1-1

Accounting in Action
Chapter 1
 1-2

C1

Accounting in Business
 1-3

Why Accounting???
• Let see the video and find out….

• https://www.youtube.com/watch?v=4kIWqDK
4j5Q
 1-4

Opportunities in Accounting

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.
 1-5

Identify the activities and users

associated with accounting.

Accounting consists of three basic activities—it

 identifies,

 records, and

 communicates

 the economic events of an organization to interested users.

 1-6

Three Activities
Illustration 1-1
The activities of the accounting process

The accounting process includes

the bookkeeping function.
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C1

Users of Financial Information

Accounting is called the language of business because all organizations
set up an accounting information system to communicate data to help
people make better decisions. Accounting serves many users who can
be divided into two groups: external users and internal users.
 1-8

Who Uses Accounting Data

INTERNAL
USERS

Illustration 1-2
Questions that internal
users ask
 1-9

Who Uses Accounting Data

EXTERNAL
USERS

Illustration 1-3
Questions that external
users ask
LO 1
 1 - 10

DO IT! 1 Basic Concepts

Indicate whether the following statements are true or false.

1. The three steps in the accounting process are identification,

recording, and communication.

2. Bookkeeping encompasses all steps in the accounting process.

3. Accountants prepare, but do not interpret, financial reports.

4. The two most common types of external users are investors and
company officers.

5. Managerial accounting activities focus on reports for internal users.

Solution: 1. True 2. False 3. False 4. False 5. True

LO 1
 1 - 11

Forms of Business Ownership

Proprietorship Partnership Corporation

 Owned by one  Owned by two or  Ownership

person more persons divided into
 Owner is often shares of stock
 Often retail and
manager/operator service-type  Separate legal
 Owner receives businesses entity organized
any profits, suffers under state
 Generally
any losses, and is corporation law
unlimited
personally liable personal liability  Limited liability
for all debts
 Partnership
agreement

LO 2
 1 - 12

Assumptions

Question
A business organized as a separate legal entity under state
law having ownership divided into shares of stock is a

a. proprietorship.

b. partnership.

c. corporation.

d. sole proprietorship.

LO 2
 1 - 13

C3

Ethics – A Key Concept

The goal of accounting is to provide useful information for
decisions. 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.
 1 - 14

C4 Generally Accepted
Accounting Principles (GAAP)
Financial accounting is governed by concepts and rules known
as generally accepted accounting principles (GAAP). GAAP aims
to make information relevant, reliable, and comparable.

Reliable information is
trusted by users.

Relevant information Comparable information

affects decisions is helpful in contrasting
of users. organizations.
 1 - 15

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP) –

Standards that are generally accepted and universally practiced.
These standards indicate how to report economic events.

Standard-setting bodies:
► Financial Accounting Standards
Board (FASB)
► Securities and Exchange
Commission (SEC)
► International Accounting
Standards Board (IASB)

LO 2
 1 - 16

C4

International Standards
In today’s global economy, there is increased demand by external
users for comparability in accounting reports. This demand often
arises when companies wish to raise money from lenders and
investors in different countries.

International Accounting International Financial

Standards Board (IASB) Reporting Standards (IFRS)

An independent group Identify preferred accounting

(consisting of individuals practices
from many countries), issues
International Financial
Reporting Standards (IFRS)

Differences between U.S. GAAP and IFRS are decreasing as the

FASB and IASB pursue a convergence process aimed to achieve a
single set of accounting standards for global use.
 1 - 17

C4 Principles and Assumptions of

Accounting

General principles are the basic Specific principles are detailed rules
assumptions, concepts, and used in reporting business
guidelines for preparing financial transactions and events. Specific
statements. General principles stem principles arise more often from the
from long-used accounting practices. rulings of authoritative groups.
 1 - 18

C4

Accounting Principles

Cost Principle
Accounting information is based on
actual cost. Actual cost is
considered objective. It dictates that
companies record assets at their
cost.

