Chapter 1:
Introduction to Accounting and Business
Business: is an organization in which basic resources such as materials and labor are
assembled and processed to provide goods and services to customers.
Profit: Are the difference between the amounts received from customers for goods or
services provided and the amounts paid for the inputs used to provide the goods or
services.
-some business operates for other goals than profit
Types of Business:

Merchandising – sell products to customers.

Manufacturing - change basic inputs into products that are sold to
individual customers.

Service – provide services rather than products to customers.
Types of Business Organization:

Proprietorship – is owned by one individual
 Comprises 70% of business organizations in US
 Cost of organizing is low
 Limited financial resources
 Used by small business

Partnership – is owned by two or more individuals.
 Comprises 10% of business organizations in the US
 Combines the skills and resources of more than one person
Prepared by: Maria Mari
Fall, 2007
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Chapter 1:
Introduction to Accounting and Business


Corporation – is organized under state or federal statutes as a separate
legal entity.
 Generates 90% of the total dollars of business receipted
 Comprises 20% of the business organizations
 Includes ownership divided into shares of stock
 Used by large businesses
 Ability to obtain large amounts of capital
Limited liability corporation (LLC)
 Combines the attributes of a partnership and a corporation I
that it is organized as a corporation.
 Can elect to be taxed as a partnership
 Popular alternative to a partnership
 Has tax and liability advantages to the owners
Business Stakeholders:

Is a person or entity that has an interest in the economics performance of
the business.

Owners who have invested resources in the business clearly have an
interest in how well the business performs.


Managers are those individuals who the owners have authorized to
operate the business.

Employees provide services to the business in exchange for their pay.

Customers, government, and creditors also have a stake in the success
of the business

Capital market stakeholders provide the major financing for the
business in order for the business to begin and continue its operations
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Chapter 1:
Introduction to Accounting and Business

Product or service market stakeholders – include customers who
purchase the business’ products or services as well as the vendors who
supply inputs to the business

Government stakeholders have an interest in the economic performance
of the business.

Internal stakeholders include individuals employed by the business.
The Role of Ethics in Business
 Ethics – moral principles that guide the conduct of individuals.
 Failure of ethics caused by
o Individual character
o Firm culture
o Laws and enforcement
The Role of Accounting in Business
Accounting – is an information system that provides reports to stakeholders
about the economic activities and condition of a business.
The process by which the accountant provides information to business
stakeholders is as follows:
1.
2.
3.
4.
5.
Identify the stakeholders
Assess stakeholders information needs
Design the accounting information system
Record economic data about business activities
Prepare accounting reports for stakeholders
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Chapter 1:
Introduction to Accounting and Business
Profession of Accounting
1. Financial Accounting – primarily concerned with the recording and
reporting of economic data and activities for a business. External uses.
2. Managerial Accounting - – uses both financial accounting and
estimated data to aid management in running day-to-day operations and in
planning future operations. Internal uses.
Accountants are employed either in:

Private Accounting – accountants employed by a business firm or a
not-for-profit organization.
a. Management accountants: http://www.imanet.org/
b. Controller
i. Certified Management Accountants
c. Internal Accountants
i. Certified Internal Auditor: http://www.theiia.org
3. Public Accounting – accountants and their staffs who provide services
on a fee basis
a. Certified Public Accountants: Http://www.aicpa.org
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Chapter 1:
Introduction to Accounting and Business
Generally Accepted Accounting Principles (GAAP)
A set of rules for the preparation of accounting information
Financial Accounting Standards Board (FASB)
the authoritative body that has the primary responsibility for developing
accounting principles.
Accounting Principles and Concepts
Business Entity Concept
The activities of a business are recorded separately from the activities of the
stakeholders.
Limits the economic data in the accounting system to data related directly to the
activities of the business.
The Cost Concept
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Fall, 2007
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Chapter 1:
Introduction to Accounting and Business
Is the concept that states that assets are entered at their cost.
Objectivity concept – requires that the accounting records and reports be based
upon the objective evidence.
Unit of measure concept – requires that economic data be recorded in dollars.
The Accounting Equation:
Assets = Liabilities + Owner’s Equity
The accounting equation must always hold true!
Assets, Liabilities, and Owner’s Equity:
ASSETS – resources owned by the business







Cash
Accounts receivable – amounts owed by customers
Prepaid expense – assets to be used in the future {supplies, prepaid
insurance}
Merchandise Inventory – merchandise for sale in the course of
business
Equipment
Land
Building
LIABILITIES – rights of creditors or debts of the business





Accounts payable – amount owed to creditors
Dividends payable – amounts owed to shareholders
Accrued expenses
Mortgage payable
Notes payable
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Chapter 1:
Introduction to Accounting and Business
OWNER’S EQUITY (SHAREHOLDER’S EQUITY) – rights of
owners




