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Copyright 2012 Pearson Education, Inc. Publishing asCopyright 2012 Pearson Education, Inc. Publishing as

Accounting and the Business

Environment

Chapter 1

1

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Define accounting

2

1

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Identifcation

Select economicevents(transactions)

Recording

Record,classiy,and

summarize

AccountingRepor

ts

SOFT!T"Annual Report

#repareaccounting

reports

Analyse and

interpretor users

$ommunication

ILLUSTRATION 1-1

THE ACCOUNTING PROCESS

2000

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Definition of Accounting:

Accounting is the language of business. Accounting is the information

system that measures business activity, processes the data into reports,

and communicates the results to decision makers.

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Accounting is the language of

business.!

"he information system that:

#easures business activity

$rocesses the data into reports

Communicates the results to decision makers

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Financial Accountingo #rovides inormation primarily to people outside t%e

companyo

#rovides inormation t%at &ould 'e %elpul in attractingcapitalE!uity and debt "use#ul in debt contracts$Credit #ro% suppliersCusto%ers

o #rovides inormation %elpul in monitoring andevaluating management perormance

anagerial AccountingPro&ides in#or%ation to people inside the co%pany

Internal in&est%ent decisionsPer#or%ance e&aluationTa AccountingPro&ides in#or%ation to the ta' authorities

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7/82Copyright 2012 Pearson Education, Inc. Publishing asCopyright 2012 Pearson Education, Inc. Publishing as

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ILLUSTRATION 1-2

QUESTIONS ASKED BY INTERNAL USERS

$an &e a*ord to give employees

pay raises t%is year+

Is cas% sucient to pay 'ills+

-%at is t%e cost o manuacturingeac% unit o product+

-%ic% product line is t%e most

profta'le+

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ILLUSTRATION 1-3

QUESTIONS ASKED BY EXTERNAL USERS

Is t%e company earningsatisactory income+

.o& does t%e company comparein size and profta'ility &it% itscompetitors+

-ill t%e company 'e a'le to pay its de'ts as t%ey come due+

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Accounting

1.Includes bookkeeping

2.Also includes much more

Bookkeeping

1.Involves only the recording of economic

events

2.Is just one part of accounting

BOOKKEEPING DISTINGUISHED

FROM ACCOUNTING

1(

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Define the users of

financial information

1)

2

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Decision #akers

1*

%ndividuals Businesses

Creditors %nvestors

"a&ing Authorities

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"'o (ields of Accounting

Financial Accounting

$rovides information for

e&ternal decision makers

%nvestorsCreditors

"a&ing Authorities

Managerial Accounting

(ocuses on information for

internal decision makers

#anagersBusiness )'ners

Employees

1+

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S1-! "S#$S %F FI&A&'IA( I&F%$MA)I%&

*uppose you are the manager of +regs "unes, %nc. "he

company needs a bank loan in order to purchase music

e-uipment. %n evaluating the loan re-uest, the banker

asks about the assets and liabilities of the business. %n

particular, the banker 'ants to kno' the amount of the

businesss stockholders e-uity.Requirements:

1. %s the banker considered an internal or e&ternal user

of financial information

/. 0hich financial statement 'ould provide the best

information to ans'er the bankers -uestions

20

The banker is an external user.

The balance sheet

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Describe the accounting

profession and the organiations

that govern it

21

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"he Accounting $rofession

2ucrative career 'ith many opportunitiesCertified $ublic Accountants 3C$As4

$ass -ualifying e&am

#eet education and5or e&perience re-uirements

22

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+overning )rganiations

2

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Ethics in Accounting and Business

2-

Conflict of %nterest

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Audit*EC re-uires companies to have financial statements

e&amined by independent accountants

Auditors 'ill provide an opinion on financial

statements, if possible

2

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%dentify the different types

of business organiations

2(

-

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BUSINESS ENTERPRISES

A business o*ned by one person is generally a

proprietorship+o*ner,s euity./

A business o*ned by t*o or more persons associated as

partners is a partnership+partners, euity./

A business organi0ed as a separate legal entity under

corporation la* and having o*nership divided into

transferable shares is called a corporation

+shareholders, euity./

2)

