1
Introduction to
Accounting and
Business
1
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What are the problems?
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Are there profits?
What do we own?
How much cash do we have?
Can we afford it???
Where is the $$$ going?
How much did it cost us
Who owes us money? How much
What are we worth?
 Service
businesses
 Merchandising businesses
 Manufacturing businesses
Types of Businesses
Service Business
Name 3 not listed in your book
Product
Disney
Delta Air Lines
Marriott Hotels
Merrill Lynch
Sprint
Entertainment
Transportation
Hospitality and lodging
Financial advice
Telecommunication
Types of Businesses
Merchandising Business
Name 3 not listed in your book
Product
Wal-Mart
Toys “R” Us
Circuit City
Lands’ End
Amazon.com
General merchandise
Toys
Consumer electronics
Apparel
Internet books, music, video
retailer
Types of Businesses
Manufacturing Business
Name 3 not listed in your book
Product
General Motors
Intel
Boeing
Nike
Coca-Cola
Sony
Cars, trucks, vans
Computer chips
Jet aircraft
Athletic shoes and apparel
Beverages
Stereos and television
Businesses can be organized in
three different forms. What are
they?
 Proprietorship
 Partnership
 Corporation
A proprietorship
is owned by one
individual.
Joe’s
Advantages
• Ease in organizing
• Low cost of
organizing
Disadvantage
• Limited source of
financial resources
• Unlimited liability
A partnership is
owned by two or
more individuals.
Joe and Marty’s
Advantages
• More financial
resources than a
proprietorship.
• Additional
management skills.
Disadvantage
• Unlimited liability.
A corporation is
organized under state
or federal statutes as a
separate legal entity.
J & M, Inc.
Advantage
• The ability to obtain
large amounts of
resources by issuing
stocks.
Disadvantage
• Double taxation.
The Process of Providing
Information
What is meant by “stakeholders”?
Who are the users of Accounting
Information?
Internal users:
External users:
Profession of Accounting
Accountants employed by a business firm or
a not-for-profit organization are said to be
engaged in private accounting.
Accountants and their staff who provide
services on a fee basis are said to be
employed in public accounting.
Generally Accepted
Accounting
Principles (GAAP)
SOME COMMON GAAP
The business entity concept
limits the economic data in
the accounting system to
data related directly to the
activities of the business.
The cost concept is the
basis for entering the
exchange price, or cost
of an acquisition in the
accounting records.
SOME COMMON GAAP
The objectivity concept
requires that the accounting
records and reports be based
upon objective evidence.
The unit-of-measure
concept requires that
economic data be
recorded in dollars.
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

What are the three types of business
organizations?
Name three users of business information.
What are the four accounting principles?
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources
owned by a
business
List five things
owned by a business
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the
creditors, which
represent debts
of the business
What are some
common
business debts?
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the
owners
What are other terms we
associate with these rights?
The Accounting Equation
Assets = Liabilities + Owner’s Equity
What is a business
transaction?
A business transaction is an economic event or
condition that directly changes an entity’s financial
condition or directly affects its results of operations.
Seven business transactions
What different financial activities
take place in a business?
List as many as you can.
Seven business transactions
1. Receipt of cash
2. Payment of cash
3. Events that create a legal obligation to pay
out cash (or other assets) in the future
4. Events that obligate another party to pay you
cash (or other assets) in the future
5. Sale of a product or completion of a service
for a customer––this is known as earning
revenue
6. The use of products or services in running
your business––this is known as incurring an
expense
7.
An investment made in the business by the
owners
The Accounting Equation
Assets = Liabilities + Owner’s Equity
Now we will see the effect of very
specific transactions as they effect
the Equation. Remember: the
Equation must always stay in
balance.
ANALYZING BUSINESS TRANSACTIONS
a. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions.
For every business transaction, ask
the following questions:
1.Is there a financial effect? What is
the amount?
2.What parts of the equation will be
effected?
3.Are they increasing or decreasing?
a. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions.
a.
Assets
=
Cash
25,000
=
Owner’s Equity
Chris Clark, Capital
25,000 Investment
by Chris
Clark
b. NetSolutions exchanged $20,000 for land.
Assets
Cash + Land
Bal. 25,000
b. –20,000
+20,000
Bal. 5,000
20,000
=
=
Owner’s Equity
Chris Clark, Capital
25,000
25,000
c. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay the
supplier in the near future (on account).
Assets
=
Cash + Supplies + Land
Bal. 5,000
c.
Bal. 5,000
20,000
+ 1,350
1,350
20,000
Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
=
25,000
+ 1,350
1,350
25,000
d. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
Assets
Cash + Supplies + Land
Bal. 5,000
1,350
20,000
d. + 7,500
Bal. 12,500
1,350
20,000
=
=
Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
1,350
25,000
+ 7,500 Fees
earned
1,350
32,500
e. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
Assets
=
Cash + Supplies + Land
Bal. 12,500
1,350
20,000
e. – 3,650
Bal.8,850
1,350
20,000
=
Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
1,350
32,500
–2,125 Wages
– 800 Rent
– 450 Util.
