Introducing Accounting in

Business
ACG 2021: Chapter 1
Business
 is an organization in which basic
resources such as materials and
labor are assembled and processed
to provide goods and services to
customers.
 Profit: Are the difference between
the amounts received from
customers for goods or services
provided and the amounts paid for
the inputs used to provide the
goods or services.
Types of Businesses
 Merchandising – sell products to
customers.
Types of Businesses
 Manufacturing - change basic inputs
into products that are sold to
individual customers.
Types of Businesses
 Service – provide services rather
than products to customers.
Types of Business
Organization
 Proprietorship –
 is owned by one individual
 Comprises 70% of business organizations
in US
 Cost of organizing is low
 Limited financial resources
 Used by small business
Types of Business
Organizations
 Partnership –
 Is owned by two or more individuals.
 Comprises 10% of business organizations
in the US
 Combines the skills and resources of more
than one person
Types of Business
Organization
 Corporation – is organized under
state or federal statutes as a
separate legal entity.
 Generates 90% of the total dollars of
business receipted
 Comprises 20% of the business
organizations
 Includes ownership divided into shares of
stock
 Used by large businesses
 Ability to obtain large amounts of capital
Types of Business
Organization
 Limited liability corporation (LLC)
 Combines the attributes of a partnership
and a corporation I that it is organized as
a corporation.
 Can elect to be taxed as a partnership
 Popular alternative to a partnership
 Has tax and liability advantages to the
owners
Business Stakeholders
 Is a person or entity that has an interest
in the economics performance of the
business.
 Owners who have invested resources in the
business clearly have an interest in how well
the business performs.

 Managers are those individuals who the

owners have authorized to operate the
business.
 Employees provide services to the business
in exchange for their pay.
 Customers, government, and creditors
also have a stake in the success of the
business
Business Stakeholders
 Capital market stakeholders provide the
major financing for the business in order for the
business to begin and continue its operations
 Product or service market stakeholders –
include customers who purchase the business’
products or services as well as the vendors who
supply inputs to the business
 Government stakeholders have an interest
in the economic performance of the business.
 Internal stakeholders include individuals
employed by the business
Ethics
 Are beliefs that distinguish right
from wrong
 Accepted standards of good and
bad behavior
 Code of Professional Conduct
Accounting
 Is an information and measurement
system that identifies, records, and
communicates relevant, reliable and
comparable information about an
organization’s business activities
 Language of business
The Process of Accounting
 Identify the
stakeholders
 Assess stakeholders
information needs
 Design the accounting
information system
 Record economic data
about business activities
 Prepare accounting
reports for stakeholders
Profession of Accounting
 Financial Accounting
 Is the area of accounting
aimed at serving external
users by providing then with
financial statements.
 External auditors attest to
these financial statements
Profession of Accounting
 Managerial Accounting - –
uses both financial
accounting and estimated
data to aid management
in running day-to-day
operations and in planning
future operations.
 Internal uses.
Careers in Accounting
 Private accounting
 Public Accounting
 Government The Certified Forensic
Accountant, Cr.FASM

 
accounting
 Forensic                            

Accounting
 Intl Accounting
Generally Accepted Accounting
Principles (GAAP)
 Governs financial  Financial
accounting Accounting
practice Standards Board
 Purpose is to (FASB)
make information  Private group that
in financial sets both broad
and specific
statements
principles
relevant, reliable,
and comparable
 Securities and
Exchange
Commission (SEC)
Standard Setting
 SEC:  Public Company
 Is the government Accounting
group that Oversight Board
establishes  Rules all publicly
reporting traded companies
requirements for accounting
companies that practices
issue stock to the
public
Principles of Accounting
 General principles
 Are the basic assumptions, concepts,
and guidelines for preparing financial
statements
 Specific Principles
 Are detailed rules used in reporting
business transactions and events
Specific Principles
 Objectivity  Cost principle
principle  Means that
 Means that accounting
accounting information is
information is based on actual
supported by cost
independent
unbiased evidence
Specific Principles
 Going concern  Monetary unit
principle principle
 Means that  Means that we can
accounting express
information transactions and
reflects an events in
assumption that monetary units
the business will
continue operating
Specific Principles
 Revenue  Three concepts
Recognition  Revenue is recognized
when earned
principle  Proceeds from selling
 Provides guidance product and services
on when a need not be in cash
company must  Revenue is measured
recognize revenue by the cash received
plus the cash value of
 Recognize means any other items
to record it received.
Specific principles
 Business entity principle
 Means that a business is accounted for
separately from other business entities.
 Accounting Equation

