Understanding Accounting's Role in Society

1. Chapter One An Introduction to Accounting

2. Explain the role of accounting in society. LO 1 LO 1

3. Role of Accounting in Society Should I invest money in IBM or General Motors? Accounting provides information that is useful in answering questions about resource allocation.

4. Market-Based Allocations A market is a group of people or entities organized to exchange things of value.

5. Resource users Transform resources into desirable products Control the distribution of resources Market-Based Allocations Consumers Conversion Agents Resource Owners

6. Profit Income Earnings Market-Based Allocations Common terms for the added value created in the transformation process:

8. Investors Creditors Financial Resources Conversion agents need financial resources (money) to establish and operate their businesses.

9. Liquidation If a business fails, any resources (assets) it still has are returned to the resource providers (investors and creditors). The process of dividing remaining assets and returning them to resource providers is called business liquidation.

10. Physical Resources In their most primitive form, physical resources are called natural resources. Owners of physical resources seek to sell those resources to profitable businesses which are able to pay higher prices and make repeat purchases.

11. Labor Resources Labor resources include both intellectual and physical labor.Workers seek relationships with businesses that have high earnings potential because these businesses are better able to pay high wages.

12. Financial Accounting Focused on the needs of external users Managerial Accounting Focused on the needs of internal users Types of Accounting Information

13. Non-business Resource Allocation Not all entities allocate resources based on profitability. Organizations that are not motivated by profit are called not-for-profit entities. Government, foundations, religious groups, the Peace Corps, and various benevolent organizations allocate resources based on humanitarian concerns.

14. Non-business Resource Allocation Not all entities allocate resources based on profitability. Organizations that are not motivated by profit are called not-for-profit entities. Other organizations allocate resources to support art, music, dance, and theater.

16. Private Accounting Public Accounting Certified Management Accountant Certified Internal Auditor Certified Public Accountant Audit services Tax services Consulting services Careers in Accounting

17. Measurement Rules Accountants establish measurement and reporting rules that businesses use to facilitate communication. Generally Accepted Accounting Principles

18. Distinguish among the different accounting entities involved in business events. LO 2 LO 2

19. Business Owner Bank Reporting Entities Financial accounting reports disclose the financial activities of particular individuals or organizations described as reporting entities. Each entity is treated as a separate reporting unit.

20. Name and define the major elements of financial statements. LO 3 LO 3

21. Financial Statements Income Statement Statement of Changes in Equity FASB's GAAP Balance Sheet Statement of Cash Flows

22. Elements of Financial Statements The elements represent broad categories. • Assets • Liabilities • Equity • Contributed Capital • Revenue • Expenses • Distributions • Net Income • Gains • Losses We will discuss elements 1-8 in this chapter. We will save elements 9 and 10 for a later chapter.

23. Elements of Financial Statements • Assets—Cash, Equipment, Buildings, Land • Liabilities • Equity • Contributed Capital • Revenue • Expenses • Distributions • Net Income • Gains • Losses Subclassifications of the elements are frequently called accounts. Accounts are reported in the financial statements.

24. Describe the relationships expressed in the accounting equation. LO 4 LO 4

25. Accounting Equation Assets = Claims • Claims on the assets are from two sources: • Creditors (liabilities) • Investors or owners (equity). Assets = Liabilities + Equity

26. Accounting Equation Assets = Liabilities + Equity

27. Common Stock + Retained Earnings Accounting Equation Assets = Liabilities + Equity Assets = Liabilities + Stockholders' Equity

28. Record business events in general ledger accounts organized under an accounting equation. LO 5 LO 5

29. Recording Business Events Under the Accounting Equation Accounting Event Transaction • Source • Exchange • Use

30. Asset Source Transactions • Businesses obtain assets from three sources: • Owners • Creditors • Profitable Operations

31. RCS increases assets (cash). • RCS increases stockholders’ equity (common stock). Asset Source Transaction Recorded Twice Event 1: Rustic Camp Sites (RCS) was formed on January 1, 2008, when it acquired $120,000 cash from issuing common stock. Double-Entry Bookkeeping

32. RCS increases assets (cash). • RCS increases liabilities (notes payable). Asset Source Transaction Event 2: RCS acquired an additional $400,000 of cash by borrowing from a creditor.

33. RCS decreases assets (cash). • RCS increases assets (land). Asset Exchange Transaction Event 3: RCS paid $500,000 cash to purchase land.

34. RCS increases assets (cash). • RCS increases stockholders’ equity (retained earnings). Asset Source Transaction revenues Event 4: RCS obtained $85,000 cash by leasing campsites to customers.

35. RCS decreases assets (cash). • RCS decreases stockholders’ equity (retained earnings). Asset Use Transaction expenses Event 5: RCS paid $50,000 cash for operating expenses such as salaries, rent, and interest.

36. RCS decreases assets (cash). • RCS decreases stockholders’ equity (retained earnings). Asset Use Transaction dividends Event 6: RCS paid $4,000 in cash dividends to its owners.

37. Explain how the historical cost and reliability concepts affect amounts reported in the financial statements. LO 6 LO 6

38. Historical Cost Concept Reliability Concept Requires that most assets be reported at the amount paid for them (their historical cost) regardless of increases in market value. Information is reliable if it can be independently verified. Appraised values are opinions and will vary from appraiser to appraiser. Event 7: The land that RCS paid $500,000 to purchase had an appraised market value of $525,000 on December 31, 2008.

39. Classify business events as asset source, use, or exchange. LO 7 LO 7

40. Asset Source Asset Exchange AssetUse Recap: Types of Transactions The described transactions have been classified into one of three categories: Increase assets, increase claims on assets Increase one asset, decrease another asset Decrease assets, decrease claims on assets

41. Summary of Transactions Now, let’s prepare the financial statements for RCS using the data presented above.

42. Use general ledger account information to prepare four financial statements. LO 8 LO 8

43. { Revenues exceeded expenses. Revenues are matched to expenses. Preparing Financial Statements Matching Concept Income is measured for a span of time called the Net Loss Accounting Period results when expenses exceed revenues.

44. Preparing Financial Statements

45. Assets are displayed in order of liquidity. equal Preparing Financial Statements

46. Preparing Financial Statements Operating Investing Financing

47. The Closing Process Transfers net income (or loss) and dividends to Retained Earnings. Establishes zero balances in all revenue, expense, and dividend accounts.

48. Revenues Assets TemporaryAccounts Permanent Accounts Equity Liabilities Dividends Expenses Permanent accounts track financial results from year to year. Temporary and Permanent Accounts Temporary accounts track financial results for a limited period of time.

49. Record business events using a horizontal financial statements model. LO 9 LO 9

50. Horizontal Financial Statements Model