– 275 Misc.
1,350
28,850
f. NetSolutions paid $950 to
creditors during the month.
Assets
Cash + Supplies + Land
Bal. 8,850
1,350
20,000
f.
– 950
Bal. 7,900
1,350
20,000
=
=
Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
1,350
28,850
– 950
400
28,850
g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies were used.
Assets
Cash + Supplies + Land
Bal. 7,900
1,350
20,000
g.
– 800
Bal. 7,900
550
20,000
=
=
Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
400
28,850
– 800 Supplies
expense
400
28,050
h. At the end of the month, Chris
withdrew $2,000 in cash from the
business for personal use.
Assets
Cash + Supplies + Land
Bal. 7,900
550
20,000
h. –2,000
Bal. 5,900
550
20,000
=
=
Owner’s
Liabilities + Equity
Accounts
Chris Clark,
Payable
Capital
400
28,050
–2,000 Withdrawal
400
26,050
Effects of Transactions on Owner’s Equity
Owner’s Equity
Decreased by
Increased by
Owner’s
withdrawals
Owner’s
investments
Expenses
Revenues
Net
income
Accounting reports, called
financial statements,
provide summarized
information to the owner.




Income statement—A summary of the revenue
and expenses for a specific period of time.
Statement of owner’s equity—A summary of the
changes in the owner’s equity that have
occurred during a specific period of time.
Balance sheet—A list of the assets, liabilities,
and owner’s equity as of a specific date.
Statement of cash flows—A summary of the
cash receipts and disbursements for a specific
period of time.
NetSolutions
Income Statement
For the Month Ended November 30, 2005
REVENUE:
Fees Income
Operating Expense
List each expense
Total operating expenses
Net income
NetSolutions
Income Statement
For the Month Ended November 30, 2005
Fees earned
$7 500 00
Operating expenses:
Wages expense
$2 125 00
800 00
Rent expense
Supplies expense
Utilities expense
800 00
450 00
Miscellaneous expense
Total operating expenses
Net income
To the statement
of owner’s equity
275 00
1 135 00
$3 050 00
NetSolutions
Statement of Owner’s Equity
For the Month Ended November 30, 2005
Chris Clark, capital, November 1, 2005
Investment on November 1
From the income
Net income for November
statement
$
0
$25 000 00
3 050 00
$28 050 00
2 000 00
Less withdrawals
Increase in owner’s equity
To
the
Chris Clark, capital, November 30, 2005
balance sheet
26 050 00
$26 050 00
NetSolutions
Balance Sheet
November 30, 2005
From the
statement of
Liabilities owner’s equity
Assets
Cash
Supplies
Land
$ 5 900 00 Accounts Payable $
400 00
550 00 Owner’s Equity
20 000 00 Chris Clark, cap.
26 050 00
Total liabilities and
Total assets
$26 450 00
owner’s equity
This balance sheet presented
using the account form
$26 450 00
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
Cash flows from operating activities:
Cash received from customers
$ 7 500 00
Deduct cash payments for expenses
and payments to creditors
4 600 00
Net cash flow from operating activities
2 900 00
Cash flows from investing activities:
Cash payment for acquisition of land
(20 000 00 )
Cash flows from financing activities:
Cash received as owner’s investment
$25 000 00
Deduct cash withdrawal by owner
2 000 00
Net cash flow from financing activities
23 000 00
Net cashShould
flow and
Nov.
30, 2005
bal. sheet
$ 5 900 00
match
Cash
on thecash
balance
Tools for Financial
Analysis and Interpretation
The ratio of liabilities to owner’s equity
allows owners like Chris Clark to analyze
the firm’s ability to withstand poor
business conditions.
Total Liabilities
Ratio of liabilities
=
to owner’s equity
Total owner’s equity (or total
stockholders’ equity)
Tools for Financial
Analysis and Interpretation
Ratio of
$400
liabilities to =
$26,050
owner’s equity
Ratio of
liabilities to = 0.015
owner’s equity
Chapter 1
The End
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Objectives
1. Describe the nature
of a business.
After studying
this
2. Describe the chapter,
role of accounting
in business.
you should
3. Describe the importance
business ethics and
be ableofto:
the basic principles of proper ethical conduct.
4. Describe the profession of accounting.
5. Summarize the development of accounting
principles and relate them to practice.
6. State the accounting equation and define each
element of the equation.
Objectives
7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
8. Describe the financial statements of a
proprietorship and explain how they interrelate.
9. Use the ratio of liabilities to owner’s equity to
analyze the ability of a business to withstand
poor business conditions.