Chapter 1
ACCOUNTING IN BUSINESS
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CA
Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved.
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C1
IMPORTANCE OF ACCOUNTING
Accounting
Identifying
Select transactions and events
Recording
Input, measure and classify
Communicating
Prepare, analyze and interpret
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C2
USERS OF ACCOUNTING
INFORMATION
External Users
•Lenders
•Consumer Groups
•Shareholders •External Auditors
•Governments •Customers
Internal Users
•Managers
•Sales Staff
•Officers/Directors •Budget Officers
•Internal Auditors •Controllers
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C2
USERS OF ACCOUNTING
INFORMATION
External Users
Financial accounting
provides external users
with financial statements.
Internal Users
Managerial accounting
provides information needs
for internal decision-makers.
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C2
OPPORTUNITIES IN ACCOUNTING
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C3
ETHICS - A KEY CONCEPT
Ethics
Beliefs that
distinguish right
from wrong
Accepted standards
of good and bad
behavior
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C3
ETHICS - A KEY CONCEPT
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C4
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Financial accounting practice is governed by concepts
and rules known as generally accepted accounting
principles (GAAP).
Relevant Information
Affects the decision of its users.
Reliable Information
Is trusted by users.
Comparable
Information
Is helpful in contrasting
organizations.
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C4
INTERNATIONAL STANDARDS
The International Accounting Standards Board (IASB), an
independent group (consisting of 16 individuals from many
countries), issues International Financial Reporting Standards
(IFRS) that identify preferred accounting practices.
IASB
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C4
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
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C4
PRINCIPLES AND ASSUMPTIONS
OF ACCOUNTING
Revenue Recognition Principle
1. Recognize revenue when it is earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash received
plus cash value of items received.
Expense Recognition or
Matching Principle
A company must record its expenses
incurred to generate the revenue reported.
Cost Principle
Accounting information is based on
actual cost. Actual cost is
considered objective.
Full Disclosure Principle
A company is required to report the
details behind financial statements
that would impact users’ decisions.
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C4
ACCOUNTING ASSUMPTIONS
Now
Future
Going-Concern Assumption
Reflects assumption that the business
will continue operating instead of
being closed or sold.
Monetary Unit Assumption
Express transactions and events in
monetary, or money, units.
Business Entity Assumption
Time Period Assumption
A business is accounted for
separately from other business
entities, including its owner.
Presumes that the life of a company can
be divided into time periods, such as
months and years.
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C4
FORMS OF BUSINESS ENTITIES
Sole
Proprietorship
Partnership
Corporation
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C4
CORPORATION
Owners of a corporation or company are called
shareholders (or stockholders). Shareholders are
not personally liable for corporate acts. When a
corporation issues only one class of shares, we
call it ordinary shares (or common stock).
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C4
IASB CONCEPTUAL FRAMEWORK
FOR FINANCIAL REPORTING
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C4
CONCEPTUAL FRAMEWORK
2 Fundamental
Qualitative
Characteristics
4 Enhancing
Qualitative
Characteristics
Cost-benefit constraint: The cost of providing the information
must be weighed against the benefits that can be derived from
using it.
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C4
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
•
Relevant financial information is capable of making a difference in users’
decisions.
• Predictive value: can be used as an input to processes to predict
future outcomes。
• Confirmatory value: provides feedback about (confirms or changes)
previous evaluations.
Materiality: Information is material if omitting it or misstating it could
influence decisions.
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C4
FUNDAMENTAL QUALITATIVE CHARACTERISTICS
•
•
•
Complete: includes all information necessary for a user to understand the
phenomenon.
Neutral: without bias in the selection or presentation of financial
information.
Free from error: no errors or omissions in the description of the
phenomenon, and the process used to produce the reported information.
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C4
ENHANCING QUALITATIVE CHARACTERISTICS
•
•
•
•
Comparability: enables users to identify and understand similarities in, and
differences among, items.
Verifiability: different knowledgeable and independent observers could reach
consensus.
Timeliness: having information available to decision-makers in time.
Understandability: Classifying, characterizing and presenting information
clearly and concisely makes it understandable. Users are assumed to have
reasonable knowledge of business.
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A1
TRANSACTION ANALYSIS AND THE
ACCOUNTING EQUATION
Accounting Equation
Assets
= Liabilities + Equity
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A1
ASSETS
Cash
Accounts
Receivable
Vehicles
Store
Supplies
Resources
owned or
controlled by a
company
expected to
yield future
benefits.
Notes
Receivable
Land
Buildings
Equipment
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A1
LIABILITIES
Accounts
Payable
Notes
Payable
Creditors’
claims on
assets
Taxes
Payable
Wages
Payable
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A1
EQUITY
Owner’s
Claims on
Assets
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P1
TRANSACTION ANALYSIS
Business activities can be transactions and events.
