Chapter 1

I ntroduction to Accounting
and Business
Accounting, 21
st
Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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1. Describe the nature of a business.
2. Describe the role of accounting in business.
3. Describe the importance of business ethics and
the basic principles of proper ethical conduct.
4. Describe the profession of accounting.
5. Summarize the development of accounting
principles and relate them to practice.
6. State the accounting equation and define each
element of the equation.
Objectives
After studying this
chapter, you should
be able to:
7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
Objectives
8. Describe the financial statements of a
proprietorship and explain how they interrelate.
9. Use the ratio of liabilities to owners equity to
analyze the ability of a business to withstand
poor business conditions.
Manufacturing Business
Product
General Motors Cars, trucks, vans
Intel Computer chips
Boeing Jet aircraft
Nike Athletic shoes and apparel
Coca-Cola Beverages
Sony Stereos and television
Types of Businesses
Merchandising Business
Product
Wal-Mart General merchandise
Toys R Us Toys
Circuit City Consumer electronics
Lands End Apparel
Amazon.com Internet books, music, video
retailer
Types of Businesses
Service Business
Product
Disney Entertainment
Delta Air Lines Transportation
Marriott Hotels Hospitality and lodging
Merrill Lynch Financial advice
Sprint Telecommunication
Types of Businesses
There are three types of
business organizations
Proprietorship
Partnership
Corporation
A proprietorship
is owned by one
individual.
Advantages
Ease in organizing
Low cost of
organizing
Disadvantage
Limited source of
financial resources
Unlimited liability
Joes
A partnership is
owned by two or
more individuals.
Advantages
More financial
resources than a
proprietorship.
Additional
management skills.
Disadvantage
Unlimited liability.
Joe and Martys
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.
J & M, Inc.
Business Strategies
A business strategy is an integrated
set of plans and actions designed to
enable the business to gain an
advantage over its competitors, and
in doing so, to maximize its profits.
Business Strategies
Under a low-cost strategy, a business
designs and produces products or
services of acceptable quality at a cost
lower than that of its competitors.
Wal-Mart
Southwest Airlines
Business Strategies
Under a differential strategy, a business
designs and produces products or services
that possess unique attributes or
characteristics which customers are willing
to pay a premium price.
Maytag
Tommy Hilfiger
Value Chain of a Business
A value chain is the way a
business adds value for its
customers by processing inputs
into product or service.
Inputs
Business
Processes
Products or
Services
Customer
Value
A business stakeholder is a person or
entity having an interest in the
economic performance of the business.
Business Stakeholders
2
Assess
stakeholders
informational
needs.
The Process of
Providing Information
STAKEHOLDERS
Internal:
Owners,
managers,
employees
External:
Customers,
creditors,
government
1
Identify
stake-
holders.
Accounting
Information
System
Design the
accounting
information
system to meet
stakeholders
needs.
3
4
Record
economic
data about
business
activities
and events.
The Process of
Providing Information
5
Prepare
accounting
reports for
stakeholders.
STAKEHOLDERS
Internal:
Owners,
managers,
employees
External:
Customers,
creditors,
government
Accounting
Information
System
The Process of
Providing Information
Business Ethics
1. Avoid small ethical lapses.
2. Focus on your long-term
reputation.
3. You may expect to suffer
adverse personal
consequences for holding
to an ethical position.
Sound
Principles that
form the
foundation for
ethical
behavior
Profession of 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.
Generally Accepted
Accounting
Principles (GAAP)
The business entity concept
limits the economic data in
the accounting system to
data related directly to the
activities of the business.
The cost concept is the
basis for entering the
exchange price, or cost
of an acquisition in the
accounting records.
The objectivity concept
requires that the accounting
records and reports be based
upon objective evidence.
The unit-of-measure
concept requires that
economic data be
recorded in dollars.
The Accounting Equation
Assets = Liabilities + Owners Equity
The resources
owned by a
business
The Accounting Equation
Assets = Liabilities + Owners Equity
The rights of the
creditors, which
represent debts
of the business
The Accounting Equation
Assets = Liabilities + Owners Equity
The rights of the
owners
What is a business
transaction?
A business transaction is an economic event or
condition that directly changes an entitys financial
condition or directly affects its results of operations.
On November 1,
2005, Chris
Clark begins a
business that will
be known as
NetSolutions.
a. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions.
Chris Clark, Capital
25,000 Investment
by Chris
Clark
Cash
25,000
a.
Assets Owners Equity
=
=
b. NetSolutions exchanged $20,000 for land.
Chris Clark, Capital
25,000
Cash + Land
25,000
Bal.
Assets Owners Equity
=
=
b. 20,000 +20,000
Bal. 5,000 20,000 25,000
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
c. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay the
supplier in the near future (on account).
Owners
Liabilities + Equity
=
Bal. 5,000 20,000 25,000
c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
=
d. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
Bal. 12,500 1,350 20,000 1,350 32,500
d. + 7,500 + 7,500
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
Owners
Liabilities + Equity
Bal. 5,000 1,350 20,000 1,350 25,000
Fees
earned
=
=
e. 3,650 2,125
800
450
275
Wages
Rent
Util.
Misc.
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
e. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
Owners
Liabilities + Equity
=
Bal. 12,500 1,350 20,000 1,350 32,500
=
Bal.8,850 1,350 20,000 1,350 28,850
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
f. NetSolutions paid $950 to
creditors during the month.
Owners
Liabilities + Equity
=
Bal. 8,850 1,350 20,000 1,350 28,850
f. 950 950
=
Bal. 7,900 1,350 20,000 400 28,850
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies were used.
Owners
Liabilities + Equity
=
Bal. 7,900 1,350 20,000 400 28,850
g. 800 800
=
Bal. 7,900 550 20,000 400 28,050
Supplies
expense
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
h. At the end of the month, Chris
withdrew $2,000 in cash from the
business for personal use.
Owners
Liabilities + Equity
Bal. 7,900 550 20,000 400 28,050
h. 2,000 2,000
Bal. 5,900 550 20,000 400 26,050
With-
drawal
=
=
Owners
withdrawals
Expenses
Decreased by
Owners Equity
Effects of Transactions on Owners Equity
Increased by
Owners
investments
Revenues
Net
income
Accounting reports, called
financial statements,
provide summarized
information to the owner.
Financial Statements
Income statementA summary of the revenue
and expenses for a specific period of time.
Statement of owners equityA summary of
the changes in the owners equity that have
occurred during a specific period of time.
Balance sheetA list of the assets, liabilities,
and owners equity as of a specific date.
Statement of cash flowsA summary of the
cash receipts and disbursements for a specific
period of time.
Fees earned $7 500 00
Operating expenses:
Rent expense
$2 125 00 Wages expense
800 00
Supplies expense
450 00 Utilities expense
275 00 Miscellaneous expense
Total operating expenses 4 450 00

