CH 01

Chapter
1-1
Accounting in
Action
Chapter
1-2 Accounting Principles, Ninth Edition
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 its components.
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 Owners
Owners
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:

(1) identify, record, and communicate the
economic events of an
(2) organization to
(3) interested users.
Chapter
1-5 SO 1 Explain what accounting is.
What is Accounting?
Three Activities
Illustration 1-1
Accounting process
The accounting process includes

the bookkeeping function.
Chapter
1-6 SO 1 Explain what accounting is.
Who Uses Accounting Data?
Internal Users
Management IRS
Human Investors
Resources
There are two broad
groups of users of Labor
financial information: Unions
Finance
internal users and
external users. Creditors
Marketing
SEC
Customers External
Users
Chapter
1-7 SO 2 Identify the users and uses of accounting.
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
1-8 SO 2 Identify the users and uses of accounting.
Discussion Question
Q1-1: Accounting is ingrained in our society and it
is vital to our economic system. Do you agree?
Explain.
See notes page for discussion
SO 3 Understand why ethics is a fundamental business concept.

Chapter
1-9
The Building Blocks of Accounting
Ethics In Financial Reporting

Standards of conduct by which ones 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.

Chapter
1-10
Ethics
Review Question
Ethics are the standards of conduct by which one's
actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.

Chapter
1-11
Financial Statements
Various users Balance Sheet
need financial Income Statement
Statement of Owners Equity
information Statement of Cash Flows
Note Disclosure
The accounting profession

has attempted to develop Generally Accepted
a set of standards that
Accounting
are generally accepted
and universally practiced.
Principles (GAAP)
Chapter
1-12 SO 4 Explain generally accepted accounting principles and the cost principle.
Organizations Involved in Standard Setting:
Securities and Exchange Commission (SEC)

http://www.sec.gov/
Financial Accounting Standards Board (FASB)

http://www.fasb.org/
International Accounting Standards Board

(IASB) http://www.iasb.org/
Chapter
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
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
Corporation.
Chapter SO 5 Explain the monetary unit assumption
and the economic entity assumption.
1-15
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.
1-16
Assumptions
Review Question
Combining the activities of Kellogg and General
Mills would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.

1-17
Forms of Business Ownership
Review Question
A business organized as a separate legal entity
under state law having ownership divided into
shares of stock is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.

1-18
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 SO 6 State the accounting equation, and define

its components.
1-19
Owners
Equity

Assets
Resources a business owns.

Provide future services or benefits.
Cash, Supplies, Equipment, etc.
its components.
1-20
Owners
Equity

Liabilities
Claims against assets (debts and obligations).

Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
its components.
1-21
Owners
Equity

Owners Equity
Ownership claim on total assets.

Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or
Partnership).
its components.
1-22
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.

its components.
1-23
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.

its components.
1-24
Using The Basic Accounting Equation
Transactions are a businesss 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 SO 7 Analyze the effects of business transactions

on the accounting equation.
1-25
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

owners equity) of the company changed?
Record/
Dont Record

1-26
Transactions
Discussion Question
Q1-18: In February 2010, Paula King invested
an additional $10,000 in her business, Kings
Pharmacy, which is organized as a proprietorship.
Kings accountant, Lance Jones, recorded this
receipt as an increase in cash and revenues. Is
this treatment appropriate? Why or why not?

1-27
Transactions 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:

1-28
Transaction (2). Purchase of Equipment for Cash.

Softbyte purchases computer equipment for $7,000 cash.

1-29
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.

1-30
Transaction (4). Services Provided for Cash. Softbyte

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

1-31
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.

1-32
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.

1-33
Transaction (7). Payment of Expenses. Softbyte pays the

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

1-34
Transaction (8). Payment of Accounts Payable. Softbyte

pays its $250 Daily News bill in cash.

1-35
Transaction (9). Receipt of Cash on Account. Softbyte

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

1-36
Transaction (10). Withdrawal of Cash by Owner. Ray Neal

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

1-37
Illustration 1-8
Summary of Transactions Tabular summary of
Softbyte transactions

1-38
Companies prepare four financial statements from

the summarized accounting data:
Owners Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows
Chapter
1-39 SO 8 Understand the four financial statements and how they are prepared.
Review Question
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
Chapter
Financial Statements Income Statement
Reports the revenues and expenses for a specific period of time.

