Chapter

1-1
 CHAPTER 1

ACCOUNTING IN
ACTION

Accounting Principles, Eighth Edition

Chapter
1-2
 Study Objectives

1. Explain what accounting is.

2. Identify the users and uses of accounting.
3. Understand why ethics is a fundamental business concept.
4. Explain generally accepted accounting principles and the
cost principle.
5. Explain the monetary unit assumption and the economic
entity assumption.
6. State the accounting equation, and define assets, liabilities,
and owner’s equity.
7. Analyze the effects of business transactions on the
accounting equation.
8. Understand the four financial statements and how they are
prepared.
Chapter
1-3
 Accounting in Action

The Building The Basic Using the

What is Basic Financial
Blocks of Accounting
Accounting? Accounting Statements
Accounting Equation Equation

Three Ethics in Assets Transaction Income

activities financial Liabilities analysis statement
Who uses reporting Summary of Owner’s
Owner’s
accounting Generally equity transactions equity
data accepted statement
accounting Balance
principles sheet
Assumptions Statement of
cash flows

Chapter
1-4
 What is Accounting?

The purpose of accounting is to:

identify,
record, and
communicate
the economic events(transactions) of an
organization to interested users.

Chapter
1-5 LO 1 Explain what accounting is.
 WHAT IS ACCOUNTING?

Accounting is a services activity. Its

function is to provide quantitative
information, primarily financial in
nature, about economic entities
(organizations) that is to be useful in
making economic decisions, in
making reasoned choices among
alternative courses of action. -American Institute
of Certified Public Accountants (AICPA)

Chapter
1-6
 Objectives of Accounting
1. Making decisions concerning the use of limited
resources, including the identification of crucial
decision areas and determination of objectives
and goals.
2. Effectively directing and controlling an
organization’s human and material resources.
3. Maintaining and reporting on the custodianship
of resources.
4. Facilitating social functions and controls-
corporate social responsibility (CSR), including
NGOs, charities, and government agencies may
Chapter

engage in social accounting.

1-7
 Scope of Accounting
1. Data Creation and Collection: Historic and Predictive
2. Data Recording using Accounting Methods (GAAP) and
Data Processing (Manual, Mechanical & Electronic)
3. Data Evaluation that includes:
 Budgetary Control including Standard Costing and
Variance Analysis
 Performance Analysis
 Cash Flow Analysis
 Analysis and Interpretation of Accounting Information
 Auditing
4. Data Reporting to :
• Internal management
• External stakeholders
5. Accounting Theory in the heart of the above
Chapter Accounting theory is a set of assumptions and methodologies used in the study
1-8
and application of financial reporting principles.
 Role of Accounting
The role of accounting in business is to help internal and external stakeholders make
better business decisions by providing them with financial information.
1. Role as Watchdogs:
 Scorekeeping function: It is one of the primary purposes of
accounting information. It basically deals with the financial health
of the enterprise.
2. Role as Helper:
 Attention directing function: the process of giving a signal to
the user of accounting information about the need to take a decision.
 Problem solving function: provision of such information which
enables the manager to find solutions to the problems
3. Role as Decision Maker
4. Role as an associate with business world
5. Role as a Professional: Accountants are the gatekeepers of
governance and financial reporting
6.Chapter
Role as Technicians: undertake a wide range of accountancy,
1-9
financial and taxation tasks
 Functions of Accounting
Accounting involves the creation of financial records of business transactions, flows of
finance, the process of creating wealth in an organization, and the financial position of a
business at a particular moment in time.

PRIVATE ACCOUNTANT
Financial Management Tax
Accounting Accounting Accounting
General
accounting,
Preparation of Cost accounting,
Preparation
financial Preparation of of tax return,
statements budgets, Tax planning
Internal audit

Chapter
1-10
 Functions of Accounting

PUBLIC ACCOUNTANT
Financial Management Tax
Accounting Accounting Accounting

Audit of Advisory Preparation

financial services to of tax return,
Management
statements Tax planning

Chapter
1-11
 Functions of Accounting

GOVERNMENT ACCOUNTANT
Financial Management Tax
Accounting Accounting Accounting
Preparation of General
financial statements, accounting, Review
Review of Cost accounting, of tax return, Help
to taxpayers,
financial statements , Preparation of
budgets,
Writing regulation,
Writing regulation, Investigation of
Investigation of Internal audit law violation
law violation
Chapter
1-12
 Functions of Accounting
FORENSIC ACCOUNTANT
Forensic Accounting
Forensic Accounting: scientific methods and techniques to the
investigation of crime. It uses accounting, auditing, and
investigative skills to conduct investigations into theft and fraud.
The job of forensic accountants is to catch the preparators of the huge
amount of theft and fraud occurring at corporate level.
This includes tracing money-laundering (illegally obtained money)
and identity-theft activities as well as tax evasion.
Insurance companies hire forensic accountants to detect insurance
frauds
Chapter such as arson(fire starting/rising), and law offices employ
1-13
forensic accountants to identify material assets in divorces.
 Parties Involved with Accounting

