Accounting McGraw Hills Chapter1 (1)

8/20/2019 Accounting McGraw Hills Chapter1 (1)

1/30

Chapter 1Chapter 1

Accounting: The Language

of Business


2/30

Learning ObjectivesLearning Objectives

After studying this chapter, you should be After studying this chapter, you should be

able to:able to: Explain how accounting information assists inExplain how accounting information assists in

making decisions.making decisions. Describe the components of the balance sheet.Describe the components of the balance sheet.

Analyze business transactions and relate them Analyze business transactions and relate them

to changes in the balance sheet.to changes in the balance sheet.

Compare features of proprietorships,Compare features of proprietorships,

partnerships, and corporations.partnerships, and corporations.


3/30

IntroductionIntroduction Accounting Accountin

g a process of identifying, a process of identifying,

recording, summarizing, and reportingrecording, summarizing, and reporting

economic information to decision makerseconomic information to decision makers

in the form ofin the form of !nancial statements!nancial statements

"inancial accounting"inancial accountin

g focuses on the focuses on the

speci!c needs of decision makers externalspeci!c needs of decision makers external

to the organization, such as stockholders,to the organization, such as stockholders,suppliers, banks, and go#ernment agenciessuppliers, banks, and go#ernment agencies


4/30

The Nature ofThe Nature of

Accounting Accounting

$he$he accounting systemaccount

ing system is a series ofis a series of

steps performed to analyze, record,steps performed to analyze, record,

%uantify, accumulate, summarize,%uantify, accumulate, summarize,

classify, report, and interpret economicclassify, report, and interpret economic

e#ents and their e&ects on ane#ents and their e&ects on an

organization and to prepare theorganization and to prepare the

!nancial statements.!nancial statements.


5/30

The Nature ofThe Nature of

Accounting Accounting

Accounting systems are designed to Accounting systems are designed to

meet the needs of the decisions makersmeet the needs of the decisions makers

who use the !nancial information.who use the !nancial information.

E#ery business has some sort ofE#ery business has some sort of

accounting system.accounting system. $hese accounting systems may be #ery$hese accounting systems may be #ery

complex or #ery simple, but the real #aluecomplex or #ery simple, but the real #alue

of any accounting system lies in theof any accounting system lies in the

information that the system pro#ides.information that the system pro#ides.


6/30

Accounting as an Aid to Accounting as an Aid to

Decision MakingDecision Making Accounting information is useful to Accounting information is useful to

anyone who makes decisions that ha#eanyone who makes decisions that ha#eeconomic results.economic results.• 'anagers want to know if a new product will be'anagers want to know if a new product will be

pro!table.pro!table.• (wners want to know which employees are(wners want to know which employees are

producti#e.producti#e.• )n#estors want to know if a company is a good)n#estors want to know if a company is a good

in#estment.in#estment.• Creditors want to know if they should extend credit,Creditors want to know if they should extend credit,

how much to extend, and for how long.how much to extend, and for how long.• *o#ernment regulators want to know if !nancial*o#ernment regulators want to know if !nancial

statements conform to re%uirements.statements conform to re%uirements.


7/30


8/30

Financia andFinancia and

Manage!ent AccountingManage!ent Accounting $he ma+or distinction between !nancial$he ma+or distinction between !nancial

and management accounting is theand management accounting is the

users of the information.users of the information. "inancial accounting"inancial accounting ser#es external users.ser#es external users. 'anagement accounting'anagement accounting ser#es internalser#es internal

users, such as top executi#es, management,users, such as top executi#es, management,

and administrators withinand administrators within

organizations.organizations.


9/30


Manage!ent AccountingManage!ent Accounting

$he primary %uestions about an$he primary %uestions about an

organizations success that decisionorganizations success that decision

makers want to know are:makers want to know are:

-hat is the !nancial picture of the-hat is the !nancial picture of the

organization on a gi#en dayorganization on a gi#en day

/ow well did the organization do during a/ow well did the organization do during a

gi#en periodgi#en period


10/30



Accountants answer these primary %uestions Accountants answer these primary %uestions

with three ma+or !nancial statements.with three ma+or !nancial statements.

0alance 1heet0alance 1heet !nancial picture on a gi#en !nancial picture on a gi#en

dayday )ncome 1tatement)ncome 1tatement performance o#er a gi#en performance o#er a gi#en

periodperiod

1tatement of Cash "lows1tatement of Cash "lows performance o#er performance o#er

a gi#en perioda gi#en period


11/30



Annual report Annual report a document prepared a document prepared

by management and distributed toby management and distributed to

current and potential in#estors tocurrent and potential in#estors to

inform them about the companys pastinform them about the companys pastperformance and future prospects.performance and future prospects. $he annual report is one of the most$he annual report is one of the most

common sources of !nancial informationcommon sources of !nancial informationused by in#estors and managers.used by in#estors and managers.