Assets minus Liabilities
Capital stock – investment by shareholders
Retained earnings – earnings kept in the business
Dividends – distribution of income to shareholders
Business Transactions and the Accounting Equation
Business transactions – an economic event or condition that directly changes
an entity’s financial condition or directly affects its results of operations.
Transactions a: Pat deposits $15,000 in a bank account in return for shares of
stock.
Assets
Cash $15,000
=
Liabilities
+
Stockholder’s Equity
Capital stock $15,000
Transactions b: Purchased land for cash $10,000.
Assets
=
Liabilities
+
Stockholder’s Equity
Cash
Land
Capital stock
$15,000
$15,000
-10,000
+10,000
Transactions c: Purchased supplies on account $500.
Assets
=
Liabilities
+
Stockholder’s Equity
Cash
Supplies
Land
Accounts payable
Capital stock
$15,000
$15,000
-10,000
+10,000
$500
$500
Revenue – income from the operation of the business



Sales
Fees earned
Commission income
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Chapter 1:
Introduction to Accounting and Business
Expenses – cost of doing business




Salaries expense
Rent expense
Depreciation expense
Miscellaneous expense
Transactions d: Billed customers for services rendered $5,000.
Assets
= Liabilities
+
Cash
Accts rec. Supplies Land
Accounts pay
$15,000
-10,000
+10,000
$500
$500
$5,000
Transactions e: Paid rent for month $600.
Assets
= Liabilities
+
Cash
Accts rec. Supplies Land
Accounts pay
$15,000
-10,000
+10,000
$500
$500
$5,000
-$600
$4,400
$5,000
$500
$10,000 =
$500
+
Stockholder’s
Capital stock
$15,000
Fees earned
$5,000
Stockholder’s
Capital stock
$15,000
Fees earned
$5,000
Rent expenses
-$600
$19,400
$19,900
=
$19,900
After every transaction, the accounting equation holds true.
Stockholder’s Equity
Capital stock – increased by investments by shareholders
Retained earnings – increased by revenues and decreased by expenses and dividends
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Fall, 2007
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Chapter 1:
Introduction to Accounting and Business
Financial Statements
1. Income Statement – a summary of revenue and expenses for a specific
period of time.
Revenue minus Expenses = Net income (Net losses)
ABC Consulting
Income Statement
For the month ended September 30,
2007
Fees earned
Expenses:
Wages expense
Rent expense
Supplies expense
Utilities expense
Miscellaneous expense
Total expenses
$
7,500.00
$
4,450.00
$
3,050.00
$
2,125.00
$
800.00
$
800.00
$
450.00
$
275.00
Net income
2. Retained earnings statement – a summary of the changes in the
earnings retained in the corporation for a specific period of time.
Beginning Retained Earnings
+ Net income
– Dividends
= Ending Retained earnings
ABC Consulting
Retained Earnings Statement
For the month ended September 30,
2007
Retained earnings, September 1, 2007
Net income
Less dividends
Retained earnings, September 30, 2007
Prepared by: Maria Mari
Fall, 2007
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$
$
$
-
3,050.00
2,000.00
$
1,050.00
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Chapter 1:
Introduction to Accounting and Business
3. Balance Sheet – a list of assets, liabilities, stockholder’s equity for a
specific date
Assets = Liabilities + Stockholder’s Equity
ABC Consulting
Balance Sheet
For the month ended September 30,
2007
Assets
Cash
Supplies
Land
$
$
$
$
5,900.00
550.00
20,000.00
26,450.00
$
400.00
Capital stock
Retained earnings
$
$
$
25,000.00
1,050.00
26,050.00
TOTAL LIAB & SE
$
26,450.00
TOTAL ASSETS
Liabilities
Accounts payable
Stockholder's Equity
4. Statement of cash flows – a summary of the cash receipts and cash
payments for a specific period of time.
Operations + Investing +Financing
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Chapter 1:
Introduction to Accounting and Business
ABC Consulting
Statement of Cash Flows
For the month ended
September 30, 2007
Cash flows from operating activities:
Cash received from customers
Deduct cash payments for expenses
and vendors
Net cash flow from operating activities
Cash flow from investing activities:
Cash payments for purchase of land
Cash flow from financing activities
Cash received from issuing stock
Deduct cash dividends
Net cash flow from financing activities
Net cash flow
$
7,500.00
$
(4,600.00)
$
2,900.00
$
(20,000.00)
$
$
23,000.00
5,900.00
$ 25,000.00
$
(2,000.00)
Net cash flow should equal balance in cash account at end of year.
All financial statements should be identified by the name of the business, the title
of statement, and the date or period of time.
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Fall, 2007
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