Accounting and theBusiness Environment pot

is an information system that...measures business activities,processes information, and.... Resources Claims toEconomicResources The Accounting Equation Assets = Liabilities + Owner’s Eq

Accounting and the

Business Environment

Chapter

1

Objective 1

Use accounting

vocabulary

is an information system that

measures business activities,processes information, and

communicates financial information

Accounting

is called the language of business.

Accounting

for the entity.

Users of Accounting Information

Management AccountingFinancial Accounting

Fields of Accounting

Standards of Professional

Conduct

Types of Business Organizations

 What are some advantages?

– total undivided authority

– no restrictions on type of business – must

 What are some advantages?

better credit standing – possibly

– more brain power, but consultation with partners required

 What are some disadvantages?

– unlimited personal liability for general partners

– need for written partnership agreement

 What are some advantages?

– separate legal existence

– limited liability of stockholders

– transferability of ownership relatively easy

 What are some disadvantages?

– taxes – possible double taxation

– extensive governmental regulation

Objective 2

Apply Accounting Concepts and Principles

To provide information usefulfor making investment and

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

same data.

The Reliability (Objectivity) Principle

Assets and services

acquiredshould be recorded

at their actual cost

The Cost Principle

The entity will continue

to operate in the future

The Going Concern Concept

The dollar’s purchasingpower is relatively

stable

The Stable-Monetary-Unit Concept

Objective 3

Use the Accounting Equation

Resources

Claims toEconomicResources

The Accounting Equation

Assets = Liabilities + Owner’s Equity

Owner’s Equity

 What is owner’s equity?

 It is what’s left of the assets after liabilities have been deducted

– the same as net assets

– the owner’s claim on the entity’s assets

Transactions that Affect

Owner’s Equity

OWNER’S EQUITY INCREASES

 What are revenues?

 They are amounts received or to be received

from customers for sales of products or services.

– sales

– performance of services

– interest

 What are expenses?

 They are amounts that have been paid or will be paid later for costs that have been incurred to

Objective 4

Analyze Business Transactions

Accounting for Business

Transactions

 What is a transaction?

 It is any event that both affects the financial position of the business and can be reliably recorded

Accounting for Business

Accounting for Business

Transactions

5 Gillen performs services, and the client agrees

to pay $3,000 within one month.

6 During the month, she pays $3,300 for

Owner’s Assets = Liabilities + Equity

Accounting for Business

Transactions

Accounting for Business

Transactions

 Notice that the equation always stays in balance

 Each transaction affects at least two

accounts, sometimes more

 Some transactions affect only one side of the equation; some affect both sides

Accounting for Business

 She sold some land at cost for $9,000

 She withdrew $2,000 from the business

Objective 5

Prepare Financial Statements

– are the final

product of the

accounting process

– tell how thebusiness is performingand where it stands

Financial Statements

Objective 6

Evaluate Business

Performance

Relationships Among the Statements:

Utilities and telephone expense 400

Equipment rental expense 600

Office rent expense 1,100 3,300

G Gillen, capital, April 1, 20xx $ 0 Contribution of capital 30,000

G Gillen, capital, April 30, 20xx $33,200

Relationships Among the Statements:

Statement of Owner’s Equity

Relationships Among the Statements:

G Gillen, capital 33,200 Total liabilities and

owner’s equity $33,400

Relationships Among the Statements: Statement Of Cash Flows

Cash flows from operating activities:

Cash receipts from services rendered $6,500

Cash flows from investing activities

Purchase and sale of land ($11,000)

Cash Flows from Financing Activities:

Investment by Owner $30,000 Withdrawals 2,000 Net Cash Flows from

End of Chapter

1