Accounting
Standards GAAP
Setters

Preparers of
Financial Financial
Statements Statements
Users of
Accounting
Audit Information
Auditors
Reports

Auditing
Standards GAAS
Setters
Chapter
1-14
 Accounting as an Information System

Accounting as an Information System

Decisions
Information Users:
Financial Supported:
Managers
Information Performance
Investors (owners)
provided: evaluations
Employees
Stock investments
Lenders
Profitability Tax strategies
Suppliers &
Financial Position Labour relations
other trade creditors
Cash Flows Resource
Customers
allocations
Government &
Lending
its representatives
decisions
Public
Borrowing
Chapter
1-15
 What is Accounting?

Three Activities
Illustration 1-1
Accounting process

The accounting process includes

the bookkeeping function.

Chapter
1-16 LO 1 Explain what accounting is.
 THE ACCOUNTING
PROCESS
Ten-Step Sequence:
1. Identification of transactions
2. Journalizing (Journalize or record
transactions)
3. Posting to the ledger (Posting to
ledger accounts)
4. Preparation of a trial balance
5. Adjusting entries (Make end-of-period
adjustments)
Chapter
1-17
 THE ACCOUNTING PROCESS
Ten-Step Sequence: …. cont’d
6. Preparation of an adjusted trial balance
7. Preparation of financial statements and
appropriate disclosures
8. Closing entries (Journalize and post the closing entries) the
temporary accounts are closed or reset at the end of the year.
9. Preparation of a post-closing trial balance
10. Reversing entries: These are made on the first day of an
accounting period in order to remove certain adjusting entries made in the
previous accounting period. These are used in order to avoid the double
counting of revenues or expenses and to allow for the efficient processing of
documents.

Chapter
1-18
 Users of Accounting Information

External users Internal users

make decisions make decisions
about the entity. for the entity.
• Investors (owners) Management & employees
• Creditors that include:
• Regulatory agencies • Top management
• Tax authority • Departmental/Regional management
• Customers • Marketing managers
• Labor unions • Production supervisors
• Economic planners • Finance directors
Chapter • Public • Company officers
1-19
 Who Uses Accounting Data?
Internal Users Tax
Management Authority
Human Investors
Resources

Labor
Unions
Finance Common Questions

Creditors
Marketing
SEC
Customers External
Users
Chapter
1-20 LO 2 Identify the users and uses of accounting.
 Who Uses Accounting Data?
Common Questions Asked User
1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income? Investors
3. Do we need to borrow in the
near future? Management
4. Is cash sufficient to pay
dividends to the stockholders? Finance
5. What price for our product
will maximize net income? Marketing
6. Will the company be able to
pay its short-term debts? Creditors
Chapter
1-21 LO 2 Identify the users and uses of accounting.
 Information Needs of the Users of Financial
Statements
Investors need accounting information that will help to
assess:
 Risk inherent in their investments
 Return on and return of their investments
 Ability of the enterprise to pay dividends
Employees need accounting information that will help to
assess:
 Stability and profitability of their employers
 Ability of the enterprise to provide remuneration,
retirement benefits and employment opportunities

Chapter
1-22
 Information Needs of the Users of Financial
Statements
Lenders need accounting information that will help to
assess:
 Timely repayment of loans, and the interest attaching
to the loans
Suppliers and other Trade Creditors need accounting
information that will help to assess:
 Timely repayment of the amounts owing to them
 Trade creditors’ more interest on short-term
continuation of the enterprise, if they are not
dependent as a major customer

Chapter
1-23
 Information Needs of the Users
of Financial Statements
Customers need accounting information that will help to assess:
 Continuance of an enterprise, especially when they have a
long-term involvement with, or are dependent on, the
enterprise
Governments and their Agencies need accounting information:
 About allocation of resources and, therefore, the activities of
enterprises
 To regulate the activities of enterprises, determine taxation
policies
 To use those as the basis for national income and similar
statistics
Public need accounting information that will help to assess:
 Trends and recent developments in the prosperity of the
Chapter
enterprise and the range of its activities
1-24
 The Building Blocks of Accounting

Ethics In Financial Reporting

Standards of conduct by which one’s actions are judged as
right or wrong, honest or dishonest, fair or not fair, are
Ethics.

