Chapter 1

Accounting in
Action
Chapter
1-1 Accounting Principles, Ninth Edition
 What
What is
is Accounting?
Accounting?

The purpose of accounting is to:

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

Chapter
1-2 SO 1 Explain what accounting is.
 What
What is
is Accounting?
Accounting?
Illustration 1-1
Three Activities Accounting
process

The accounting process includes

the bookkeeping function.

Chapter
1-3 SO 1 Explain what accounting is.
 Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Internal
Users Manageme IRS
nt Investors
Human
Resources
There are two broad
groups of users of Labor
financial information: Unions
Finance
internal users and
external users. Creditor
Marketin s
g SEC
Customer Externa
s l Users
Chapter
1-4 SO 2 Identify the users and uses of accounting.
 Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Common Questions Asked User
1. Can we afford to give
our employees a pay Human
raise? 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 Finance
stockholders?
5. What price for our product
will maximize net income? Marketing
6. Will the company be able
to pay its short-term Creditors
debts?
Chapter
1-5 SO 2 Identify the users and uses of accounting.
 The
The Building
Building Blocks
Blocks of
of Accounting
Accounting

Financial Statements
Various users Balance
Balance Sheet
Sheet
need financial Income
Income Statement
Statement
Statement
Statement of
of Owner’s
Owner’s Equity
Equity
information Statement
Statement of
of Cash
Cash Flows
Flows
Note
Note Disclosure
Disclosure

The accounting Generally

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

Chapter
1-6 SO 4 Explain generally accepted accounting principles and the
 The
The Building
Building Blocks
Blocks of
of Accounting
Accounting

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
1-7 SO 4 Explain generally accepted accounting principles and the
 Assumptions
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
Corporation. Ownership
Chapter SO 5 Explain the monetary unit
1-8
assumption and the economic
 Forms
Forms of
of Business
Business Ownership
Ownership

Proprietorsh
Partnership Corporation
ip
Generally Owned by two Ownership
owned by one or more divided into
person. persons. shares of stock
Often small Often retail and Separate legal
service-type service-type entity
businesses businesses organized
Owner receives Generally under state
any profits, unlimited corporation law
suffers any personal Limited liability
losses, and is liability
personally
Partnership
Chapter liable for all SO 5 Explain the monetary unit
1-9 agreementassumption and the economic
debts.
 The
The Basic
Basic Accounting
Accounting Equation
Equation

Owner’s
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 SO 6 State the accounting equation, and

1-10
define its components.
 The
The Basic
Basic Accounting
Accounting Equation
Equation

Owner’s
Assets = Liabilities +
Equity

Provides the underlying framework for

recording and summarizing economic events.
Asset
s
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Chapter SO 6 State the accounting equation, and
1-11
define its components.
 The
The Basic
Basic Accounting
Accounting Equation
Equation

Owner’s
Assets = Liabilities +
Equity

Provides the underlying framework for

recording and summarizing economic events.
Liabiliti
es
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
Chapter SO 6 State the accounting equation, and
1-12
define its components.
 The
The Basic
Basic Accounting
Accounting Equation
Equation

Owner’s
Assets = Liabilities +
Equity

Provides the underlying framework for

recording and summarizing economic events.
Owner’s
Equity
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or
Partnership).
Chapter SO 6 State the accounting equation, and
1-13
define its components.
 Owners’
Owners’ Equity
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 SO 6 State the accounting equation, and

1-14
define its components.
 Owners’
Owners’ Equity
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 SO 6 State the accounting equation, and

1-15
define its components.
 Transactions
Transactions (Question?)
(Question?)

Q1-15: Are the following events recorded in the

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

Criterio Is the financial position (assets, liabilities,

n or owner’s equity) of the company
changed?

Record/
Don’t
Record
Chapter SO 7 Analyze the effects of business
1-16
transactions on the accounting
 Transactions
Transactions Analysis
Analysis

Transaction (1). Investment By Owner. Ray Neal

decides to open a computer programming service which
he names Softbyte. On September 1, 2010, he invests
$15,000 cash in the. The effect of this transaction on the
basic equation is:

Chapter SO 7 Analyze the effects of business

1-17
transactions on the accounting
 Transactions
Transactions Analysis
Analysis

Transaction (2). Purchase of Equipment for Cash.