Matching Principle Full Disclosure Principle

A company must record its expenses A company is required to report the details
incurred to generate the revenue behind financial statements that would
reported. impact users’ decisions.
 1 - 19

C4

Accounting Assumptions

Time Period Assumption

Presumes that the life of a company can
be divided into time periods, such as
months and years.
 1 - 20

Assumptions

Question
Combining the activities of Kellogg and General Mills
would violate the

a. cost principle.

b. business entity assumption.

c. monetary unit assumption.

d. ethics principle.

LO 2
 1 - 21

State the accounting equation, and define

its components.

Assets = Liabilities + Owner's Equity

Basic Accounting Equation

 Provides the underlying framework for recording and
summarizing economic events.
 Assets are claimed by either creditors or owners.
 If a business is liquidated, claims of creditors must be paid
before ownership claims.

LO 3
 1 - 22

Basic Accounting Equation

Assets = Liabilities + Owner's Equity

Assets
 Resources a business owns.
 Provide future services or benefits.
 Cash, Supplies, Equipment, etc.

LO 3
 1 - 23

Basic Accounting Equation

Assets = Liabilities + Owner's Equity

Liabilities
 Claims against assets (debts and obligations).
 Creditors (party to whom money is owed).
 Accounts Payable, Notes Payable, Salaries and Wages
Payable, etc.

LO 3
 1 - 24

Basic Accounting Equation

Assets = Liabilities + Owner's Equity

Owner's Equity
 Ownership claim on total assets.
 Referred to as residual equity.
 Investment by owners and revenues (+)
 Drawings and expenses (-).

LO 3
 1 - 25

A1 Transaction Analysis and the

Accounting Equation
The Accounting Equation

Expanded Accounting Equation:

Net Income
 1 - 26

Owner’s Equity Illustration 1-6

Expanded accounting
equation

Increases in Owner’s Equity

 Investments by owner are the assets the owner puts into the
business.
 Revenues result from business activities entered into for the
purpose of earning income.
► Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.

LO 3
 1 - 27

Owner’s Equity Illustration 1-6

Expanded accounting
equation

Decreases in Owner’s Equity

 Drawings An owner may withdraw cash or other assets for
personal use.
 Expenses are the cost of assets consumed or services used in
the process of earning revenue.
► Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.

LO 3
 1 - 28

DO IT! 3 Owner's Equity Effects

Classify the following items as investment by owner, owner’s

drawings, revenue, or expenses. Then indicate whether each
item increases or decreases owner’s equity.

Classification Effect on Equity

1. Rent Expense Expense Decrease

2. Service Revenue Revenue Increase

3. Drawings Drawings Decrease

4. Salaries and Wages

Expense Decrease
Expense
LO 3
 1 - 29

P1

Transaction Analysis
Transaction 1
On December 1, Chas Taylor personally invests $30,000 cash in FastForward and
deposits the cash in a bank account opened under the name of FastForward.

The accounts involved are:

(1) Cash (asset)
(2) Owner Capital (equity)
 1 - 30

P1

Transaction Analysis
Transaction 2
FastForward uses $2,500 of its cash to buy supplies of brand name footwear for
performance testing over the next few months.

The accounts involved are:

(1) Cash (asset)
(2) Supplies (asset)
 1 - 31

P1

Transaction Analysis
Transaction 3
FastForward spends $26,000 to acquire equipment for testing footwear. This is
an exchange of one asset, cash, for another asset, equipment. The equipment is
an asset because of its expected future benefits from testing footwear.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
 1 - 32

P1

Transaction Analysis
Transaction 4
Taylor decides more supplies of footwear and accessories are needed. These
additional supplies total $7,100, but as we see from the accounting equation,
FastForward has only $1,500 in cash. Taylor arranges to purchase them on credit
from CalTech Supply Company.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
 1 - 33

P1

Transaction Analysis
Transaction 5
In one of its first jobs, FastForward provides consulting services to a
powerwalking club and immediately collects $4,200 cash.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)
 1 - 34

P1

Transaction Analysis
Transaction 6 and 7
FastForward pays $1,000 rent and the biweekly $700 salary of the company’s
only employee.