Assets = Liabilities +
Stockholder’s Equity

What
business What
What the business owes! business
owns! is worth!
Assets
 resources owned by the business
 Such as:
 Cash
 Accounts receivable – amounts owed
by customers
 Prepaid expense – assets to be used
in the future {supplies, prepaid
insurance}
 Merchandise Inventory –
merchandise for sale in the course of
business
 Equipment
 Land
 Building
Liabilities
 rights of creditors or
debts of the business
 Accounts payable –
amount owed to creditors
 Dividends payable –
amounts owed to
shareholders
 Accrued expenses
 Mortgage payable
 Notes payable
Stockholder’s Equity
 Assets minus Liabilities
 Capital stock
 investment by shareholders
 Retained earnings
 earnings kept in the business
 Dividends
 distribution of income to
shareholders
Revenues & Expenses
 Revenue  Expenses
 income from the  cost of doing
operation of the business
business  Salaries expense
 Sales  Rent expense
 Fees earned  Depreciation
 Commission expense
income  Miscellaneous
 Increase retained expense
earnings  Decrease retained
 Results from earnings
operations  Cost of doing
business
Financial Statements
 Four financial statements are
prepared for external and internal
use
 Prepared in specific order
 Income Statement
 Statement of Retained Earnings
 Balance Sheet
 Statement of Cash Flows
 Income Statement
 Income Statement – a summary of revenue
and expenses for a specific period of time.
 Formula:
 Revenue minus Expenses = Net income (Net
losses)
 Income Statement

This amount is transferred to

the Statement of Retained
Earnings
Retained earnings statement
 a summary of the changes in the
earnings retained in the corporation for
a specific period of time.
 Formula:
Beginning Retained Earnings
+ Net income
- Dividends
= Ending Retained earnings
 Retained earnings statement

Transferred to Balance Sheet

Balance Sheet
 a list of assets, liabilities,
stockholder’s equity for a specific
date
 Assets = Liabilities + Stockholder’s
Equity
Balance Sheet

Same as net cash flows

Statement of Cash Flows
 Statement of cash flows – a
summary of the cash receipts and
cash payments for a specific
period of time.
 Operations + Investing +Financing
Statement of Cash Flows
 1-4

On November 1, 2007, Chris

Clark organizes a corporation
that will be known as
NetSolutions.
 1-4

Stockholders’
Assets = Equity
Cash Capital Stock
= 25,000
a. 25,000

a. Chris Clark deposits $25,000 in a bank

account in the name of NetSolutions in
return for shares of stock in the
corporation. 41
 1-4

Stock issued to owners

(stockholders), such as Chris
Clark, is referred to as
capital stock. The owner’s
equity in a corporation is
called stockholders’ equity.
 1-4

Stockholders’
Assets = Equity
Cash + Land Capital Stock
Bal. 25,000 = 25,000
b. –20,000 +20,000
Bal. 5,000 20,000 25,000

b. NetSolutions exchanged $20,000 for land.

43
 1-4

Stockholders’
Assets = Liabilities + Equity
Accounts Capital
Cash + Supplies + Land Payable + Stock
=
Bal. 5,000 20,000 25,000
c. +1,350 +1,350
Bal. 5,000 1,350 20,000 1,350 25,000

c. During the month, NetSolutions purchased

supplies for $1,350 and agreed to pay the
supplier in the near future (on account). 44
 1-4

Beginning with transaction (d)

the asset section will be shown
first, then the liabilities and
stockholders’ equity will be
shown in the following slide.
 1-4

Assets

Cash + Supplies + Land

5,000 1,350 20,000
Bal.
d. +7,500
12,500 1,350 20,000
Bal.

d. NetSolutions provided services to

customers, earning fees of $7,500 and
received the amount in cash. 46
 1-4

Liabilities + Stockholders’ Equity

Accounts Capital Fees
Payable+ Stock + Earned
1,350 25,000 Bal.
+7,500 d.
1,350 25,000 7,500 Bal.