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Comparison of Business (orms

2*

$roprietorship $artners Corporation

)'ners$roprietor:)ne )'ner

$artners: "'o ormore

*tockholders:usually many

2ife of)rganiation

2imited by o'ner6schoice or death

2imited byo'ners choice

or death%ndefinite

2iability of o'nersfor business debts

$roprietor: )'neris personally liable

$artners arepersonally liable

*tockholders notpersonally liable

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Delineate the distinguishing

characteristics and organiation

of a corporation

2+

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Corporate Characteristics

0

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Corporate Characteristics3continued4

1

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Corporate Characteristics3continued4

2

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)rganiation of a Corporation

%ncorporators obtain charter from the state

Charter authories corporation to:

%ssue stock

Conduct business in accordance 'ith state la'

%ncorporators agreed to a set of byla's

Byla's are the rule book that guides the

corporation.

Corporations begins to e&ist 'hen stock is

issued

*tockholders vote on 'ho 'ill serve on Board of

Directors

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*tructure of a Corporation

-

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S1-! )23#S %F B"SISS %$4A&I5A)I%&

Akbar plans on opening Akbar Computers. 7e is

considering various types of business organiationsand 'ishes to organie his business 'ith unlimited

life and limited liability features. Additionally,

Akbar 'ants the option to raise additional e-uity

easily in the future. 0hich type of business

organiation 'ill meet Akbars needs best

A corporation has all the requirements of Akbarsrequest. A corporation has an unlimited life,

shareholders have limited liability and additional

stock can be sold to raise additional equity.

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Apply accounting concepts and

principles

(

(

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%(8*

%nternational (inancial 8eporting *tandards+uidelines that govern accounting

+oals include:

$rovide useful information for investment and lendingdecisions

#ust be relevant, reliable, and comparable

)

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Accounting $rinciples

*

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Accounting $rinciples

+

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Accounting $rinciples3continued4

-0

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Describe the accounting e-uation,

and define assets, liabilities, and

e-uity

-1

)

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"he Accounting E-uation

-2

A**E"* 2%AB%2%"%E* E9%";

Economic

8esources

Claims to Economic

8esources

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Assets

Economic resourcesBenefit the business in the future

E&amples:

Cash

Accounts receivable

#erchandise inventory

(urniture

2and

-

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Claims to Assets

(iabilitiesDebts payable to outsiders

E&amples:

Accounts payable

Bank loans

#ortgages

#uity)'ners claims to the

assets of the business

%n a corporation,stockholders e-uity

--

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"he Accounting E-uation

-

Assets

2iabilities

E-uity

>> >>

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E-uity of a Corporation

-(

Assets 2iabilities*tockholders

e-uity

$aid@in

capital

8etained

earnings

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E-uity of a Corporation

-)

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et %ncome

-*

8etained

earnings

et income3loss4

@ Dividends

8evenues

@ E&penses

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8evenues

Amounts earned by delivering goods or servicesto customers

*ales revenue

*ervice revenue%nterest revenue

Dividend revenue

-+

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E&penses

)utflo's of assets or increasing liabilities in thecourse of delivering goods or services to

customers

rent e&pense

*alary e&pense

Advertising e&pense

tilities e&pense

%nterest e&pense

$roperty ta& e&pense

0

#1 16! '7A$A')#$IS)I'S %F A '%$3%$A)I%&

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#1-16! '7A$A')#$IS)I'S %F A '%$3%$A)I%&8

A''%"&)I&4 '%&'#3)S8 A&9 "SI&4 )7#

A''%"&)I&4 #:"A)I%&

*elect financial information for three corporations follo's:

Requirements:

1. Compute the missing amount in the accounting e-uation

for each entity.

1

Assets (iabilities #uity

e' 8ock +as >> ,>>>

D ideo 8entals >>

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#1-16! '%&)I&"#9

/ 2ist the seven main characteristics of a

corporation.