Net income revenues exceed expenses. Illustration 1-9
Net loss expenses exceed revenues. Financial statements and
their interrelationships
Chapter
Financial Statements Net income is needed to determine the
ending balance in owners equity.
Illustration 1-9
Financial statements and
Chapter
1-42
Financial Statements Owners Equity Statement
Statement indicates the reasons Illustration 1-9

why owners equity has increased or their interrelationships
decreased during the period.
Chapter
Financial
Statements
The ending
balance in
owners equity
is needed in
preparing the
balance sheet
Illustration 1-9
Chapter
1-44
Financial Statements Balance Sheet
Illustration 1-9
Chapter
Financial
Statements
Illustration 1-9
Chapter
1-46
Statement of Cash Flows

Information for a specific period of time.
Answers the following:
1. Where did cash come from?

2. What was cash used for?
3. What was the change in the cash balance?
Chapter
Financial Statements Statement of Cash Flows
Illustration 1-9
Chapter
Review Question
Which of the following financial statements is
prepared as of a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.
Chapter
Discussion Question
Q1-19: A companys net income appears directly on
the income statement and the owners equity
statement, and it is included indirectly in the
companys balance sheet. Do you agree? Explain.
Chapter
Accounting Career Opportunities
Public Accounting
Careers in auditing and taxation serving the general public.
Private Accounting
Careers in industry working in cost accounting, budgeting,
accounting information systems, and taxation.
Opportunities in Government
Careers with the IRS, the FBI, the SEC, and in public
colleges and universities.
Forensic Accounting
Careers with insurance companies and law offices to conduct
investigations into theft and fraud.
Chapter
1-51 SO 9 Explain the career opportunities in accounting.
Copyright
Copyright 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
unlawful. Request for further information should be addressed
to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.
Chapter
1-52

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Chapter

1. Explain what accounting is.

The Building The Basic Using the

Three Ethics in Assets Transaction Income

The purpose of accounting is to:

The accounting process includes

See notes page for discussion

SO 3 Understand why ethics is a fundamental business concept.

Ethics In Financial Reporting

Recent financial scandals include: Enron,

Congress passed Sarbanes-Oxley Act of 2002.

Effective financial reporting depends on sound

SO 3 Understand why ethics is a fundamental business concept.

SO 3 Understand why ethics is a fundamental business concept.

The accounting profession

Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB)

International Accounting Standards Board

Cost Principle (Historical) dictates that companies

Monetary Unit Assumption include in the

Proprietorship Partnership Corporation

Generally owned Owned by two or Ownership

Chapter SO 5 Explain the monetary unit assumption

Chapter SO 5 Explain the monetary unit assumption

Provides the underlying framework for recording and

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership

Chapter SO 6 State the accounting equation, and define

Provides the underlying framework for recording and

Resources a business owns.

Provides the underlying framework for recording and

Claims against assets (debts and obligations).

Provides the underlying framework for recording and

Ownership claim on total assets.

Revenues result from business activities entered into for

Chapter SO 6 State the accounting equation, and define

Expenses are the cost of assets consumed or services used

Chapter SO 6 State the accounting equation, and define

Transactions are a businesss economic events

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the

Chapter SO 7 Analyze the effects of business transactions

Q1-15: Are the following events recorded in the

Criterion Is the financial position (assets, liabilities, or

Chapter SO 7 Analyze the effects of business transactions

See notes page for discussion

Transaction (1). Investment By Owner. Ray Neal decides

Chapter SO 7 Analyze the effects of business transactions

Transaction (2). Purchase of Equipment for Cash.

Chapter SO 7 Analyze the effects of business transactions

Transaction (3). Purchase of Supplies on Credit. Softbyte

Chapter SO 7 Analyze the effects of business transactions

Transaction (4). Services Provided for Cash. Softbyte

Chapter SO 7 Analyze the effects of business transactions

Transaction (5). Purchase of Advertising on Credit.

Chapter SO 7 Analyze the effects of business transactions

Transaction (6). Services Provided for Cash and Credit.

Chapter SO 7 Analyze the effects of business transactions

Transaction (7). Payment of Expenses. Softbyte pays the

Chapter SO 7 Analyze the effects of business transactions

Transaction (8). Payment of Accounts Payable. Softbyte