d. NetSolutions provided services to

customers, earning fees of $7,500 and
received the amount in cash.
47
Expenses 1-4

The amounts used in earning revenue are

called expenses. Expenses are assets that
have been used up, consumed, or expired.
Adding expenses to the stockholders’ equity
section results in a space problem. To adjust
for these added headings, the word “Bal.” has
been omitted from Slides 50, 52, 54, and 56.
The bottom row in these four slides provides
the balances after each transaction.
 1-4

Assets
Cash + Supplies + Land
Bal. 12,500 1,350 20,000
e. –3,650
Bal. 8,850 1,350 20,000

e. NetSolutions paid the following

expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
49
 1-4

Liabilities + Stockholders’ Equity

Accounts Capital Fees Wages Rent Utilities Misc.
Payable + Stock + Earned + Exp. + Exp. + Exp. + Exp.
1,350 25,000 7,500
–2,125 –800 –450 –275 e.
1,350 25,000 7,500 –2,125 –800 –450 –275

e. NetSolutions paid the following expenses:

wages, $2,125; rent, $800; utilities, $450; and
miscellaneous, $275.
50
 1-4

Assets
Cash + Supplies + Land
Bal. 8,850 1,350 20,000
f. –950
Bal. 7,900 1,350 20,000

f. NetSolutions paid $950 to

creditors during the month.
51
 1-4

Liabilities + Stockholders’ Equity

Accounts Capital Fees Wages Rent Utilities Misc.
Payable + Stock + Earned + Expense + Expense + Expense + Expense
1,350 25,000 7,500 –2,125 –800 –450 –275
–950 f.
400 25,000 7,500 –2,125 –800 –450 –275

f. NetSolutions paid $950 to

creditors during the month.
52
 1-4

Assets
Cash + Supplies + Land
Bal. 7,900 1,350 20,000
g. –800
Bal. 7,900 550 20,000

g. At the end of the month, the cost

of supplies on hand is $550, so
$800 of supplies were used. 53
 1-4

Liabilities + Stockholders’ Equity

Accounts Capital Fees Wages Rent Supplies Util. Misc.
Payable + Stock + Earned + Exp. + Exp. + Exp. + Exp. + Exp.
400 25,000 7,500 –2,125 –800 –450 –275
–800 g.
400 25,000 7,500 –2,125 –800 –800 –450 –275

g. At the end of the month, the cost

of supplies on hand is $550, so
$800 of supplies were used. 54
 1-4

Assets
Cash + Supplies + Land
Bal. 7,900 550 20,000
h. –2,000
Bal. 5,900 550 20,000

h. At the end of the month, NetSolutions

pays $2,000 to stockholder (Chris
Clark) as dividends.
55
 1-4

Dividends are distributions of

earnings to stockholders. You
should be careful not to confuse
dividends with expenses.
Dividends do not represent assets or
services used in the process of
earning revenues.
 1-4

Liabilities + Stockholders’ Equity

Accounts Capital Fees Wages Rent Supplies Util. Misc.
Payable + Stock + Dividends Earned + Exp. + Exp.+ Exp. + Exp. + Exp.
400 25,000 7,500 –2,125 –800 –800 –450 –275
–2,000 h.
400 25,000 –2,000 7,500 –2,125 –800 –800 –450 –275

h. At the end of the month, NetSolutions

pays $2,000 to stockholder (Chris Clark)
as dividends.
57
 1-4

Stockholders’ Equity

Increased by Decreased by

Investments by Dividends paid to

stockholders stockholders
Revenues Expenses

58
Retained Earnings 1-4

Retained earnings represent

stockholders’ equity created
from business operations
through revenue, expense,
and dividend transactions.
 NetSolutions
1-4
Retained Earnings
November Operations
(Revenue and Expense Transactions)
Fees Wages Rent Supplies Utilities Misc.
Earned – Expense – Expense – Expense – Expense – Expense
+7,500
–2,125 –800 –450 –275
7,500 –2,125 –800 –450 –275
–800
7,500 –2,125 –800 –800 –450 –275

7,500 –2,125 –800 –800 –450 –275

60
$3,050