NetSolutions
Income Statement
For the Month Ended November 30, 2005
800 00
Net income $3 050 00
To the statement
of owners equity

Chris Clark, capital, November 1, 2005 $ 0
NetSolutions
Statement of Owners Equity
For the Month Ended November 30, 2005
Investment on November 1 $25 000 00
Net income for November 3 050 00
$28 050 00
Less withdrawals 2 000 00
Increase in owners equity 26 050 00
Chris Clark, capital, November 30, 2005 $26 050 00

From the income
statement
To the
balance sheet
Assets Liabilities
NetSolutions
Balance Sheet
November 30, 2005
Cash $ 5 900 00 Accounts Payable $ 400 00
Supplies 550 00 Owners Equity
Land 20 000 00 Chris Clark, cap. 26 050 00
Total liabilities and
Total assets $26 450 00 owners equity $26 450 00
From the
statement of
owners equity
This balance sheet presented
using the account form
When the balance sheet displays
the liabilities and owners equity
below the assets, the report form is
being used.
Cash flows from operating activities:
Cash received from customers $ 7 500 00
Deduct cash payments for expenses
and payments to creditors 4 600 00
Net cash flow from operating activities 2 900 00
Cash flows from investing activities:
Cash payment for acquisition of land (20 000 00
Cash flows from financing activities:
Cash received as owners investment $25 000 00
Deduct cash withdrawal by owner 2 000 00
Net cash flow from financing activities 23 000 00
Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
Should match Cash on the balance sheet
)
Statement of Cash Flows
Cash Flows from Operating ActivitiesThis section
reports a summary of cash receipts and cash payments
from operations.
Cash Flows from I nvesting ActivitiesThis section
reports the cash transactions for the acquisition and sale
of relatively permanent assets.
Cash Flows from Financing ActivitiesThis section
reports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.
Ratio of liabilities
to owners equity
=
Total Liabilities
Total owners equity (or total
stockholders equity)
The ratio of liabilities to owners equity
allows owners like Chris Clark to analyze
the firms ability to withstand poor
business conditions.
Tools for Financial
Analysis and Interpretation
Ratio of
liabilities to
owners equity
=
$400
$26,050
Tools for Financial
Analysis and Interpretation
=

0.015
Ratio of
liabilities to
owners equity
The End
Chapter 1