Chapter 1

Introduction to
Accounting and Business

By:
Hendru Chahayo, SE., MM.
(HCO)

Principles of Accounting, 23e

1-1 Reeve • Warren • Duchac
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 Introduction to Accounting and Business

After studying this chapter, you should be able to:

Describe the nature of a business, the

1 role of accounting, and ethics in
business.

Summarize the development of

2 accounting principles and relate them to
practice.

State the accounting equation and define

3 each element of the equation.

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 Introduction to Accounting and Business (continued)

Describe and illustrate how business

4
transactions can be recorded in terms of the
resulting change in the elements of the
accounting equation.
Describe the financial statements of a
5
proprietorship and explain how they interrelate.

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 1

Describe the nature of a

business, the role of
accounting, and ethics in
business.

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Types of Businesses

Service Business Service

Delta Air Lines Transportation
services
The Walt Disney Company Entertainment
services

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Types of Businesses

Merchandising Business Product

Wal-Mart General merchandise
Amazon.com Internet books, music,
videos

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Types of Businesses

Manufacturing Business Product

General Motors Corp. Cars, trucks, vans
Dell Inc. Personal computers

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The Role of Accounting in Business

Accounting can be defined as an

information system that provides
reports to users about the economic
activities and condition of a business.

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The process by which accounting provides

information to users is as follows:
• Identify users.
• Assess users’ informational needs.
• Design the accounting information system
to meet users’ needs.
• Record economic data about business
activities and events.
• Prepare accounting reports for users.
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Exhibit 1 Users of Accounting Information

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Managerial Accounting
The area of accounting that provides
internal users with information is called
managerial accounting.
The objective of managerial
accounting is to provide relevant and
timely information for managers’ and
employees’ decision-making needs.

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Financial Accounting
The area of accounting that provides
external users with information is
called financial accounting.
The objective of financial accounting
is to provide relevant and timely
information for the decision-making
needs of users outside of the
business.
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 1

Role of Ethics in
Accounting and Business
Ethics are moral principles
that guide the conduct of
individuals.

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The answer to
“What went
wrong for
these
• Failure of individual
character
companies?”
(Exhibit 2) • Firm culture of greed
involves one and ethical indifference
or both of
these factors.
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Exhibit 3 Guideline for Ethical Conduct

1. Identify an ethical decision by using your personal ethical standards of

honesty and fairness.
2. Identify the consequences of the decision and its effect on others.
3. Consider your obligations and responsibilities to those that will be affected
by your decision.
4. Make a decision that is ethical and fair to those affected by it.

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Opportunities for Accountants

Accountants employed by a business
firm or a not-for-profit organization are
said to be employed in private
accounting.
Accountants and their staff who provide
services on a fee basis are said to be
employed in public accounting.

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Summarize the
development of accounting
principles and relate them
to practice.

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Generally Accepted
Accounting Principles

• Financial accountants follow generally

accepted accounting principles (GAAP) in
preparing reports.
• Within the United States, the Financial
Accounting Standards Board (FASB) has the
primary responsibility for developing
accounting principles.

(continued)

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• The Securities and Exchange Commission

(SEC), an agency of the U.S. government, has
authority over the accounting and financial
disclosures for companies whose shares of
ownership are traded and sold to the public.
• Many countries outside the United States use
generally accepted accounting principles
adopted by the International Accounting
Standards Board (IASB).

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Business Entity Concept

Under the business entity

concept, the activities of a
business are recorded
separately from the activities
of its owners, creditors, or
other businesses.

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Business Entity Concept

A proprietorship is owned by one

individual.
• 70% of business entities in the United
States.
• Easy and cheap to organize.
• Resources are limited to those of the
owner.
• Used by small businesses.
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Business Entity Concept

A partnership is similar to a
proprietorship except that it is owned
by two or more individuals.
• 10% of business organizations in the
United States (combined with limited
liability companies).
• Combines the skills and resources of
more than one person.
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Business Entity Concept

A corporation is organized under state or federal
statutes as a separate legal taxable entity.
• Generates 90% of business revenues.
• 20% of the business organizations in the United
States.
• Ownership is divided into shares called stock.
• Can obtain large amounts of resources by issuing
stocks.
• Used by large businesses.
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Business Entity Concept

A limited liability company (LLC) combines
attributes of a partnership and a corporation.
• 10% of business organizations in the
United States (combined with
partnerships).
• Often used as an alternative to a
partnership.
• Has tax and legal liability advantages for
owners.
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Cost Concept
Under the cost concept,
amounts are initially recorded
in the accounting records at
their cost or purchase price.

