Introducing Accounting in
Business
ACG 2021: Chapter 1
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.
Types of Businesses

Merchandising – sell products to
customers.
Types of Businesses

Manufacturing - change basic inputs
into products that are sold to
individual customers.
Types of Businesses

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
Types of Business
Organizations

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
Types of Business
Organization

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
Types of Business
Organization

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


Business Stakeholders




Capital market stakeholders provide the
major financing for the business in order for the
business to begin and continue its operations
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
Ethics
Are beliefs that distinguish right
from wrong
 Accepted standards of good and
bad behavior
 Code of Professional Conduct

Accounting
Is an information and measurement
system that identifies, records, and
communicates relevant, reliable and
comparable information about an
organization’s business activities
 Language of business

The Process of Accounting





Identify the
stakeholders
Assess stakeholders
information needs
Design the accounting
information system
Record economic data
about business activities
Prepare accounting
reports for stakeholders
Profession of Accounting

Financial Accounting


Is the area of accounting
aimed at serving external
users by providing then with
financial statements.
External auditors attest to
these financial statements
Profession of Accounting


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.
Careers in Accounting





Private accounting
Public Accounting
Government
accounting
Forensic
Accounting
Intl Accounting
The Certified Forensic
Accountant, Cr.FASM
Generally Accepted Accounting
Principles (GAAP)


Governs financial
accounting
practice
Purpose is to
make information
in financial
statements
relevant, reliable,
and comparable

Financial
Accounting
Standards Board
(FASB)


Private group that
sets both broad
and specific
principles
Securities and
Exchange
Commission (SEC)
Standard Setting

SEC:

Is the government
group that
establishes
reporting
requirements for
companies that
issue stock to the
public

Public Company
Accounting
Oversight Board

Rules all publicly
traded companies
accounting
practices
Principles of Accounting

General principles


Are the basic assumptions, concepts,
and guidelines for preparing financial
statements
Specific Principles

Are detailed rules used in reporting
business transactions and events
Specific Principles

Objectivity
principle

Means that
accounting
information is
supported by
independent
unbiased evidence

Cost principle

Means that
accounting
information is
based on actual
cost
Specific Principles

Going concern
principle

Means that
accounting
information
reflects an
assumption that
the business will
continue operating

Monetary unit
principle

Means that we can
express
transactions and
events in
monetary units
Specific Principles

Revenue
Recognition
principle


Provides guidance
on when a
company must
recognize revenue
Recognize means
to record it

Three concepts



Revenue is recognized
when earned
Proceeds from selling
product and services
need not be in cash
Revenue is measured
by the cash received
plus the cash value of
any other items
received.
Specific principles

Business entity principle

Means that a business is accounted for
separately from other business entities.
Accounting Equation
Assets = Liabilities + Stockholder’s Equity
What the business
owns!
What
business
owes!
What
business
is worth!
Assets


resources owned by the business
Such as:







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
Stockholder’s Equity
Assets minus Liabilities
 Capital stock



Retained earnings


investment by shareholders
earnings kept in the business
Dividends

distribution of income to
shareholders
Revenues & Expenses

Revenue






income from the
operation of the
business
Sales
Fees earned
Commission
income
Increase retained
earnings
Results from
operations

Expenses







cost of doing
business
Salaries expense
Rent expense
Depreciation
expense
Miscellaneous
expense
Decrease retained
earnings
Cost of doing
business
Financial Statements
Four financial statements are
prepared for external and internal
use
 Prepared in specific order

Income Statement
 Statement of Retained Earnings
 Balance Sheet
 Statement of Cash Flows

Income Statement


Income Statement – a summary of revenue
and expenses for a specific period of time.
Formula:

Revenue minus Expenses = Net income (Net
losses)
Income Statement
This amount is transferred to
the Statement of Retained
Earnings
Retained earnings statement


a summary of the changes in the
earnings retained in the corporation for
a specific period of time.
Formula:
Beginning Retained Earnings
+ Net income
- Dividends
= Ending Retained earnings
Retained earnings statement
Transferred to Balance Sheet
Balance Sheet


a list of assets, liabilities,
stockholder’s equity for a specific
date
Assets = Liabilities + Stockholder’s
Equity
Balance Sheet
Same as net cash flows
Statement of Cash Flows


