ACCT2020 Introduction to Accounting for Non-Business Majors Chapter 2
21542065 Introduction to Accounting and Business
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Transcript of 21542065 Introduction to Accounting and Business
Chapter Chapter 11Introduction to Accounting Introduction to Accounting
and Businessand BusinessAccounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
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1. Describe the nature of a business.
2. Describe the role of accounting in business.
3. Describe the importance of business ethics and the basic principles of proper ethical conduct.
4. Describe the profession of accounting.
5. Summarize the development of accounting principles and relate them to practice.
6. State the accounting equation and define each element of the equation.
ObjectivesObjectivesObjectivesObjectivesAfter studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
7. Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation.
ObjectivesObjectivesObjectivesObjectives
8. Describe the financial statements of a proprietorship and explain how they interrelate.
9. Use the ratio of liabilities to owner’s equity to analyze the ability of a business to withstand poor business conditions.
Manufacturing BusinessManufacturing BusinessManufacturing BusinessManufacturing Business
ProductProduct ProductProduct
General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television
General Motors Cars, trucks, vansIntel Computer chipsBoeing Jet aircraftNike Athletic shoes and apparelCoca-Cola BeveragesSony Stereos and television
Types of Businesses
Merchandising BusinessMerchandising BusinessMerchandising BusinessMerchandising Business
ProductProduct ProductProduct
Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video
retailer
Wal-Mart General merchandiseToys “R” Us ToysCircuit City Consumer electronicsLands’ End ApparelAmazon.com Internet books, music, video
retailer
Types of Businesses
Service BusinessService BusinessService BusinessService Business
ProductProduct ProductProduct
Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication
Disney EntertainmentDelta Air Lines TransportationMarriott Hotels Hospitality and lodgingMerrill Lynch Financial adviceSprint Telecommunication
Types of Businesses
There are three types of business organizations
There are three types of business organizations
Proprietorship Partnership Corporation
A proprietorship is owned by one
individual.
A proprietorship is owned by one
individual.
Advantages• Ease in organizing• Low cost of
organizing
Disadvantage• Limited source of
financial resources• Unlimited liability
Joe’s
A partnership is owned by two or more individuals.
A partnership is owned by two or more individuals.
Advantages• More financial
resources than a proprietorship.
• Additional management skills.
Disadvantage
• Unlimited liability.
Joe and Marty’s
A corporation is organized under state or federal statutes as a separate legal entity.
A corporation is organized under state or federal statutes as a separate legal entity.
Advantage• The ability to obtain
large amounts of resources by issuing stocks.
Disadvantage
• Double taxation.
J & M, Inc.
Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies
A business strategy is an integrated set of plans and actions designed to
enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.
Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies
Under a low-cost strategy, a business designs and produces products or
services of acceptable quality at a cost lower than that of its competitors.
Wal-Mart
Southwest Airlines
Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies
Under a differential strategy, a business designs and produces products or services
that possess unique attributes or characteristics which customers are willing
to pay a premium price.
Maytag
Tommy Hilfiger
Value Chain of a BusinessValue Chain of a BusinessValue Chain of a BusinessValue Chain of a Business
A value chain is the way a business adds value for its
customers by processing inputs into product or service.
InputsInputsBusiness Business ProcessesProcesses
Products or Products or ServicesServices
Customer Customer ValueValue
A business stakeholder is a person or entity having an interest in the
economic performance of the business.
Business StakeholdersBusiness StakeholdersBusiness StakeholdersBusiness Stakeholders
2Assess stakeholders’ informational needs.
The Process of The Process of Providing InformationProviding Information
The Process of The Process of Providing InformationProviding Information
STAKEHOLDERSInternal: Owners, managers, employees
External: Customers, creditors, government
1Identify stake-holders.
Accounting Information
System
Design the accounting information system to meet stakeholders’ needs.
34Record economic data about business activities and events.
The Process of The Process of Providing InformationProviding Information
The Process of The Process of Providing InformationProviding Information
5Prepare accounting reports for stakeholders.
STAKEHOLDERSInternal: Owners, managers, employees
External: Customers, creditors, government
Accounting Information
System
The Process of The Process of Providing InformationProviding Information
The Process of The Process of Providing InformationProviding Information
Business EthicsBusiness EthicsBusiness EthicsBusiness Ethics
1. Avoid small ethical lapses.
2. Focus on your long-term reputation.
3. You may expect to suffer adverse personal consequences for holding to an ethical position.
Sound Principles that
form the foundation for
ethical behavior
Sound Principles that
form the foundation for
ethical behavior
Profession of AccountingProfession of AccountingProfession of AccountingProfession of Accounting
Accountants employed by a business firm or a not-for-profit organization are said to be
engaged in private accounting.
