Accounting in Business
Chapter 1
John J. Wild
Fundamental Accounting Principles
23rd Edition
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education.
An explanation of it
Step #1: Memorize the account names,
what kinds of accounts they are, which
financial statements the accounts belong in
and account normal balances.
Kind
Account
Names
Kind
Account
Names
Kind
Account
Name
Kind
Account
Names
Kind
Account
Names
Step #1: Memorize the account names,
what kind of accounts they are, what
financial statements the accounts belong
in and account normal balances.
I/S
SOE
B/S
Step #1: Memorize the account names,
what kind of accounts they are, what
financial statements the accounts belong in
and account normal balances.
Dr. = Debit
Cr. = Credit
The Next Handout:
Our Green
Sheet
Three reasons to
memorize this sheet
right away:
1. This is the first step
in learning debits and
credits.
2. The sooner you
memorize this, the
sooner accounting
will make sense.
3. I will give you a
Bonus Quiz worth 5
BPs next class
meeting on this!
Asset
Asset
Liability
Equity
Revenue
Expense
Asset
Asset
Asset
Expense
Liability
Asset
Contra-Equity
Liability
Revenue
Expense
Asset
Revenue
Expense
Expense
Asset
Liability
Asset
Expense
Revenue
Revenue
B/S
B/S
B/S
B/S & SOE
I/S
I/S
B/S
B/S
B/S
I/S
B/S
B/S
SOE
B/S
I/S
I/S
B/S
I/S
I/S
I/S
B/S
B/S
B/S
I/S
I/S
I/S
Dr.
Dr.
Cr.
Cr.
Cr.
Dr.
Dr.
Dr.
Dr.
Dr.
Cr.
Dr.
Dr.
Cr.
Cr.
Dr.
Dr.
Cr.
Dr.
Dr.
Dr.
Cr.
Dr.
Dr.
Cr.
Cr.
Issues related to sole proprietors & your perspective
Sole Proprietorships
Fact: A sole proprietorship is
owned by one person.
Sole proprietorships have:
Two equity accounts
Capital
Drawings
What is Accounting?
Accounting
is a
system.
The system:
Identifies
Records &
The information is:
Relevant
Financial
information.
Communicates
Reliable
Comparable
to help users make
better decisions.
Before We Continue...
An Accountant vs. A Consumer PERSPECTIVE
• FOR THE REMAINDER SEMESTER: I want you to pretend you are an
accountant working for a company.
• In other words, do not view accounting and the material we cover in this
class from a “consumer” perspective.
• Rather, view accounting and everything we do as an accountant who is
working for a business and must input accounting data from other
consumers.
• To put it another way, you are the accountant at Wal-Mart, not the
consumer shopping at Wal-Mart.
The major players in the business world
The SEC, FASB and GAAP
Fact: The accounting industry is regulated by the government.
Regulations began with the
passage of the Securities
Act of 1933
and Securities and
Exchange Act of 1934.
The SEC has
delegated that
responsibility to the
FASB.
The Securities and Exchange
Commission (SEC)
was formed and given broad powers
to determine measurement rules for
financial statements.
The Financial Accounting
Standards Board (FASB) is
currently recognized as the body
to formulate GAAP.
GAAP = Generally Accepted Accounting Principles
What Are Generally Accepted Accounting
Principles (GAAP)?
US GAAP are the authoritative standards for reporting
accounting information.
US GAAP
Are the rules
publicly-traded
companies must
follow
GAAP are the common set
of accounting principles,
standards and procedures
companies must use to
compile their financial
information.
The external auditor polices companies and provides reasonable assurance they follow GAAP.
External Auditors & their Responsibility
The external auditor’s responsibility is to perform an audit on the
financial statements of a company. The auditor’s audit provides
reasonable assurance the company’s financial statements are in
Overall, I believe
accordance with US GAAP.
An audit is an examination
of the financial reports to
ensure that they represent
what they claim and
conform with GAAP.
these financial
statements are
fairly stated.
Defining them and how to recall
13
A/R & A/P Defined, Illustrated & How to Recall Them
Double entries are always required in an accounting system
• Fact: Accountants divide financial data and information into periods.
• A/R: We create an A/R when we extend credit to someone via a sale. In other words,
revenue will increase and so will A/R (cash will be collected at a later date).
• A/P: We create an A/P when someone extends credit to us via a sale they make to us.
In other words, expense will increase and so will A/P (we will pay cash at a later date).
A/R or A/P recorded
A/R +
Sales +
Exp +
A/P
+
Cash collected/paid
Easy way to recall what an A/R &
A/P is:
Cash +
A/R
-
i Receive (cash in future)
A/P Cash
-
i Pay (cash in future)
End of accounting period
*Put an “i” in front of word
A look at it
13
The Accounting Equation With its Definitions
50
A =
Assets
Economic Resources
10
L
+
Liabilities
40
OE
Owners’
Equity
Sources of Financing
Liabilities: loans from creditors
Owners’ Equity: investment money from owner
A look at both
Business Transactions and the Accounting Equation
A business transaction is an economic event or condition that directly
changes an entity’s financial condition or its results of operations.
Two important facts:
1. Every business transaction affects at least two accounts.
2. The accounting equation must remain in balance after each business
transaction.
A = L + OE
(Assets)
(Liabilities)
(Owners’ Equity)
Remember:
Revenues,
expenses and
drawings
affect Owner’s
Equity
BTs & the Accounting Equation: Owner Investment
Chas Taylor invests $30,000 cash to start the business, FastForward.
