chapter 1 introduction to accounting and business accounting, 21 st edition author: warren reeve...
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Chapter Chapter 11Introduction to Accounting Introduction to Accounting
and Businessand BusinessAccounting, 21st Edition
Author: Warren Reeve Fess
PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
Manufacturing BusinessManufacturing BusinessManufacturing BusinessManufacturing Business
ProductProduct ProductProduct
General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television
General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television
Types of Businesses
Merchandising BusinessMerchandising BusinessMerchandising BusinessMerchandising Business
ProductProduct ProductProduct
Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video
retailer
Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video
retailer
Types of Businesses
Service BusinessService BusinessService BusinessService Business
ProductProduct ProductProduct
Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication
Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication
Types of Businesses
There are three types of business organizations:
There are three types of business organizations:
Proprietorship Partnership Corporation
A proprietorship is owned by one individual.
A proprietorship is owned by one individual.
Advantages• Ease in organizing• Low cost of
organizing
Disadvantage• Limited source of
financial resources• Unlimited liability
A partnership is owned by two or more individuals.
A partnership is owned by two or more individuals.
Advantages• More financial
resources than a proprietorship.
• Additional management skills.
Disadvantage
• Unlimited liability.
A corporation is organized under state or federal statutes as a separate legal entity.
A corporation is organized under state or federal statutes as a separate legal entity.
Advantage• The ability to obtain
large amounts of resources by issuing stocks.
Disadvantage
• Double taxation.
A business stakeholder is a person or entity having an interest in the economic performance of the business.
Business StakeholdersBusiness StakeholdersBusiness StakeholdersBusiness Stakeholders
STAKEHOLDERS
Internal: Owners, managers, employees
External: Customers, creditors, government
• Accounting provides information for managers to use in operating the business.
• In addition, accounting provides information to other stakeholders to use in assessing the economic performance and condition of the business.
The Role of Accounting in Business
The Role of Accounting in Business
•Accounting can be defined as an information system that provides reports to stakeholders about the economic activities and condition of a business.
•You may think of accounting as the “Language of business” this is because accounting is the means by which business information is communicated to the stakeholders.
Definition of AccountingDefinition of Accounting
Profession of AccountingProfession of AccountingProfession of AccountingProfession of Accounting
Accountants employed by a business firm or a not-for-profit organization are said to be
engaged in private accounting.
Accountants employed by a business firm or a not-for-profit organization are said to be
engaged in private accounting.
Accountants and their staff who provide services on a fee basis are said to be
employed in public accounting.
Accountants and their staff who provide services on a fee basis are said to be
employed in public accounting.
Generally Accepted Accounting Generally Accepted Accounting Principles (GAAP)Principles (GAAP)
Generally Accepted Accounting Generally Accepted Accounting Principles (GAAP)Principles (GAAP)
Financial accountants follow Generally Accepted Accounting Principles (GAAP) in preparing reports.
These reports allow investors and other stakeholders to compare one company to another.
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources The resources owned by a owned by a
businessbusiness
The resources The resources owned by a owned by a
businessbusiness
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the The rights of the creditors, which creditors, which represent debts represent debts of the businessof the business
The rights of the The rights of the creditors, which creditors, which represent debts represent debts of the businessof the business
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the The rights of the ownersowners
The rights of the The rights of the ownersowners
What is a business transaction?
A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.
On November 1, 2005, Hassan Mohamed begins a business that will be known as Talasan
Business Transactions and the Accounting Equation
a. Hassan deposits $25,000 in a bank a. Hassan deposits $25,000 in a bank account in the name of account in the name of TalasanTalasan..
a. Hassan deposits $25,000 in a bank a. Hassan deposits $25,000 in a bank account in the name of account in the name of TalasanTalasan..
Hassan M, Capital25,000 Investment
by Hassan
Cash25,000 a.
Assets Owner’s Equity=
=
b. Talasan exchanged $20,000 for land.b. Talasan exchanged $20,000 for land.b. Talasan exchanged $20,000 for land.b. Talasan exchanged $20,000 for land.
Hassan M, Capital25,000
Cash + Land 25,000 Bal.
Assets Owner’s Equity=
=b. –20,000 +20,000Bal. 5,000 20,000 25,000
Accounts Hassan M,Cash + Supplies + Land Payable Capital
Assets
c. During the month, Talasan purchased c. During the month, Talasan purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).
c. During the month, Talasan purchased c. During the month, Talasan purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).