Accountants employed by a business firm or a not-for-profit organization are said to be
engaged in private accounting.
Accountants and their staff who provide services on a fee basis are said to be
employed in public accounting.
Accountants and their staff who provide services on a fee basis are said to be
employed in public accounting.
Generally Accepted Generally Accepted Accounting Accounting
Principles (GAAP)Principles (GAAP)
Generally Accepted Generally Accepted Accounting Accounting
Principles (GAAP)Principles (GAAP)
The The business entity conceptbusiness entity concept limits the economic data in limits the economic data in the accounting system to the accounting system to
data related directly to the data related directly to the activities of the business.activities of the business.
The The business entity conceptbusiness entity concept limits the economic data in limits the economic data in the accounting system to the accounting system to
data related directly to the data related directly to the activities of the business.activities of the business.
The cost concept is the basis for entering the
exchange price, or cost of an acquisition in the
accounting records.
The cost concept is the basis for entering the
exchange price, or cost of an acquisition in the
accounting records.
The The objectivity conceptobjectivity concept requires that the accounting requires that the accounting records and reports be based records and reports be based
upon objective evidence.upon objective evidence.
The The objectivity conceptobjectivity concept requires that the accounting requires that the accounting records and reports be based records and reports be based
upon objective evidence.upon objective evidence.
The unit-of-measure concept requires that
economic data be recorded in dollars.
The unit-of-measure concept requires that
economic data be recorded in dollars.
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources The resources owned by a owned by a
businessbusiness
The resources The resources owned by a owned by a
businessbusiness
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the The rights of the creditors, which creditors, which represent debts represent debts of the businessof the business
The rights of the The rights of the creditors, which creditors, which represent debts represent debts of the businessof the business
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the The rights of the ownersowners
The rights of the The rights of the ownersowners
What is a business transaction?
A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.
On November 1, 2005, Chris
Clark begins a business that will
be known as NetSolutions.
a. Chris Clark deposits $25,000 in a bank a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.account in the name of NetSolutions.
a. Chris Clark deposits $25,000 in a bank a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.account in the name of NetSolutions.
Chris Clark, Capital25,000 Investment
by Chris Clark
Cash25,000 a.
Assets Owner’s Equity=
=
b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.
Chris Clark, Capital25,000
Cash + Land 25,000 Bal.
Assets Owner’s Equity=
=b. –20,000 +20,000Bal. 5,000 20,000 25,000
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
c. During the month, NetSolutions purchased c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).
c. During the month, NetSolutions purchased c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplies for $1,350 and agreed to pay the supplier in the near future (supplier in the near future (on accounton account).).
Owner’s Liabilities + Equity=
Bal. 5,000 20,000 25,000c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
=
d. NetSolutions provided services to d. NetSolutions provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.
d. NetSolutions provided services to d. NetSolutions provided services to customers, earning fees of $7,500 and customers, earning fees of $7,500 and received the amount in cash.received the amount in cash.
Bal. 12,500 1,350 20,000 1,350 32,500d. + 7,500 + 7,500
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets Owner’s Liabilities + Equity
Bal. 5,000 1,350 20,000 1,350 25,000Fees earned
=
=
e. – 3,650 –2,125– 800– 450
– 275
Wages
Rent
Util.
Misc.
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
e. NetSolutions paid the following e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.
e. NetSolutions paid the following e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.
Owner’s Liabilities + Equity=
Bal. 12,500 1,350 20,000 1,350 32,500
=
Bal. 8,850 1,350 20,000 1,35028,850
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
f. NetSolutions paid $950 to f. NetSolutions paid $950 to creditors during the month.creditors during the month.
f. NetSolutions paid $950 to f. NetSolutions paid $950 to creditors during the month.creditors during the month.
Owner’s Liabilities + Equity=
Bal. 8,850 1,350 20,000 1,350 28,850f. – 950 – 950
=
Bal. 7,900 1,350 20,000 400 28,850
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.
g. At the end of the month, the cost g. At the end of the month, the cost of supplies on hand is $550, so of supplies on hand is $550, so $800 of supplies were used.$800 of supplies were used.
