Accounting in Business

Accounting in Business
Copyright © 2015 McGraw-Hill Education. All rights

reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education.
1-2
Importance of Accounting
For example, the sale Keep a chronological Prepare reports such as

by Apple of an iPhone. log of transactions. financial statements.
C1
2
1-3
Users of Financial Information

Accounting is called the language of business because all organizations
set up an accounting information system to communicate data to help
people make better decisions. Accounting serves many users who can
be divided into two groups: external users and internal users.
C2 3
1-4
Opportunities in Accounting
Accounting information is in all aspects of our lives. When

we earn money, pay taxes, invest savings, budget
earnings, and plan for the future, we use accounting.
C2 4
1-5
Ethics – A Key Concept

The goal of accounting is to provide useful information for
decisions. For information to be useful, it must be trusted.
This demands ethics in accounting. Ethics are beliefs that
distinguish right from wrong. They are accepted standards of
good and bad behavior.
C3 5
1-6
Fraud Triangle
Three factors must exist for a person to commit fraud:
opportunity, pressure, and rationalization.
Envision a way to commit Fails to see the criminal

fraud with a low perceived nature of the fraud or
risk of getting caught justifies the action
Must have some pressure to

C3 commit fraud, like unpaid bills
6
01-C4: Generally Accepted
Accounting Principles
7
1-8
Generally Accepted
Accounting Principles (GAAP)
Financial accounting is governed by concepts and rules known
as generally accepted accounting principles (GAAP). GAAP aims
to make information relevant, reliable, and comparable.
Reliable information is
trusted by users.
Relevant information Comparable information

affects decisions is helpful in contrasting
of users. organizations.
C4
8
1-9
International Standards
In today’s global economy, there is increased demand by external
users for comparability in accounting reports. This demand often
arises when companies wish to raise money from lenders and
investors in different countries.
International Accounting International Financial
Standards Board (IASB) Reporting Standards (IFRS)
An independent group Identify preferred accounting

(consisting of individuals practices
from many countries), issues
International Financial
Reporting Standards (IFRS)
Differences between U.S. GAAP and IFRS are decreasing as the

FASB and IASB pursue a convergence process aimed to achieve a
single set of accounting standards for global use.
C4
9
1 - 10
Conceptual Framework and Convergence
C4
10
1 - 11
Principles and Assumptions of Accounting
General principles are the basic Specific principles are detailed rules
assumptions, concepts, and used in reporting business
guidelines for preparing financial transactions and events. Specific
statements. General principles stem principles arise more often from the
from long-used accounting practices. rulings of authoritative groups.
C4
11
1 - 12
Accounting Principles
Measurement Principle Revenue Recognition Principle

(or Cost Principle) 1. Recognize revenue when it is earned.
Accounting information is based on 2. Proceeds need not be in cash.
actual cost. Actual cost is 3. Measure revenue by cash received
considered objective. plus cash value of items received.
Expense Recognition Principle

Full Disclosure Principle
(or Matching Principle) A company is required to report the details
A company must record its expenses
behind financial statements that would
incurred to generate the revenue
impact users’ decisions.
reported.
C4
12
1 - 13
Accounting Assumptions
Going-Concern Assumption
Monetary Unit Assumption
Reflects assumption that the
Express transactions and events in
business will continue operating
monetary, or money, units.
instead of being closed or sold.
Business Entity Assumption

A business is accounted for Time Period Assumption
separately from other business Presumes that the life of a company
entities, including its owner. can be divided into time periods,
such as months and years.
C4
13
1 - 14
Proprietorship, Partnership,
and Corporation
Here are some of the major attributes of proprietorships, partnerships,

and corporations:
C4
14
1 - 15
Sarbanes–Oxley (SOX)
Congress passed the Sarbanes–Oxley Act to help curb financial abuses at
companies that issue their stock to the public. SOX requires that these public
companies apply both accounting oversight and stringent internal controls.
The desired results include more transparency, accountability, and
truthfulness in reporting transactions.
C4
15
1 - 16
Dodd-Frank Wall Street Reform and Consumer Protection Act
This act was designed to:

1. promote accountability and transparency in the
financial system,
2. put an end to the notion of “too big to fail,”
3. protect the taxpayer by ending bailouts, and
4. protect consumers from abusive financial services.
C4
16
01-A1: The Accounting
Equation
17
1 - 18
Transaction Analysis and the Accounting

