Introduction to Accounting and Business

1. 0 1 Introduction to Accounting and Business

2. 0 After studying this chapter, you should be able to: • Describe the nature of a business and the role of ethics and accounting in business. • Summarize the development of accounting principles and relate them to practice. • State the accounting equation and define each element of the equation.

3. 0 After studying this chapter, you should be able to: • Describe and illustrate how business transactions can be recorded in terms of the resulting change in the basic elements of the accounting equation. • Describe the financial statements of a proprietorship and explain how they interrelate.

4. 0 1-1 Objective 1 Describe the nature of a business and the role of ethics and accounting in business.

5. ServiceBusinessService The Walt Disney Company Entertainment Delta Air Lines Transportation Marriott International Hotels Hospitality and lodging Bank of America Corporation Financial services XM Satellite Radio Satellite radio 0 1-1 Types of Businesses

6. Merchandising BusinessProduct Wal-Mart General merchandise GameStop Corporation Video games and accessories Best Buy Consumer electronics Gap Inc. Apparel Amazon.com Internet books, music, video 0 1-1 Types of Businesses

7. Manufacturing BusinessProduct General Motors Corp. Cars, trucks, vans Samsung Cell phones Dell Inc. Personal computers Nike Athletic shoes and apparel The Coca-Cola Company Beverages Sony Corporation Stereos and televisions 0 1-1 Types of Businesses

8. 0 1-1 Common Forms of Business Organizations • Proprietorship • Partnership • Corporation • Limited liability company

9. 0 1-1 A proprietorshipis owned by one individual and— • Comprises 70% of business organizations in the United States. • Requires low cost of organizing. • Is limited to financial resources of the owner. • Is used by small businesses.

10. 0 1-1 A partnershipis similar to a proprietorship except that it is owned by two or more individuals and— • Comprises 10% of business organizations in the United States. • Combines the skills and resources of more than one person.

11. 0 1-1 A corporationis organized under state or federal statues as a separate legal taxable entity and— • Generates 90% of the total dollars of business receipts received. • Comprises 20% of the businesses. Continued

12. 0 1-1 • Includes ownership divided into shares of stock, sold to shareholders (stockholders). • Is able to obtain large amounts of resources by issuing stock. • Is used by large businesses.

13. 0 1-1 A limited liability company(LLC)combines attributes of a partnership and a corporation in that it is organized as a corporation. However, a limited liability corporation can elect to be taxed as a partnership and— • Is a popular alternative to a partnership. • Has tax and liability advantages to the owners.

14. 0 1-1 A business stakeholderis a person orentity having an interest in the economic performance and well-being of a business.

15. 0 1-1 Capital market stakeholdersprovide the major financing for the business in order for the business to begin and continue its operations.

16. 0 1-1 Product or service marketstakeholdersinclude customers who purchase the business’s products or services as well as the vendors who supply inputs to the business.

17. 0 1-1 Government stakeholdershave an interest in the economic performance of a business. City, county, state, and federal governments collect taxes from businesses within their jurisdiction.

18. 0 1-1 Internal stakeholdersinclude individuals employed by the business. Managers have an incentive to maximize the economic value of the business. Employees have an interest because their jobs depend on it.

19. 0 1-1 The moral principles that guide the conduct of individuals are called ethics.

20. 0 1-1 The answer to “What went wrong for these companies?” (Exhibit 2) involves three factors. 1. Individual character 2. Firm culture 3. Laws and enforcement

21. 0 1-1 Accountingcan be defined as aninformation system that provides reports to stakeholders about the economic activities and condition of a business.

22. 0 1-1 The process by which accounting provides information to business stakeholders is as follows: • Identify stakeholders. • Assess stakeholders’ information needs. • Design the accounting information system to meet stakeholders’ needs. • Record economic data about business activities and events. • Prepare accounting reports for stakeholders.

23. 0 1-1 23

24. 0 1-1 Financial accounting is primarily concerned with the recording and reporting of economic data and activities for a business. Managerial accounting uses both financial accounting and estimated data to aid management in running day-to-day operations and in planning future operations.

25. 0 1-1 Accountants employed by a business firm or a not-for-profit organization are said to be employed in private accounting. Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.

26. 0 1-2 Objective 2 Summarize the development of accounting principles and relate them to practice.

