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 Chapter 1

An Introduction to Bookkeeping

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 Chapter 1: An Introduction to Bookkeeping

Chapter Objectives
After completing this chapter, you will be able to:
• define the three forms of business organization
• define the five categories of accounts: assets,
liabilities, owner’s equity, revenues, and expenses
• classify accounts according to the five categories
• identify the generally accepted accounting principles

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 Chapter 1: An Introduction to Bookkeeping

• What is bookkeeping?
• Keeping track of money-related activities for an
individual or a business

• What kinds of money-related activities?

• Cash received
• Cash paid out
• Sales
• Purchases
• Others activities

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 Chapter 1: An Introduction to Bookkeeping

• Personal • Bookkeeping for

Bookkeeping Business
• Cash received • Cash received
• Cash paid out • Cash paid out
• Things owned • Sales
• Debts owed • Purchases
• Things owned
• Debts owed

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 Chapter 1: An Introduction to Bookkeeping

Financial Statements: Balance Sheet

• The balance sheet shows what you own (assets) and the
debts you owe (liabilities). Owner’s Equity is the difference
between assets and liabilities.

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 Chapter 1: An Introduction to Bookkeeping

Financial Statements: Income Statement

• The income statement shows the revenue (income) earned
and the operating costs incurred. Net income is the
difference between revenue and costs.

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 Chapter 1: Three Forms of Business Organization

Every business is one of the three forms of

business organization:
• Proprietorship
• Partnership
• Corporation

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 Chapter 1: Three Forms of Business Organization

Proprietorship
• A business with only one owner
• The owner is the manager, the owner
makes all the business decisions, and the
owner is responsible for all the liabilities of
the business

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 Chapter 1: Three Forms of Business Organization

Partnership
• A business owned by two or more persons
(called partners)
• The partners share the management and
decision-making
• Each partner is responsible for the debts of
the business

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 Chapter 1: Three Forms of Business Organization

Corporation
• A business that operates under a
government charter
• Owners are called shareholders or
stockholders

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 Chapter 1: Five Classes of Accounts

Every business divides its accounts into five

classes:
• Assets
• Liabilities
• Owner's Equity
• Revenues
• Expenses

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 Chapter 1: Five Classes of Accounts

Assets
• Things of value, owned by the business
• Examples include cash, buildings, equipment, merchandise
for sale

Liabilities
• Debts owing to others
• Examples include credit cards, bank loans and mortgages

Owner's Equity
• The value of assets that remains after all debts have been
paid off

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 Chapter 1: Five Classes of Accounts

Revenues
• Earnings from the sales of goods and/or services to
customers
• A business can have more than one kind of revenue.

Expenses
• Costs of operating the business
• Examples include rent, salaries, electricity, water,
advertising, etc.

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 Chapter 1: Five Classes of Accounts

Assets versus Expenses

Assets
• Contribute to the current operating year and to the
following year (or years)

Expenses
• Contribute only to the current operating year

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 Chapter 1: GAAP

All accountants follow the same practices and

procedures (the same rules) in how they record
accounting activities and report accounting
information.
These “rules” are called the Generally
Accepted Accounting Principles (“GAAP”).
They help to ensure that all accounting
information is fair, free from bias, and reliable.

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 Chapter 1: GAAP

A brief description of Generally Accepted Accounting

Principles:

• Business Entity Concept

• Accounting for the business must be kept separate from
the affairs of the owner

• Continuing-Concern Concept
• Assumes the business will continue operations without
interruption

• Conservatism Principle
• Information must be fair and reasonable
• Values must not be overstated or understated

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 Chapter 1: GAAP

• Objectivity Principle
• Transactions must be based on objective evidence.
• Each transaction must have a verifiable source document to
prove when it happened, what it was for, and how much

• Time-Period Concept
• Each transaction will relate to a specific financial period (a
specific month or a specific operating year)

• Recognition Principle
• Revenue is recognized when it has been earned, whether the
money has been received or not. Expenses are recognized when
they have been consumed, whether paid for or not
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 Chapter 1: GAAP

• Matching Principle
• Related to the Recognition Principle
• Each expense must be recorded in the same financial
period as the revenue it helped to earn

• Cost Principle
• Related to the Objectivity Principle
• Purchases must be recorded at their cost price

• Consistency Principle
• The same accounting principles must be used period after
period, year after year

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 Chapter 1: GAAP

• Materiality Principle
• GAAP principles must be followed unless the value of
a transaction is considered insignificant (immaterial)

• Full-Disclosure Principle
• All information about a company's financial situation
must be included in the financial statements

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Chapter 1: An Introduction to Bookkeeping

End of Chapter 1

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