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Chapter 01
ACCOUNTING IN BUSINESS
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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C1
IMPORTANCE OF ACCOUNTING
Accounting
Identifying
Select transactions and events
Recording
Input, measure and classify
Communicating
Prepare, analyze and interpret
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C2
USERS OF ACCOUNTING
INFORMATION
External Users
•Lenders
•Consumer Groups
•Shareholders •External Auditors
•Governments •Customers
Internal Users
•Managers
•Sales Staff
•Officers/Directors •Budget Officers
•Internal Auditors •Controllers
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C2
USERS OF ACCOUNTING
INFORMATION
External Users
Financial accounting
provides external users
with financial statements.
Internal Users
Managerial accounting
provides information needs
for internal decision-makers.
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C2
OPPORTUNITIES IN ACCOUNTING
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C2
ACCOUNTING JOBS BY AREA
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C3
ETHICS - A KEY CONCEPT
Ethics
Beliefs that
distinguish right
from wrong
Accepted standards
of good and bad
behavior
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C3
ETHICS - A KEY CONCEPT
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C4
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Financial accounting practice is governed by concepts
and rules known as generally accepted accounting
principles (GAAP).
Relevant Information
Affects the decision of its users.
Reliable Information
Is trusted by users.
Comparable
Information
Is helpful in contrasting
organizations.
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C4
SETTING ACCOUNTING PRINCIPLES
Financial Accounting Standards Board
is the private group that sets both
broad and specific principles.
The Securities and Exchange Commission is the
government agency that establishes reporting
requirements for companies that issue stock to the public.
The International Accounting Standards Board (IASB)
issues International Financial Reporting Standards that
identify preferred accounting practices to create harmony
among accounting practices of different countries.
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C4
INTERNATIONAL STANDARDS
The International Accounting Standards Board (IASB), an
independent group (consisting of 16 individuals from many
countries), issues International Financial Reporting Standards
(IFRS) that identify preferred accounting practices.
IASB
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C4
INTERNATIONAL STANDARDS
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C4
PRINCIPLES AND ASSUMPTIONS
OF ACCOUNTING
Revenue Recognition Principle
1. Recognize revenue when it is earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash received
plus cash value of items received.
Matching Principle
A company must record its expenses
incurred to generate the revenue reported.
Cost Principle
Accounting information is based on
actual cost. Actual cost is
considered objective.
Full Disclosure Principle
A company is required to report the
details behind financial statements
that would impact users’ decisions.
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C4
ACCOUNTING ASSUMPTIONS
Now
Future
Going-Concern Assumption
Reflects assumption that the business
will continue operating instead of
being closed or sold.
Monetary Unit Assumption
Express transactions and events in
monetary, or money, units.
Business Entity Assumption
Time Period Assumption
A business is accounted for
separately from other business
entities, including its owner.
Presumes that the life of a company can
be divided into time periods, such as
months and years.
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C4
FORMS OF BUSINESS ENTITIES
Sole
Proprietorship
Partnership
Corporation
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C4
CHARACTERISTICS OF BUSINESSES
Characteristic
Proprietorship Partnership Corporation
Business entity
yes
yes
yes
Legal entity
no
no
yes
Limited liability
no*
no*
yes
Unlimited life
no
no
yes
Business taxed
no
no
yes
One owner allowed
yes
no
yes
* Proprietorships and partnerships that are
set up as LLCs provide limited liability.
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C4
CORPORATION
Owners of a corporation are called
shareholders (or stockholders). Shareholders are
not personally liable for corporate acts. When a
corporation issues only one class of stock, we
call it common stock (or capital stock).
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C4
SARBANES-OXLEY (SOX)
Congress passed the Sarbanes-Oxley Act to help curb financial abuses at
companies that issue their stock to the public. Management must issue a report
stating that its internal controls are effective. Auditors must verify the
effectiveness of internal controls.
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A1
TRANSACTION ANALYSIS AND THE
ACCOUNTING EQUATION
Accounting Equation
Assets
= Liabilities + Equity
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A1
ASSETS
Cash
Accounts
Receivable
Vehicles
Store
Supplies
Notes
Receivable
Resources
owned or
controlled by
a company
Land
Buildings
Equipment
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A1
LIABILITIES
Accounts
Payable
Notes
Payable
Creditors’
claims on
assets
Taxes
Payable
Wages
Payable
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A1
EQUITY
Owner’s
Claims on
Assets
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P1
TRANSACTION ANALYSIS EQUATION
The accounting equation MUST remain in
balance after each transaction.
Assets
=
Liabilities
+
Equity
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P1
TRANSACTION 1: INVESTMENT BY OWNERS
On December 1, Chas Taylor invests
$30,000 cash to start a consulting business.
The accounts involved are:
(1) Cash (asset)
(2) Owner Capital (equity)
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P1
TRANSACTION 2: PURCHASE
SUPPLIES FOR CASH
Chas Taylor’s company, FastForward
purchases supplies paying $2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
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P1
TRANSACTION 3: PURCHASE
EQUIPMENT FOR CASH
FastForward purchases equipment for
$26,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
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P1
TRANSACTION 4: PURCHASE
SUPPLIES ON CREDIT
FastForward purchases Supplies of $7,100 on
account.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
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P1
TRANSACTION 5: PROVIDE
SERVICES FOR CASH
The company provides consulting services
receiving $4,200 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
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P1
TRANSACTION 6 AND 7: PAYMENT
OF EXPENSES IN CASH
The company pays $1,000 rent and $700 in
salary to the company’s only employee.
The accounts involved are:
(1) Cash (asset)
(2) Expenses (equity)
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P1
SUMMARY OF TRANSACTIONS
Other transactions were executed during December and the summary of
all transactions is shown below:
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P2
FINANCIAL STATEMENTS
Let’s prepare the financial statements reflecting the
transactions we have recorded.
1.Income Statement
2.Statement of Owner’s Equity
3.Balance Sheet
4.Statement of Cash Flows
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P2
INCOME STATEMENT
The income statement describes a company’s revenues
and expenses along with the resulting net income or
loss over a period of time due to earnings activities.
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P2
STATEMENT OF OWNER’S EQUITY
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P2
BALANCE SHEET
The Balance Sheet describes a company’s financial
position at a point in time.
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P2
STATEMENT OF CASH FLOWS
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A2
DECISION ANALYSIS
Return on assets (ROA) is stated in ratio form as
income divided by assets invested.
Return on assets =
Net income
Average total assets
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A3
1A RETURN AND RISK ANALYSIS
Many different
returns may be
reported.
Risk is the
uncertainty about
the return we will
earn.
The lower the risk, the lower our expected return.
ROA
Interest return on
savings accounts.
Interest return on
corporate bonds.
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C5
1B - BUSINESS ACTIVITIES AND THE
ACCOUNTING EQUATION
There are three major types of activities in any organization:
1. Financing Activities – Provide the means organizations
use to pay for resources such as land, buildings, and
equipment to carry out plans.
2. Investing Activities - Are the acquiring and disposing of
resources (assets) that an organization uses to acquire
and sell its products or services.
3. Operating Activities – Involve using resources to
research, develop, and purchase, produce, distribute,
and market products and services.
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END OF CHAPTER 01