;/ 0hich accounting concept tells us that the previous

three corporations 'ill continue to e&ist in the future

2

Continuous ife and transferability

Corporate taxation

!overnment re"ulation

imited iability of #tockholders$o %utual A"ency

#eparate e"al &ntity

#eparation of o'nership and mana"ers

!oin" Concern Concept

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se the accounting e-uation to

analye transactions

*

" i

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"ransaction

An event that affects the financial position ofthe business

Can be measured reliably

Every transaction impacts at least t'o items"he accounting e-uation balances before

and after each transaction

-

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TRANSACTION ANALYSIS

Marc 9oucetdecides to open a computer

programming service/

A/0

Sot'yte

S C O S S

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TRANSACTION 1

On Septem'er 1, %e invests 213,444cas% in t%e 'usiness, &%ic% %e namesSot'yte5

Trans. # = Liabilities +

Cash Supplies Equipment

Accounts

Payable

M. Doucet

Capital

!" "$%%% = "$%%% &n'estment

()ner*s EquityAssets

)here is an increase in the asset 'ash8 >>8 and

an eual increase in the o*ner,s euity8 M/ 9oucet8

'apital8 >>/

)here is an increase in the asset 'ash8 >>8 and

an eual increase in the o*ner,s euity8 M/ 9oucet8

'apital8 >>/


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TRANSACTION 2

Softbyte purchases computer euipment for

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TRANSACTION 3

Sot'ytepurc%ases computer paper and supplies epected to lastseveral mont%s rom $%ua% Supply $ompanyor 21,644onaccount5

)he asset Supplies is increased >8 and the liability

Accounts 3ayable is increased by the same amount/

)he asset Suppliesis increased >8 and the liability

Accounts 3ayableis increased by the same amount/


Cash Supplies EquipmentAccounts

PayableM. Doucet

Capital

-alance %%% ,%%% "$%%%

()ner*s EquityAssetsTrans. # = Liabilities +


PayableM. Doucet

Capital

-alance %%% ,%%% "$%%%

!/ "0%% "0%%

-alance %%% + "0%% + ,%%% = "0%% + "$%%%



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TRANSACTION 4

Sot'ytereceives 21,744 cas% romcustomers or programming services it%as provided5

'ash is increased >8 and

M/ 9oucet8 'apital is increased >/

'ashis increased >8 and

M/ 9oucet8 'apitalis increased >/



PayableM. Doucet

Capital

-alance %%% "0%% ,%%% "0%% "$%%%



PayableM. Doucet

Capital

-alance %%% "0%% ,%%% "0%% "$%%%

!1 "%% "%% Ser'ice 2e'enue

-alance 3%% + "0%% + ,%%% = "0%% + "0%%



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TRANSACTION 5

Softbyte receives a bill for for advertising its business

but pays the bill on a later date/

Softbytereceives a bill for for advertising its business

but pays the bill on a later date/

Accounts 3ayable is increased 8 and M/

9oucet8 'apital is decreased /

Accounts 3ayableis increased 8 and M/

9oucet8 'apitalis decreased /



PayableM. Doucet

Capital

-alance 3%% + "0%% + ,%%% = "0%% + "0%%



PayableM. Doucet

Capital

-alance 3%% + "0%% + ,%%% = "0%% + "0%%

!$ $% !$%A4'ertisin5 E6pense

-alance 3%% "0%% ,%%% "$% "$3$%



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TRANSACTION

Sot'yteprovides programming services o28,344 or customers and receives cas% o21,344, &it% t%e 'alance paya'le onaccount5

'ash is increased >@ Accounts $eceivable is

increased >>@ and M/ 9oucet8 'apital is

increased >/

'ashis increased >@ Accounts $eceivableis

increased >>@ andM/ 9oucet8 'apitalis

increased >/


CashAccount2ecei'able Supplies Equipment

AccountsPayable

M. DoucetCapital

-alance 3%% + % + "0%% + ,%%% = "$% "$3$%



AccountsPayable

M. DoucetCapital

-alance 3%% + % + "0%% + ,%%% = "$% "$3$%

!0 "$%% %%% /$%% Ser'ice 2e'enue

-alance "%,%% %%% "0%% ,%%% "$% "31$%



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TRANSACTION !

