Chapter 1
Introducing Accounting
in Business
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C1
Importance of Accounting
Accounting
Accounting
is a
system that
Identifies
Identifies
Records
Records
Relevant
Relevant
information
that is
Communicates
Communicates
Reliable
Reliable
Comparable
Comparable
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to
tohelp
helpusers
usersmake
make
better
betterdecisions.
decisions.
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Accounting Activities
Identifying
Business
Activities
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Recording
Business
Activities
Communicating
Business
Activities
Users of Accounting
Information
C2
External Users
Lenders
Consumer Groups
Internal Users
Managers
Sales Staff
Governments Customers
Internal Auditors
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Controllers
Users of Accounting
Information
C2
External Users
Internal Users
McGraw-Hill/Irwin
C3
Opportunities in Accounting
Financial
Financial
Preparation
Preparation
Analysis
Analysis
Auditing
Auditing
Regulatory
Regulatory
Consulting
Consulting
Planning
Planning
Criminal
Criminal
investigation
investigation
AccountingAccountingrelated
related
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Managerial
Managerial
General
Generalaccounting
accounting
Cost
accounting
Cost accounting
Budgeting
Budgeting
Internal
Internalauditing
auditing
Consulting
Consulting
Controller
Controller
Treasurer
Treasurer
Strategy
Strategy
Lenders
Lenders
Consultants
Consultants
Analysts
Analysts
Traders
Traders
Directors
Directors
Underwriters
Underwriters
Planners
Planners
Appraisers
Appraisers
Taxation
Taxation
Preparation
Preparation
Planning
Planning
Regulatory
Regulatory
Investigations
Investigations
Consulting
Consulting
Enforcement
Enforcement
Legal
Legalservices
services
Estate
Estateplans
plans
FBI
FBIinvestigators
investigators
Market
Marketresearchers
researchers
Systems
Systemsdesigners
designers
Merger
Mergerservices
services
Business
Businessvaluation
valuation
Human
services
Human services
Litigation
Litigationsupport
support
Entrepreneurs
Entrepreneurs
C4
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Accepted
standards of
good and bad
behavior
C4
Identify
ethical concerns
Analyze
options
Use personal
Consider all
ethics to
good and bad
recognize ethical consequences.
concern.
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Make ethical
decision
Choose best
option after
weighing all
consequences.
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Financial
Financial accounting
accountingpractice
practice is
isgoverned
governedby
by
concepts
conceptsand
andrules
rules known
knownas
as generally
generallyaccepted
accepted
accounting
accountingprinciples
principles (GAAP).
(GAAP).
Relevant
Relevant
Information
Information
Reliable
Reliable Information
Information
Comparable
Comparable
Information
Information
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Affects
Affectsthe
thedecision
decisionof
of
its
itsusers.
users.
Is
Istrusted
trustedby
by
users.
users.
Used
Usedin
incomparisons
comparisons
across
acrossyears
years&&companies.
companies.
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The International
Accounting Standards
Board (IASB) issues
International Financial
Reporting Standards (IFRS)
that identify preferred
accounting practices.
If IFRS are adopted
worldwide, a company can
potentially use a single set
of financial statements in all
financial markets.
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U.S.
Financial Accounting
Standards Board is the
private group that sets both
broad and specific
principles.
The Securities and
Exchange Commission is
the government group that
establishes reporting
requirements for
companies that issue
shares or stock to the
public.
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IFRS
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Principles of Accounting
Objectivity Principle
Accounting information is
supported by independent,
unbiased evidence.
Now
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Cost Principle
Accounting information is
based on actual cost.
Future
Going-Concern Principle
Reflects assumption that the
business will continue operating
instead of being closed or sold.
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Principles of Accounting
C5
Sole
Sole
Proprietorship
Proprietorship
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Partnership
Partnership
Corporation
Corporation
C5
Characteristics of Businesses
**Proprietorships
Proprietorshipsand
andpartnerships
partnershipsthat
thatare
areset
set up
up as
as
limited
limitedliability
liabilitycorporations
corporations(LLC)
(LLC)provide
providelimited
limitedliability.
liability.
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C5
Corporation
A1
Accounting Equation
Assets
Assets
Liabilities
Liabilities
Assets
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Equity
Equity
Liabilities
& Equity
Assets
A1
Cash
Cash
Accounts
Accounts
Receivable
Receivable
Vehicles
Vehicles
Store
Store
Supplies
Supplies
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Resources
Resources
owned
owned or
or
controlled
controlled
by
by aa
company
company
Notes
Notes
Receivable
Receivable
Land
Land
Buildings
Buildings
Equipment
Equipment
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Liabilities
Accounts
Accounts
Payable
Payable
Notes
Notes
Payable
Payable
Creditors
Creditors
claims
claims on
on
assets
assets
Taxes
Taxes
Payable
Payable
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Wages
Wages
Payable
Payable
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Equity
Retained
Retained
Earnings
Earnings
Contributed
Contributed
Capital
Capital
Owners
Owners
claim
claim on
on
assets
assets
Dividends
Dividends
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Expanded Accounting
Equation
A1
Assets
Assets
Common
Common
Stock
Stock
=
_
Liabilities
Liabilities
Dividends
Dividends
+
Revenues
Revenues
Equity
Equity
Expenses
Expenses
Retained Earnings
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A2
Assets
Assets
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Liabilities
Liabilities
Equity
Equity
A2
Transaction Analysis
J. Scott invests $20,000 cash to start
the business in exchange for stock.
The accounts involved are:
(1) Cash (asset)
(2) Common Stock (equity)
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A2
Transaction Analysis
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A2
Transaction Analysis
Purchased supplies paying $1,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
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A2
Transaction Analysis
Purchased supplies paying $1,000 cash.
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A2
Transaction Analysis
Purchased equipment for $15,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
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A2
Transaction Analysis
Purchased equipment for $15,000 cash.
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A2
Transaction Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account or on
credit (i.e. will pay cash in the near
future).
The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
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Transaction Analysis
A2
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A2
Transaction Analysis
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A2
Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
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A2
Transaction Analysis
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A2
Transaction Analysis
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A2
Transaction Analysis
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A2
Transaction Analysis
Paid salaries of $800 to employees.
The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Remember that the balance in the salaries
expense account actually increases.
But, equity decreases because expenses
reduce equity.
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A2
Transaction Analysis
Paid salaries of $800 to employees.
A2
Transaction Analysis
A2
Transaction Analysis
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Financial Statements
Lets prepare the Financial Statements reflecting
the transactions we have recorded.
1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet
4. Statement of Cash Flows
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P1
Income Statement
Net income is the
difference
between
Revenues and
Expenses.
The income statement describes a
companys revenues and expenses along
with the resulting net income or loss over a
period of time due to earnings activities.
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Balance Sheet
The
TheBalance
BalanceSheet
Sheetdescribes
describes
aacompanys
companysfinancial
financialposition
position
at
ataapoint
pointin
intime.
time.
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P1
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ROA
ROA is
is viewed
viewed as
as an
an
indicator
indicator of
of operating
operating
efficiency.
efficiency.
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End of Chapter 1
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