Introduction to Accounting and Business

1. 1 Introduction to Accounting and Business

3. Accounting is an Information System which facilitates Problem-Solving in a business • What are the problems? • Are there profits? • What do we own? • How much cash do we have? • Can we afford it??? • Where is the $$$ going? • How much did it cost us • Who owes us money? How much • What are we worth?

4. What are the three types of business operated for profit? • Service businesses • Merchandising businesses • Manufacturing businesses

5. Product Disney Entertainment Delta Air Lines Transportation Marriott Hotels Hospitality and lodging Merrill Lynch Financial advice Sprint Telecommunication Types of Businesses Service Business Name 3 not listed in your book

6. 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 Merchandising Business Name 3 not listed in your book

7. 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 Manufacturing Business Name 3 not listed in your book

8. Businesses can be organized in three different forms. What are they? • Proprietorship • Partnership • Corporation

9. A proprietorshipis owned by one individual. • Advantages • Ease in organizing • Low cost of organizing • Disadvantage • Limited source of financial resources • Unlimited liability Joe’s

10. Advantages • More financial resources than a proprietorship. • Additional management skills. A partnership is owned by two or more individuals. • Disadvantage • Unlimited liability. Joe and Marty’s

11. 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.

12. The Process of Providing Information What is meant by “stakeholders”? Who are the users of Accounting Information? Internal users: External users:

13. 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.

14. Generally Accepted Accounting Principles (GAAP)

15. SOME COMMON 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.

16. SOME COMMON GAAP 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.

17. Quick Quiz 1—close your books and notes. • What are the three types of business organizations? • Name three users of business information. • What are the four accounting principles?

19. The Accounting Equation Assets = Liabilities + Owner’s Equity List five things owned by a business The resources owned by a business

20. The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business What are some common business debts?

21. The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners What are other terms we associate with these rights?

22. The Accounting Equation Assets = Liabilities + Owner’s Equity Let’s examine how this equation comes into play.

23. 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.

24. Seven business transactions What different financial activities take place in a business? List as many as you can.

25. Seven business transactions • Receipt of cash • Payment of cash • Events that create a legal obligation to pay out cash (or other assets) in the future • Events that obligate another party to pay you cash (or other assets) in the future • Sale of a product or completion of a service for a customer––this is known as earning revenue • The use of products or services in running your business––this is known as incurring an expense • 7. An investment made in the business by the owners

26. The Accounting Equation Assets = Liabilities + Owner’s Equity Now we will see the effect of very specific transactions as they effect the Equation. Remember: the Equation must always stay in balance.

27. ANALYZING BUSINESS TRANSACTIONS a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions. • For every business transaction, ask the following questions: • Is there a financial effect? What is the amount? • What parts of the equation will be effected? • Are they increasing or decreasing?

28. Assets Owner’s Equity = Chris Clark, Capital 25,000 Investment by Chris Clark Cash 25,000 = a. a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.

29. Bal. 5,000 20,000 25,000 b. NetSolutions exchanged $20,000 for land. Assets Owner’s Equity = Chris Clark, Capital 25,000 Cash + Land 25,000 Bal. = b. –20,000 +20,000

30. Bal. 5,000 1,350 20,000 1,350 25,000 c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account). Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital = Bal. 5,000 20,000 25,000 c. + 1,350 + 1,350

31. Bal. 12,500 1,350 20,000 1,350 32,500 d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash. Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital Bal. 5,000 1,350 20,000 1,350 25,000 = Fees earned d.+ 7,500 + 7,500

32. e. – 3,650 –2,125 – 800 – 450 – 275 Wages Rent Util. Misc. • Bal. 8,850 1,350 20,000 1,350 28,850 e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital Bal. 12,500 1,350 20,000 1,350 32,500 =

33. Bal. 7,900 1,350 20,000 400 28,850 f. NetSolutions paid $950 to creditors during the month. Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital = Bal. 8,850 1,350 20,000 1,350 28,850 f. – 950 – 950

34. Bal. 7,900 550 20,000 400 28,050 g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used. Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital = Bal. 7,900 1,350 20,000 400 28,850 Supplies expense g. – 800 – 800

35. Bal. 5,900 550 20,000 400 26,050 h. At the end of the month, Chris withdrew $2,000 in cash from the business for personal use. Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital = Bal. 7,900 550 20,000 400 28,050 With-drawal h. –2,000 –2,000

36. Decreased by Increased by Owner’s withdrawals Expenses Owner’s investments Revenues Net income Effects of Transactions on Owner’s Equity Owner’s Equity

38. Accounting reports, called financial statements, provide summarized information to the owner.

39. Financial 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.

40. NetSolutions Income Statement For the Month Ended November 30, 2005 REVENUE: Fees Income Operating Expense List each expense Total operating expenses Net income

41. NetSolutions Income Statement For the Month Ended November 30, 2005 Fees earned $7 500 00 Operating expenses: Wages expense $2 125 00 Rent expense 800 00 Supplies expense 800 00 Utilities expense 450 00 Miscellaneous expense 275 00 Total operating expenses 1 135 00 To the statement of owner’s equity Net income $3 050 00

42. Investment on November 1 $25 000 00 Net income for November 3 050 00 $28 050 00 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2005 Chris Clark, capital, November 1, 2005 $ 0 From the income statement Less withdrawals 2 000 00 Increase in owner’s equity 26 050 00 Chris Clark, capital, November 30, 2005 $26 050 00 To the balance sheet

43. NetSolutions Balance Sheet November 30, 2005 From the statement of owner’s equity Assets Liabilities Cash $ 5 900 00 Accounts Payable $ 400 00 Supplies 550 00 Owner’s Equity Land 20 000 00 Chris Clark, cap. 26 050 00 Total liabilities and Total assets $26 450 00 owner’s equity $26 450 00 This balance sheet presented using the accountform

44. NetSolutions Statement of Cash Flows For the Month Ended November 30, 2005 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 owner’s 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 ) Should match Cash on the balance sheet

45. Total Liabilities Total owner’s equity (or total stockholders’ equity) Ratio of liabilities to owner’s equity = Tools for Financial Analysis and Interpretation The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze the firm’s ability to withstand poor business conditions.

46. Ratio of liabilities to owner’s equity $400 $26,050 = Ratio of liabilities to owner’s equity 0.015 = Tools for Financial Analysis and Interpretation

47. Chapter 1 The End

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49. Objectives 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. After studying this chapter, you should be able to:

50. Objectives 7. Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation. 8. Describe the financial statements of a proprietorship and explain how they interrelate. 9. Use the ratio of liabilities to owner’s equity to analyze the ability of a business to withstand poor business conditions.