Accounting in Business

Chapter 1

Wild, Kwok, Venkatesh and Shaw

Fundamental Accounting Principles
3rd Edition

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 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.

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 Learning Objective C1

Explain the purpose and

importance of accounting.

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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.

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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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Users of Financial Information

Accounting is called the language of business because it communicates
data that help people make better decisions. People using accounting
information are divided into two groups: external users and internal
users.

• Lenders • Research and development managers

• External auditors • Purchasing managers
• Shareholders • Human resource managers
• Regulators • Marketing managers
• Customers • Production managers
• Distribution managers
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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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Ethics – A Key Concept Exhibit

1.3
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 Exhibit

1.4
Three factors push a person to commit fraud: opportunity,
pressure, and rationalization.

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Learning Objective C3: Explain why ethics are crucial to accounting.
 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 wants information to have relevance
and faithful representation.

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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
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International Standards
Our global economy demands 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.
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Principles, Assumptions and

Constraint
Exhibit

1.5

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.
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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. Information based on and
cost is 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.
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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.
 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.

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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
Qualitative Characteristics
Exhibit

1.6

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Learning Objective A1

Define and interpret the

accounting equation and each
of its components.

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Business Transaction and Accounting

The Accounting Equation

Assets = Liabilities + Equity

Expanded Accounting Equation:

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Learning Objective A1: Define and interpret the accounting equation and each of its components.
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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)

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 1
Chas Taylor invests $30,000 cash to start
the business, Fast Forward.

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 2:
Purchase Supplies for Cash
Company purchases supplies by
paying $2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 2
Company purchases supplies by paying
$2,500 cash.

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 3:
Purchase Equipment for Cash

Purchases equipment for $26,000 cash.

The accounts involved are:

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

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 3
Purchases equipment for $26,000 cash.

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 4:
Purchase Supplies on Credit
Purchases supplies of $7,100 on credit.

The accounts involved are:

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

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 4
Purchases Supplies of $7,100 on credit.

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

The accounts involved are:

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

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 5
Provides consulting services to a customer
and receives $4,200 cash right away.

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transactions 6 and 7:
Payment of Expenses in Cash
Pays 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 balances in the Expense accounts actually increase.

But total Equity decreases, because expenses reduce equity.

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transactions 6 and 7
Pays rent of $1,000 and
salaries of $700 to employees.

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 8:
Provide Services and Facilities for Credit

Provides 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)

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 8
Provides consulting services of $1,600 and rents
facilities for $300 to a customer for credit.

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Learning Objective P1: Analyze business transactions using the accounting equation.
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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)

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 9
Client in transaction 8 pays $1,900 for consulting services.

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Learning Objective P1: Analyze business transactions using the accounting equation.
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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)

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 10
FastForward pays $900 as partial payment for supplies
purchased in transaction 4.

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Learning Objective P1: Analyze business transactions using the accounting equation.
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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!!

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Transaction 11
Owner withdraws $200 cash for personal use.

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

1.7

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Learning Objective P1: Analyze business transactions using the accounting equation.
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Learning Objective P2

Identify and prepare basic

financial statements and explain
how they interrelate.

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Financial Statements

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Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
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Exhibit 1.8: Financial Statements

and Their Links

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Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
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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
profit divided by the average total assets invested.

Net Profit Exhibit

Return on assets =
Average total assets
1.9

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

Exhibit

1.10

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Learning Objective A2: Compute and interpret return on assets.
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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
returns may be
the return we will earn. 1A.1
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.
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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.
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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 assets such as land, buildings, and equipment.

 Owner financing—resources contributed by the owner

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

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

 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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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.

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Learning Objective C5: Identify and describe the three major activities of organizations.
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End of Chapter 1

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