Accounting Concepts and Procedures

Chapter 1
Accounting
Concepts and
Procedures
Learning Objectives
1. Explain Accounting, Business, and the

Accounting Equation
2. Prepare a Balance Sheet
3. Record Transactions into the
Expanded Accounting Equation
4. Prepare the Three Financial
Statements
Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-2

Learning Objective 1
Explain Accounting,
Business, and the
Accounting Equation

Accounting
• Language of business
• Provides information to:
– Managers
– Owners
– Investors
– Governmental agencies
– Others inside and outside the organization

Accounting System
• The accounting process:

– Analyzes - Looking at what happened
– Records - Putting information into system
– Classifies - Grouping similar activities
– Summarizes - Totaling the results
– Reports - Issuing the statements
– Interprets - Examining the statements
– Communicates - Provides reports

Accounting
• Provides financial information for decision

makers:
– Individuals
– Small businesses
– Large corporations
– Governmental agencies
• In a timely fashion

Business Organizations
• Sole proprietorship – one owner

– The owner makes all the decisions for the business
• Partnership – at least two owners
– Partners share the decision making and risks of the
business
• Corporation – owned by stockholders
– A business owned by stockholders
• Liability Corporation (LLC) – owned by a few
stockholders
– Liable only to the extent of their investment

Table 1.1 Types of Business Organizations

Business Classifications
• Service - actual services are provided for

clients (e.g. consulting firms)
• Merchandising - make their own products or
sell products made by another supplier (e.g.
JCPenney)
• Manufacturing - Companies that make their
own products (e.g. Ford Motor Co.)

Table 1.2 Examples of Service, Merchandise, and
Manufacturing Businesses

GAAP
• Generally Accepted Accounting Principles

– Procedures and guidelines that must be followed
during the accounting process
– Used to ensure everyone prepares and interprets
financial reports the same way
• International Financial Reporting Standards
(IFRS)
– Guidelines developed by the International
Accounting Standards Board
– US is considering a change from GAAP to IFRS.

Difference between Bookkeeping
and Accounting
• Bookkeeping
– Is the recording function of the accounting
process
– Enters accounting information in the company’s
books
• Accounting
– Prepares the financial statements
– Involves many complex activities

The Accounting Equation
• A business is considered a separate business

entity
– Finances are kept separate and distinct from
personal finances
• All transactions use the accounting equation
– Assets = Liabilities + Owner’s Equity

Assets = Liabilities + Owner’s Equity
• Assets - properties of value owned by a

business
– Cash, land, supplies, office equipment, buildings,
and other properties of value
• Equities - rights of financial claim to the
assets

Liabilities
• Liabilities - Obligations that come due in the

future.
• Result in increasing the financial rights or
claims of creditors to assets.
– Examples include accounts payable
• Companies that are owed money are called
creditors.
– They have a claim to assets.

Assets = Liabilities + Owner’s Equity
• Liability – future obligation

• Total claims against the assets – Equities
– Accountants divide equities into two parts
• The claims of creditors
• The claims of owners

The Capital Account
• Capital - the owner’s investment in a

company
• Does not always mean cash
• Includes any assets the owner has put into
the business

Accounting Transactions
• Transaction A
– Aug. 28: Mia invests $6,000 in cash and $200 of
office equipment into the business

• Transaction B
• Aug. 29: Law practice buys office
equipment for cash, $500
• Shift in assets - the makeup of the

assets has changed, but the total
remains the same
• Transaction C
• Aug. 30: Buys additional office
equipment on account, $300.
• Accounts payable - unwritten promise

to pay the creditor
Prepare a Balance Sheet

Balance Sheet
• Shows the history of a company

• Reports financial position as of a particular
date
• Presents ending balances in assets,
liabilities, and owner’s equity
• Assets appear on the left side
• Liabilities and Equity appear on the right
side

Figure 1.1 The Balance Sheet

Preparing a Balance Sheet
• The heading of the balance sheet

provides the following information:
– The company name
– The name of the statement
– The date for which the report is prepared
• Use of the Dollar Sign
– Placed to the left of each column’s top
figure and to the left of the column’s total

Record Transactions into
the Expanded Accounting
Equation

The Accounting Equation Expanded:
Revenue, Expenses, and Withdrawals
• Revenue
– Amount earned by performing services or
selling goods to customers
– Increases owner’s equity
– Recorded when earned
• Assets increase
– Cash if the client pays right away
– Accounts receivable - client promises to
pay in the future

The Accounting Equation Expanded:
Revenue, Expenses, and Withdrawals
• Expenses
– Cost incurred in its efforts to create revenue
– Decreases owner’s equity
– Recorded when incurred
– Paid in cash or can
be charged

Net Income/Net Loss
• Revenues – Expenses =
– Net Income/Net Loss
• If revenues > expenses = net income
– Increases equity
• If expenses > revenues = net loss
– Decreases equity

Withdrawals
• Cash or other assets removed from the

business to pay personal expenses
• Decreases owner’s equity
• Not related to the business
• Not an expense

Figure 1.3 Owner’s Equity

• Transaction D
– Sept. 1–30: Provided legal services for cash,
$2,000.
INSERT TABLE ON p. 10

• Transaction E
– Sept. 1–30: Provided legal services on account,
$3,000.
INSERT FIRST TABLE ON

p. 11

• Transaction F
– Sept. 1–30: Received $900 cash as partial
payment from previous services performed on
account.