The accounts involved are:

(1) Cash (asset)
(2) Expenses (equity)
 1 - 35

P1

Transaction Analysis
Transaction 8
FastForward provides consulting services of $1,600 and rents its test facilities for
$300 to a podiatric services center. The center is billed for the $1,900 total. This
transaction results in a new asset, called accounts receivable, from this client.

The accounts involved are:

(1) Accounts Receivable (asset)
(2) Revenues (equity)
 1 - 36

P1

Transaction Analysis
Transaction 9
The podiatric center pays $1,900 to FastForward 10 days after it is billed for
consulting services.

The accounts involved are:

(1) Cash (asset)
(2) Accounts Receivable (asset)
 1 - 37

P1

Transaction Analysis
Transaction 10
FastForward pays CalTech Supply $900 cash as partial payment for its earlier
$7,100 purchase of supplies, leaving $6,200 unpaid.

The accounts involved are:

(1) Cash (asset)
(2) Accounts Payable (liability)
 1 - 38

P1

Transaction Analysis
Transaction 11
The owner of FastForward withdraws $200 cash for personal use.

The accounts involved are:

(1) Cash (asset)
(2) Withdrawals (equity)
 1 - 39

P1

Summary of Transactions
 1 - 40

Summary of Transactions

1. Each transaction is analyzed in terms of its effect on:

a. The three components of the basic accounting
equation.

b. Specific of items within each component.

2. The two sides of the equation must always be equal.

LO 4
 1 - 41

a. Office Store has assets equal to $123,000 and liabilities equal to $47,000 at year-end. What is the total
equity for Office Store at year-end?

Assets = Liabilities + Equity

$123,000 = $47,000 + $ 76,000

b. At the beginning of the year, Addison Company’s assets are $300,000 and its equity is $100,000. During
the year, assets increase $80,000 and liabilities increase $50,000. What is the equity at the end of the year?

Assets = Liabilities + Equity

Beginning $300,000 = $200,000 + $100,000
Change 80,000 = 50,000 + 30,000
Ending $380,000 = $250,000 + $130,000
 1 - 42

c. At the beginning of the year, Quaker Company’s liabilities equal $70,000. During the year, assets increase
by $60,000, and at year-end assets equal $190,000. Liabilities decrease $5,000 during the year.
What are the beginning and ending amounts of equity?

Assets = Liabilities + Equity

Beginning $130,000 = $70,000 + $60,000
Change 60,000 = (5,000) + 65,000
Ending $190,000 = $65,000 + $125,000
 Quick Check
• Annie's Attic has the following account balances for the dates
given:
September 1 September 30
Cash $40,000 60,000
Accounts Receivable 40,000 38,000
Accounts payable 6,000 ?
 
Also, its net income, for September 1 through September 30 was
$20,000 and there were no investments or withdrawals by the
owner. Determine the equity at both September 1 and
September 30. 
 Solution
Answer: September 1st Equity = $74,000; September 30th Equity = $94,000
 
Feedback:
Total assets:
September 1 September 30
Cash $40,000 60,000
Accounts Receivable 40,000 38,000
Total assets $80,000 $98,000
At September 1:
Assets = Liabilities + Equity
$80,000 = $6,000 + Equity
Equity = $74,000

At September 30:
Equity, September 1 $74,000
Plus September net income 20,000
Equity, September 30 $94,000 
 1 - 45

P2
Financial Statements
The four financial statements and their purposes are:
1. Income statement — describes a company’s revenues and
expenses along with the resulting net income or loss over a
period of time due to earnings activities.
2. Statement of owner’s equity— explains changes in equity
from net income (or loss) and from any owner investments
and withdrawals over a period of time.
3. Balance sheet — describes a company’s financial position
(types and amounts of assets, liabilities, and equity) at a point
in time.
4. Statement of cash flows — identifies cash inflows (receipts)
and cash outflows (payments) over a period of time.
 1 - 46

P2

Income Statement
The income statement describes a company’s revenues
and expenses along with the resulting net income or
loss over a period of time due to earnings activities.
 1 - 47

P2

Statement of Owner’s Equity

The statement of owner’s equity reports information about
how equity changes over the reporting period.