Recent financial scandals include: Enron, WorldCom,

HealthSouth, AIG, and others.

Congress passed Sarbanes-Oxley Act of 2002.

Effective financial reporting depends on sound ethical

behavior.

LO 3 Understand why ethics is a fundamental business concept.

Chapter
1-25
 The Building Blocks of Accounting
Financial Statements
Balance Sheet
Various users Income Statement
need financial Statement of Owners’ Equity
information Statement of Cash Flows
Note and Disclosure

The accounting profession

has attempted to develop Generally Accepted
a set of standards that Accounting Principles
are generally accepted (GAAP)
and universally practiced.

Generally accepted accounting principles [GAAP] are the common set of standards
and rules that are recognized as a general guide for financial reporting. Generally
accepted means that these principles must have substantial authoritative support.
Chapter
1-26 LO 4 Explain generally accepted accounting principles and the cost principle.
Notes and Disclosures
These are all such information which cannot be presented on
the face of income statement, balance sheet, statement of cash
flows and statement of changes in equity.
Typical notes to the financial statement are:
1.An introduction of the business outlining its legal status, its
country of incorporation and the name of its parents if any and
a statement about the company's areas of business and its
operations.
2.A summary of accounting policies related to revenue
recognition, inventories, property, plant and equipment,
financial instruments, etc.
3.A schedule of property plant and equipment showing the
addition and deletion of assets, related movement in the
accumulated
Chapter depreciation account and book value.
1-27
Notes and Disclosures
4.A breakup of cost of sales, selling expenses and administrative
expenses.
5.A detailed disclosure of different classes of financial instruments and
their related risks.
6.A breakup of the gross amounts and present values of lease obligations
of the business.
7.A detail of transactions with related parties.
8.A detail of contingencies that may affect the business in future, for
example legal proceedings against the business.
9.A description of major events that occurred after the balance sheet date,
etc.

Chapter
1-28
 The Building Blocks of Accounting

Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)

http://www.sec.gov/

Financial Accounting Standards Board (FASB)

http://www.fasb.org/ ICAB in Bangladesh

International Accounting Standards Board

(IASB) http://www.iasb.org/

Chapter
1-29 LO 4 Explain generally accepted accounting principles and the cost principle.
 CONCEPTUAL FRAMEWORK OF ACCOUNTING

• The Conceptual Framework of Accounting serves

as the basis for resolving accounting and reporting
problems.
• The conceptual framework consists of:
1) objectives of financial reporting;
2) qualitative characteristics of accounting
information;
3) elements of financial statements; and
4) operating guidelines (assumptions,
principles, and constraints).

Chapter
1-30
 CONCEPTUAL FRAMEWORK OF ACCOUNTING
Issue # 1
Objectives of Financial Reporting
Objectives of financial reporting are to provide
information that is:
1 useful to those making investment and credit
decisions
2 helps in assessing future cash flows
3 identifies the economic resources (assets), the
claims to those resources (liabilities), and the
changes in those resources and claims.

Chapter
1-31
 CONCEPTUAL FRAMEWORK OF ACCOUNTING
Issue # 2
Qualitative Characteristics of Accounting Information

To be useful, information should possess the

following qualitative characteristics:
1 relevance
2 reliability
3 comparability
4 consistency

Chapter
1-32
 CONCEPTUAL FRAMEWORK OF ACCOUNTING
Qualitative Characteristics of Accounting Information
RELEVANCE
• Accounting information has relevance if it makes a difference in a decision.
• Relevant information helps users forecast future events (predictive value), it
confirms or corrects prior expectations (feedback value).
• Information must be available to decision makers before it loses its capacity to
influence their decisions (timeliness).
RELIABILITY
• Reliability of information means that the information is free of error and bias,
in short, it can be depended on.
• To be reliable, accounting information must be verifiable.
COMPARABILITY AND CONSISTENCY
• Comparability means that the information should be comparable with
accounting information about other enterprises.
• Consistency means that the same accounting principles and methods should
be used from year to year within a company.
Chapter
1-33
 CONCEPTUAL FRAMEWORK OF ACCOUNTING
Qualitative Characteristics of Accounting Information

Useful
Financial
Information has:

Relevance Reliability
1 Predictive value 1 Verifiable
2 Feedback value 2 Faithful representation
3 Timeliness 3 Neutral

Comparability Consistency

Chapter
1-34
 CONCEPTUAL FRAMEWORK OF ACCOUNTING
Qualitative Characteristics of Accounting Information

Chapter
1-35
 CONCEPTUAL FRAMEWORK OF ACCOUNTING
Issue # 3
ELEMENTS OF FINANCIAL STATEMENTS
Elements of Financial Statements are the set of definitions that describe
the basis terms used in accounting. They include such terms as:
• Assets are the resources owned by an entity.
• Liabilities are the creditorship claims on total assets of an
entity.
• Owner’s Equity is the ownership claim on total assets of an
entity.
• Revenues are the gross increases in owner’s equity resulting
from business activities entered into for the purpose of earning
income.
• Expenses are the cost of assets consumed or services used in
the process of earning revenues.
Chapter
1-36
 CONCEPTUAL FRAMEWORK OF ACCOUNTING
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP):
Operating Guidelines
Issue # 4
GAAP or Operating guidelines are classified as
assumptions, principles, and constraints.
• Assumptions provide a foundation for the accounting process.
• Principles indicate how transactions and other economic events should
be recorded.
• Constraints on the accounting process allow for a relaxation of the
principles under certain circumstances.

Assumptions Principles Constraints

Monetary unit Revenue recognition Materiality
Economic entity Matching Conservatism
Time period Full disclosure
Going concern Cost

Chapter
1-37
 CONCEPTUAL FRAMEWORK OF ACCOUNTING
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP):
Operating Guidelines

Assumptions
Monetary Unit Assumption – include in the
accounting records only transaction data that can be
expressed in terms of money.
Economic Entity Assumption – requires that
activities of the entity be kept separate and distinct
from the activities of its owner and all other economic
entities.
Proprietorship.
Forms of
Partnership. Business Ownership
Chapter
Corporation.
1-38
LO 5 Explain the monetary unit assumption and
the economic entity assumption.
 CONCEPTUAL FRAMEWORK OF ACCOUNTING
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP):
Operating Guidelines

Assumptions ... Cont’d

 Time Period Assumption – This assumption states that

economic life of a business divided into artificial time periods. Thus,
it is assumed that the activities of business enterprises or any
enterprise can be divided into months, quarters, half-years, or a year
for meaningful financial reporting purposes.
 Going Concern Assumption – This assumption assumes
that the enterprise will continue in operation long enough to
carry out its existing objectives. If a going concern assumption
is not used, then plant assets should be stated at their
liquidation value (selling price less cost of disposal/ removal/
elimination) – not at their cost. In that case, depreciation and
amortization of these assets would not be needed.
Amortization is the paying off of debt with a fixed repayment schedule in regular installments over a period
ofChapter
time for example with a mortgage or a car loan. It also refers to the spreading out of capital expenses for
1-39
intangible assets over a specific duration (usually over the asset's useful life) for accounting and tax purposes.
 CONCEPTUAL FRAMEWORK OF ACCOUNTING
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP):
Operating Guidelines

Principles
 Revenue Recognition Principle – This principle dictates that
revenue should be recognized in the accounting period in which
it is earned.
 Matching Principle (Expense Recognition) Principle – Expense
recognition is traditionally tied to revenue recognition and
referred to as the matching principle. This principle dictates that
expenses be matched with revenues in the period in which
efforts are made to generate revenues.
 Full Disclosure Principle – This principle requires that
circumstances and events that make a difference to financial
statement users be disclosed.
Chapter
1-40
 CONCEPTUAL FRAMEWORK OF ACCOUNTING
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP):
Operating Guidelines

Principles ... Cont’d

Cost Principle (Historical) – dictates that companies record

assets at their cost.
Issues:
Reported at cost when purchased and also over the time
the asset is held.
Cost easily verified, whereas market value is often
subjective.
Fair value information may be more useful.
Chapter
1-41 LO 4 Explain generally accepted accounting principles and the cost principle.
 CONCEPTUAL FRAMEWORK OF ACCOUNTING
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP):
Operating Guidelines

Constraints
 Materiality Constraints – Materiality relates to an item’s impact on a
firm’s overall financial condition and operations. An item is material
when it is likely to influence the decision of a reasonably
prudent/sensible investor or creditor. It is immaterial if its inclusion or
omission has no impact on a decision maker. In short, if the item
does not make a difference in decision making, GAAP does not have
to be followed.
 Conservatism Constraints – This constraint dictates that when in
doubt, choose the method that will be the least likely to overstate
assets and income. or does not understate expenses or liabilities. It does
not mean understating assets or income. Conservatism provides a
reasonable guide in difficult situations: Do not overstate assets and
income. A common application of this constraint is the use of the
“lower of cost or market” method for inventories.
Chapter
1-42
 Forms of Business Ownership