Softbyte pays its advertising bill of in cash/Softbytepays its advertising bill of in cash/

'ash is decreased and Accounts

3ayable is decreased the same amount/

'ashis decreased andAccounts

3ayableis decreased the same amount/

Cash

Account

2ecei'able Supplies Equipment

Accounts

Payable

M. Doucet

Capital-alance 3%%% %%% "0%% ,%%% "$% ",,$%



AccountsPayable

M. DoucetCapital

-alance 3%%% %%% "0%% ,%%% "$% ",,$%

! !$% !$%

-alance ,$% + %%% + "0%% + ,%%% = "0%% + ",,$%



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TRANSACTION "

)he sum of > in cash is received from customers *ho

have previously been billed for services in )ransaction 6/

)he sum of >in cash is received from customers *ho

have previously been billed for services in )ransaction 6/

'ash is increased > and Accounts

$eceivable is decreased by the same amount/

'ashis increased >andAccounts

$eceivableis decreased by the same amount/



AccountsPayable

M. DoucetCapital

-alance ,$% + %%% + "0%% + ,%%% = "0%% + ",,$%



AccountsPayable

M. DoucetCapital

-alance ,$% %%% "0%% ,%%% "0%% ",,$%

!3 0%% !0%%

-alance 3/$% + "1%% + "0%% + ,%%% = "0%% + ",,$%



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TRANSACTION 10

Marc 9oucet *ithdra*s > in cash from

the business for his personal use/

Marc 9oucet*ithdra*s > in cash from

the business for his personal use/

'ash is decreased > and M/ 9oucet8

'apital is decreased by the same amount/

'ashis decreased >andM/ 9oucet8

'apitalis decreased by the same amount/



AccountsPayable

M. DoucetCapital

-alance 3/$% "1%% "0%% ,%%% "0%% ",,$%



AccountsPayable

M. DoucetCapital

-alance 3/$% "1%% "0%% ,%%% "0%% ",,$%

!"% !"/%% !"/%% Doucet Dra)in5s

-alance %$% + "1%% + "0%% + ,%%% = "0%% + "01$%


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FINANCIAL STATEMENTS

After transactions are identified8 recorded8 andsummari0ed8 four financial statementsare prepared

from the summari0ed accounting data!

1. An income statementpresents the revenuesand epenses and resulting net income or net

loss of a company for a specific period of

time/

2.A statement of o*ner,s euitysummari0es the

changes in o*ner,s euity for a specific period

of time/

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FINANCIAL STATEMENTS

In addition to t%e income statement andstatement o o&ner9s e:uity, t&oadditional statements are prepared;

3.A 'alance s%eetreports t%e assets,lia'ilities, and o&ner9s e:uity o a'usiness enterprise at aspecifc date5

4.A cas%

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%ncome *tatement

()

*tatement of 8etained

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*tatement of 8etained

Earnings

(*

Balance *heet

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Balance *heet

(+

*tatement of Cash (lo's

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*tatement of Cash (lo's

)0

31-;6A! 3$#3A$I&4 FI&A&'IA( S)A)#M#&)S

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Copyright 2012 Pearson Education, Inc. Publishing asCopyright 2012 Pearson Education, Inc. Publishing as)1

*tudio $hotography, %nc., 'orks 'eddings and prom@type parties. "he

balance of retained earnings 'as >> at December ?1, />11. At

December ?1, />1/, the businesss accounting records sho' these

balances:

$repare the follo'ing financial statements for *tudio $hotography, %nc.for the year ended December ?1, />1/:

a. %ncome statement

b. *tatement of retained earnings

c. Balance sheet

%nsurance e&pense < H,>>> Accounts receivable < H,>>>

Cash ?F,>>> ote payable 1/,>>>

Accounts payable F,>>> 8etained earnings F,>>>

Advertising e&pense ?,>>> *alary e&pense /=,>>>

*ervice revenue H>,>>> E-uipment =>,>>>

Dividends ?1,>>> Common stock /I,>>>

31-;6A! '%&)I&"#9

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Copyright 2012 Pearson Education, Inc. Publishing asCopyright 2012 Pearson Education, Inc. Publishing as)2

