1-Accounting and Business Environment

Accounting and the
Business Environment
Copyright © 2007 Prentice-Hall. All rights reserved 1

Objective 1
Describe the nature and types

of business organizations

Types of Business
Organizations
• Service companies - provide services
to customers
• Merchandise or retail companies -
sell products
• Manufacturing companies - make
their own products

Types of Business
Organizations
• Proprietorships
• Partnerships
• Corporations

Objective 2
Explain the role of accounting

in business organizations

Organization
Accountability
• Fiduciary obligation to manage the
resources of an organization
responsibly
• Stakeholders – investors, creditors,
suppliers, employees, customers,
government agencies, and investees

Business Activities
• Financing
• Investing
• Operating

Accounting
• Measures
• Processes
• Communicates
• Financial information to decision
makers

Financial vs. Managerial
Accounting
• Financial Accounting - for those
outside of the company
– Reports are called Financial Statements
– Prepared according to GAAP
• Managerial Accounting
– Helps managers plan, control, and make
decisions

Objective 3
Define Generally Accepted

Accounting Principles and
describe the basic accounting
concepts

GAAP
• Generally Accepted Accounting
Principles - established rules,
principles, and concepts
• Formulated by Financial Accounting
Standards Board (FASB)

GAAP
• Primary objective of financial
accounting – provide information
that is useful for making investment
and lending decisions

Entity Concept
• Accounting Entity – organization that
stands apart as a separate economic
unit

Reliability (Objectivity)
Principle
• Accounting information is based on

the most reliable data available
– Verifiable
– Free from bias
– Individuals would arrive at similar
conclusions using same data

Cost Principle
• Acquired assets and services should
be recorded at their actual cost
(historical cost)

Going Concern Concept
• Assumes that the entity will remain
in operation for the foreseeable
future

S1-1
a. An organization that stands as a
separate economic unit must not
have its financial affairs confused
with that of other entities.
____ 1. Cost principle
a. 2. Entity concept
____
____ 3. Going-concern concept
____ 4. Reliability principle

S1-1
b. Data must be verifiable.
c. The entity will remain in operation
for the foreseeable future.
____ 1. Cost principle
____
c. 3. Going-concern concept
____
b. 4. Reliability principle
____

S1-1
d. Acquired assets and services
should be recorded at their actual
cost.
d. 1. Cost principle
____
____
c. 3. Going-concern concept
____
b. 4. Reliability principle
____

Objective 4
Use the accounting equation

to analyze business
transactions

Assets
• Economic resources, expected to
benefit the business in the future
– Cash
– Accounts receivable
– Merchandise inventory
– Furniture
– Land

Claims to the Assets
• Liabilities – economic obligations
payable to an individual or
organization outside the business
–Accounts payable
–Notes payable
–Salary payable

Claims to the Assets
• Owner’s Equity (capital) – claim of
business owner to the assets of the
business

The Accounting Equation
Assets = Liabilities + Owner’s Equity
Economic Claims to
Resources Economic
Resources

Revenues
• Amounts earned by delivering goods
or services to customers
– Sales revenue
– Service revenue
– Interest revenue
– Dividend revenue

Expenses
• Decrease in owner’s equity - occurs
from using resources in the course of
delivering goods or services to
customers
– Salary expense
– Rent expense
– Utilities expense
– Interest expense

Net Income (Loss)
Revenues – Expenses

Components of
Owner’s Equity
Revenues
-
Beginning
Balance of
Owner’s Equity Expenses
+ =
Ending
Owner Owner
+ Net Income - = Balance of
Investments (Net Loss) Withdrawals Owner’s Equity

Transaction
• An event that affects the financial
position of a particular entity and can
be recorded reliably

S1-4
a. Debts that are owed to creditors
b. Economic resources that are
expected to be of benefit in the
future
c. Claims of the owner of the business
b. 1. Assets
_____
_____
a. 2. Liabilities
c. 3. Owner’s equity
_____

S1-9
a. Assets b. Liabilities
c. Owner’s Equity d. Revenues e. Expenses
e
____ 1. Utilities Expense
a
____ 2. Accounts Receivable
____
c 3. Gay Gillen, Capital
a
____ 4. Office Supplies
e
____ 5. Lease Expense, Computer
____
e 6. Salary Expense
S1-9
a. Assets b. Liabilities
c. Owner’s Equity d. Revenues e. Expenses
a
____ 7. Cash
____
e 8. Rent Expense, Office
d
____ 9. Service Revenue
b
____ 10. Accounts Payable
a
____ 11. Land

Exercise 1-14
Assets Liabilities Owner’s
Equity
Gemstone $?
$82,800 $61,800 $21,000
Sampson
Hardware
72,000 38,000
? 34,000
Lundy
102,700 79,800 ?
22,900
Plumbing