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Objectivity Concept

The objectivity concept requires

that the amounts recorded in the
accounting records be based on
objective evidence.

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Unit of Measure Concept

The unit of measure concept
requires that economic data
be recorded in dollars.

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Example Exercise 1-1

Cost Concept
On August 25, Gallatin Repair Service extended an
offer of $125,000 for land that had been priced for sale
at $150,000. On September 3, Gallatin Repair Service
accepted the seller’s counteroffer of $137,000. On
October 20, the land was assessed at a value of
$98,000 for property tax purposes. On December 4,
Gallatin Repair Service was offered $160,000 for the
land by a national retail chain. At what value should
the land be recorded in Gallatin Repair Service’s
records?

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Example Exercise 1-1 (continued)
2
Follow My Example 1-1

$137,000. Under the cost concept, the land should be

recorded at the cost to Gallatin Repair Service.

For Practice: PE 1-1A, PE 1-1B

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 3

State the accounting

equation and define each
element of the equation.

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The Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources
owned by a
business

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The Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the

creditors are
the debts of the
business.

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The Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the

owners

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Example Exercise 1-2

Accounting Equation
John Joos is the owner and operator of You’re A Star, a
motivational consulting business. At the end of its
accounting period, December 31, 2009, You’re A Star has
assets of $800,000 and liabilities of $350,000. Using the
accounting equation, determine the following amounts:
a. Owner’s equity, as of December 31, 2009.
b. Owner’s equity, as of December 31, 2010,
assuming that assets increased by $130,000 and
liabilities decreased by $25,000 during 2010.

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 Example Exercise 1-2 (continued)
3
Follow My Example 1-2

a. Assets = Liabilities + Owner’s Equity

$800,000 = $350,000 + Owner’s Equity
Owner’s Equity = $450,000
b. First, determine the change in Owner’s Equity during 2010 as
follows:
Assets = Liabilities + Owner’s Equity
$130,000 = –$25,000 + Owner’s Equity
Owner’s Equity = $155,000
Next, add the change in Owner’s Equity on December 31, 2009
to arrive at Owner’s Equity on December 31, 2010, as shown
below:
$605,000 = $450,000 + $155,000

Example
1-35Exercise1-2 continued For Practice: PE 1-2A, PE 1-2B
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Describe and illustrate how

business transactions can be
recorded in terms of the resulting
change in the elements of the
accounting equation.

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Business Transaction
A business transaction is an economic event or condition that directly changes
an entity’s financial condition or its results of operations.
Sebagai suatu organisasi yang berorientasi pada perolehan laba,
perusahaan akan berusaha untuk menghasilkan barang atau jasa
untuk dijual ke konsumen dengan harga tertentu hingga perusahaan
mendapatkan keuntungan. Untuk melaksanakan kegiatannya, tentunya
perusahaan memerlukan dana

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Transaction A

On November 1, 2009, Chris Clark

deposits $25,000 in a bank account
in the name of NetSolutions.

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Transaction A (continued)

Assets = Owner’s Equity

CASH CHRIS CLARK, CAPITAL
a. 25,000 = 25,000
Investment by Chris Clark

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Transaction B
On November 5, 2009, NetSolutions
paid $20,000 for the purchase of land
as a future building site.

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Transaction B (continued)

Assets = Owner’s Equity

CASH + LAND CHRIS CLARK, CAPITAL
Bal. 25,000 = 25,000
b. –20,000 +20,000
Bal. 5,000 20,000 25,000

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Transaction C
On November 10, 2009,
NetSolutions purchased supplies
for $1,350 and agreed to pay the
supplier in the near future.

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Transaction C (continued)

Assets = Liabilities + Owner’s Equity

ACCOUNTS CHRIS CLARK,
CASH + SUPPLIES + LAND PAYABLE + CAPITAL
=
Bal. 5,000 20,000 25,000
c. +1,350 +1,350
Bal. 5,000 1,350 20,000 1,350 25,000

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Beginning with Transaction D

the asset section will be shown
first, then the liabilities and
owner’s equity will be shown in
the following slide.