12/30


Manage!ent AccountingManage!ent Accounting $he annual report usually includes:$he annual report usually includes:

a letter from corporate managementa letter from corporate management

a discussion and analysis of recenta discussion and analysis of recent

economic e#ents by managementeconomic e#ents by management footnotes that explain many elements offootnotes that explain many elements of

the !nancial statements in more detailthe !nancial statements in more detail

the report of the independent auditorsthe report of the independent auditors a statement of managements responsibilitya statement of managements responsibility

for preparation of the !nancial statementsfor preparation of the !nancial statements

other corporate informationother corporate information


13/30

The "aance #heetThe "aance #heet

-hat are the di&erent sections-hat are the di&erent sections

of the 0alance 1heetof the 0alance 1heet


14/30


1ections of the balance sheet:1ections of the balance sheet: Assets Assets resources of the !rm that are expected resources of the !rm that are expected

to increase or cause future cash 2owsto increase or cause future cash 2ows

3e#erything the !rm owns43e#erything the !rm owns4 5iabilities5iabilities obligations of the !rm to outsiders obligations of the !rm to outsiders

or claims against its assets by outsiders 3debtsor claims against its assets by outsiders 3debts

of the !rm4of the !rm4

(wners E%uity(wners E%uity the residual interest in, or the residual interest in, orremaining claims against, the !rms assetsremaining claims against, the !rms assets

after deducting liabilities 3rights of the owners4after deducting liabilities 3rights of the owners4


15/30


$he balance sheet e%uation:$he balance sheet e%uation:

Assets 6 5iabilities 7 (wners Assets 6 5iabilities 7 (wners

E%uityE%uity

oror

(wners E%uity 6 Assets (wners E%uity 6 Assets

5iabilities5iabilities


16/30

The "aance #heetThe "aance #heet$AMILTON COM%AN& $AMILTON COM%AN&

"aance #heet"aance #heet

Dece!ber '1( 1))*Dece!ber '1( 1))*

Assets Assets LiabiitiesLiabiities

Current assets+Current assets+ Current iabiities+Current iabiities+

CashCash , -(./. , -(./. Accounts pa0abe Accounts pa0abe ,,

)(22)(22 Accounts receivabe Accounts receivabe /(2-2 /(2-2 3ages pa0abe 3ages pa0abe

'(*4. '(*4.

Tota current assets , 4(.4.Tota current assets , 4(.4. Tota iabiitiesTota iabiities ,1'(.4.,1'(.4.

%ant assets+%ant assets+

LandLand , )(*.. , )(*.. 56uip!ent56uip!ent 4(.22 4(.22 O7ners8 56uit0 O7ners8 56uit0

Tota pant assetsTota pant assets 14(/..14(/.. $a!iton( capita$a!iton( capita )(/..)(/..

Tota iabiities andTota iabiities and

Tota assetsTota assets ,//(/2,//(/2 O7ners8 e6uit0 O7ners8 e6uit0 ,//(/2 ,//(/2 99999999999999999999999999 9999999999999 9999999999999


17/30


TransactionsTransactions

$he balance sheet is a&ected by e#ery$he balance sheet is a&ected by e#ery

transaction that an entity encounters.transaction that an entity encounters.

Each transaction has counterbalancingEach transaction has counterbalancingentries that keep total assets e%ual toentries that keep total assets e%ual to

total liabilities and owners e%uity, i.e.,total liabilities and owners e%uity, i.e.,

the balance sheet e%uationthe balance sheet e%uation mustmust

alwaysalways be balanced.be balanced.


18/30


TransactionsTransactions 8ust as the balance sheet e%uation must 8ust as the balance sheet e%uation must

always balance, the balance sheetalways balance, the balance sheet mustmust

also alwaysalso always balance.balance.

A balance sheet could be prepared after A balance sheet could be prepared after

e#ery transaction, but this practicee#ery transaction, but this practice

would be awkward and unnecessary.would be awkward and unnecessary. $herefore, balance sheets are usually$herefore, balance sheets are usually

prepared monthly or on some otherprepared monthly or on some other

periodic schedule.periodic schedule.


19/30

Transaction Ana0sisTransaction Ana0sis

$ransactions are recorded in$ransactions are recorded in

accountsaccounts, which are summary, which are summary

records of the changes in particularrecords of the changes in particular

assets, liabilities, or owners e%uity.assets, liabilities, or owners e%uity. $he$he account balanceaccount balance is the total ofis the total of

all entries to the account.all entries to the account.