Studio 3hotography8 Inc/

Income Statement

;ear Ended December ?1, />1/

8evenue:

*ervice revenue < H>,>>>E&penses:

*alary e&pense < /=,>>>

%nsurance e&pense H,>>>

Advertising e&pense ?,>>>

"otal e&penses ?G,>>>

et income < ,>>>

31-;6A! '%&)I&"#9

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Copyright 2012 Pearson Education, Inc. Publishing asCopyright 2012 Pearson Education, Inc. Publishing as)

Studio 3hotography8 Inc/Statement of $etained #arnings

;ear Ended December ?1, />1/

8etained earnings, December ?1, />11 < 1G,>>>

Add: et income ,>>>

*ubtotal < G>,>>>

2ess: Dividends 31?,>>>4

8etained earnings, December ?1, />11 < F,>>>

31-;6A! '%&)I&"#9

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Copyright 2012 Pearson Education, Inc. Publishing asCopyright 2012 Pearson Education, Inc. Publishing as)-

Studio 3hotography8 Inc/

Balance Sheet

December ?1, />1/

Assets (iabilities

Cash

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se financial statements to evaluate business

performance

)

14

Decision +uidelines

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Decision +uidelines

)(

Chapter 1 *ummary

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Chapter 1 *ummary

Accounting is the language of business. (inancial

statements report a companys activities in monetary

terms.

Different usersJincluding individuals, business

o'ners, managers, investors, creditors, and ta&authoritiesJrevie' a companys financial statements

for different reasons. Each users goal 'ill determine

'hich pieces of the financial statements he or she

'ill find most useful.

))

Chapter 1 *ummary

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Chapter 1 *ummary

#ost .*. businesses follo' generally accepted

accounting principles 3+AA$4. %f the company is

publicly traded, then it must also follo' *EC

guidelines. %f the company operates internationally,

then international financial reporting standards3%(8*4 'ill apply. "he goal is that, eventually, all

public .*. companies 'ill report using %(8* rules.

"here are three main forms of business organiations:

proprietorships, partnerships, corporations,. Each isuni-ue in its formation, o'nership, life, and liability

e&posure.

)*

Chapter 1 *ummary

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Chapter 1 *ummary

Corporations are formed 'ith a specific state byissuance of a charter. "he stockholders o'n the

corporation, but they have no liability for the

corporations actions.

Corporations usually raise capital more easily thanother forms of business, but have the disadvantage of

additional regulation and additional ta&es.

"he accounting concepts are the underlying

assumptions used 'hen recording financial

information for a business. "hink of the concepts like

rules of a game. ;ou have to play by the rules.

)+

Chapter 1 *ummary

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Chapter 1 *ummary

"he accounting e-uation must al'ays e-ual. "hat is,

Assets 3'hat you o'n4 must e-ual 2iabilities 3'hatyou o'e4 E-uity 3net 'orth4. %n a corporation,

e-uity is composed of paid@in capital 3by outsiders4

and retained earnings 3earnings kept for use by the

company4.

"he accounting e-uation is Assets K 2iabilities

E-uity. Every business transaction affects various

parts of the e-uation, but after each transaction isrecorded, the e-uation must A20A;* balance

3e-ual4.

*0

Chapter 1 *ummary

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Chapter 1 *ummary

(inancial statements are prepared from the ending

balances of each account. Each financial statementsho's a different vie' of the companys overall

results.

(inancial statements are prepared from thetransaction analyses 3summary of events4 reported

in each account 3E&hibit 1@G4 in the order sho'n in

E&hibit 1@F. o one financial statement sho's

everything about a company. %t is the financialstatements AD the relationships the statements

sho' that give users the overall picture for a

specific company.*1

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chapter 1_ijaz (2)

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