Net income
from the income
statement.
 1 - 48

P2

Balance Sheet
The balance sheet describes a company’s financial
position at a point in time.
 1 - 49

P2

Statement of Cash Flows

 1 - 50

Financial Statements

Question
Net income will result during a time period when:

a. assets exceed liabilities.

b. assets exceed revenues.

c. expenses exceed revenues.

d. revenues exceed expenses.

LO 5
 1 - 51

Financial Statements

Question
Which of the following financial statements is prepared as of
a specific date?

a. Balance sheet.

b. Income statement.

c. Owner's equity statement.

d. Statement of cash flows.

LO 5
 On October 1, Keisha King organized Real Answers, a new consulting firm; on October 3, the owner contributed
$84,000 cash. On October 31, the company's records show the following items and amounts. Use this information
to prepare an October income statement for the business.
  
  Cash $11,360 Owner withdrawals $2,000
  Accounts receivable 14,000 Consulting fees earned 14,000
  Office supplies 3,250 Rent expense 3,550
  Land 46,000 Salaries expense 7,000
  Office equipment 18,000 Telephone expense 760
  Accounts payable 8,500 Miscellaneous expenses 580
Owner investments 84,000

Real Answers
Income Statement
For Month Ended October 31
Revenues:
Consulting fees earned $ 14,000

Expenses:
Rent expense $ 3,550
Salaries expense 7,000
Telephone expense 760
Miscellaneous expenses 580

Total expenses 11,890 To Statement of

Net income (loss) $ 2,110 Owner’s Equity

Exercise 1-14 page 36 1 - 52

 On October 1, Keisha King organized Real Answers, a new consulting firm; on October 3, the owner contributed
$84,000 cash. On October 31, the company's records show the following items and amounts. Use this information
to prepare an October statement of owner’s equity for Real Answers.
  
  Cash $11,360 Owner withdrawals $2,000
  Accounts receivable 14,000 Consulting fees earned 14,000
  Office supplies 3,250 Rent expense 3,550
  Land 46,000 Salaries expense 7,000
  Office equipment 18,000 Telephone expense 760
  Accounts payable 8,500 Miscellaneous expenses 580
Owner investments 84,000

Real Answers
Statement of Owner's Equity
For Month Ended October 31
K. King, Capital, October 1 $ -
Add:
Investment by owner 84,000
From Income Statement
Net income

Less:
Withdrawals by owner
Net loss
K. King, Capital, October 31

Exercise 1-15 page 36 1 - 53

 On October 1, Keisha King organized Real Answers, a new consulting firm; on October 3, the owner contributed
$84,000 cash. On October 31, the company's records show the following items and amounts. Use this information
to prepare an October statement of owner’s equity for Real Answers.
  
  Cash $11,360 Owner withdrawals $2,000
  Accounts receivable 14,000 Consulting fees earned 14,000
  Office supplies 3,250 Rent expense 3,550
  Land 46,000 Salaries expense 7,000
  Office equipment 18,000 Telephone expense 760
  Accounts payable 8,500 Miscellaneous expenses 580
Owner investments 84,000

Real Answers
Income Statement
For Month Ended October 31
Revenues:
Consulting fees earned $ 14,000

Expenses:
Rent expense $ 3,550
Salaries expense 7,000
Telephone expense 760
Miscellaneous expenses 580

Total expenses 11,890

Net income (loss) $ 2,110

Exercise 1-15 page 36 1 - 54

 On October 1, Keisha King organized Real Answers, a new consulting firm; on October 3, the owner contributed
$84,000 cash. On October 31, the company's records show the following items and amounts. Use this information
to prepare an October statement of owner’s equity for Real Answers.
  