The accounts involved are:
(1) Cash (asset)
(2) Capital (equity)
Assets
(1)
=
Cash
$ 30,000
Supplies Equipment
$ 30,000
$
Liabilities
Accounts
Notes
Payable
Payable
+
Equity
C. Taylor,
Capital
$ 30,000
-
$
-
$
-
$
+
$30,000
-
$ 30,000
=
Overall effect on the accounting equation:
$30,000
=
0
A = L + OE
Balanced
With cash
BTs & the Accounting Equation: Supplies Purchase
FastForward purchased supplies paying $2,500 cash.
(1) Cash (asset)
The accounts involved are:
(2) Supplies (asset)
Assets
=
Cash
Supplies Equipment
(1) $
30,000
(2)
(2,500) $
2,500
$
27,500 $
2,500 $
-
Liabilities
Accounts
Notes
Payable
Payable
$
-
$
-
+
Equity
C. Taylor,
Capital
$
30,000
$
30,000
Overall effect on the accounting equation:
$30,000
=
0
+
$30,000
A = L + OE
Balanced
BTs & the Accounting Equation: Equipment Purchase
FastForward purchased equipment for $26,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Assets
(1)
(2)
(3)
=
Cash
Supplies Equipment
$ 30,000
(2,500) $ 2,500
(26,000)
$
26,000
$
1,500
$
2,500
$
26,000
Liabilities
Accounts
Notes
Payable
Payable
$
-
$
-
+
Equity
C. Taylor,
Capital
$ 30,000
$ 30,000
Overall effect on the accounting equation:
$30,000
=
0
+
$30,000
A = L + OE
Balanced
On account
BTs & the Accounting Equation: Supplies Purchase
FastForward purchased Supplies of $7,100 on account.
The accounts involved are: (1) Supplies (asset)
(2) Accounts Payable (liability)
Assets
(1)
(2)
(3)
(4)
=
Cash
Supplies Equipment
$ 30,000
(2,500) $ 2,500
(26,000)
$
26,000
7,100
$
1,500
$
9,600
$
26,000
Liabilities
Accounts
Notes
Payable
Payable
$
7,100
$
7,100
$
-
+
Equity
C. Taylor,
Capital
$ 30,000
$ 30,000
Overall effect on the accounting equation:
$37,100
=
$7,100
+
$30,000
A = L + OE
Balanced
BTs & the Accounting Equation: Revenue Earned
FastForward provided consulting services to a customer and received $4,200 cash.
The accounts involved are: (1) Cash (asset)
Affect on equity
(2) Service Revenue (revenue)
Assets
=
Cash
Supplies Equipment
Bal. $ 1,500 $ 9,600 $ 26,000
(5)
4,200
$ 5,700 $ 9,600 $ 26,000
Overall effect on the accounting equation:
$41,300
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 7,100
C. Taylor,
Capital Revenue
$ 30,000
$ 4,200
$ 7,100 $
$ 30,000 $ 4,200
$7,100
+
-
$34,200
A = L + OE
Balanced
BTs & the Accounting Equation: Expenses Used
FastForward paid rent of $1,000 and salaries of $700 to employees.
The accounts involved are:
(1) Cash (asset)
(2) Rent expense (expense)
Affect on
equity
(3) Salaries expense (expense)
Assets
=
Cash
Supplies Equipment
Bal. $ 5,700 $
9,600 $ 26,000
(6)
(1,000)
(7)
(700)
$
4,000 $
9,600 $ 26,000
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 7,100
C. Taylor,
Capital
Revenue Expenses
$
30,000 $ 4,200
(1,000)
$
(700)
$ 7,100 $
$
-
30,000 $
4,200 $
(1,700)
Overall effect on the accounting equation:
$39,600
=
$7,100
+
$32,500
A = L + OE
Balanced
BTs & the Accounting Equation: Drawings Paid
FastForward owner withdraws $200 for personal use.
The accounts involved are: (1) Cash (asset)
(2) Drawing (Contra-equity)
Assets
=
Cash
Supplies Equipment
Bal. $ 5,700 $
9,600 $ 26,000
(6)
(1,000)
(7)
(700)
(8)
(200)
$ 3,800 $
9,600 $ 26,000
Liabilities
+
Accounts Notes
Payable Payable
$ 7,100
$ 7,100 $
Affect on equity
Equity
C. Taylor, C. Taylor,
Capital
Drawings Revenue Expenses
$ 30,000
$ 4,200
$ 3,000 $ (1,000)
$
(700)
$
(200)
$ 30,000 $
(200) $ 7,200 $ (1,700)
-
Overall effect on the accounting equation:
$39,400
=
$7,100
+
$32,300
A = L + OE
Balanced
Defining the (1) Balance Sheet (2) Income Statement, and (3)
Statement of OE
Our Three Financial Statements with Definitions
1. INCOME STATEMENT – reports the revenues less the expenses of the
accounting period.
2. STATEMENT OF OWNER’S EQUITY – reports the changes in each of the
company’s owners’ equity accounts, including the change in beginning
and ending owner’s equity balances caused by net income and
drawings during the reporting period.
3. BALANCE SHEET – reports the amount of assets, liabilities, and owners’
equity of an accounting entity at a point in time.
FastForward’s Income Statement
R
E
NI
FastForward’s Statement of Owner’s Equity
BOE + NI - Draw = EOE
FastForward’s Balance Sheet
A
=
L
+
OE
How they are related
How Our Three Financial Statements are Related
The Three F/S Relationships
Income
Statement
Statement of
Owner’s
Equity
Balance
Sheet
Revenues – Expenses = Net Income
Beginning Owner’s Equity
+ Net Income
- Drawings
= Ending Owner’s Equity
Assets = Liabilities + Owner’s Equity