Chapter 1

ACCOUNTING IN BUSINESS

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CA

Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved.

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C1

IMPORTANCE OF ACCOUNTING
Accounting

Identifying
Select transactions and events

Recording
Input, measure and classify

Communicating
Prepare, analyze and interpret
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C2 USERS OF ACCOUNTING
INFORMATION

External Users Internal Users

•Lenders •Consumer Groups •Managers •Sales Staff

•Shareholders •External Auditors •Officers/Directors •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
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C2 USERS OF ACCOUNTING
INFORMATION

External Users Internal Users

Financial accounting Managerial accounting

provides external users provides information needs
with financial statements. for internal decision-makers.
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C2
OPPORTUNITIES IN ACCOUNTING
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C3

ETHICS - A KEY CONCEPT

Ethics

Beliefs that Accepted standards

distinguish right of good and bad
from wrong behavior
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C3

ETHICS - A KEY CONCEPT

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C4 GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Financial accounting practice is governed by concepts
and rules known as generally accepted accounting
principles (GAAP).

Relevant Information Affects the decision of its users.

Reliable Information Is trusted by users.

Comparable Is helpful in contrasting

Information organizations.
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C4

INTERNATIONAL STANDARDS

The International Accounting Standards Board (IASB), an

independent group (consisting of 16 individuals from many
countries), issues International Financial Reporting Standards
(IFRS) that identify preferred accounting practices.

IASB
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C4 GENERALLY ACCEPTED ACCOUNTING

PRINCIPLES
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C4 PRINCIPLES AND ASSUMPTIONS

OF ACCOUNTING

Revenue Recognition Principle

1. Recognize revenue when it is earned. Cost Principle
2. Proceeds need not be in cash. Accounting information is based on
3. Measure revenue by cash received actual cost. Actual cost is
plus cash value of items received. considered objective.

Expense Recognition or Full Disclosure Principle

Matching Principle A company is required to report the
A company must record its expenses details behind financial statements
incurred to generate the revenue reported. that would impact users’ decisions.
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C4

ACCOUNTING ASSUMPTIONS

Now Future
Going-Concern Assumption Monetary Unit Assumption
Express transactions and events in
Reflects assumption that the business
monetary, or money, units.
will continue operating instead of
being closed or sold.

Business Entity Assumption Time Period Assumption

A business is accounted for Presumes that the life of a company can
separately from other business be divided into time periods, such as
entities, including its owner. months and years.
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C4

FORMS OF BUSINESS ENTITIES

Sole Partnership Corporation

Proprietorship
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C4
CORPORATION

Owners of a corporation or company are called

shareholders (or stockholders). Shareholders are
not personally liable for corporate acts. When a
corporation issues only one class of shares, we
call it ordinary shares (or common stock).
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C4

IASB CONCEPTUAL FRAMEWORK

FOR FINANCIAL REPORTING
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C4

CONCEPTUAL FRAMEWORK
2 Fundamental
Qualitative
Characteristics

4 Enhancing
Qualitative
Characteristics

Cost-benefit constraint: The cost of providing the information

must be weighed against the benefits that can be derived from
using it.
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C4

FUNDAMENTAL QUALITATIVE CHARACTERISTICS

• Relevant financial information is capable of making a difference in users’

decisions.
• Predictive value: can be used as an input to processes to predict
future outcomes。
• Confirmatory value: provides feedback about (confirms or changes)
previous evaluations.

Materiality: Information is material if omitting it or misstating it could

influence decisions.
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C4

FUNDAMENTAL QUALITATIVE CHARACTERISTICS

• Complete: includes all information necessary for a user to understand the

phenomenon.
• Neutral: without bias in the selection or presentation of financial
information.
• Free from error: no errors or omissions in the description of the
phenomenon, and the process used to produce the reported information.
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C4

ENHANCING QUALITATIVE CHARACTERISTICS

• Comparability: enables users to identify and understand similarities in, and

differences among, items.
• Verifiability: different knowledgeable and independent observers could reach
consensus.
• Timeliness: having information available to decision-makers in time.
• Understandability: Classifying, characterizing and presenting information
clearly and concisely makes it understandable. Users are assumed to have
reasonable knowledge of business.
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A1 TRANSACTION ANALYSIS AND THE

ACCOUNTING EQUATION

Accounting Equation

Assets = Liabilities + Equity

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A1

ASSETS
Cash
Accounts Notes
Receivable Receivable
Resources
owned or
controlled by a
Vehicles company
Land
expected to
yield future
benefits.
Store Buildings
Supplies
Equipment
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A1

LIABILITIES

Accounts Notes
Payable Payable

Creditors’
claims on
assets
Taxes Wages
Payable Payable
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A1

EQUITY
Owner’s
Claims on
Assets
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P1

TRANSACTION ANALYSIS
 Business activities can be transactions and events.
 Record those that affect the accounting equation and can
be reliably measured.
 Examples of transactions:
 Selling of products and services (external transactions).
 The business used its supplies, which are reported as
expenses (internal transactions).
 Examples of events:
 Changes in the market value of certain assets and liabilities and
natural events such as floods and fires that destroy assets and
create losses.
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P1

TRANSACTION ANALYSIS
The accounting equation MUST remain in
balance after each transaction.