Equation
The Accounting Equation
Assets = Liabilities + Equity
Expanded Accounting Equation:
A1
Net Income 18
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Proprietorship Partnership Corporation
Generally owned Owned by two or Ownership divided

by one person. more persons. into shares
Often small Often retail and Separate legal
service-type service-type entity organized
businesses businesses under state
Owner receives Generally unlimited corporation law
any profits, suffers personal liability Limited liability
any losses, and is
Partnership
personally liable for
agreement
all debts.
Slide
1-19 SO 5 Explain the monetary unit assumption and the economic entity assumption.
The
The Basic
Basic Accounting
Accounting Equation
Equation
Provides the underlying framework for recording and

summarizing economic events.
Applies to all economic entities regardless of size.
Slide
1-20 SO 6 State the accounting equation, and define its components.
The
The Basic
Basic Accounting
Accounting Equation
Equation

Assets
Resources a business owns.
Provide future services or benefits.
Cash, Inventory, Equipment, etc.
Slide
The
The Basic
Basic Accounting
Accounting Equation
Equation

Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
Slide
The
The Basic
Basic Accounting
Accounting Equation
Equation

Equity
Ownership claim on total assets.
Referred to as residual equity.
Share capital and retained earnings.
Slide
The
The Basic
Basic Accounting
Accounting Equation
Equation
Illustration 1-7
Revenues result from business activities entered into for the purpose
of earning income.
Generally results from selling merchandise, performing services,
renting property, and lending money.
Slide
The
The Basic
Basic Accounting
Accounting Equation
Equation
Illustration 1-7
Expenses are the cost of assets consumed or services used in the

process of earning revenue.
Common expenses are salaries expense, rent expense, utilities
expense, tax expense, etc.
Slide
The
The Basic
Basic Accounting
Accounting Equation
Equation
Illustration 1-7
Dividends are the distribution of cash or other assets to shareholders.

 Reduce retained earnings
 Not an expense
Slide
Using
Using The
The Accounting
Accounting Equation
Equation
Transactions are a business’s economic events

recorded by accountants.
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the accounting
equation.
Slide
1-27 SO 7 Analyze the effects of business transactions on the accounting equation.
Using
Using The
The Accounting
Accounting Equation
Equation
Illustration: Are the following events recorded in the
accounting records?
Discuss Illustration 1-8
Purchase product
Event Pay rent.
computer. design with
customer.
Criterion Is the financial position (assets, liabilities, or

equity) of the company changed?
Record/
Don’t Record
Slide
Using
Using The
The Accounting
Accounting Equation
Equation
Transaction Analysis
Slide
Transactions
Transactions Analysis
Analysis
Transaction (1). Investment by Shareholders. Ray and

Barbara Neal decides to open a computer programming service
which he names Softbyte. On September 1, 2011, they invest
$15,000 cash in exchange for capital shares. The effect of this
transaction on the basic equation is:
Slide Solution on SO 7 Analyze the effects of business transactions

notes page
1-30 on the accounting equation.
Transactions
Analysis
Transaction (2). Purchase of Equipment for Cash. Softbyte

purchases computer equipment for $7,000 cash.

notes page
Transactions
Analysis
Transaction (3). Purchase of Supplies on Credit. Softbyte

purchases for $1,600 from Acme Supply Company computer
paper and other supplies expected to last several months.

notes page
Transactions
Analysis
Transaction (4). Services Provided for Cash. Softbyte

receives $1,200 cash from customers for programming services
it has provided.

notes page
Transactions
Analysis
Transaction (5). Purchase of Advertising on Credit. Softbyte

receives a bill for $250 from the Daily News for advertising but
postpones payment until a later date.

notes page
Transactions
Analysis
Transaction (6). Services Provided for Cash and Credit.