Statement of cash flows – a
summary of the cash receipts and
cash payments for a specific
period of time.
Operations + Investing +Financing
Statement of Cash Flows
1-4
On November 1, 2007, Chris
Clark organizes a corporation
that will be known as
NetSolutions.
1-4
a.
Assets
=
Cash
25,000
=
Stockholders’
Equity
Capital Stock
25,000
a. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions in
return for shares of stock in the
corporation.
41
1-4
Stock issued to owners
(stockholders), such as Chris
Clark, is referred to as
capital stock. The owner’s
equity in a corporation is
called stockholders’ equity.
1-4
Assets
Cash + Land
Bal. 25,000
b. –20,000
+20,000
Bal. 5,000
20,000
=
=
Stockholders’
Equity
Capital Stock
25,000
25,000
b. NetSolutions exchanged $20,000 for land.
43
1-4
Assets
=
Cash + Supplies + Land
Bal. 5,000
c.
Bal. 5,000
20,000
+1,350
1,350
20,000
Stockholders’
Liabilities + Equity
Accounts
Capital
Payable + Stock
=
25,000
+1,350
1,350
25,000
c. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay the
supplier in the near future (on account).
44
1-4
Beginning with transaction (d)
the asset section will be shown
first, then the liabilities and
stockholders’ equity will be
shown in the following slide.
1-4
Assets
Cash + Supplies + Land
Bal. 5,000
d. +7,500
Bal. 12,500
1,350
20,000
1,350
20,000
d. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
46
1-4
Liabilities + Stockholders’ Equity
Accounts
Capital
Fees
Payable + Stock
+ Earned
Bal.
1,350
25,000
+7,500 d.
1,350
25,000
7,500 Bal.
d. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
47
Expenses
The amounts used in earning revenue are
called expenses. Expenses are assets that
have been used up, consumed, or expired.
Adding expenses to the stockholders’ equity
section results in a space problem. To adjust
for these added headings, the word “Bal.” has
been omitted from Slides 50, 52, 54, and 56.
The bottom row in these four slides provides
the balances after each transaction.
1-4
1-4
Assets
Cash + Supplies + Land
Bal. 12,500
1,350
20,000
e. –3,650
Bal. 8,850
1,350
20,000
e. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
49
1-4
Stockholders’ Equity
Liabilities +
Accounts
Payable +
1,350
1,350
Capital
Fees
Wages
Rent
Stock + Earned + Exp. + Exp.
25,000
7,500
25,000
7,500
Utilities Misc.
+ Exp. + Exp.
–2,125
–800
–450
–275 e.
–2,125
–800
–450
–275
e. NetSolutions paid the following expenses:
wages, $2,125; rent, $800; utilities, $450; and
miscellaneous, $275.
50
1-4
Assets
Cash + Supplies + Land
Bal. 8,850
1,350
20,000
f. –950
Bal. 7,900
1,350
20,000
f. NetSolutions paid $950 to
creditors during the month.
51
1-4
Stockholders’ Equity
Liabilities +
Accounts
Capital
Fees
Wages
Rent
Utilities
Misc.
Payable + Stock + Earned + Expense + Expense + Expense + Expense
–800
–450
–275
1,350
25,000
7,500 –2,125
f.
–950
400
25,000
7,500
–2,125
–800
f. NetSolutions paid $950 to
creditors during the month.
–450
–275
52
1-4
Assets
Cash + Supplies + Land
Bal. 7,900
1,350
20,000
g.
–800
Bal. 7,900
550
20,000
g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies were used.
53
1-4
Stockholders’ Equity
Liabilities +
Accounts Capital
Fees
Wages Rent Supplies Util. Misc.
Payable + Stock + Earned + Exp. + Exp. + Exp. + Exp. + Exp.
400
25,000
7,500 –2,125 –800
–450 –275
g.
–800
400
25,000
7,500
–2,125
–800
–800
–450 –275
g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies were used.
54
1-4
Assets
Cash + Supplies + Land
Bal. 7,900
550
20,000
h. –2,000
Bal. 5,900
550
20,000
h. At the end of the month, NetSolutions
pays $2,000 to stockholder (Chris
Clark) as dividends.
55
1-4
Dividends are distributions of
earnings to stockholders. You
should be careful not to confuse
dividends with expenses.
Dividends do not represent assets or
services used in the process of
earning revenues.
1-4
Stockholders’ Equity
Liabilities +
Accounts Capital
Fees Wages Rent Supplies Util. Misc.
Payable + Stock + Dividends Earned + Exp. + Exp.+ Exp. + Exp. + Exp.
400
25,000
7,500
–2,125
–800
–800
–450 –275
h.
–2,000
400
25,000
–2,000
7,500 –2,125
–800
–800
–450 –275
h. At the end of the month, NetSolutions
pays $2,000 to stockholder (Chris Clark)
as dividends.
57
1-4
Stockholders’ Equity
Increased by
Decreased by
Investments by
stockholders
Dividends paid to
stockholders
Revenues
Expenses
58
Retained Earnings
Retained earnings represent
stockholders’ equity created
from business operations
through revenue, expense,
and dividend transactions.
1-4
NetSolutions
Retained Earnings
November Operations
(Revenue and Expense Transactions)
1-4
Fees
Wages
Rent
Supplies Utilities
Misc.
Earned – Expense – Expense – Expense – Expense – Expense
+7,500
–2,125
–800
–450
–275
7,500
–2,125
–800
–450
–275
–800
7,500
–2,125
–800
–800
–450
–275
7,500
–2,125
–800
–800
–450
–275
60
$3,050