Chapter 1
1
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
1
Define accounting vocabulary
2
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Accounting is “the language of business.”
The information system that:
a) Measures business activity
(A legal activity that is engaged in for the primary
purpose of making profit is called business activity)
b) Processes the data into reports
c) Communicates the results to decision makers
d) Presents information in monetary terms
3
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
2
Define the users of
Accounting Information
4
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
5
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Financial Accounting
Provides information for
external decision makers
Investors
Creditors
Taxing Authorities
Competitors
Customers
6
Managerial Accounting
Provides information for
internal decision makers
Business Owners
Managers
Employees
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
S1-2: USERS OF FINANCIAL INFORMATION
Suppose you are the manager of Greg’s Tunes. The company
needs a bank loan in order to purchase music equipment. In
evaluating the loan request, the banker asks about the assets and
liabilities of the business. In particular, the banker wants to know
the amount of the business’s stockholders’ equity.
Requirements:
1. Is the banker considered an internal or external user of
financial information?
The banker is an external user.
2. Which financial statement would provide the best information
to answer the banker’s questions?
The balance sheet would include assets, liabilities and
equity.
7
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
3
Describe the accounting
profession and the organizations
that govern it
8
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Lucrative (profitable) career with many opportunities
Certified Public Accountants (CPAs)
Pass qualifying exam
Meet education and/or experience requirements
9
single company.
• Certified professionals who work for a
Certified Management
Accountants, or CMAs
serve the general public
• Licensed professional accountants who
Certified Public
Accountants, or CPAs
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Standards, the international accounting rule book
• Publishes the International Financial Reporting
• International Accounting Standards Board
10
IASB
AICPA
• Private organization of public accountants
• American Institute of Certified Public Accountants
GAAP
• Main U.S. accounting rule book
• Generally Accepted Accounting Principles
FASB
standards.
• A privately funded organization, formulates accounting
• Financial Accounting Standards Board
SEC
markets.
• U.S. governmental agency that oversees U.S. financial
• Securities and Exchange Commission
4
Identify the different types
of business organizations
11
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Proprietorship
Partnership
Corporation
LLC and LLP
Not-for-profit
12
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Owners
Life of
Organizati
on
Proprietorship
Partners
Corporation
LLC, LLP
Not-forProfit
One Owner
Two or
more
usually many
Members
None
Limited by
owner's choice
or death
Limited by
owner’s
choice or
death
Indefinite
Indefinite
Indefinite
Stockholders
are not
personally
liable
Members
are not
personally
liable
Fiduciary
liability
of board
members
Liability of
Partners are
owners for
Owner is
personally
business
personally liable
liable
debts
13
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
5
Organization of a Corporation
14
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
15
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
S1-4: TYPES OF BUSINESS ORGANIZATION
Chloe Michaels plans on opening Chloe Michaels’
Floral Designs. She is considering the various types
of business organizations and wishes to organize
her business with unlimited life and limited liability
features. Additionally, Chloe wants the option to
raise additional equity easily in the future. Which
type of business organization will meet Chloe’s
needs best?
A Corporation has all the requirements of Chloe’s
request. A corporation has an unlimited life,
shareholders have limited liability and additional
stock can be sold to raise additional equity.
16
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
6
Apply accounting concepts and
principles
17
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Entity
Concept
Cost
Principle
18
Faithful
Representation
Principle
GoingConcern
Concept
Stable
Monetary Unit
Concept
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Entity Concept
• A business is separate from its owners
Faithful Representation Principle
• Accounting information is complete, neutral, and
free from material error
Cost Principle
• Assets are recorded at purchase price
19
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Going-Concern
• Assumption that business will remain in
operation for the unforeseeable future
Stable Monetary Unit Concept
• In the U.S. amounts are recorded in dollars
• The dollar is considered a stable unit of
measure
20
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
7
Describe the accounting equation
and define assets, liabilities and
equity
21
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
ASSETS
Economic
Resources
22
LIABILITIES
EQUITY
Claims to Economic
Resources
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Economic resources
Benefit the business in the future
Examples:
Cash
Accounts receivable
Merchandise inventory
Furniture
Building
Motor car
23
I will
receive the
money
later
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Liabilities
Debts payable to outsiders
Examples:
Accounts payable
Bank loans
Mortgages
24
I will pay you
later
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Equity
Owner’s claims to the
assets of the business
25
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Assets
Liabilities
Equity
$5,000
$2,000
$3,000
Liabilities
Assets
26
Owner’s
Equity
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
OWNER’S EQUITY
INCREASES
OWNER’S EQUITY
DECREASES
Owner
Investments
Owner
Withdrawals
Owner’s Equity
Revenues
27
Expenses
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Amounts earned by delivering goods or services
to customers
Sales revenue
Service revenue
Interest revenue
28
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Expenses are incurred cost that you will have to
pay for, either now or later
Store or rent expense
Salary expense
Advertising expense
Utilities expense
Property tax expense
29
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
E1-16: CHARACTERISTICS OF A CORPORATION,
ACCOUNTING CONCEPTS, AND USING THE
ACCOUNTING EQUATION
Select financial information for three corporations follows:
Liabilities
Equity
New Rock Gas
Assets
$?
$74,000
$24,000
$50,000
DJ Video Rentals
$75,000
$?
$43,000
$32,000
Corner Grocery
$100,000
$53,000
$?
$47,000
Requirements:
Compute the missing amount in the accounting equation
for each entity.
30
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
8
Use the accounting equation to
analyze transactions
31
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
An event that affects the financial position of
the business
Can be measured reliably
Every transaction impacts at least two items
The accounting equation balances before and
after each transaction
32
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
33
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
34
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
35
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
36
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
9
Prepare financial statements
37
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
Income
Statement
Balance
Sheet
Statement of
Owner’s Equity
Statement of
Cash Flows
38
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
39
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
40
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
41
Copyright © 2012 Pearson
Education,
Inc. Publishing
Prof.
Rashid Pervez
Rashidas Prentice Hall.
42
Copyright
2012 Pearson Education, Inc. Publishing as Prentice Hall.
Prof. Rashid
Pervez ©
Rashid