  Cash $11,360 Owner withdrawals $2,000
  Accounts receivable 14,000 Consulting fees earned 14,000
  Office supplies 3,250 Rent expense 3,550
  Land 46,000 Salaries expense 7,000
  Office equipment 18,000 Telephone expense 760
  Accounts payable 8,500 Miscellaneous expenses 580
Owner investments 84,000

Real Answers
Statement of Owner's Equity
For Month Ended October 31
K. King, Capital, October 1 $ -
Add:
Investment by owner 84,000
From Income Statement
Net income 2,110
86,110
Less:
Withdrawals by owner 2,000
Net loss
K. King, Capital, October 31 $ 84,110 To Balance Sheet

Exercise 1-15 page 36 1 - 55

 On October 1, Keisha King organized Real Answers, a new consulting firm; on October 3, the owner contributed
$84,000 cash. On October 31, the company's records show the following items and amounts. Use this information
to prepare an October balance sheet for Real Answers.
  
  Cash $11,360 Owner withdrawals $2,000
  Accounts receivable 14,000 Consulting fees earned 14,000
  Office supplies 3,250 Rent expense 3,550
  Land 46,000 Salaries expense 7,000
  Office equipment 18,000 Telephone expense 760
  Accounts payable 8,500 Miscellaneous expenses 580
Owner investments 84,000

Exercise 1-16 page 36 1 - 56

   
  Cash $11,360 Owner withdrawals $2,000
  Accounts receivable 14,000 Consulting fees earned 14,000
  Office supplies 3,250 Rent expense 3,550
  
  Land 46,000 Salaries expense 7,000
  Office equipment 18,000 Telephone expense 760
  Accounts payable 8,500 Miscellaneous expenses 580
Owner investments 84,000

Real Answers
Balance Sheet
October 31
Assets Liabilities
  Cash $11,360   Accounts payable $8,500
  Accounts receivable 14,000
  Office supplies 3,250
  Land 46,000 Owner's Equity
From Statement of
  Office equipment 18,000 K. King, Capital Equity 84,110

Total Assets $92,610 Total Liabilities and Equity $92,610

Exercise 1-16 page 36 1 - 57

Prepare a November 30 balance sheet in proper form for Green
Bay Delivery Service from the following alphabetical list of the
accounts at November 30:

Accounts receivable………………….. $10,000

Accounts payable………………………….. 18,000

Building…………………………………….... 28,000

Cash………………………….…………….... 8,000

Notes payable………………………………. 45,000

Office equipment……………...…………….. 12,000

R. Perkins, Capital………………………….. ?

Trucks……………………………………….. 55,000
Answer
GREEN BAY DELIVERY SERVICE
Balance Sheet
November 30
Assets   Liabilities  

Cash…………………….. $ 8,000 Accounts payable……… $ 18,000

Accounts receivable…… 10,000 Notes payable………….. 45,000

Office equipment………. 12,000 Total liabilities…………… $ 63,000

Building…………………. 28,000    
Trucks………………….. 55,000 Equity  
    R. Perkins, Capital…….. 50,000

Total liabilities and

Total assets……………. $113,000 equity……………………. $113,000
 1 - 60

A2

Return on Assets
Return on assets (ROA) is stated in ratio form as
income divided by assets invested.

Net income
Return on assets =
Average total assets

Dell
 1 - 61

DO IT! 4 Tabular Analysis

Transactions made by Virmari & Co., a public accounting firm, for

the month of August are shown below. Prepare a tabular analysis
which shows the effects of these transactions on the expanded
accounting equation, similar to that shown in Illustration 1-8.
•The owner invested $25,000 cash in the business.
•The company purchased $7,000 of office equipment on credit.
•The company received $8,000 cash in exchange for services
performed.
•The company paid $850 for this month’s rent.
•The owner withdrew $1,000 cash for personal use.