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Transaction D
On November 18, 2009, NetSolutions
received cash of $7,500 for providing
services to customers. A business
earns money by selling goods or
services to its customers. This amount
is called Revenue.

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Transaction D (continued)

Assets
CASH + SUPPLIES + LAND
Bal. 5,000 1,350 20,000
d. +7,500
Bal. 12,500 1.350 20,000

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Transaction D (continued)

Liabilities + Owner’s Equity

ACCOUNTS CHRIS CLARK, FEES
PAYABLE + CAPITAL + EARNED
Bal. 1,350 25,000
d. +7,500
Bal. 1,350 25,000 7,500

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Expenses
During the month, NetSolutions spent cash or used up
other assets in earning revenue. Assets used in this
process of earning revenue are called expenses.
Selama satu bulan, NetSolutions menghabiskan uang
tunai atau digunakan aset lain dalam mendapatkan
pendapatan. Aset yang digunakan dalam proses ini
mendapatkan penghasilan disebut beban

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Transaction E
On November 30, 2009, NetSolutions
paid the following expenses during
the month: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous,
$275.

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Transaction E (continued)

Assets
CASH + SUPPLIES + LAND
Bal. 12,500 1,350 20,000
e. –3,650
Bal. 8,850 1.350 20,000

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Transaction E (continued)

Liabilities + Owner’s Equity

ACCOUNTS CHRIS CLARK, FEES WAGES RENT UTIL. MISC.
PAYABLE + CAPITAL + EARNED – EXP. – EXP. – EXP. – EXP.
Bal. 1,350 25,000 7,500
e. –2,125 –800 –450 –275
Bal. 1,350 25,000 7,500 –2,125 –800 –450 –275

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Transaction F
On November 30, 2009,
NetSolutions paid creditors on
account, $950.

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Transaction F (continued)

Assets
CASH + SUPPLIES + LAND
Bal. 8,850 1,350 20,000
f. –950
Bal. 7,900 1.350 20,000

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Transaction F (continued)

Liabilities + Owner’s Equity

ACCOUNTS CHRIS CLARK, FEES WAGES RENT UTIL. MISC.
PAYABLE + CAPITAL + EARNED – EXP. – EXP. – EXP. – EXP.
Bal. 1,350 25,000 7,500 –2,125 –800 –450 –275
f. –950
Bal. 400 25,000 7,500 –2,125 –800 –450 –275

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Transaction G
On November 30, 2009, Chris Clark
determined that the cost of supplies
on hand at the end of the period was
$550.

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Transaction G (continued)

Assets
CASH + SUPPLIES + LAND
Bal. 7,900 1,350 20,000
g. –800
Bal. 7,900 550 20,000

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Transaction G (continued)

Liabilities + Owner’s Equity

ACCOUNTS CHRIS CLARK, FEES WAGES RENT SUP. UTIL. MISC.
PAYABLE + CAPITAL + EARNED – EXP. – EXP. – EXP. – EXP. – EXP.
400 25,000 7,500 –2,125 –800 –450 –275
Bal.
g. –800
Bal. 400 25,000 7,500 –2,125 –800 –800 –450 –275

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Transaction H

On November 30, 2009, Chris Clark

withdrew $2,000 from NetSolutions
for personal use.

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Transaction H (continued)

Assets
CASH + SUPPLIES + LAND
Bal. 7,900 550 20,000
h. –2,000
Bal. 5,900 550 20,000

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Transaction H (continued)

Liabilities + Owner’s Equity

ACCTS. CLARK, CLARK, FEES WAGES RENT SUP. UTIL. MISC.
PAY. + CAPITAL – DRAW. + EARNED – EXP. – EXP. – EXP. – EXP. – EXP.
400 25,000 7,500 –2,125 –800 –800 –450 –275
Bal.
h. –2,000
Bal.400 25,000 –2,000 7,500 –2,125 –800 –800 –450 –275

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Summary

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Exhibit 5 Effects of Transactions on Owner’s Equity

