Accounting in Business

Chapter 1

Wild and Shaw

Fundamental Accounting Principles
24th Edition

Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter 1 Learning Objectives
CONCEPTUAL
C1 Explain the purpose and importance of accounting.
C2 Identify users and uses of, and opportunities in, accounting.
C3 Explain why ethics are crucial to accounting.
C4 Explain generally accepted accounting principles and define and apply several accounting
principles.
C5 Appendix 1B Identify and describe the three major activities of organizations.

ANALYTICAL
A1 Define and interpret the accounting equation and each of its components.
A2 Compute and interpret return on assets.
A3 Appendix 1A—Explain the relation between return and risk.

PROCEDURAL
P1 Analyze business transactions using the accounting equation.
P2 Identify and prepare basic financial statements and explain how they interrelate.

© McGraw-Hill Education 2
 Learning Objective C1

Explain the purpose and

importance of accounting.

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 1-4

Importance of Accounting Exhibit

1.1

For example, the sale Keep a chronological Prepare reports such as

by Apple of an iPhone. log of transactions. financial statements.

Accounting is an information and measurement system that identifies,

records, and communicates an organization’s business activities.

© McGraw-Hill Education 4
Learning Objective C1: Explain the purpose and importance of accounting.
 Learning Objective C2

Identify users and uses of, and

opportunities in, accounting.

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 1-6

Users of Financial Information

Accounting is called the language of business because all organizations
set up an accounting information system to communicate data to help
people make better decisions. Accounting serves many users who can be
divided into two groups: external users and internal users.

• Lenders • Research and development managers

• External auditors • Purchasing managers
• Shareholders • Human resource managers
• Board of directors • Marketing managers
• Regulators • Production managers
• Customers • Distribution managers
Learning Objective C2: Identify users and uses of, and opportunities in, accounting. © McGraw-Hill Education 6
 1-7

Opportunities in Accounting Exhibit

1.2

Accounting information is in all aspects of our lives. When

we earn money, pay taxes, invest savings, budget
earnings, and plan for the future, we use accounting.

Learning Objective C2: Identify users and uses of, and opportunities in, accounting.
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 Learning Objective C3

Explain why ethics

are crucial to accounting.

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 1-9

Ethics – A Key Concept Exhibit

1.5

The goal of accounting is to provide useful information for

decisions. For information to be useful, it must be trusted.
This demands ethics in accounting. Ethics are beliefs that
distinguish right from wrong. They are accepted standards of
good and bad behavior.

Learning Objective C3: Explain why ethics are crucial to accounting.

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Fraud Triangle
Three factors must exist for a person to commit fraud:
opportunity, pressure, and rationalization.

Envision a way to commit Fails to see the criminal

fraud with a low perceived nature of the fraud or
risk of getting caught justifies the action

Must have some pressure to

commit fraud, like unpaid bills
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Learning Objective C3: Explain why ethics are crucial to accounting.
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Sarbanes–Oxley (SOX)
• Congress passed the Sarbanes–Oxley Act to help stop financial
abuses at companies that issue public stock.
• SOX requires documentation and verification of internal controls
and emphasizes effective internal controls.
• Failure to comply can lead to penalties and criminal prosecution of
executives.

Learning Objective C3: Explain why ethics are crucial to accounting.

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 1 - 12

Dodd-Frank Wall Street Reform and

Consumer Protection Act
This act has two important provisions:
1. Clawback provision which mandates
recovery of excessive pay
and
2. Whistleblower provision whereby the SEC
will pay whistleblowers 10% to 30% of
sanctions exceeding $1,000,000.

Learning Objective C3: Explain why ethics are crucial to accounting.

© McGraw-Hill Education 12
 Learning Objective C4

Explain generally accepted

accounting principles and
define and apply several
accounting principles.

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Generally Accepted
Accounting Principles (GAAP)
Financial accounting is governed by concepts and rules known
as generally accepted accounting principles (GAAP). GAAP aims
to make information relevant, reliable, and comparable.

Reliable information is
trusted by users.

Relevant information Comparable information

affects decisions is helpful in contrasting
of users. organizations.

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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 1 - 15

International Standards
In today’s global economy, there is increased demand by external
users for comparability in accounting reports.