 Record those that affect the accounting equation and can
be reliably measured.
 Examples of transactions:
 Selling of products and services (external transactions).
 The business used its supplies, which are reported as
expenses (internal transactions).
 Examples of events:

 Changes in the market value of certain assets and liabilities and
natural events such as floods and fires that destroy assets and
create losses.
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P1
TRANSACTION ANALYSIS
The accounting equation MUST remain in
balance after each transaction.
Assets
=
Liabilities
+
Equity
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P1
TRANSACTION 1: INVESTMENT BY OWNERS
On December 1, Chas Taylor invests
$30,000 cash to start a consulting business,
Fast Forward, which records:
The accounts involved are:
(1) Cash (asset)
(2) Owner Capital (equity)
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P1
TRANSACTION 2: PURCHASE
SUPPLIES FOR CASH
FastForward purchases supplies paying
$2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
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P1
TRANSACTION 3: PURCHASE
EQUIPMENT FOR CASH
FastForward purchases equipment for
$26,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
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P1
TRANSACTION 4: PURCHASE
SUPPLIES ON CREDIT
FastForward purchases Supplies of $7,100 on
account.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
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P1
TRANSACTION 5: PROVIDE
SERVICES FOR CASH
FastForward provides consulting services
receiving $4,200 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
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P1
TRANSACTION 6 AND 7: PAYMENT
OF EXPENSES IN CASH
FastForward pays $1,000 rent and $700 in salary
to the company’s only employee.
The accounts involved are:
(1) Cash (asset)
(2) Expenses (equity)
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P1
TRANSACTION 8: PROVIDE SERVICES AND
FACILITIES FOR CREDIT
FastForward provides consulting services of
$1,600 and rents out its test facilities for $300,
both on account.
The accounts involved are:
(1) Accounts Receivable (asset)
(2) Revenues (equity)
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P1
TRANSACTION 9: RECEIPT OF CASH FROM
ACCOUNTS RECEIVABLE
FastForward receives $1,900 from client of test
facilities in transaction 8.
The accounts involved are:
(1) Cash (asset)
(2) Accounts Receivable (asset)
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P1
TRANSACTION 10: PAYMENT
OF ACCOUNTS PAYABLE
FastForward pays $900 as partial payment for
transaction 4 on supplies.
The accounts involved are:
(1) Cash (asset)
(2) Accounts Payable (liability)
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P1
TRANSACTION 11: WITHDRAWAL OF
CASH BY OWNER
The owner withdraws $200 cash.
The accounts involved are:
(1) Cash (asset)
(2) Withdrawals
(equity)
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P1
SUMMARY OF TRANSACTIONS
The summary of all transactions is shown below:
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P2
FINANCIAL STATEMENTS
• Statement of profit or loss and
other comprehensive income
• Statement of changes in equity
• Statement of financial position
• Statement of cash flows
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P2
INCOME STATEMENT
to Statement of
Changes in Equity
The income statement describes a company’s revenues and
expenses along with the resulting net profit or loss over a
period of time due to earnings activities.
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P2
STATEMENT OF CHANGES IN EQUITY
from
Income
Statement
to Statement
of Financial
Position
The statement of changes in equity reports information about
how equity changes over the reporting period.
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P2
STATEMENT OF FINANCIAL POSITION
The Statement of Financial Position describes a
company’s financial position at a point in time.
from Statement of
Changes in Equity
to Statement of Cash Flows
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P2
STATEMENT OF CASH FLOWS
from Statement of
Financial Position
The Statement of Cash Flows describes a company’s cash
flows for operating, investing, and financing activities.
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A2
DECISION ANALYSIS
Return on assets (ROA) is stated in ratio form as profit
divided by assets invested.
Return on assets =
Net profit
Average total assets
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A3
1A RETURN AND RISK ANALYSIS
Many different
returns may be
reported.
Risk is the
uncertainty about
the return we will
earn.
The lower the risk, the lower our expected return.
ROA
Interest return on
savings accounts.
Interest return on
corporate bonds.
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C5
1B - BUSINESS ACTIVITIES AND THE
ACCOUNTING EQUATION
There are three major types of activities in any organization:
1.Financing Activities – Provide the means organizations
use to pay for resources such as land, buildings, and
equipment to carry out plans.
2.Investing Activities - Are the acquiring and disposing of
resources (assets) that an organization uses to acquire and
sell its products or services.
3.Operating Activities – Involve using resources to research,
develop, and purchase, produce, distribute, and market
products and services.
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END OF CHAPTER 1