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Example Exercise 1-3

Transactions
Salvo Delivery Service is owned and operated by Joel
Salvo. The following selected transactions were
completed by Salvo Delivery Service during February:
1. Received cash from owner as additional
investment, $35,000.
2. Paid creditors on account, $1,800.
3. Billed customers for delivery services on account,
$11,250.
4. Received cash from customers on account, $6,740.
5. Paid cash to owner for personal use, $1,000.
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 Example Exercise 1-3 (continued)
4

Indicate the effect of each transaction on the

accounting equation elements (Assets, Liabilities,
Owner’s Equity, Drawing, Revenue, and Expense) by
listing the numbers identifying the transactions, (1)
through (5). Also, indicate the specific item within the
accounting equation element that is affected. To
illustrate, the answer to (1) is shown below.
(1) Asset (Cash) increases by $35,000; Owner’s Equity
(Joel Salvo, Capital) increases by $35,000.

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 Example Exercise 1-3 (continued)
4
Follow My Example 1-3
Follow My Example 1-3

(2) Asset (Cash) decreases by $1,800; Liability

(Accounts Payable) decreases by $1,800.
(3) Asset (Accounts Receivable) increases by $11,250;
Revenue (Delivery Service Fees) increases by
$11,250.
(4) Asset (Cash) increases by $6,740; Asset (Accounts
Receivable) decreases by $6,740.
(5) Asset (Cash) decreases by $1,000; Drawing (Joel
Salvo, Drawing) increases by $1,000.
For Practice: PE 1-3A, PE 1-3B
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 5

Describe the financial

statements of a
proprietorship and
explain how they
interrelate.

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Financial Statements

After transactions have been recorded and summarized, reports are prepared
for users. The accounting reports providing this information are called
financial statements.
Financial statement atau laporan keuangan berdasarkan pengertian
dari Wikipedia adalah catatan informasi keuangan perusahaan pada
suatu periode akuntansi yang dapat digunakan untuk
menggambarkan kinerja perusahaan tersebut.
Financial statement merupakan bagian dari pelaporan keuangan
(financial reporting)

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Income Statement
The income statement reports the revenues and
expenses for a period of time, based on the matching
concept.
Laporan laba / rugi (income statement) disebut
juga laporan pendapatan dan biaya (profit and
loss statement) atau hasil operasi (statement of
operation), yaitu suatu laporan yang dibuat
secara sistematis berisikan gambaran ringkasan
tentang penghasilan (income) dan beban
(expenses) dalam periode tertentu dari suatu
perusahaan.

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Matching Concept
The matching concept is applied by matching the expenses with
the revenue generated during a period by those expenses.
 Matching Concept adalah suatu proses akuntansi yang
mengaitkan antara biaya dengan pendapatan. Menurut
konsep ini bahwa beban baru dapat diakui dalam laporan
rugi-laba atas dasar hubungan antara biaya yang timbul
dengan pos penghasilan tertentu yang diperoleh.Konsep ini
melibatkan secara bersamaan  atau gabungan antara
penghasilan dan biaya yang dihasilkan secara langsung
dari suatu transaksi atau peristiwa lain yang sama misal
pembebanan biaya komisi penjualan terhadap jumlah
penjualan yang diperoleh ,sehingga perhitungan laba-rugi
yang dilaporkan benar-benar menggambarkan keaadan
yang sebenarnya.

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The excess of revenue over the

expenses is called net income
or net profit. If the expenses
exceed the revenue, the excess
is a net loss.

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Exhibit 6 Financial Statements for NetSolutions

Net income is carried

to the statement of
owner’s equity.
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Example Exercise 1-4

Income Statement
The assets and liabilities of Chickadee Travel Service at
April 30, 2010, the end of the current year, and its revenue
and expenses for the year are listed below. The capital of the
owner, Adam Cellini, was $80,000 at May 1, 2009, the
beginning of the current year.
Accounts payable $ 12,200 Miscellaneous expense $ 12,950
Accounts receivable 31,350 Office expense 63,000
Cash 53,050 Supplies 3,350
Fees earned 263,200 Wages expense 131,700
Land 80,000
Prepare an income statement for the current year ended
April 30, 2010.
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 Example Exercise 1-4 (continued)
5
Follow My Example 1-3
Follow My Example 1-4

CHICKADEE TRAVEL SERVICE

INCOME STATEMENT
For the Year Ended April 30, 2010
Fees earned $263,200
Expenses:
Wages expense $131,700
Office expense 63,000
Miscellaneous expense 12,950
Total expenses 207,650
Net income $ 55,550
For Practice: PE 1-4A, PE 1-4B
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Statement of Owner’s Equity

The statement of owner’s equity
reports the changes in the
owner’s equity for a period of
time.