Owner’s Liabilities + Equity=
Bal. 5,000 20,000 25,000c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
=
d. Talasan provided services to d. Talasan provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.
d. Talasan provided services to d. Talasan provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.
Bal. 12,500 1,350 20,000 1,350 32,500d. + 7,500 + 7,500
Accounts Hassan M,Cash + Supplies + Land Payable Capital
Assets Owner’s Liabilities + Equity
Bal. 5,000 1,350 20,000 1,350 25,000Fees earned
=
=
e. – 3,650 –2,125– 800– 450
– 275
Wages
Rent
Util.
Misc.
Accounts Hassan M,Cash + Supplies + Land Payable Capital
Assets
e. Talasan paid the following expenses: e. Talasan paid the following expenses: wages, $2,125; rent, $800; utilities, wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.$450; and miscellaneous, $275.
e. Talasan paid the following expenses: e. Talasan paid the following expenses: wages, $2,125; rent, $800; utilities, wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.$450; and miscellaneous, $275.
Owner’s Liabilities + Equity=
Bal. 12,500 1,350 20,000 1,350 32,500
=
Bal. 8,850 1,350 20,000 1,35028,850
Accounts Hassan M,Cash + Supplies + Land Payable Capital
Assets
f. Talasan paid $950 to creditors f. Talasan paid $950 to creditors during the month.during the month.
f. Talasan paid $950 to creditors f. Talasan paid $950 to creditors during the month.during the month.
Owner’s Liabilities + Equity=
Bal. 8,850 1,350 20,000 1,350 28,850f. – 950 – 950
=
Bal. 7,900 1,350 20,000 400 28,850
Accounts Hassan M,Cash + Supplies + Land Payable Capital
Assets
g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.
g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.
Owner’s Liabilities + Equity=
Bal. 7,900 1,350 20,000 400 28,850g. – 800 – 800
=
Bal. 7,900 550 20,000 400 28,050
Supplies expense
Accounts Hassan M,Cash + Supplies + Land Payable Capital
Assets
h. At the end of the month, Hassan h. At the end of the month, Hassan withdrew $2,000 in cash from the withdrew $2,000 in cash from the business for personal use.business for personal use.
h. At the end of the month, Hassan h. At the end of the month, Hassan withdrew $2,000 in cash from the withdrew $2,000 in cash from the business for personal use.business for personal use.
Owner’s Liabilities + Equity
Bal. 7,900 550 20,000 400 28,050h. –2,000 –2,000Bal. 5,900 550 20,000 400 26,050
With-drawal
=
=
Owner’s withdrawals
Expenses
Decreased byDecreased by
Owner’s Equity
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Increased byIncreased by
Owner’s investments
Revenues
Net income
Accounting reports, called financial statements, provide summarized information to the owner.
Accounting reports, called financial statements, provide summarized information to the owner.
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements• Income statement—A summary of the revenue and
expenses for a specific period of time.
• Statement of owner’s equity—A summary of the changes in the owner’s equity that have occurred during a specific period of time.
• Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date.
• Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.
Fees earned $7 500 00
Operating expenses:
Rent expense
$2 125 00Wages expense
800 00
Supplies expense
450 00Utilities expense
275 00Miscellaneous expense
Total operating expenses 1 135 00
TalasanIncome Statement
For the Month Ended November 30, 2005
800 00
Net income $3 050 00
Hassan M, capital, November 1, 2005 $ 0
TalasanStatement of Owner’s Equity
For the Month Ended November 30, 2005
Investment on November 1 $25 000 00Net income for November 3 050 00
$28 050 00Less withdrawals 2 000 00Increase in owner’s equity 26 050 00Hassan M, capital, November 30, 2005 $26 050 00
Assets Liabilities
TalasanBalance Sheet
November 30, 2005
Cash $ 5 900 00 Accounts Payable $ 400 00
Supplies 550 00 Owner’s Equity
Land 20 000 00 Hassan M, cap. 26 050 00
Total liabilities and
Total assets $26 450 00 owner’s equity $26 450 00
This balance sheet presented using the account form
When the balance sheet displays the liabilities and owner’s equity below the
assets, the report form is being used.
When the balance sheet displays the liabilities and owner’s equity below the
assets, the report form is being used.
The EndThe End
Chapter 1Chapter 1
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