Softbyte provides $3,500 of programming services for
customers. The company receives cash of $1,500 from
customers, and it bills the balance of $2,000 on account.

notes page
Transactions
Analysis
Transaction (7). Payment of Expenses. Softbyte pays the

following Expenses in cash for September: store rent $600,
salaries of employees $900, and utilities $200.

notes page
Transactions
Analysis
Transaction (8). Payment of Accounts Payable. Softbyte

pays its $250 Daily News bill in cash.

notes page
Transactions
Analysis
Transaction (9). Receipt of Cash on Account. Softbyte

receives $600 in cash from customers who had been billed for
services [in Transaction (6)].

notes page
Transactions
Analysis
Transaction (10). Dividends. The corporation pays a dividend

of $1,300 in cash.

notes page
Transactions
Analysis
Illustration 1-10
Summary of Transactions Tabular summary of
Softbyte transactions
Slide
Financial
Financial Statements
Statements
Companies
Companiesprepare
preparefour
fourfinancial
financialstatements
statementsfrom
fromthe
the
summarized
summarized accounting
accounting data:
data:
Retained Statement Statement

Income
Earnings of Financial of Cash
Statement
Statement Position Flows
Slide
1-41 SO 8 Understand the four financial statements and how they are prepared.
Financial
Statements Income Statement
Reports the revenues and expenses for a specific period of time.

Net income – revenues exceed expenses. Illustration 1-11
Financial statements and
Net loss – expenses exceed revenues. their interrelationships
Slide
Net income is needed to determine the
Financial
Statements ending balance in retained earnings.
Illustration 1-11
their interrelationships
Slide
1-43 SO 8
Retained Earnings
Financial
Statements Statement
Statement indicates the reasons why Illustration 1-11

retained earnings has increased or their interrelationships
decreased during the period.
Slide
Financial
Financial
Statements
Statements
The ending
balance in
retained
earnings is
needed in
preparing the
statement of
financial position
Illustration 1-11
Slide
Financial
Statements Balance Sheet
Illustration 1-11
Slide
Financial
Financial
Statements
Statements
Illustration 1-11
Slide
1-47
Financial
Statements
Statement of Cash Flows

Information for a specific period of time.
Answers the following:
1. Where did cash come from?

2. What was cash used for?
3. What was the change in the cash balance?
Slide
Financial
Statements Statement of Cash Flows
Illustration 1-11
Slide
NEED-TO-KNOW
Use the accounting equation to compute the missing financial statement amounts.

Bose $150 = $30 + $120
Vogue $400 = $100 + $300
Use the expanded accounting equation to compute the missing financial statement amounts.
+ Owner, - Owner, + Revenues - Expenses

Capital Withdrawals
Nikon $200 $80 $120 $100 $0 $60 ($40)
YouTube $400 $160 $240 $220 ($10) $120 ($90)
50
NEED-TO-KNOW
Assume Tata began operations on January 1 and completed the following transactions during its first month of
operations.
Jan. 1 Jamsetji invested $4,000 cash in the Tata company.

Jan. 5 The company purchased $2,000 of equipment on credit.
Jan. 14 The company provided $540 of services for a client on credit.
Jan. 21 The company paid $250 cash for an employee’s salary
Arrange the following asset, liability, and equity titles in a table: Cash; Accounts Receivable; Equipment;
Accounts Payable; J. Tata, Capital; J. Tata, Withdrawals; Revenues; and Expenses.

Cash Accounts Equipment Accounts + J. Tata, - J. Tata, + Revenues- Expenses
Receivable Payable Capital Withdrawals
Jan. 1 $4,000 $4,000
Jan. 5 $2,000 $2,000
Jan. 14 $540 $540
Jan. 21 ($250) ($250)
$3,750 $540 $2,000 $2,000 $4,000 $0 $540 ($250)
Total Assets $6,290

Total Liabilities 2,000
Total Equity $4,290
51
01-P2: Financial Statements
52
1 - 53
The four financial statements and their purposes are:
1. Income statement — describes a company’s revenues and
expenses along with the resulting net income or loss over a
period of time due to earnings activities.
2. Statement of owner’s equity— explains changes in equity
from net income (or loss) and from any owner investments
and withdrawals over a period of time.
3. Balance sheet — describes a company’s financial position
(types and amounts of assets, liabilities, and equity) at a
point in time.
4. Statement of cash flows — identifies cash inflows (receipts)
and cash outflows (payments) over a period of time.
P2
53
NEED-TO-KNOW
Prepare the (a) income statement, (b) statement of owner's equity, and (c) balance sheet, for Apple using the following
condensed data from its fiscal year ended September 28, 20X2.
Accounts payable $22,367 Investments and other assets $163,042
Other liabilities 61,084 Land and equipment 16,597
Cost of sales (expense) 119,724 Selling and other expense 14,149
Cash 14,259 Accounts receivable 13,102
Owner, Capital, September 29, 20X1 118,210 Net income 37,037
Withdrawals in fiscal year 20X2 31,698 Owner, Capital, September 28, 20X2 123,549
Revenues 170,910
Income Statement Statement of Owner’s Equity Balance Sheet

