ACCOUNTING
Chapter 1
Accounting Terms
LESSON 1-1
• The Accounting Equation
• What is accounting?
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Planning
Recording
Analyzing
Interpreting financial information
• The language of business!
ACCOUNTING SYSTEM
• A planned process for providing
financial information that will be
useful to management
ACCOUNTING RECORDS
• Organized summaries of a business’s
financial activities
FINANCIAL STATEMENTS
• Financial reports that summarize the
financial condition and operations of
a business.
• Used by:
– Suppliers that are considering extending
credit to a business
– Institutions that are considering
extending loans to a business
– Business owners and managers
SERVICE BUSINESS
• A business that performs an activity
for a fee.
– Accounting
– Doctor
– Stylist
– Lawn care
– Daycare
– Car Wash
PROPRIETORSHIP
• A business owned and controlled by one
person
– Advantages
• Ease of formation
• Total control by the owner
• Profits that are not shared
– Disadvantages
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Limited resources
Unlimited liability
Limited expertise
Limited life
Obligation to follow the laws of both the federal
government and the state and city in which the
business is formed.
ASSET
• Anything of value that is owned
– Cash
– Supplies
– Accounts Receivable
– Prepaid Insurance
– Equipment
Equities
• Financial right to the assets of a
business
• Two types
– Equity of those to whom money is
owed – Liabilities
– Equity of the owner
Liabilities
• An amount owed by a business
– Accounts payable
– Notes payable
OWNER’S EQUITY
• The amount remaining after the
value of all liabilities is subtracted
from the value of all assets.
ACCOUNTING EQUATION
• An equation showing the
relationship among assets, liabilities,
and owner’s equity.
• ASSETS = LIABILITIES + OWNER’S
EQUITY
• A = L + OE
ETHICS
• The principles of right and wrong
that guide an individual in making
decisions.
BUSINESS ETHICS
• The use of ethics in making business
decisions.
REVIEW OF 1-1
• What is accounting?
• Give two examples of a service
business.
• What is a proprietorship?
• State the accounting equation.
LESSON 1-2
• How Business Activities Change the
Accounting Equation
TRANSACTION
• A business activity that changes
assets, liabilities, or owner’s equity.
• Example
– A business pays cash for supplies
• After each transaction, the
accounting equation must remain in
balance.
ACCOUNT
• A record summarizing all the
information pertaining to a single
item.
ACCOUNT TITLE
• The name given to an account.
ACCOUNT BALANCE
• The amount in an account.
CAPITAL
• The account uses to summarize the
owner’s equity in a business.
• The capital account is an owner’s
equity account
REVIEW OF 1-2
• What must be done if a transaction
increases on the left side of the
accounting equation?
• How can a transaction affect only one
side of the accounting equation?
• To what does the phrase on account
refer?
LESSON 1-3
• How Transactions Change Owner’s
Equity in an Accounting Equation
REVENUE
• An increase in owner’s equity
resulting from the operation of a
business.
• Money from a sale.
SALE ON ACCOUNT OR A CHARGE
SALE
• A sale for which cash will be received
at a later date.
EXPENSE
• A decrease in owner’s equity
resulting from the operation of a
business.
– Utilities
– Repairs
– Miscellaneous
– Rent
– Salaries
WITHDRAWALS
• Assets taken out of a business for the
owner’s personal use.
REVIEW OF 1-3
• How is owner’s equity affected when
cash is received from sales?
• How is owner’s equity affected when
services are sold on account?
• How is owner’s equity affected when
cash is paid for expenses.
GAAP
• Generally Accepted Accounting
Principles
• Why is GAAP necessary?
– By requiring the financial statement
preparers to consistently follow certain
standards and rules such as GAAP, the
users are able to compare the financial
statements of several companies and
to track the results of one company
over several time periods.
SEC
• Security and Exchange Commission
– Has the authority to establish GAAP
– Allowed a series of private
organizations to determine GAAP
FASB
• Financial Accounting Standards
Board
– The organization that the SEC has
given the authority to set accounting
standards.
– Established in 1973.
ACCOUNTING CONCEPTS FOR CHAPTER 1
• Business Entity
– Applied when a business’s financial
information is recorded and reported
separately from the owner’s personal
financial information.
• Unit of Measurement
– Applied when business transactions are
stated in numbers that have common
values.
– Example – in the US transactions are
recorded in dollars.
ASSIGNMENT
• Applications:
– 1-1
– 1-2
– 1-3
– 1-4 – mastery
– 1-5 - challenge