Analyze this:
July 6: Hobt invested $60,000 in the business by
opening a bank account in the name of K. Hobt, D.D.S.
What
Does the
accounts
account
areincrease
involved?
or decrease?
(1) Cash (asset)
(2) Owner’s Equity (equity)

Exercise 1-18
Date Assets Liabilities Owner’s
Equity
July Cash Dental Land Accounts K. Hobt, Type of
Supplies Payable Capital Transaction
6 60,000 60,000 Investment
Assets = $60,000 Liabilities &

Owner’s Equity = $60,000

Analyze this:
July 9: The business paid $55,000 cash for land.
Ken plans to build an office building on the land.
DoesWhat
the account increase
accounts or decrease?
are involved?
(1) Cash (asset)
(2) Land (asset)

Exercise 1-18
Equity
6 60,000 60,000 Investment

9 -55,000 55,000
Bal 5,000 55,000 60,000
Liabilities &
Assets = $60,000

Analyze this:
July 12: The business purchased
dental supplies for $2,000 on account.
DoesWhat
the account increase
are involved?
(1) Dental Supplies (asset)
(2) Accounts Payable (liability)

Exercise 1-18
Equity
Bal 5,000 55,000 60,000

12 2,000 2,000
Bal 5,000 2,000 55,000 2,000 60,000


Analyze This:
July 15: The business treated patients and
earned service revenue of $7,000, receiving cash.
DoesWhat
the account
accounts
increase
are involved?
or decrease?
(1) Cash (asset)
(2) Revenues (equity)
When the owner
completes work,
his interest in the
assets increases

Exercise 1-18
Equity
Bal 5,000 2,000 55,000 2,000 60,000

15 7,000 7,000 Revenue
Bal 12,000 2,000 55,000 2,000 67,000


Analyze This:
July 17: The business paid office
rent, $1,000.
Does the account
What increase
are involved?
(1) Cash (asset)
(2) Expense (equity)
When an expense is
incurred, owner’s
equity decreases

Exercise 1-18
Equity
Bal 12,000 2,000 55,000 2,000 67,000

17 -1,000 -1,000 Rent Exp
Bal 11,000 2,000 55,000 2,000 66,000
Liabilities &
Assets = $68,000
Analyze This:
July 28: The business sold supplies to another
dentist for the cost of those supplies, $500.
Does the
Whataccount increase
are involved?
(1) Cash (asset)
(2) Medical Supplies (asset)

Exercise 1-18
Equity
Bal 11,000 2,000 55,000 2,000 66,000

28 500 -500
Bal 11,500 1,500 55,000 2,000 66,000


Analyze This:
July 31: The business paid $1,500 on
account related to the July 12 purchase.
Does the
Whataccount increase
are involved?
(1) Cash (asset)
(2) Accounts Payable (liability)

Exercise 1-18
Equity
Bal 11,500 1,500 55,000 2,000 66,000

31 -1,500 -1,500
Bal 10,000 1,500 55,000 500 66,000


Accounting for Business
Transactions
• The equation always stays in balance
• Each transaction affects at least two
accounts, sometimes more
• Some transactions affect only one
side of the equation; some affect
both sides

Objective 5
Prepare financial statements

and explain the relationships
between them

Financial Statements
• Income statement
• Statement of owner’s equity
• Balance sheet
• Statement of cash flows

Income Statement
• Summary of an entity’s revenues,
expenses, and net income or net loss
for a specific period
Revenues - Expenses
– Net Income: Revenues > Expenses
– Net Loss: Expenses > Revenues

Statement of Owner’s
Equity
• Summary of changes in an entity’s
owner’s equity during a specific period
Beginning owner’s equity
+ Owner’s investments
+ Net income
- Net loss
- Owner’s withdrawals
Ending owner’s equity

Balance Sheet
• Reports the entity’s assets, liabilities,
and owner’s equity as of a specific
date
Assets = Liabilities + Owner’s Equity

Statement of Cash Flows
• Reports cash receipts and cash
payments during a period
– Operating
– Investing
– Financing

S1-10
Income Statement (IS)
Balance Sheet (BS)
Statement of Owner’s Equity (OE)
_____1.
BS Accounts Receivable
_____2.
BS Notes Payable
_____3.
IS Advertising Expense
_____4.
IS Service Revenue
OE
_____5. J. P., Capital, June 1
_____6.
BS Office Supplies

K. Hobt, D.D.S.
Income Statement
For the Month Ended July 31, 2007
Revenue: Notice the
proper
Fees earned $7,000
heading
Expenses:
Rent expense 1,000
Net income $6,000
Double
underline for
your final
answer