Assets = Liabilities + Equity

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P1

TRANSACTION 1: INVESTMENT BY OWNERS

On December 1, Chas Taylor invests
$30,000 cash to start a consulting business,
Fast Forward, which records:
The accounts involved are:
(1) Cash (asset)
(2) Owner Capital (equity)
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P1 TRANSACTION 2: PURCHASE
SUPPLIES FOR CASH
FastForward purchases supplies paying
$2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
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P1 TRANSACTION 3: PURCHASE
EQUIPMENT FOR CASH
FastForward purchases equipment for
$26,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
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P1 TRANSACTION 4: PURCHASE
SUPPLIES ON CREDIT
FastForward purchases Supplies of $7,100 on
account.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
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P1 TRANSACTION 5: PROVIDE
SERVICES FOR CASH
FastForward provides consulting services
receiving $4,200 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
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P1 TRANSACTION 6 AND 7: PAYMENT

OF EXPENSES IN CASH
FastForward pays $1,000 rent and $700 in salary
to the company’s only employee.
The accounts involved are:
(1) Cash (asset)
(2) Expenses (equity)
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P1 TRANSACTION 8: PROVIDE SERVICES AND

FACILITIES FOR CREDIT
FastForward provides consulting services of
$1,600 and rents out its test facilities for $300,
both on account.
The accounts involved are:
(1) Accounts Receivable (asset)
(2) Revenues (equity)
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P1 TRANSACTION 9: RECEIPT OF CASH FROM

ACCOUNTS RECEIVABLE
FastForward receives $1,900 from client of test
facilities in transaction 8.
The accounts involved are:
(1) Cash (asset)
(2) Accounts Receivable (asset)
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P1 TRANSACTION 10: PAYMENT

OF ACCOUNTS PAYABLE
FastForward pays $900 as partial payment for
transaction 4 on supplies.
The accounts involved are:
(1) Cash (asset)
(2) Accounts Payable (liability)
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P1 TRANSACTION 11: WITHDRAWAL OF

CASH BY OWNER
The owner withdraws $200 cash.

The accounts involved are:

(1) Cash (asset)
(2) Withdrawals (equity)
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P1

SUMMARY OF TRANSACTIONS
The summary of all transactions is shown below:
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P2

FINANCIAL STATEMENTS

• Statement of profit or loss and

other comprehensive income
• Statement of changes in equity
• Statement of financial position
• Statement of cash flows
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P2

INCOME STATEMENT

to Statement of
Changes in Equity

The income statement describes a company’s revenues and

expenses along with the resulting net profit or loss over a
period of time due to earnings activities.
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P2
STATEMENT OF CHANGES IN EQUITY

from
Income
Statement

to Statement
of Financial
Position

The statement of changes in equity reports information about

how equity changes over the reporting period.
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P2

STATEMENT OF FINANCIAL POSITION

The Statement of Financial Position describes a
company’s financial position at a point in time.
from Statement of
Changes in Equity

to Statement of Cash Flows

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P2
STATEMENT OF CASH FLOWS
from Statement of
Financial Position

The Statement of Cash Flows describes a company’s cash

flows for operating, investing, and financing activities.
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A2

DECISION ANALYSIS
Return on assets (ROA) is stated in ratio form as profit
divided by assets invested.

Net profit
Return on assets =
Average total assets
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A3

1A RETURN AND RISK ANALYSIS

Risk is the
Many different
uncertainty about
returns may be
the return we will
reported.
earn.

The lower the risk, the lower our expected return.

ROA
Interest return on
savings accounts.
Interest return on
corporate bonds.
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C5

1B - BUSINESS ACTIVITIES AND THE

ACCOUNTING EQUATION
There are three major types of activities in any organization:
1.Financing Activities – Provide the means organizations
use to pay for resources such as land, buildings, and
equipment to carry out plans.
2.Investing Activities - Are the acquiring and disposing of
resources (assets) that an organization uses to acquire and
sell its products or services.
3.Operating Activities – Involve using resources to research,
develop, and purchase, produce, distribute, and market
products and services.
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END OF CHAPTER 1