Proprietorship Partnership Corporation

Generally owned Owned by two or Ownership

by one person. more persons. divided into
Often small shares of stock
Often retail and
service-type service-type Separate legal
businesses businesses entity organized
Owner receives under state
Generally
any profits, corporation law
unlimited
suffers any personal liability Limited liability
losses, and is
Partnership
personally liable
agreement
for all debts.
Chapter LO 5 Explain the monetary unit assumption
and the economic entity assumption.
1-43
 The Basic Accounting Equation

Owners’
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership

claims.

Chapter LO 6 State the accounting equation, and define

assets, liabilities, and owner’s equity.
1-44
 The Basic Accounting Equation

Owners’
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Assets

Resources a business owns.

Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Chapter LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
1-45
 The Basic Accounting Equation

Owners’
Assets = Liabilities +
Equity
Provides the underlying framework for recording and
summarizing economic events.
Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
A note payable is a written promissory note. Under this agreement, a borrower obtains a specific amount of
money from a lender and promises to pay it back with interest over a predetermined time period.
accounts payable :money owed by a company to its creditors.
Chapter LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
1-46
 The Basic Accounting Equation

Owners’
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.

Owners’ Equity

Ownership claim on total assets.

Referred to as residual/ remaining equity.
Capital, Drawings, etc. (Proprietorship or
Partnership).
Chapter LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
1-47
 Owners’ Equity
Illustration 1-6

Revenues result from business activities entered into for

the purpose of earning income.
Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
Chapter LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
1-48
 Owners’ Equity
Illustration 1-6

Expenses are the cost of assets consumed or services

used in the process of earning revenue.
Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.
Chapter LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.
1-49
 Using The Basic Accounting Equation

Transactions are a business’s economic events

recorded by accountants.

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the

accounting equation.

Chapter LO 7 Analyze the effects of business transactions

on the accounting equation.
1-50
 Transactions (Question?)

Q1-15: Are the following events recorded in the

accounting records? Owner
Supplies are An employee withdraws
Event purchased is hired. cash for
on account. personal use.

Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?

Record/
Don’t Record

Chapter LO 7 Analyze the effects of business transactions

on the accounting equation.
1-51
 Transactions (Problem)

P1-1A: Barone’s Repair Shop was started on May 1 by

Nancy. Prepare a tabular analysis of the following
transactions for the month of May.

1. Invested $10,000 cash to start the repair shop.

Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment

Chapter LO 7 Analyze the effects of business transactions

on the accounting equation.
1-52
 Transactions (Problem)
2. Purchased equipment for $5,000 cash.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000

Chapter LO 7 Analyze the effects of business transactions

on the accounting equation.
1-53
 Transactions (Problem)
3. Paid $400 cash for May office rent.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense

Chapter LO 7 Analyze the effects of business transactions

on the accounting equation.
1-54
 Transactions (Problem)
4. Received $5,100 from customers for repair service.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue

Chapter LO 7 Analyze the effects of business transactions

on the accounting equation.
1-55
 Transactions (Problem)
5. Withdrew $1,000 cash for personal use.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings

Chapter LO 7 Analyze the effects of business transactions

on the accounting equation.
1-56
 Transactions (Problem)
6. Paid part-time employee salaries of $2,000.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense

Chapter LO 7 Analyze the effects of business transactions

on the accounting equation.
1-57
 Transactions (Problem)
7. Incurred $250 of advertising costs, on account.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense

Chapter LO 7 Analyze the effects of business transactions

on the accounting equation.
1-58
 Transactions (Problem)
8. Provided $750 of repair services on account.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. +750 +750 Revenue

Chapter LO 7 Analyze the effects of business transactions

on the accounting equation.
1-59
 Transactions (Problem)
9. Collected $120 cash for services previously billed.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. +750 +750 Revenue
9. +120 -120
6,820 + 630 + 5,000 = 250 + 12,200
Chapter LO 7 Analyze the effects of business transactions
on the accounting equation.
1-60
 Financial Statements

Companies prepare four financial statements from

the summarized accounting data:

Owners’ Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows

Chapter
1-61 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements

Income Statement

Barone’s Repair Shop Reports the revenues

Income Statement
For the Month Ended May 31, 2007
and expenses for a
Revenues:
specific period of time.
Service revenue $ 5,850
Expenses: Net income – revenues
Salary expense 2,000 exceed expenses.
Rent expense 400
Advertising expense 250
Total expenses 2,650 Net loss – expenses
Net income $ 3,200 exceed revenues.