27. 0 1-2 The business entity conceptlimits the economic data in the accounting system to data related directly to the activities of the business.

28. 0 1-2 The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.

29. 0 1-2 The objectivity concept requires that the accounting records and reports be based upon objective evidence.

30. 0 1-2 The unit of measureconceptrequires that economic data be recorded in dollars.

31. Example Exercise 1-1 Follow My Example 1-1 $137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service. 31 0 1-2 On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records?

32. 0 1-3 Objective 3 State the accounting equation and define each element of the equation.

33. 0 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business

34. 0 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business

35. 0 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners

36. Example Exercise 1-2 Follow My Example 1-2 0 1-3 John Joos is the owner and operator of You’re A Star, a motivational consulting business. At the end of its accounting period, December 31, 2007, You’re A Star has assets of $800,000 and liabilities of $350,000. Using the accounting equation, determine the following amounts: The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2007, balance sheet of Hindsight Consulting. • Owner’s equity, as of December 31, 2007. • b. Owner’s equity, as of December 31, 2008, assuming that assets increased by $130,000 and liabilities decreased by $25,000 during 2008. • A = L + OE • $800,000 = $350,000 + OE • OE = $450,000 • A = L + OE • $130,000 = –$25,000 + OE OE = $155,000 • OE on Dec. 31, 2008: • $605,000 ($450,000 + $155,000) 36

37. 0 1-4 Objective 4 Describe and illustrate how business transactions can be recorded in terms of the resulting change in the basic elements of the accounting equation.

38. 0 1-4 A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

39. 0 1-4 On November 1, 2007, Chris Clark begins a business that will be known as NetSolutions.

40. Assets Owner’s Equity = Cash 25,000 = a. 0 1-4 Chris Clark, Capital 25,000 Investment by Chris Clark a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions. 40

41. Bal. 5,000 20,000 25,000 0 1-4 Assets Owner’s Equity = Chris Clark, Capital 25,000 Cash + Land 25,000 Bal. = b. –20,000 +20,000 b. NetSolutions exchanged $20,000 for land. 41

42. +1,350 +1,350 c. Bal. 5,000 1,350 20,000 1,350 25,000 0 1-4 Owner’s Liabilities + Equity Assets = Accounts Chris Clark, Cash + Supplies + Land Payable Capital = Bal. 5,000 20,000 25,000 c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account). 42

43. 0 1-4 Beginning with entry (d) the asset section will be shown first, then the liabilities and owner’s equity will be shown in the following slide.

44. d. +7,500 Bal. 12,500 1,350 20,000 0 1-4 Assets Cash + Supplies + Land Bal. 5,000 1,350 20,000 d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash. 44

45. +7,500 d. 1,350 Bal. 25,000 7,500 0 1-4 Liabilities + Owner’s Equity Accounts Chris Clark, Fees Payable Capital + Earned + Bal. 1,350 25,000 d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash. 45

46. 0 1-4 Expenses The amounts used in earning revenue are called expenses. Adding expenses to the owner’s equity section results in a space problem. To adjust for these added headings, the word “Bal.” has been omitted from Slides 48, 50, 52, and 54. The bottom row in these four slides provides the balances after each transaction.

47. Bal. 8,850 1,350 20,000 0 1-4 Assets Cash + Supplies + Land Bal. 12,500 1,350 20,000 e. –3,650 e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. 47

48. e. –2,125 –800 –450 –275 1,350 25,000 7,500 –2,125 –800 –450 –275 0 1-4 Liabilities +Owner’s Equity Accounts Chris Clark, Fees Wages Rent Utilities Misc. Payable + Capital + Earned Expense Expense Expense Expense 1,350 25,000 7,500 e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. 48

49. Bal. 7,900 1,350 20,000 0 1-4 Assets Cash + Supplies + Land Bal. 8,850 1,350 20,000 f. –950 f. NetSolutions paid $950 to creditors during the month. 49

50. f. –950 400 25,000 7,500 –2,125 –800 –450 –275 0 1-4 Liabilities +Owner’s Equity Accounts Chris Clark, Fees Wages Rent Utilities Misc. Payable + Capital + Earned Expense Expense Expense Expense –2,125 –800 –450 –275 1,350 25,000 7,500 f. NetSolutions paid $950 to creditors during the month. 50