K. Hobt, D.D.S.
Statement of Owner’s Equity
From income
For are
Dates the Month Ended July 31, 2007
statement
important to
the reader of
K.
theHobt, capital,
financial July 1, 2007 $ 0
reports
Add: Investment by owner 60,000
Net income for the month 6,000
Subtotal $66,000
Less: Withdrawals by owner 0
K. Hobt, capital, July 31, 2007 $66,000

Details, Details
• Note the headings for both of these
statements
Name of company
Name of financial statement
For the period ended …….
• Both statements report activity over
a period of time
• Final sums are double-underlined

Details, Details
• Negative amounts are presented in
parentheses
• Net income is computed first because
you need that number to complete
the ending balance in owner’s equity
• When preparing a financial
statement, clearly label each line in
the statement

Details, details
• If you are using columnar paper,
always start your number columns in
the far right-hand column
• Numbers that are added or
subtracted from each other should
be in the same column

K. Hobt, D.D.S From statement of
owner’s equity
Balance Sheet
July 31, 2007
Assets Liabilities
Cash $10,000 Accounts payable $500
Medical supplies 1,500 Owner’s equity,
Notice the
Land 55,000
proper
M. Lange, capital 66,000
heading Total liabilities and
Total assets $ 66,500 owner’s equity $ 66,500

Details, Details
• Note - heading for the balance sheet
is different from other statements
Name of company
Name of financial statement
Date
• This statement reports what the
company owns and who has claims to
the assets at a specific point in time

Exercise 1-20
Hawkins Graphic Design
Balance Sheet
November 30, 2009
Assets Liabilities
Cash $2,000 Accounts payable $2,500
Accounts receivable 6,900 Note payable 8,000
Supplies 600 Total liabilities $10,500
Equipment 15,500 Owner’s Equity

A. Samuel, capital 14,500
Total liabilities and
Total Assets $25,000 owner’s equity $25,000

Exercise 1-20
1. What type of business organization
is Hawkins’ Graphic Design?
You can tell what type of
organization a company is by
examining the owner’s equity
section of the balance sheet. Since
there is one owner capital account,
it is a sole proprietorship
3. What does the balance sheet
report? Financial position

Exercise 1-21
Office Furniture Asset
Utilities Expense Expense
Accounts Payable Liability
T. Sullivan, Capital Owner’s Equity
Service Revenue Revenue
Accounts Receivable Asset
Supplies Expense Expense

Exercise 1-21
Note Payable Liability
Rent Expense Expense
Cash Asset
Office Supplies Asset
Salary Expense Expense
Salaries Payable Liability
Property Tax Expense Expense

Exercise 1-21
Sullivan, Architect
Income Statement
Year Ended December 31, 2009
Service revenue $161,200
Expenses:
Salary expense $60,000
Rent expense 24,000
Utilities expense 6,800
Supplies expense 4,000
Property tax expense 1,200
Total expenses 96,000
Net income $65,200
Exercise 1-21
Sullivan, Architect
Statement of Owner’s Equity
Year Ended December 31, 2009
Sullivan, capital, January 1, 2009 $ 0
Add: Net income 65,200
Investment by owner 15,000
Subtotal $80,200
Less: Owner withdrawal 53,100
?
Sullivan, capital, December 31, 2009 $27,100

Objective 6
Explain the role of ethics in

accounting and business

Ethics
• The principles of right behavior that
guide decision-making
– Responsibility
– Fairness
– Trustworthiness
– Respect
– Caring
– Citizenship

Ethics
• Audit
– Examination of company’s financial
situation
– Performed by independent accountants
(CPAs)

Standards of Professional
Conduct
• AICPA – Code of Professional

Conduct for Accountants
• IMA – Standards of Ethical Conduct

Thank You

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Accounting and the

Copyright © 2007 Prentice-Hall. All rights reserved 1

Describe the nature and types

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Explain the role of accounting

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Define Generally Accepted

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• Accounting information is based on

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Use the accounting equation

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Assets = Liabilities + Owner’s Equity

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6 60,000 60,000 Investment

Assets = $60,000 Liabilities &

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6 60,000 60,000 Investment

Bal 5,000 55,000 60,000

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Bal 5,000 55,000 60,000

Bal 5,000 2,000 55,000 2,000 60,000

Assets = $62,000 Liabilities &

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Bal 5,000 2,000 55,000 2,000 60,000

Bal 12,000 2,000 55,000 2,000 67,000

Assets = $69,000 Liabilities &

Copyright © 2007 Prentice-Hall. All rights reserved 41

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Bal 12,000 2,000 55,000 2,000 67,000

Bal 11,000 2,000 55,000 2,000 66,000

Copyright © 2007 Prentice-Hall. All rights reserved 44

Bal 11,000 2,000 55,000 2,000 66,000

Bal 11,500 1,500 55,000 2,000 66,000