International Accounting
Standards Board (IASB)

Issues International Financial International Financial

Reporting Standards (IFRS) Reporting Standards (IFRS)

Identifies preferred
accounting practices

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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 1 - 16

Exhibit
Conceptual Framework 1.6

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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 1 - 17

Principles, Assumptions and

Constraint
Exhibit
1.7

General principles are the Specific principles are detailed rules

assumptions, concepts, and used in reporting business
guidelines for preparing financial transactions and events.
statements.

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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 1 - 18

Accounting Principles

Measurement Principle Revenue Recognition Principle

(Cost Principle) 1. recognize revenue when goods or
Accounting information is based on services are provided to customers
actual cost. Actual cost is and
considered objective. 2. at an amount expected to be received
from the customer.

Expense Recognition Principle Full Disclosure Principle

(Matching Principle) A company reports the details behind
A company records its expenses financial statements that would impact
incurred to generate the revenue users’ decisions in the notes to the
reported. financial statements.

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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 1 - 19

Accounting Assumptions
Going-Concern Assumption Monetary Unit Assumption
The business is presumed to Transactions and events are
continue operating instead of being expressed in monetary, or money,
closed or sold. units.

Business Entity Assumption Time Period Assumption

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

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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 1 - 20

Proprietorship, Partnership, Corporation,

and Limited Liability Company
Here are some of the major attributes of sole proprietorships,
partnerships, corporations and limited liability companies (LLC):

Exhibit
1.8

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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 Accounting Constraint
Cost-benefit
Only information with benefits of
disclosure greater than their cost
need to be disclosed.

Materiality
Only information that would
influence the decisions of a
reasonable person need to be
disclosed.

© McGraw-Hill Education 21
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 Learning Objective A1

Define and interpret the

accounting equation and each
of its components.

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 1 - 23

Business Transaction and Accounting

The Accounting Equation

Assets = Liabilities + Equity

Expanded Accounting Equation:

Net Income
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Learning Objective A1: Define and interpret the accounting equation and each of its components.
 Learning Objective P1

Analyze business transactions

using the accounting equation.

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 Transaction 1:
Investment by Owner
Chas Taylor invests $30,000 cash to
start a business named FastFoward.
The accounts involved are:
(1) Cash (asset)
(2) C. Taylor, Capital (equity)

© McGraw-Hill Education 25
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation 1
Chas Taylor invests $30,000 cash to start
the business, Fast Forward.
Assets = Liabilities + Equity
Accounts Notes C.Taylor,
Cash Supplies Equipment Payable Payable Capital
(1) $ 30,000 $ 30,000

$ 30,000 $ - $ - $ - $ - $ 30,000

$ 30,000 = $ 30,000
© McGraw-Hill Education 26
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 2:
Purchase Supplies for Cash
Company purchased supplies by
paying $2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)

© McGraw-Hill Education 27
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation 2
Company purchased supplies by paying
$2,500 cash.
Assets = Liabilities + Equity
Accounts Notes C.Taylor,
Cash Supplies Equipment Payable Payable Capital
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
Accounting Equation
must remain in
balance!!

$ 27,500 $ 2,500 $ - $ - $ - $ 30,000

$ 30,000 = $ 30,000
© McGraw-Hill Education 28
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 3:
Purchase Equipment for Cash
Purchased equipment for $26,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)

© McGraw-Hill Education 29
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation 3
Purchased equipment for $26,000 cash.

Assets = Liabilities + Equity

Accounts Notes C.Taylor,
Cash Supplies Equipment Payable Payable Capital
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
(3) (26,000) $ 26,000 Accounting Equation
still remains in
balance!!
$ 1,500 $ 2,500 $ 26,000 $ - $ - $ 30,000

$ 30,000 = $ 30,000

© McGraw-Hill Education 30
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 4:
Purchase Supplies on Credit
Purchased supplies of $7,100 on credit.