• Transaction G
– Sept. 1–30: Paid salaries expense, $700.

• Transaction H
– Sept. 1–30: Paid rent expense, $400.

• Transaction I
– Sept. 1–30: Incurred advertising expenses of
$200, to be paid next month.

• Transaction J
– Sept. 1–30: Mia withdrew $100 for personal use.

Prepare the Three Financial
Statements

Income Statement
• Shows business results

– Revenues
– Expenses
– Net income/loss
• Covers a certain period of time
– A month, a quarter, a year

Income Statement
• Preparing Statements
– The company name
– The name of the statement
– The period of time
the statement covers

Figure 1.4 The Income Statement

Statement of Owner’s Equity
• Increased by:
– Owner Investment
– Net Income (Revenue - Expenses) and Revenue
Greater Than Expenses
• Decreased by:
– Owner Withdrawals
– Net Loss (Revenue - Expenses) and Expenses
Greater Than Revenue

Figure 1.5 Statement of Owner’s Equity
—Net Income

Figure 1.6 Statement of Owner’s Equity
—Net Loss

Figure 1.7 The Accounting Equation and
the Balance Sheet

Table 1.3 What Goes on Each Financial
Statement

Main Elements of the Income Statement, the
Statement of Owner’s Equity, and the Balance
Sheet
• The income statement is prepared first.

– Net income or loss is needed for the statement of
owner’s equity.
• The statement of owner’s equity is prepared
second.
– The net income or net loss comes from the
income statement.
• The balance sheet is prepared last.
– The balance in Capital comes from the statement
of owner’s equity.

Summary of the Chapter
• Defining and listing the functions of accounting.

• The functions of accounting involve analyzing, recording,
classifying, summarizing, reporting, and interpreting financial
information.
• Forms of business organization:
• A sole proprietorship is a business owned by one person.
• A partnership is a business owned by two or more persons.
• A corporation is a business owned by stockholders.
• An LLC is owned by a limited number of stockholders.
• The Sarbanes-Oxley Act helps prevent fraud at trading
companies.
• GAAP and IFRS are guidelines established by U.S. (GAAP) and
international (IFRS) accounting standard boards.

Recording transactions in the basic accounting

equation.
• Assets = Liabilities + Owner’s Equity is the basic accounting
equation.
• Liabilities represent amounts owed to creditors.
• Capital does not mean cash.
• In a shift of assets the composition of assets changes but the
total of assets does not change.
• Seeing how revenue, expenses, and withdrawals expand the
basic accounting equation.
• Revenue generates an inward flow of assets. Expenses
generate an outward flow of assets or a potential outward
flow.

• When revenue totals more than expenses, net income is the

result; when expenses total more than revenue, there is a net
loss.
• Owner’s equity can be subdivided into four elements: capital,
withdrawals, revenue, and expenses.
• Withdrawals and expenses will decrease owner’s equity.
• Preparing an income statement, a statement of owner’s
equity, and a balance sheet.
• The income statement is a statement written for a specific
period of time that lists earned revenue and expenses
incurred to produce the earned revenue.

• The statement of owner’s equity is a statement written for a

specific period of time that reveals the causes of a change in
capital. The ending figure for capital will be used on the
balance sheet.
• The balance sheet is a statement written for a specific point of
time that uses the ending balances of assets and liabilities
from the accounting equation and the capital from the
statement of owner’s equity.
• The income statement should be prepared first because the
information on it about net income or net loss is used to
prepare the statement of owner’s equity, which in turn
provides information about capital for the balance sheet.

Questions?

Figure 1.2 Partial Balance Sheet

Figure 1.8 Michael Brown’s Income Statement
and Statement of Owner’s Equity

Figure 1.9 Michael Brown’s Balance Sheet

Accounting Concepts and Procedures

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounting Concepts and Procedures

Uploaded by

Copyright:

Available Formats

Chapter 1

1. Explain Accounting, Business, and the

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-2

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-3

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-4

• The accounting process:

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-5

• Provides financial information for decision

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-6

• Sole proprietorship – one owner

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-7

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-8

• Service - actual services are provided for

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-9

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-10

• Generally Accepted Accounting Principles

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-11

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-12

• A business is considered a separate business

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-13

• Assets - properties of value owned by a

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-14

• Liabilities - Obligations that come due in the

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-15

• Liability – future obligation

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-16

• Capital - the owner’s investment in a

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-17

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-18

• Shift in assets - the makeup of the

• Accounts payable - unwritten promise

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-21

• Shows the history of a company

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-22

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-23

• The heading of the balance sheet

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-24

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-25

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-26

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-27

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-28

• Cash or other assets removed from the

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-29

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-30

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-31

INSERT FIRST TABLE ON

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-32

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-33

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-34

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-35

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-36

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-37

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-39

• Shows business results

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-40

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-41

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-42

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-43

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-44

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-45

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-46

Copyright ©2016 Pearson Education, Inc. All rights reserved. 1-47

• The income statement is prepared first.