1.

Definition of Accounting

isis an
an information
information system
system that…
that…

• Measures
• Processes
• Communicates…..
Financial information to decision makers
Accounting...

isis called
called the
the language
language of
of business.
business.
2.Users of Accounting Information

External
External users
users Internal
Internal users
users
make
make decisions
decisions make
make decisions
decisions
about
about the
the entity.
entity. for
for the
the entity.
entity.
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

 External vs. Internal Users

External Users Internal Users

Decision making by: Decision Making by:

• Investors • Management
• Creditors • Employees
 3. Fields of Accounting

Provides information for

people outside the company.

Financial
Financial Accounting
Accounting

Focuses on information for

internal decision makers
Management
Management Accounting
Accounting
C5

1.3Types of Business Organizations

Sole
Sole Partnership
Partnership Corporation
Corporation
Proprietorship
Proprietorship
1. Sole Proprietorship
• A business is owned by a single individual.

2. Partnership
• A business is owned by two or more owners.
3. Corporation
• A business is owned by stockholders
• Owners’ liability is limited to the amount of their investment in
the firm.
• Owners hold common stock certificates, and ownership can be
transferred by selling the certificates.
Sole Proprietorship

• Advantages • Disadvantages
• Easiest to start • Limited to life of owner
• Least regulated • Equity capital limited
• Single owner keeps all to owner’s personal
the profits wealth
• Taxed once as personal • Unlimited liability
income
Partnership
• Advantages
• Two or more owners
• More capital available
• Relatively easy to start
• Income taxed once as
personal income
• Disadvantages
• Unlimited liability
• Partnership dissolves
when one partner dies
or wishes to sell
Corporation

• Advantages • Disadvantages
• Limited liability
• Unlimited life
• Separation of
ownership and
management
• Transfer of ownership
is easy
• Easier to raise capital
• Separation of
ownership and
management
• Double taxation
(income taxed at the
corporate rate and
then dividends taxed
at personal rate)
 Basic Business Forms

Type of Operations

 Merchandising - a business that sells ready made

merchandise (typical retailer).

 Manufacturing - a business that converts raw materials to

finished goods to sell to customers.

 Service - a business that provides a service to customers.

 Wal-Mart
Wal-Martisisaa
PAUSE AND REFLECT merchandiser;
merchandiser;General
Motors is a
General
manufacturer;
Motors is a manufacturer;
American
AmericanExpress
Expressisisaa
service
servicebusiness.
business.

Can you think of a

business that fits
into each of these
categories?
Objective 2

Apply accounting
concepts and principles
1.4 Generally Accepted
Accounting Principles
• What is the primary objective of financial reporting?

To
To provide
provide information
information useful
useful
for
for making
making investment
investment and
and
lending
lending decisions
decisions
Information must be
•Relevant
•Reliable
•Comparable
GAAP
Accounting guidelines that govern how accountants measure,
process, and communicate financial information
The main concepts and principles

• The entity concept

• The reliable principle
• The cost principle
• The going-concern concept
• The stable-monetary-unit concept
 1.The Entity Concept
Organization that stands apart as a separate economic unit

Although a proprietor is not legally distinct from the

business activities of the proprietorship, the Entity
Concept requires that the transactions of the
business (proprietorship) are accounted for
separately from the transactions of the proprietor.
The Entity Concept Example

• Assume that John decides to open up a gas station and coffee shop.
• The gas station made $250,000 in profits, while the coffee shop lost
$50,000.
The Entity Concept Example

• How much money did John make?

• At a first glance, we would assume that John made $200,000.
• However, by applying the entity concept we realize that the gas
station made $250,000 while the coffee shop lost $50,000.
2.The Reliability/Objectivity Principle