The accounts involved are:

(1) Supplies (asset)
(2) Accounts Payable (liability)

© McGraw-Hill Education 31
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation 4
Purchased Supplies of $7,100 on credit.
Assets = Liabilities Equity +
C.
Accounts Notes Taylor,
Cash Supplies Equipment Payable Payable Capital
(1) $ 30,000 $ 30,000
Accounting Equation still
(2) (2,500) $ 2,500 remains in balance!!
(3) (26,000) $ 26,000
(4) 7,100 $ 7,100

$ 1,500 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000

$ 37,100 = $ 37,100
© McGraw-Hill Education 32
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction Analysis: Revenues,
Expenses and Withdrawals

Now, let’s look at transactions involving

revenues, expenses and withdrawals.

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Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 5:
Provide Services for Cash
Provided consulting services to a customer
and received $4,200 cash right away.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

© McGraw-Hill Education 34
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation 5
Provided consulting services to a customer
and received $4,200 cash right away.

Assets = Liabilities + Equity

Accounts Notes C. Taylor,
Cash Supplies Equipment Payable Payable Capital Revenue
Bal. $ 1,500 $ 9,600 $ 26,000 $ 7,100 $ 30,000
(5) 4,200 $ 4,200

$ 5,700 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000 $ 4,200

$ 41,300 = $ 41,300

© McGraw-Hill Education 35
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transactions 6 and 7:
Payment of Expenses in Cash
Paid rent of $1,000 and
salaries of $700 to employees.

The accounts involved are:

(1) Cash (asset)
(2) Rent expense (equity)
(3) Salaries expense (equity)
Remember that the balance in the Expense accounts actually increase.
But, total Equity decreases, because expenses reduce equity.

© McGraw-Hill Education 36
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation 6 and 7
Paid rent of $1,000 and
salaries of $700 to employees.
Assets = Liabilities + Equity
Accounts Notes C. Taylor
Cash Supplies Equipment Payable Payable Capital Revenue Expenses
Bal. $ 5,700 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200
(6) (1,000) (1,000)
(7) (700) $ (700)

$ 4,000 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000 $ 4,200 $ (1,700)

$ 39,600 = $ 39,600

Remember that expenses decrease equity.

© McGraw-Hill Education 37
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 8:
Provide Services and Facilities for Credit
Provided consulting services of $1,600 and rents
facilities for $300 to a customer for credit.

The accounts involved are:

(1) Accounts receivable (asset)
(2) Consulting Revenues (equity)
(3) Rental Revenue (equity)

© McGraw-Hill Education 38
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation 8
Provided consulting services of $1,600 and rents
facilities for $300 to a customer for credit.

Assets = Liabilities + Equity

Accounts Accounts C. Taylor
Cash Receivable Supplies Equipment Payable Capital Revenue Expenses
Bal. $ 4,000 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (1,700)
(8) 1,900 $ 1,600
300

$ 4,000 $ 1,900 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 6,100 $ (1,700)

$ 41,500 = $ 41,500

© McGraw-Hill Education 39
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 9:
Receipt of Cash from Accounts Receivable
Client in transaction 8 pays $1,900 for
consulting services.

The accounts involved are:

(1) Cash (asset)
(2) Accounts receivable (asset)

© McGraw-Hill Education 40
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation 9
Client in transaction 8 pays $1,900 for consulting services.

Assets = Liabilities + Equity

Accounts Accounts C. Taylor,
Cash Receivable Supplies Equipment Payable Capital Revenue Expenses
Bal. $ 4,000 1,900 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (1,700)
(9) 1,900 (1,900) $ 1,600
300

$ 5,900 0 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 6,100 $ (1,700)

$ 41,500 = $ 41,500

© McGraw-Hill Education 41
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 10:
Payment of Accounts Payable
FastForward pays $900 as partial payment for
supplies purchased in transaction 4.

The accounts involved are:

(1) Cash (asset)
(2) Accounts payable (liability)

© McGraw-Hill Education 42
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation 10
FastForward pays $900 as partial payment for supplies
purchased in transaction 4.
Assets = Liabilities + Equity
Accounts Accounts C. Taylor,
Cash Receivable Supplies Equipment Payable Capital Revenue Expenses
Bal. $ 5,900 0 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (1,700)
(10) (900) (900) $ 1,600
300

$ 5,000 0 $ 9,600 $ 26,000 $ 6,200 $ 30,000 $ 6,100 $ (1,700)

$ 40,600 = $ 40,600

© McGraw-Hill Education 43
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 11:
Withdrawal of Cash by Owner
Owner withdraws $200 cash for personal use.
The accounts involved are:
(1) Cash (asset)
(2) C. Taylor, Withdrawals (equity)

Remember that the Withdrawals account actually increases (just like

our Expense accounts)

But, total Equity decreases because withdrawals cause equity to go

down!!
© McGraw-Hill Education 44
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation 11
Owner withdraws $200 cash for personal use.