Softbyte purchases computer equipment for $7,000
cash.

Chapter SO 7 Analyze the effects of business

1-18
transactions on the accounting
 Transactions
Transactions Analysis
Analysis

Transaction (3). Purchase of Supplies on Credit.

Softbyte purchases for $1,600 from Acme Supply
Company computer paper and other supplies expected
to last several months.

Chapter SO 7 Analyze the effects of business

1-19
transactions on the accounting
 Transactions
Transactions Analysis
Analysis

Transaction (4). Services Provided for Cash.

Softbyte receives $1,200 cash from customers for
programming services it has provided.

Chapter SO 7 Analyze the effects of business

1-20
transactions on the accounting
 Transactions
Transactions Analysis
Analysis

Transaction (5). Purchase of Advertising on Credit.

Softbyte receives a bill for $250 from the Daily News for
advertising but postpones payment until a later date.

Chapter SO 7 Analyze the effects of business

1-21
transactions on the accounting
 Transactions
Transactions Analysis
Analysis

Transaction (6). Services Provided for Cash and

Credit. Softbyte provides $3,500 of programming
services for customers. The company receives cash of
$1,500 from customers, and it bills the balance of $2,000
on account.

Chapter SO 7 Analyze the effects of business

1-22
transactions on the accounting
 Transactions
Transactions Analysis
Analysis

Transaction (7). Payment of Expenses. Softbyte pays

the following Expenses in cash for September: store rent
$600, salaries of employees $900, and utilities $200.

Chapter SO 7 Analyze the effects of business

1-23
transactions on the accounting
 Transactions
Transactions Analysis
Analysis

Transaction (8). Payment of Accounts Payable.

Softbyte pays its $250 Daily News bill in cash.

Chapter SO 7 Analyze the effects of business

1-24
transactions on the accounting
 Transactions
Transactions Analysis
Analysis

Transaction (9). Receipt of Cash on Account.

Softbyte receives $600 in cash from customers who had
been billed for services [in Transaction (6)].

Chapter SO 7 Analyze the effects of business

1-25
transactions on the accounting
 Transactions
Transactions Analysis
Analysis

Transaction (10). Withdrawal of Cash by Owner.

Ray Neal withdraws $1,300 in cash from the business for
his personal use.

Chapter SO 7 Analyze the effects of business

1-26
transactions on the accounting
 Transactions
Transactions Analysis
Analysis
Illustration 1-8

Summary of Transactions Tabular summary of

Softbyte transactions

Chapter SO 7 Analyze the effects of business

1-27
transactions on the accounting
 Financial
Financial Statements
Statements

Companies
Companies prepare
prepare four
four financial
financial statements
statements
from
from the
the summarized
summarized accounting
accounting data:
data:

Owner’s
Income Statemen
Equity Balance
Statemen t of Cash
Statemen Sheet
t Flows
t

Chapter
1-28 SO 8 Understand the four financial statements and how they are
 Financial
Financial Statements
Statements Income Statement

Reports the revenues and expenses for a specific period of

time. Illustration 1-9
Financial statements and
Net income – revenues exceed expenses. their interrelationships

Chapter
Net loss – expenses exceed revenues.
1-29 SO 8 Understand the four financial statements and how they are
 Net income is needed to determine
Financial Statements
Financial Statementsthe ending balance in owner’s equity.

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-30
 Financial
Financial Statements
Statements Owner’s Equity
Statement

Statement indicates the reasons Illustration 1-9

Financial statements and
why owner’s equity has increased their interrelationships

or decreased during the period.

Chapter
1-31 SO 8 Understand the four financial statements and how they are
Financial
Financial
Statement
Statement
ss

The ending
balance in
owner’s equity
is needed in
preparing the
balance sheet

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-32
 Financial
Financial Statements
Statements Balance
Sheet

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-33 SO 8 Understand the four financial statements and how they are
 Financial
Financial
Statement
Statement
ss

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-34
 Financial
Financial Statements
Statements Statement of Cash
Flows
Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-35 SO 8 Understand the four financial statements and how they are
 End of the Chapter!

Chapter
1-36