Reporting financial information related to the
financial position of the company
◦ The results of its operation
◦ Cash flows to external stakeholders

Managerial accounting:
◦ The processes that generate information that can be
used by internal management to make better
decisions about the day-to-day operations of the
company
◦ The specific kinds of information and reports often
differs depending upon the company and situation.
Users of Financial Information
The Organizations That Govern
Accounting
FASB
•
•
•
Financial
Accounting
Standards Board
Privately funded
Creates the rules
and standards that
govern financial
accounting
SEC
•
•
Securities and
Exchange
Commission
Oversees the US
financial markets
Generally Accepted Accounting
Principles (GAAP)
Issued by the FASB.
• Establishes the rules for
recording transactions and
preparing financial
statements.
• Published online as part of
the Accounting Standards
Codification.
• Requires that information be
useful.
•
Relevant = The info
allows users to make a
decision.
Faithfully
Representative = The
info is complete,
neutral, and free from
material error.
Accounting Assumptions
Economic
Entity
Assumption
Monetary
Unit
Assumption
Cost
Principle
Going
Concern
Assumption
Business Organization
The Accounting Equation
Assets
=
Liabilities
+
Equity
Rule: The Balance Sheet Equation
must ALWAYS be in balance.
The Accounting Equation
Assets
=
Liabilities
+
Equity
• An asset is an economic resource
that is expected to benefit the
business in the future.
Examples:
Cash
Merchandise inventory
Furniture
Land
The Accounting Equation
Assets
=
Liabilities
are debts
that are
owed to
creditors.
Liabilities
+
Equity
The Accounting Equation
Assets
=
Liabilities
+
Equity
• The owners’ claims to the assets of the business
are called equity.
• Also called stockholders’ equity
Increases in equity result from:
Contributed capital (owner contributions)
Revenues
Decreases in equity result from:
Dividends (owner distributions)
Expenses
The Accounting Equation
Assets
=
Liabilities
+
Equity
• Equity consists of two components:
1. Contributed capital
2. Retained earnings
Contributed capital:
• Also called paid-in capital, it is the amount
invested in the corporation by its owners, the
stockholders.
• Common stock represents the basic ownership of
every corporation.
The Accounting Equation
Assets
=
Liabilities
• Revenues are
economic resources
that have been earned
by delivering products
or services to
customers.
• Earnings are separate
from collections
+
Equity
Common Stock
– Dividends
+ Revenues
- Expenses
The Accounting Equation
Assets
=
Liabilities
Expenses are the
costs associated
with selling goods
or services.
+
Equity
Common Stock
– Dividends
+ Revenues
- Expenses
The Accounting Equation
Assets
=
Liabilities
• When Revenues >
Expenses = Net
Income.
• When Revenues <
Expenses = Net
Loss.
+
Equity
Common Stock
– Dividends
+ Revenues
- Expenses
Using the expanded accounting equation, solve for
the missing amount.
Assets
Liabilities
Common Stock
Dividends
Revenues
Expenses
$ 71,288
2,260
?
14,420
53,085
28,675
How Do You Analyze A Transaction?
A transaction is any event
that changes the financial
position of a company.
1. Involves the exchange of
economic resources.
2. Must be able to measure
the economic impact in
monetary units.

Is it a transaction?
Buying a copying
machine for the office
for $4,000 cash.
xMeeting with a
potential customer.
How Do You Analyze A Transaction?

When analyzing a transaction – follow these steps:
1. Identify the account classification(s) and specific
accounts affected by the transaction.
 There must be at least two accounts affected
2. How is each account affected (increased or
decreased)?
3. Determine if the accounting equation is still in
balance
 The left side must always equal the right side
Assets
=
Liabilities
+
Equity
How Do You Analyze A Transaction?
Smart Touch Learning starts a new business. The
company sells $30,000 of Common Stock. How
does this impact the Accounting Equation?
How Do You Analyze A Transaction?
Next, Smart Touch purchases land for $20,000
cash.
In this transaction, all the change occurred on the left side of the
equation. One asset was converted into a different asset.
How Do You Analyze A Transaction?
In Transaction #3, Smart Touch buys $500 of
office supplies, offering to pay in 30 days.
Remember, in business it is quite common for a business to
purchase something now, and pay for it later.
How Do You Analyze A Transaction?
In Transaction #4, Smart Touch provides training
services to customers for $5,500 cash.
How Do You Analyze A Transaction?
In Transaction #5, Smart Touch performs $3,000
of services for a customer who will pay in one
month. This promise is an asset called accounts
receivable
How Do You Analyze A Transaction?
In Transaction #6, Smart Touch pays $3,200 in
cash expenses; $2,000 for office rent and $1,200
for employee salaries.
How Do You Analyze A Transaction?
In Transaction #7, Smart Touch pays $300 to the
store from which it purchased office supplies in
Transaction #3.
How Do You Analyze A Transaction?
In Transaction #8, Smart Touch collects $2,000
from the client for which Smart Touch
performed services in Transaction #5.
Preparing Financial Statements
Income Statement
Statement of Retained Earnings
Balance Sheet
Statement of
Cash Flows

The same four
financial
statements are
prepared by
companies as a
way to
communicate
with
stakeholders.
130
Income Statement

Reports the success or failure of the company’s
operations for a period of time.
SMART TOUCH LEARNING
Income Statement
Month Ended November 30, 2014
Revenues
Service Revenue
$
Expenses
Rent expense
$ 2,000
Salaries Expense
1,200
Total expenses
Net income
$
8,500
3,200
5,300
132
Statement of Retained Earnings
Shows amounts and causes of changes in Retained
Earnings during the period.
 The ending balance in Retained Earnings will also appear in
the Stockholders’ Equity section of the Balance Sheet.

SMART TOUCH LEARNING
Statement of Retained Earnings
Month Ended November 30, 2014
Retained Earnings, Nov. 1, 2014
$
Net income for the month
Dividends
Retained Earnings, Nov. 30, 2014
$
5,300
5,300
(5,000)
300
134
The balance sheet reports on the assets,
liabilities, and stockholders’ equity of the
business as of a specific date.
135
136
Evaluate Business Performance
Evaluate Business Performance
Return on Assets (ROA)
 Formula: __Net Income
Average Total Assets

Average Total Assets =
(Beginning total assets + Ending total assets)
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