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Exhibit 6 Financial Statements for NetSolutions (continued)

From the income statement

To the balance sheet

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Example Exercise 1-5

Statement of Owner’s Equity

Using the data for Chickadee Travel Service
shown in Example Exercise 1-4, prepare a
statement of owner’s equity for the current year
ended April 30, 2010. Adam Cellini invested an
additional $50,000 in the business during the year
and withdrew cash of $30,000 for personal use.

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Example Exercise 1-5 continued
5
Follow My Example 1-5

CHICKADEE TRAVEL SERVICE

STATEMENT OF OWNER’S EQUITY
For the Year Ended April 30, 2010
Adam Cellini, capital, May 1, 2009 $ 80,000
Additional investment by owner during year$ 50,000
Net income for the year 55,550
$105,550
Less withdrawals 30,000
Increase in owner’s equity 75,550
Adam Cellini, capital, April 30, 2010 $155,550

For Practice: PE 1-5A, PE 1-5B

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Balance Sheet
A balance sheet is a list of the assets, liabilities, and owner’s
equity as of a specific date.
Neraca Keuangan (Balance sheet) merupakan laporan
keuangan yang mencakup asset, kewajiban (liability), dan
modal (Equity/Ekuitas).
Asset (Aktiva) = Liability + Equity (Passiva)

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Account Form
The account form of a balance sheet lists the assets on the left and the
liabilities and owner’s equity on the right—similar to the design of an
account.
Bentuk skontro (account form), yang membagi halaman menjadi
dua dan sebelah kiri untuk melaporkan posisi aset atau aktiva,
sedang sebelah kanan untuk melaporkan posisi kewajiban dan
modal.
Bentuk vertikal (vertical form) yang menyajikan informasi keuangan
dari atas ke bawah, dengan urutan mulai dari aset atau aktiva, lalu
kewajiban dan modal.
Isi

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Exhibit 6 Financial Statements for NetSolutions (continued)

This amount is compared From the statement

to the net cash flow on the of owner’s equity
statement of cash flows.

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Example Exercise 1-6

Balance Sheet
Using the data for Chickadee Travel Service shown in
Example Exercises 1-4 and 1-5, prepare the balance
sheet as of April 30, 2010.

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 Example Exercise 1-6 (continued)
5
Follow My Example 1-3
Follow My Example 1-6

CHICKADEE TRAVEL SERVICE

BALANCE SHEET
April 30, 2010
Assets Liabilities
Cash $ 53,050 Accounts payable $ 12,200
Accounts receivable 31,350
Supplies 3,350 Owner’s Equity
Land 80,000 Adam Cellini, capital 155,550
Total assets $167,750 Total liab. & owner’s eq. $167,750

For Practice: PE 1-6A, PE 1-6B

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Statement of Cash Flows

A statement of cash flows is a summary of the cash receipts and payments for a
specific period of time. It consists of three sections: (1) operating activities, (2)
investing activities, and (3) financing activities.
Arus kas (cash flow) adalah suatu laporan keuangan yang berisikan
pengaruh kas dari kegiatan operasi, kegiatan transaksi investasi dan
kegiatan transaksi pembiayaan/pendanaan serta kenaikan atau
penurunan bersih dalam kas suatu perusahaan selama satu periode.

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Exhibit 6 Financial Statements for NetSolutions (continued)

This amount should match

1-84 Cash on the balance sheet.
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Operating Activities
The cash flows from operating activities section reports a summary
of cash receipts and cash payments from operations.
Aktivitas Operasi
Aktivitas operasi menimburkan pendapatan dan beban dari
operasi utama suatu perusahaan. Karena itu aktivitas operasi
mempengaruhi laporan laba rugi, yang dilaporkan dengan
dasar akrual. Sedangkan laporan arus kas melaporkan
dampaknya terhadap kas. Arus masuk kas terbesar dari
opersi berasal dari pengumpulan kas dari langganan. Arus
masuk kas yang kurang penting adalah penerimaan bunga
atas pinjaman dan dividen atas investasi saham. Arus keluar
kas operasi meliputi pembayaran terhadap pemasok dan
karyawan, serta pembayaran bunga dan pajak.