Assets = Liabilities + Equity

Accounts Accounts Taylor, Taylor,
Cash Receivable Supplies Equipment Payable Capital Withdraw als Revenue Expenses
Bal. $ 5,000 0 $ 9,600 $ 26,000 $ 6,200 $ 30,000 $ 4,200 (1,700)
(11) (200) (200) $ 1,600
300

$ 4,800 0 $ 9,600 $ 26,000 $ 6,200 $ 30,000 $ (200) $ 6,100 $ (1,700)

$ 40,400 = $ 40,400

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Learning Objective P1: Analyze business transactions using the accounting equation.
 Summary of Transactions Exhibit
1.9

© McGraw-Hill Education 46
Learning Objective P1: Analyze business transactions using the accounting equation.
 Learning Objective P2

Identify and prepare basic

financial statements and explain
how they interrelate.

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Financial Statements
The four financial statements and their purposes are:
1. Income statement — describes a company’s revenues and
expenses and computes net income or loss over a period of
time.
2. Statement of owner’s equity— explains changes in equity
from owner investments and net income (or loss) and from
any withdrawals over a period of time.
3. Balance sheet — describes a company’s financial position
(types and amounts of assets, liabilities, and equity) at a point
in time.
4. Statement of cash flows — identifies cash inflows (receipts)
and cash outflows (payments) over a period of time.

© McGraw-Hill Education 48
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 Exhibit 1.10: Financial Statements and Their Links – Part 1 1 - 49

(cont. next slide)

© McGraw-Hill Education 49
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 Exhibit 1.10: Financial Statements and Their Links – Part 2 1 - 50

© McGraw-Hill Education 50
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 Learning Objective A2

Compute and interpret return

on assets.

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Return on Assets
Return on assets (ROA) is stated in ratio form as net
income divided by the average total assets invested.

Net income
Return on assets =
Average total assets

Where Average total assets = (Beginning total assets + Ending total assets) / 2

Exhibit
1.12

© McGraw-Hill Education 52
Learning Objective A2: Compute and interpret return on assets.
 Learning Objective A3

Appendix 1A
Explain the relation
between return and risk.

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Appendix 1A
Return and Risk Analysis
Many different Exhibit
Risk is the uncertainty about 1A.1
returns may be
the return we will earn.
reported.

The lower the risk, the lower our expected return.

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

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Learning Objective A3: Explain the relation between return and risk.
 1 - 55

Learning Objective C5

Appendix 1B
Identify and describe the
three major activities of
organizations.

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Activities of Organizations

Exhibit
1B.1

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Learning Objective C5: Identify and describe the three major activities of organizations.
 1 - 57

Investing Activities
One of the three major types of business activities:

Investing activities are the acquiring and disposing of

resources (assets) that an organization uses to acquire and
sell its products or services.

 Asset management—determining the amount and type

of assets for operations.
 Assets—invested amounts.
 Liabilities—creditors’ claims.
 Equity—owner’s claim.

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Learning Objective C5: Identify and describe the three major activities of organizations.
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Financing Activities
One of the three major types of business activities:

Financing activities provide the means organizations use to

pay for resources such as land, buildings, and equipment to
carry out plans.

 Owner financing—resources contributed by the owner

along with any income the owner leaves in the
organization.
 Nonowner financing—resources contributed by creditors
(lenders).

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Learning Objective C5: Identify and describe the three major activities of organizations.
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Operating Activities
One of the three major types of business activities:

Operating activities involve using resources to research,

develop, purchase, produce, distribute, and market
products and services.

 Strategic management —the process of determining

the right mix of operating activities for the type of
organization, its plans, and its market.

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Learning Objective C5: Identify and describe the three major activities of organizations.
 1 - 60

End of Chapter 1

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