20/30

Transaction Ana0sisTransaction Ana0sis

"or each transaction, the accountant"or each transaction, the accountant

must determine:must determine: which speci!c accounts are a&ectedwhich speci!c accounts are a&ected

whether the account balances arewhether the account balances are

increased or decreasedincreased or decreased

the amount of the changethe amount of the change

in each account in each account


21/30

T0pes of O7nershipT0pes of O7nership

$hree basic forms of ownership:$hree basic forms of ownership: 1ole proprietorships1ole proprietorships

9artnerships9artnershipsCorporationsCorporations


22/30


1ole 9roprietorship1ole 9roprietorship A separate organization with a A separate organization with a singlesingle

ownerowner $end to be small retail establishments and$end to be small retail establishments and

indi#idual professional or ser#ice businessindi#idual professional or ser#ice business

for example, a single dentist, attorney, or for example, a single dentist, attorney, or

public accountantpublic accountant $he sole proprietorship is an indi#idual$he sole proprietorship is an indi#idual

entity that is separate and distinct fromentity that is separate and distinct from

the owner.the owner.


23/30


9artnership9artnership An organization that +oins two or more An organization that +oins two or more

indi#iduals who act as coownersindi#iduals who act as coowners

Dentists, doctors, attorneys, and accountantsDentists, doctors, attorneys, and accountants

tend to conduct their acti#ities as partnerships.tend to conduct their acti#ities as partnerships.

1ome can be large international !rms.1ome can be large international !rms.

$he partnership is an indi#idual entity that is$he partnership is an indi#idual entity that isseparate and distinct from each of the partners.separate and distinct from each of the partners.


24/30


CorporationCorporation An arti!cial entity; created under state An arti!cial entity; created under state

lawslaws Corporations ha#eCorporations ha#e limited liabilitylimited liability

corporate creditors ha#e claims againstcorporate creditors ha#e claims against

corporate assets only.corporate assets only. )ndi#idual in#estors are at risk only up to the)ndi#idual in#estors are at risk only up to the

amount they ha#e in#ested in theamount they ha#e in#ested in the

corporation. Creditors cannot hold in#estorscorporation. Creditors cannot hold in#estors

liable for the corporations debts.liable for the corporations debts.


25/30


CorporationCorporation (wners are called(wners are called shareholdersshareholders oror

stockholdersstockholders..

9ublicly owned #s. pri#ately owned9ublicly owned #s. pri#ately ownedcorporationscorporations 9ublic9ublic 1hares in the ownership are sold to the 1hares in the ownership are sold to the

public on a stock exchange< the corporation canpublic on a stock exchange< the corporation can

ha#e many thousands of shareholders.ha#e many thousands of shareholders. 9ri#ate9ri#ate 1hares in the ownership are owned by 1hares in the ownership are owned by

families, small groups of shareholders, and sharesfamilies, small groups of shareholders, and shares

are not sold to the public.are not sold to the public.


26/30


'anagement by the owners:'anagement by the owners: 1ole proprietorship1ole proprietorship $he owner is an acti#e $he owner is an acti#e

manager in daytoday operation of themanager in daytoday operation of the

business.business. 9artnership9artnership 9artners are usually acti#e 9artners are usually acti#e

managers in daytoday operations of themanagers in daytoday operations of the

business.business.

CorporationCorporation 1hareholders usually do not 1hareholders usually do notparticipate in the daytoday operations of theparticipate in the daytoday operations of the

business.business.

Di d f FDi d f F


27/30

Disadvantages of For!sDisadvantages of For!s

of O7nershipof O7nership

CorporationsCorporations Ad#antages Ad#antages

limited liabilitylimited liability

easy transfer of ownership shares of stockeasy transfer of ownership shares of stock

can be bought and sold easily 3stockcan be bought and sold easily 3stock

exchanges4exchanges4

ease of raising ownership capital manyease of raising ownership capital many

potential stockholderspotential stockholders continuity of existence life of the corporationcontinuity of existence life of the corporation

continues e#en if its ownership changescontinues e#en if its ownership changes


28/30

Di d f FDi d t f F


29/30



9roprietorships and 9artnerships9roprietorships and 9artnerships Ad#antages Ad#antages

no taxation at the entity le#el incomeno taxation at the entity le#el incomeof sole proprietorship and partnershipof sole proprietorship and partnership

is attributed to the owners as indi#idualis attributed to the owners as indi#idual

taxpayerstaxpayers

Di d f FDi d t f F


30/30



9roprietorships and 9artnerships9roprietorships and 9artnerships Disad#antagesDisad#antages

unlimited liability creditors of the business canunlimited liability creditors of the business can

look to the owners personal assets for repaymentlook to the owners personal assets for repayment

not easy to transfer ownershipnot easy to transfer ownership

not easy to raise ownership capital few, if anynot easy to raise ownership capital few, if any

indi#iduals interested in a particular proprietorshipindi#iduals interested in a particular proprietorship

or partnershipor partnership

no continuity of existence changes in ownershipno continuity of existence changes in ownership

terminate the proprietorship or partnershipterminate the proprietorship or partnership

Accounting McGraw Hills Chapter1 (1)

Documents

Transcript of Accounting McGraw Hills Chapter1 (1)