Accounting information is based

on the most reliable data available
3.The Cost Principle

Acquired
Acquired assets
assets and
and services
services should
should bebe
recorded
recorded at
at their
their actual
actual cost
cost (historical
(historical cost)
cost)
 Eg.
Eg. The
The fair
fair value
value of
of most
most assets
assets isis known
known on on the
the
date
date the
the assets
assets was
was acquired
acquired because
because thethe buyer
buyer
and
and the
the seller
seller agreed
agreed onon the
the amount.
amount. IfIf Garsden
Garsden
Company
Company purchased
purchased aa plot
plot ofof land
land in
in 2003
2003 for
for
$100000,this
$100000,this landland would
would havehave been
been reported
reported on
on its
its
December
December 31,2003
31,2003 balance
balance sheet
sheet asas
$100000.What
$100000.What was was its
its fair
fair value
value onon December
December
31,2004?
31,2004?
A.$100000
A.$100000
B.More
B.More than
than $100000
$100000
C.Gardson
C.Gardson doesn’t
doesn’t know.
know.
GOING CONCERN CONCEPT

b l e futu re
se ea
35
The fore
30

25

Jan

Feb
20
Mar

The business
Apr
15 May

Jun

at work today
10

0
Food Gas Motel
4.The Going Concern Concept

Assumes
Assumesthat
thatthe
theentity
entitywill
willremain
remain
in
inoperation
operationfor
forthe
theforeseeable
foreseeablefuture
future
5.The Stable-Monetary-Unit Concept

The
The dollar’s
dollar’s purchasing
purchasing
power
power isis stable.
stable.
Monetary Unit
•Price level changes are ignored in
accounting, leading to the assumption
that the dollar remains relatively stable.
Objective
Objective 33

Use the accounting equation

Key words
• Assets 资产
• Liabilities 负债
• Owner’s equity 所有者权益
• Accounts receivable 应收账款
• Accounts payable 应付账款
• Notes payable 应付票据
1.5 Accounting Elements
The key elements of a business balance
sheet.
•Assets 、 Liabilities and Owner’s equity
The key elements of a business income
statement.
•Revenues and expenses
1. Assets

•Asset are economic resources owned or

controlled by a business that are
expected to benefit future operations.

Or
Something a business owns.
 Cash,
Cash,inventory,building,
PAUSE AND REFLECT inventory,building,
equipments,
equipments,
Accounts
Accountsreceivable…
receivable…

Can you List the

assets of your
business ?
 2. Liability
• Economic obligations payable to an individual or organization outside
the business

Or

Something a business owes

Accounts payable
Notes payable
Salary payable
 3.Owner’s Equity (capital)
• Claim of business owner to the assets of the business
4.Revenues
• Amounts earned by delivering goods or services to customers
• Sales revenue
• Service revenue
• Interest revenue
• Dividend revenue
 5. Expenses
• Cost of doing business
• A firm cannot generate revenue without expenses.
• Decrease in owner’s equity that occurs from using assets or
increasing liabilities in the course of delivering goods or services to
customers
• Salary expense
• Rent expense
• Utilities expense
• Interest expense
1.6 Accounting Equation

balance sheet equation

(basic accounting equation)
Assets = Liabilities + Owners’ Equity

Slide 2.8
The Accounting Equation

Assets = Liabilities + Owner’s Equity

Economic Claims to
Resources Economic
Resources
Accounting Equation
•Assets = Liabilities + Owners’ Equity
Resources Sources of Funding

Resources
= Creditors’
claims
+ Owners’
claims
to use to against against
generate resources resources
revenues
Other forms of accounting equation
Assets - Liabilities
= Owners’ Equity
 Keep
Keep in
in mind
mind the
the fundamental
fundamental accounting
accounting
equation:
equation:
___________=__________+____________.
___________=__________+____________.
Exercise 1-18

Assets Liabilities Owner’s

Equity

Pep Boys $? $60,000 $21,000

Eddie Bauer 72,000 ? 40,000

Benbrook
100,000 79,000 ?
Exxon
 Owners’
Owners’equity
equity
isis$150,000.
$150,000. Whenthe
When the
PAUSE AND REFLECT business
business borrows $20,000to
borrows $20,000 to
buy the equipment, liabilities
buy the equipment, liabilities
also
alsogo goup upby
by$20,000.
$20,000.
Owners’
Owners’equity
equity
isisunchanged.
unchanged.
 If a business has $200,000
in assets and $50,000 in
liabilities, what is the total
of its owners equity?
 If the business borrows
$20,000 and uses it to
purchase a piece of
equipment, how does
owners’ equity change?