LO 4
 1 - 62

DO IT! 4 Tabular Analysis

1. The owner invested $25,000 cash in the business.

Assets = Liabilities + Owner's Equity

Trans- Accounts Owner's Owner's

action
Cash + Equipment = Payable + Capital + Drawings + Rev. - Exp.

1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000

$18,050 $18,050
LO 4
 1 - 63

DO IT! 4 Tabular Analysis

2. The company purchased $7,000 of office equipment on credit.

Assets = Liabilities + Owner's Equity

Trans- Accounts Owner's Owner's

action
Cash + Equipment = Payable + Capital + Drawings + Rev. - Exp.

1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000

$18,050 $18,050
LO 4
 1 - 64

DO IT! 4 Tabular Analysis

3. The company received $8,000 cash in exchange for services

performed.
Assets = Liabilities + Owner's Equity

Trans- Accounts Owner's Owner's

action
Cash + Equipment = Payable + Capital + Drawings + Rev. - Exp.

1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000

$18,050 $18,050
LO 4
 1 - 65

DO IT! 4 Tabular Analysis

4. The company paid $850 for this month’s rent.

Assets = Liabilities + Owner's Equity

Trans- Accounts Owner's Owner's

action
Cash + Equipment = Payable + Capital + Drawings + Rev. - Exp.

1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000

$18,050 $18,050
LO 4
 1 - 66

DO IT! 4 Tabular Analysis

5. The owner withdrew $1,000 cash for personal use.

Assets = Liabilities + Owner's Equity

Trans- Accounts Owner's Owner's

action
Cash + Equipment = Payable + Capital + Drawings + Rev. - Exp.

1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 + $7,000 = $7,000 + $25,000 + $1,000 + $8,000 - $850

$38,150 $38,150
LO 4
 1 - 67
. 
Question
Graham Roofing Company, owned by R. Graham, began operations in May and completed the following transactions during
that first month of operations. Show the effects of the transactions on the accounts of the accounting equation by recording
increases and decreases in the appropriate columns in the table below. Do not determine new account balances after each
transaction. Determine the final total for each account and verify that the equation is in balance.
 
May 1 R. Graham invested $90,000 cash in the company.
  2 The company purchased $25,000 in office equipment. It paid $10,000 in cash and
signed a note payable promising to pay the $15,000 over the next three years.

  2 The company rented office space and paid $3,000 for the May rent.
  6 The company installed a new roof for a customer and immediately collected $5,000.

  7 The company paid a supplier $2,000 for roofing materials used on the May 6 job.

  8 The company purchased a $2,500 copy machine for office use on credit.
  9 The company completed work for additional customers on credit in the amount of
$16,000.
  15 The company paid its employees salaries $2,300 for the first half of the month.

  17 The company installed a new roof for a customer and immediately collected $2,400.

  20 The company received $10,000 in payments from the customers billed on May 9.

  28 The company paid $1,500 on the copy machine purchased on May 8. It will pay the
remaining balance in June.
  31 The company paid its employees salaries $2,400 for the second half of the month.

  31 The company paid a supplier $5,300 for roofing materials used on the remaining jobs
completed during May.
  31 The company paid $450 for this month’s utility bill.
 1 - 68

                   

  Assets = Liabilities + Equity

Date   Accounts   Accounts Notes R. Graham R. Graham    

May Cash Receivable Equipment Payable Payable Capital Withdrawals Revenues Expenses
90,000         90,000      
1
(10,000)   :   15,000        
2 25,000
(3,000)              
2 (3,000)
5,000             5,000  

6
(2,000)              
7 (2,000)
    2,500          
8 2,500
            16,000  
16,000

9
(2,300)              
15 (2,300)
2,400             2,400  

17
10,000              
20 (10,000)
(1,500)     (1,500)          
28
(2,400)              
31 (2,400)
(5,300)              
31 (5,300)
(450)              
31 (450)
  80,450 1,000 15,000 90,000 - 23,400
6,000 27,500 (15,450)
 1 - 69

End of Chapter 1