Owner’s Liabilities + Equity=
Bal. 7,900 1,350 20,000 400 28,850g. – 800 – 800
=
Bal. 7,900 550 20,000 400 28,050
Supplies expense
Accounts Chris Clark,Cash + Supplies + Land Payable Capital
Assets
h. At the end of the month, Chris h. At the end of the month, Chris withdrew $2,000 in cash from the withdrew $2,000 in cash from the business for personal use.business for personal use.
h. At the end of the month, Chris h. At the end of the month, Chris withdrew $2,000 in cash from the withdrew $2,000 in cash from the business for personal use.business for personal use.
Owner’s Liabilities + Equity
Bal. 7,900 550 20,000 400 28,050h. –2,000 –2,000Bal. 5,900 550 20,000 400 26,050
With-drawal
=
=
Owner’s withdrawals
Expenses
Decreased byDecreased by
Owner’s Equity
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Increased byIncreased by
Owner’s investments
Revenues
Net income
Accounting reports, called financial statements, provide summarized
information to the owner.
Accounting reports, called financial statements, provide summarized
information to the owner.
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements• Income statement—A summary of the revenue and
expenses for a specific period of time.
• Statement of owner’s equity—A summary of the changes in the owner’s equity that have occurred during a specific period of time.
• Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date.
• Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.
Fees earned $7 500 00
Operating expenses:
Rent expense
$2 125 00Wages expense
800 00
Supplies expense
450 00Utilities expense
275 00Miscellaneous expense
Total operating expenses 1 135 00
NetSolutionsIncome Statement
For the Month Ended November 30, 2005
800 00
Net income $3 050 00To the statement To the statement of owner’s equityof owner’s equityTo the statement To the statement of owner’s equityof owner’s equity
Chris Clark, capital, November 1, 2005 $ 0
NetSolutionsStatement of Owner’s Equity
For the Month Ended November 30, 2005
Investment on November 1 $25 000 00Net income for November 3 050 00
$28 050 00Less withdrawals 2 000 00Increase in owner’s equity 26 050 00Chris Clark, capital, November 30, 2005 $26 050 00
From the income From the income statementstatement
From the income From the income statementstatement
To the To the balance sheetbalance sheet
To the To the balance sheetbalance sheet
Assets Liabilities
NetSolutionsBalance Sheet
November 30, 2005
Cash $ 5 900 00 Accounts Payable $ 400 00
Supplies 550 00 Owner’s Equity
Land 20 000 00 Chris Clark, cap. 26 050 00
Total liabilities and
Total assets $26 450 00 owner’s equity $26 450 00
From the From the statement of statement of
owner’s equityowner’s equity
From the From the statement of statement of
owner’s equityowner’s equity
This balance sheet presented using the account form
When the balance sheet displays the liabilities and owner’s equity below the assets, the report form
is being used.
When the balance sheet displays the liabilities and owner’s equity below the assets, the report form
is being used.
Cash flows from operating activities:Cash received from customers $ 7 500 00Deduct cash payments for expenses and payments to creditors 4 600 00Net cash flow from operating activities 2 900 00
Cash flows from investing activities:Cash payment for acquisition of land (20 000 00
Cash flows from financing activities:
Cash received as owner’s investment $25 000 00
Deduct cash withdrawal by owner 2 000 00Net cash flow from financing activities 23 000 00
Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00
NetSolutionsStatement of Cash Flows
For the Month Ended November 30, 2005
Should match Should match CashCash on the balance sheet on the balance sheetShould match Should match CashCash on the balance sheet on the balance sheet
)
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsCash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations.
Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets.
Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.
Ratio of liabilities to owner’s equity
=Total Liabilities
Total owner’s equity (or total stockholders’ equity)
The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze
the firm’s ability to withstand poor business conditions.
The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze
the firm’s ability to withstand poor business conditions.
Tools for Financial Tools for Financial Analysis and InterpretationAnalysis and Interpretation
Tools for Financial Tools for Financial Analysis and InterpretationAnalysis and Interpretation
Ratio of liabilities to
owner’s equity=
$400
$26,050
Tools for Financial Tools for Financial Analysis and InterpretationAnalysis and Interpretation
Tools for Financial Tools for Financial Analysis and InterpretationAnalysis and Interpretation
= 0.015Ratio of
liabilities to owner’s equity
The EndThe End
Chapter 1Chapter 1