Introduction to Accounting
& Business
By Rachelle Agatha, CPA, MBA
Slides by Rachelle Agatha, CPA,
with excerpts from Warren, Reeve,
Duchac
After studying this lecture material,
you should be able to:
1. Describe the nature of a business
and the role of ethics and
accounting in business.
2. Summarize the development of
accounting principles and relate
them to practice.
3. State the accounting equation and
define each element of the
equation.
2
4. Describe and illustrate how business
transactions can be recorded in
terms of the resulting change in the
basic elements of the accounting
equation.
5. Describe the financial statements of
a proprietorship and explain how
they interrelate.
3
Objective 1
Describe the nature of a
business and the role of
ethics and accounting in
business.
4
Common Forms of
Business Organizations
 Proprietorship
 Partnership
 Corporation
 Limited liability
company
5
Types of Businesses
 Service
 Merchandiser
 Manufacturing
6
A proprietorship is owned by
one individual and—
 Comprises 70% of business
organizations in the United
States.
 Requires low cost of organizing.
 Is limited to financial resources
of the owner.
 Is used by small businesses.
7
A partnership is similar to a
proprietorship except that it is
owned by two or more
individuals and—
 Comprises 10% of business
organizations in the United
States.
 Combines the skills and resources
of more than one person.
8
A corporation is organized under
state or federal statues as a separate
legal taxable entity and—
 Generates 90% of the total dollars of
business receipts received.
 Comprises 20% of the businesses.
Continued
9
 Includes ownership divided into
shares of stock, sold to
shareholders (stockholders).
 Is able to obtain large amounts
of resources by issuing stock.
 Is used by large businesses.
10
A limited liability company (LLC)
combines attributes of a partnership
and a corporation in that it is
organized as a corporation.
However, a limited liability
corporation can elect to be taxed
as a partnership and—
 Is a popular alternative to a
partnership.
 Has tax and liability advantages
to the owners.
11
A business stakeholder
is a person or entity
having an interest in
the economic
performance and wellbeing of a business.
12
Capital market stakeholders
provide the major financing
for the business in order for the
business to begin and
continue its operations.
13
Product or service market
stakeholders include
customers who purchase
the business’s products or
services as well as the
vendors who supply inputs
to the business.
14
Government stakeholders
have an interest in the
economic performance of a
business. City, county, state,
and federal governments
collect taxes from businesses
within their jurisdiction.
15
Internal stakeholders include
individuals employed by the
business. Managers have an
incentive to maximize the
economic value of the
business. Employees have
an interest because their
jobs depend on it.
16
The moral principles that
guide the conduct of
individuals are called
ethics.
1. Individual character
2. Firm culture
3. Laws and enforcement
17
1-1
Accounting can be
defined as an information
system that provides
reports to stakeholders
about the economic
activities and condition of
a business.
18
The process by which accounting
provides information to business
stakeholders is as follows:
 Identify stakeholders.
 Assess stakeholders’ information
needs.
 Design the accounting information
system to meet stakeholders’ needs.
 Record economic data about
business activities and events.
 Prepare accounting reports for
stakeholders.
19
20
Financial accounting is primarily
concerned with the recording and
reporting of economic data and
activities for a business.
Managerial accounting uses both
financial accounting and estimated
data to aid management in running
day-to-day operations and in
planning future operations.
21
Accountants employed by a business
firm or a not-for-profit organization
are said to be employed in private
accounting.
Accountants and their staff who
provide services on a fee basis are
said to be employed in public
accounting.
22
Objective 2
Summarize the
development of
accounting principles
and relate them to
practice.
23
The business entity
concept or principle limits
the economic data in the
accounting system to data
related directly to the
activities of the business.
24
The cost concept or principle
is the basis for entering the
exchange price, or cost of an
acquisition in the accounting
records.
25
The objectivity concept or
principle requires that the
accounting records and
reports be based upon
objective evidence.
26
The unit of measure
concept or principle
requires that economic
data be recorded in
dollars.
27
On March 1, Smith's Repair Service extended an
offer of $115,000 for land that had been priced for
sale at $135,000. On March 15, Smith's Repair
Service accepted the seller’s counter-offer of
$125,000. On April 1, the land was assessed at a
value of $100,000 for property tax purposes. On
May 1, Smith's Repair Service was offered $150,000
for the land by a national retail chain. At what
value should the land be recorded in Smith Repair
Service’s books (general ledger)?
$125,000. Under the cost concept, the land should