Assets Detail of Assets
Liabilities Detail of Liabilities
Equity: Beginning Capital
+ Owner investments + Owner investments
- Owner withdrawals - Owner withdrawals Ending Owner, Capital
+ Revenues Detail of Revenues ± Net income (loss)
- Expenses Detail of Expenses Ending Capital
Net income (loss)
54
NEED-TO-KNOW
Accounts payable $22,367 Investments and other assets $163,042
Other liabilities 61,084 Land and equipment 16,597
Cost of sales (expense) 119,724 Selling and other expense 14,149
Cash 14,259 Accounts receivable 13,102
Owner, Capital, September 29, 20X1 118,210 Net income 37,037
Withdrawals in fiscal year 20X2 31,698 Owner, Capital, September 28, 20X2 123,549
Revenues 170,910
APPLE APPLE
Income Statement Statement of Owner's Equity
For Fiscal Year Ended September 28, 20X2 For Fiscal Year Ended September 28, 20X2
Revenues $170,910 Owner, Capital, September 29, 20X1 $118,210
Expenses Plus: Net income 37,037
Cost of sales (expense) $119,724 Less: Withdrawals by owner (31,698)
Selling and other expense 14,149 Owner, Capital, September 28, 20X2 $123,549
Total expenses 133,873
Net income $37,037
APPLE
Balance Sheet
September 28, 20X2
Assets Liabilities
Cash $14,259 Accounts payable $22,367
Accounts receivable 13,102 Other liabilities 61,084
Land and equipment 16,597 Total liabilities 83,451
Investments and other assets 163,042 Equity
Owner, Capital, September 28, 20X2 123,549
Total assets $207,000 Total liabilities and equity $207,000

55

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Accounting in Business

Copyright © 2015 McGraw-Hill Education. All rights

For example, the sale Keep a chronological Prepare reports such as

Users of Financial Information

Accounting information is in all aspects of our lives. When

Ethics – A Key Concept

Envision a way to commit Fails to see the criminal

Must have some pressure to

Relevant information Comparable information

An independent group Identify preferred accounting

Differences between U.S. GAAP and IFRS are decreasing as the

Conceptual Framework and Convergence

Principles and Assumptions of Accounting

Measurement Principle Revenue Recognition Principle

Expense Recognition Principle

Business Entity Assumption

Here are some of the major attributes of proprietorships, partnerships,

Dodd-Frank Wall Street Reform and Consumer Protection Act

This act was designed to:

Transaction Analysis and the Accounting

Assets = Liabilities + Equity

Expanded Accounting Equation:

Proprietorship Partnership Corporation

Generally owned Owned by two or Ownership divided

Assets = Liabilities + Equity

Provides the underlying framework for recording and

Applies to all economic entities regardless of size.

Assets = Liabilities + Equity

Provides the underlying framework for recording and

Assets = Liabilities + Equity

Provides the underlying framework for recording and

Assets = Liabilities + Equity

Provides the underlying framework for recording and

Expenses are the cost of assets consumed or services used in the

Dividends are the distribution of cash or other assets to shareholders.

Transactions are a business’s economic events

Criterion Is the financial position (assets, liabilities, or

Transaction (1). Investment by Shareholders. Ray and

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (2). Purchase of Equipment for Cash. Softbyte

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (3). Purchase of Supplies on Credit. Softbyte

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (4). Services Provided for Cash. Softbyte

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (5). Purchase of Advertising on Credit. Softbyte

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (6). Services Provided for Cash and Credit.

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (7). Payment of Expenses. Softbyte pays the

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (8). Payment of Accounts Payable. Softbyte

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (9). Receipt of Cash on Account. Softbyte

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (10). Dividends. The corporation pays a dividend

Slide Solution on SO 7 Analyze the effects of business transactions

Retained Statement Statement

Reports the revenues and expenses for a specific period of time.

Statement indicates the reasons why Illustration 1-11

Statement of Cash Flows

1. Where did cash come from?

Assets = Liabilities + Equity