Chapter
1-62 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements
Owners’ Equity
Income Statement Statement
Barone’s Repair Shop Barone’s Repair Shop
Income Statement Owners' Equity Statement
For the Month Ended May 31, 2007 For the Month Ended May 31, 2007

Revenues: Barone's, Capital May 1 $ -

Service revenue $ 5,850 Add: Investment 10,000
Expenses: Net income 3,200
Salary expense 2,000 13,200
Rent expense 400 Less: Drawings 1,000
Advertising expense 250 Barone's, Capital May 31 $ 12,200
Total expenses 2,650
Net income $ 3,200

Net income is needed to determine

the ending balance in owner’s equity.
Chapter
1-63 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements
Owners’ Equity
Statement
Statement indicates the Barone’s Repair Shop
reasons why owner’s Owners' Equity Statement
For the Month Ended May 31, 2007
equity has increased or
Barone's, Capital May 1 $ -
decreased during the Add: Investment 10,000
period. Net income 3,200
13,200
Less: Drawings 1,000
Barone's, Capital May 31 $ 12,200

Chapter
1-64 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements
Owners’ Equity
Balance Sheet Statement
Barone’s Repair Shop
Barone’s Repair Shop
Balance Sheet
Owners' Equity Statement
May 31, 2007
For the Month Ended May 31, 2007
Assets
Cash $ 6,820 Barone's, Capital May 1 $ -
Accounts receivable 630 Add: Investment 10,000
Equipment 5,000 Net income 3,200
Total assets $ 12,450 13,200
Liabilities Less: Drawings 1,000
Accounts payable $ 250 Barone's, Capital May 31 $ 12,200
Owners' Equity
Barone's, capital 12,200
Total liab. & equity $ 12,450 The ending balance in owner’s equity is
needed in preparing the balance sheet
Chapter
1-65 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements

Balance Sheet
Reports the assets,
Barone’s Repair Shop
Balance Sheet liabilities, and owner’s
May 31, 2007 equity at a specific date.
Assets
Cash
Accounts receivable
$ 6,820
630
Assets listed at the top,
Equipment 5,000 followed by liabilities
Total assets $ 12,450
and owner’s equity.
Liabilities
Accounts payable $ 250
Owners' Equity Total assets must equal
Barone's, capital 12,200 total liabilities and
Total liab. & equity $ 12,450
owner’s equity.
Chapter
1-66 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements
Statement of Cash Flows
Balance Sheet
Barone’s Repair Shop
Barone’s Repair Shop Statement of Cash Flows

Balance Sheet For the Month Ended May 31, 2007

Cash flow from Operations
May 31, 2007
Cash receipts from customers $ 5,220
Assets
Cash paid for expenses (2,400)
Cash $ 6,820
Cash provided by operations 2,820
Accounts receivable 630
Cash flow from Investing
Equipment 5,000
Purchase of equipment (5,000)
Total assets $ 12,450
Cash flow from Financing
Liabilities
Investment by owners 10,000
Accounts payable $ 250 Drawings by owners (1,000)
Owners' Equity Cash provided by financing 9,000
Barone's, capital 12,200 Net increase in cash 6,820
Total liab. & equity $ 12,450 Cash balance, May 1 -
Cash balance, May 31 $ 6,820

Chapter
1-67 LO 8 Understand the four financial statements and how they are prepared.
 Financial Statements
Statement of Cash Flows
Information for a
specific period of time. Barone’s Repair Shop
Statement of Cash Flows
For the Month Ended May 31, 2007
Answers the following: Cash flow from Operations
Cash receipts from customers $ 5,220
1. Where did cash come Cash paid for expenses (2,400)
from? Cash provided by operations 2,820
Cash flow from Investing
2. What was cash used Purchase of equipment (5,000)
Cash flow from Financing
for? Investment by owners 10,000
Drawings by owners (1,000)
3. What was the change Cash provided by financing 9,000

in the cash balance? Net increase in cash 6,820

Cash balance, May 1 -
Cash balance, May 31 $ 6,820

Chapter
1-68 LO 8 Understand the four financial statements and how they are prepared.
 End of Chapter 01

Thank you very much.

Chapter
1-69