Introduction to Accounting and Business

1. 1 Introduction to Accounting and Business Student Version

2. 1 1 Describe the nature of a business, the role of accounting, and ethics in business. 1-2

3. Manufacturing BusinessProduct General Motors Corp. Cars, trucks, vans Merchandising BusinessProduct Wal-Mart General merchandise 1 Types of Businesses ServiceBusinessService Delta Air Lines Transportation services

4. 1 The Role of Accounting in Business Accountingcan be defined as aninformation system that provides reports to users about the economic activities and condition of a business.

5. 1 Managerial Accounting The area of accounting that provides internal users with information is called managerial accounting. The objective of managerial accounting is to provide relevant and timely information for managers’ and employees’ decision-making needs.

6. 1 Financial Accounting The area of accounting that provides external users with information is calledfinancial accounting. The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business.

7. 2 Summarize the development of accounting principles and relate them to practice. 1-7

8. 2 Business Entity Concept Under the business entity concept, the activities of a business are recorded separately from the activities of its owners, creditors, or other businesses.

9. 2 Forms of Business Entity • A proprietorship is owned by one individual. • A partnership is similar to proprietorship except that it is owned by two or more individuals. • A corporation is organized under state or federal statutes as a separate legal taxable entity. • A limited liability company (LLC) combines attributes of a partnership and a corporation.

10. 2 Cost Concept Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price.

11. 2 Objectivity Concept The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence.

12. 2 Unit of Measure Concept The unit of measure conceptrequires that economic data be recorded in dollars.

13. 3 State the accounting equation and define each element of the equation. 1-13

14. The rights of the owners The rights of the creditors are the debts of the business The resources owned by a business 3 The Accounting Equation Assets = Liabilities + Owner’s Equity

15. 4 Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation. 1-15

16. 4 Business Transaction A business transaction is an economic event or condition that directly changes an entity’s financial condition or its results of operations.

17. 4 Transaction A On November 1, 2009, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.

18. CASH 25,000 a. 4 Transaction A (continued) Assets Owner’s Equity = CHRIS CLARK, CAPITAL 25,000Investment by Chris Clark =

19. 4 Transaction B On November 5, 2009, NetSolutions paid $20,000 for the purchase of land as a future building site.

20. b. –20,000 +20,000 4 Transaction B (continued) Assets Owner’s Equity = CASH + LAND 25,000 CHRIS CLARK, CAPITAL 25,000 = Bal. Bal. 5,000 20,000 25,000

21. 4 Transaction C On November 10, 2009, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future.

22. 4 Transaction C (continued) Assets Liabilities + Owner’s Equity = ACCOUNTS CHRIS CLARK, PAYABLE + CAPITAL CASH + SUPPLIES + LAND 5,000 20,000 25,000 = Bal. c. +1,350 +1,350 Bal. 5,000 1,350 20,000 1,350 25,000

23. 4 Transaction D On November 18, 2009, NetSolutions received cash of $7,500 for providing services to customers. A business earns money by selling goods or services to its customers. This amount is called Revenue.

24. 4 Transaction D (continued) Assets CASH + SUPPLIES + LAND 5,000 1,350 20,000 Bal. d. +7,500 Bal. 12,500 1.350 20,000

25. 4 Transaction D (continued) Liabilities + Owner’s Equity ACCOUNTS CHRIS CLARK, FEES PAYABLE + CAPITAL + EARNED 1,350 25,000 Bal. d. +7,500 Bal. 1,350 25,000 7,500

26. 4 Transaction E On November 30, 2009, NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous,$275.

27. 4 Transaction E (continued) Assets CASH + SUPPLIES + LAND 12,500 1,350 20,000 Bal. e. –3,650 Bal. 8,850 1.350 20,000

28. 4 Transaction E (continued) Liabilities + Owner’s Equity ACCOUNTS CHRIS CLARK, FEES WAGES RENT UTIL. MISC. PAYABLE + CAPITAL + EARNED – EXP. – EXP. – EXP. – EXP. 1,350 25,000 7,500 Bal. e. –2,125 –800 –450 –275 Bal. 1,350 25,000 7,500 –2,125 –800 –450 –275

29. 4 Transaction F On November 30, 2009, NetSolutions paid creditors on account, $950.

30. 4 Transaction F (continued) Assets CASH + SUPPLIES + LAND 8,850 1,350 20,000 Bal. f. –950 Bal. 7,900 1.350 20,000

31. 4 Transaction F (continued) Liabilities + Owner’s Equity ACCOUNTS CHRIS CLARK, FEES WAGES RENT UTIL. MISC. PAYABLE + CAPITAL + EARNED – EXP. – EXP. – EXP. – EXP. 1,350 25,000 7,500 –2,125 –800 –450 –275 Bal. f. –950 Bal. 400 25,000 7,500 –2,125 –800 –450 –275

32. 4 Transaction G On November 30, 2009, Chris Clark determined that the cost of supplies on hand at the end of the period was $550.

33. 4 Transaction G (continued) Assets CASH + SUPPLIES + LAND 7,900 1,350 20,000 Bal. g. –800 Bal. 7,900 550 20,000

34. 4 Transaction G (continued) Liabilities + Owner’s Equity ACCOUNTS CHRIS CLARK, FEES WAGES RENT SUP. UTIL. MISC. PAYABLE + CAPITAL + EARNED – EXP. – EXP. – EXP. – EXP. – EXP. 400 25,000 7,500 –2,125 –800 –450 –275 Bal. g. –800 Bal. 400 25,000 7,500 –2,125 –800 –800 –450 –275

35. 4 Transaction H On November 30, 2009, Chris Clark withdrew $2,000 from NetSolutions for personal use.

36. 4 Transaction H (continued) Assets CASH + SUPPLIES + LAND 7,900 550 20,000 Bal. h. –2,000 Bal. 5,900 550 20,000

37. 4 Transaction H (continued) Liabilities + Owner’s Equity ACCTS. CLARK, CLARK, FEES WAGES RENT SUP. UTIL. MISC. PAY. + CAPITAL – DRAW. + EARNED – EXP. – EXP. – EXP. – EXP. – EXP. 400 25,000 7,500 –2,125 –800 –800 –450 –275 Bal. h. –2,000 Bal.400 25,000 –2,000 7,500 –2,125 –800 –800 –450 –275

38. 5 Describe the financial statements of a proprietorship and explain how they interrelate. 1-38

39. 5 Income Statement The incomestatement reports the revenues and expenses for a period of time, based on the matching concept.

40. 5 Matching Concept The matching concept is applied by matching the expenses with the revenue generated during a period by those expenses.

41. 5 The excess of revenue over the expenses is called net income or net profit.If the expenses exceed the revenue, the excess is a net loss.

42. 5 Exhibit 6 Financial Statements for NetSolutions Net income is carried to the statement of owner’s equity.

43. 5 Exhibit 6 Financial Statements for NetSolutions (continued) From the income statement To the balance sheet

44. 5 Exhibit 6 Financial Statements for NetSolutions (continued) This amount is compared to the net cash flow on the statement of cash flows. From the statement of owner’s equity

45. 5 Exhibit 6 Financial Statements for NetSolutions (continued) This amount should match Cash on the balance sheet.