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Investing Activities
The cash flows from investing activities section reports the cash transactions for the
acquisition and sale of relatively permanent assets.
Aktivitas Investasi
Aktivitas investasi meningkatkan dan menurunkan aktiva jangka panjang
yang digunakan perusahaan untuk melakukan kegiatannya. Pembelian atau
penjualan aktiva tetap seperti tanah, gedung, atau peralatan merupakan
kegiatan investasi, atau dapat pula berupa pembelian atau penjualan
investasi dalam saham atau obligasi dari perusahaan lain.

Pada laporan arus kas kegiatan investasi mencakup lebih dari sekedar
pembelian dan penjualan aktiva yang digolongkan sebagai investasi di
neraea. Pemberian pinjaman juga merupakan suatu kegiatan investasi
karena pinjaman menciptakan piutang kepada peminjam. Pelunasan
pinjaman tersebut juga dilaporkan sebagai kegiatan investasi pada laporan
arus kas.

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Financing Activities
The cash flows from financing activities section reports the cash
transactions related to cash investments by the owner, borrowings, and
withdrawals by the owner.
Aktivitas Pendanaan
Aktivitas pendanaan meliputi kegiatan untuk memperoleh kas dari
investor dan kreditor yang diperlukan untuk menjalankan dan
melanjutkan kegiatan perusahaan. Kegiatan pendanaan mencakup
pengeluaran saham, peminjaman uang dengan mengeluarkan wesel
bayar dan pinjaman obligasi, penjualan saham perbendaharaan, dan
pembayaran terhadap pemegang saham seperti dividen dan
pembelian saham perbendaharaan. Pembayaran terhadap kreditor
hanyalah mencakup pembayaran pokok pinjaman.

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Example Exercise 1-7

Statement of Cash Flows

A summary of cash flows for Chickadee Travel Service for the
year ended April 30, 2010, is shown below.
Cash receipts:
Cash received from customers $251,000
Cash received from additional
investment of owner 50,000
Cash payments:
Cash paid for expenses 210,000
Cash paid for land 80,000
Cash paid to owner for personal use 30,000

The cash balance as of May 1, 2009, was $72,050.

Prepare a statement of cash flows for Chickadee Travel Service
1-88 for the year ended April 30, 2010.
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 Example Exercise 1-7 (continued)
5
Follow My Example 1-3
Follow My Example 1-7

Cash flows from operating activities:

Cash received from customers $251,000
Deduct cash payments for expenses 210,000
Net cash flows from operating activities $ 41,000
Cash flows from investing activities:
Cash payments for purchase of land (80,000)
Cash flows from financing activities:
Cash received from owner as investment $ 50,000
Deduct cash withdrawals by owner 30,000
Net cash flows from financing activities 20,000
Net decrease in cash during year $(19,000)
Cash as of May 1, 2009 72,050
Cash as of April 30, 2010 $ 53,050

For Practice: PE 1-7A, PE 1-7B

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Interrelationships Among
Financial Statements
• The income statement and the statement of
owner’s equity are interrelated.
Net income or net
loss appears on both
statements.

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Interrelationships Among
Financial Statements
• The statement of owner’s equity and the
balance sheet are interrelated.
The owner’s capital at the end of
the period on the statement of
owner’s equity also appears on the
balance sheet as owner’s capital.

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Interrelationships Among
Financial Statements
• The balance sheet and the statement of
cash flows are interrelated.
The cash reported on the
balance sheet is also reported
as the end-of-period cash on the
statement of cash flows.

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Financial Analysis and

Interpretation
Ratio of Liabilities to Total Liabilities
Owner’s Equity =
Total Owner’s Equity (or
Total Stockholders’
Equity)
For NetSolutions:
Ratio of Liabilities to $400
Owner’s Equity = = 0.015
$26,050

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