be recorded at the cost to Smith's Repair Service.
28
Objective 3
State the accounting
equation and define
each element of the
equation.
29
ASSETS = LIABILITIES + OWNERS EQUITY
ASSETS
LIAB +
OE
ACCOUNTING EQUATION
Slide by Rachelle Agatha, CPA
The Accounting Equation
1-3
Assets = Liabilities + Owner’s Equity
The resources
owned by a
business
31
The Accounting Equation
1-3
Assets = Liabilities + Owner’s Equity
The rights of
the creditors,
which
represent
debts of the
business
32
1-3
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of
the owners
33
Assets = Liabilities + Owner’s Equity
1-3
At the end of 12/31/08, Smith's Repair Service had
Assets of $850,000 and Liabilities of $250,000. How
much equity did Smith's Repair Service have?
ASSETS
$ 850,000
$ (250,000)
$ 600,000
= LIABILITIES
= $ 250,000
= $ (250,000)
= $
-
$ 850,000
= $
250,000
+
+
+
OWNERS
EQUITY
?
+
+
?
$
600,000
34
1-4
Objective 4
Describe and illustrate how
business transactions can be
recorded in terms of the
resulting change in the basic
elements of the accounting
equation.
35
1-4
A business transaction is an
economic event or
condition that directly
changes an entity’s
financial condition or
directly affects its results of
operations.
36
1-4
Assets
= Liab
+
.
Bal.
Accts.
Accts.
Cash + Rec. + Supplies = Payable
$ 24,620 $ 2,250 $ 380
$ 550
27,250 =
550 +
Owner's Equity
Gilmore,
Gilmore
Fees
All
Capital - Drawing + Earned - Exp.
$ 25,000
$ (1,000)
$ 6,750
$ (4,050)
26,700
Slide by Rachelle Agatha, CPA
37
1-4
Owner's Equity
+
+
=
.
Initial Capital Investment
Revenue
Expense
Withdrawls
Ending Equity
Slide by Rachelle Agatha, CPA
38
1-4
Owner’s Equity
Increased by
Decreased
by
Owner’s investments
Owner’s withdrawals
Revenues
Expenses
55
39
On January 1, 2008, Chris
Smith begins a business
that will be known as
Smith’s Repair Service
40
Chris Smith invests $25,000
into the business
Assets
Cash
25,000
=
=
Owner’s Equity
Chris Clark,
Capital
25,000 Investment
by Chris
Clark
41
1-5
Objective 5
Describe the financial
statements of a
proprietorship and
explain how they
interrelate.
42
1-5
Accounting reports,
called financial
statements, provide
summarized
information to the
owner.
43
The income statement is a
summary of the revenue
and expenses for a
specific period of time,
such as a month or a
year.
44
1-5
A statement of owner’s
equity is a summary of the
changes in the owner’s
equity that have occurred
during a specific period of
time.
45
San Diego Designer Puppy Store and Couture
1-5
Income Statement
For the Year Ended December 31, 2008
Revenue
Expenses:
Wages
Rent
Depreciation
Supplies
Utilities
Insurance
Miscellaneous
Net income
$ 153,750
$
20,775
48,000
10,800
9,375
1,065
1,800
705
$
92,520
61,230
San Diego Designer Puppy Store and Couture
Statement of Owner's Equity
For the Year Ended December 31, 2008
J. Terrier Capital, January 1, 2008
Net income
Less: Drawing
Increase in owner's equity
J Terrier Capital, December 31, 2008
$
75,000
61,230
(15,000)
46,230
$ 121,230
46
1-5
A balance sheet is a list
of the assets, liabilities,
and owner’s equity as
of a specific date.
47
San Diego Designer Puppy Store and Couture
Statement of Owner's Equity
For the Year Ended December 31, 2008
J. Terrier Capital, January 1, 2008
Net income
Less: Drawing
Increase in owner's equity
J Terrier Capital, December 31, 2008
1-5
$
75,000
61,230
(15,000)
46,230
$ 121,230
San Diego Designer Puppy Store and Couture
Balance Sheet
December 31, 2008
Assets
Cash
Supplies
Prepaid insurance
Inventory
Current assets
$12,000
1,300
900
16,000
$30,200
Equipment
Acc. Depreciation
Fixed assets
$182,865
47,335
$135,530
Total Liabilities
$44,500
J. Terrier Capital
$ 121,230
$165,730
Total Liabilities and
Owner's Equity
$165,730
Total assets
Liabilities
Accounts payable
Wages payable
Current Liabilities
Notes Payable
$15,000
4,500
$19,500
$ 25,000
48
1-5
A statement of cash
flows is a summary of
the cash receipts
and payments for a
specific period of
time.
49
Income Statement
1-5
The income statement reports
the revenues and expenses for a
period of time based on the
matching concept. This concept
is applied by matching the
expenses with the revenue
generated during a period by
those expenses.
50
1-5
The excess of revenue
over the expenses is
called net income or net
profit. If the expenses
exceed the revenue, the
excess is a net loss.
51
Statement of Owner’s Equity
1-5
The statement of owner’s
equity reports the
changes in the owner’s
equity for a period of
time. It is prepared after
the income statement.
52
Balance Sheet
1-5
The balance sheet
reports the amounts of
a firm’s assets,
liabilities, and owner’s
equity at the end of a
specific period.
53
Interrelationships Among Financial Statements

1-5
The income statement and the
statement of owner’s equity are
interrelated.
Net income or net loss
appears on both
statements.
54
1-5

The statement of owner’s
equity and the balance sheet
are interrelated.
The owner’s capital at the end
of the period on the statement
of owner’s equity also appears
on the balance sheet as
owner’s capital.
55
1-5

The balance sheet and the
statement of cash flows are
interrelated.
The cash on the balance sheet
also appears as the end-ofperiod cash on the statement of
cash flows.
56