Chapter 1

Introduction to Accounting
and Business
Instructor
Le Ngoc Anh Khoa

1-1
 Learning Objectives

After studying this chapter, you should be able to:

1. Explain what accounting is.

2. Identify the users and uses of accounting.
3. Understand why ethics is a fundamental business concept.
4. State the accounting equation, and define its components.
5. Analyze the effects of business transactions on the accounting
equation.
6. Understand the four financial statements and how they are
prepared.

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 What is Accounting?

Accounting is the “language of business.”

1-3
Explain what accounting is.
 Who Uses Accounting Data

Internal Users Tax

Management authorities
Investors
Human
Resources There are two broad groups
of users of financial
information: internal users
Finance Creditors
and external users.

Marketing External
Customers
Users

1-4
Identify the users and uses of accounting.
 Role of Ethics in Accounting and Business

Ethics In Financial Reporting

Standards of conduct by which one’s actions are judged as right
or wrong, honest or dishonest, fair or not fair, are ethics.
 Recent financial scandals include: Enron, WorldCom, AIG,
and others.
 Effective financial reporting depends on sound ethical
behavior.

1-5
Understand why ethics is a fundamental business concept.
 Types of Business

Service businesses
provide services rather than products to customers
- Vietnam Airline
- Megastar Ltd.

Merchandising businesses
sell products they purchase from other businesses to customers
- Big C
- Fahasa

Manufacturing businesses
change basic inputs into products that are sold to customers
- Tan Hiep Phat Trading & Services Co., Ltd
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 Types of Businesses
Service
Service Business
Business

Product
Product
Disney
Disney Entertainment
Entertainment
Delta
DeltaAir
Air Lines
Lines Transportation
Transportation
Marriott
Marriott Hotels
Hotels Hospitality
Hospitality and
and lodging
lodging
Merrill
Merrill Lynch
Lynch Financial
Financial advice
advice
Sprint
Sprint Telecommunication
Telecommunication

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 Types of Businesses
Merchandising
Merchandising Business
Business

Product
Product
Wal-Mart
Wal-Mart General
General merchandise
merchandise
Toys
Toys “R”
“R” Us
Us Toys
Toys
Circuit
Circuit City
City Consumer
Consumer electronics
electronics
Lands’
Lands’End
End Apparel
Apparel
Amazon.com
Amazon.com Internet
Internet books,
books,music,
music, video
video
retailer
retailer

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 Types of Businesses
Manufacturing
Manufacturing Business
Business

Product
Product
General
General Motors
Motors Cars,
Cars, trucks,
trucks, vans
vans
Intel
Intel Computer
Computer chips
chips
Boeing
Boeing Jet
Jet aircraft
aircraft
Nike
Nike Athletic
Athletic shoes
shoes and
and apparel
apparel
Coca-Cola
Coca-Cola Beverages
Beverages
Sony
Sony Stereos
Stereos and
and television
television

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 There
There are
are three
three types
types of
of
business
business organizations
organizations

 Proprietorship
 Partnership
 Corporation

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 A
Aproprietorship
proprietorship Advantages
isis owned
owned by
by one
one • Ease in organizing
individual.
individual. • Low cost of
organizing
Disadvantage
Joe’s • Limited source of
financial resources
• Unlimited liability

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 Advantages
A
Apartnership
partnership isis • More financial
owned
owned by
by two
two or
or resources than a
more
more individuals.
individuals. proprietorship.
• Additional
management skills.
Joe and Marty’s Disadvantage
• Unlimited liability.

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 AAcorporation
corporation isis
organized
organized under
under state
state Advantage
or
or federal
federal statutes
statutes as
as aa • The ability to obtain
separate
separate legal
legal entity.
entity. large amounts of
resources by issuing
stocks.
J & M, Inc. Disadvantage
• Double taxation.

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 Business
Business Strategies
Strategies

A business strategy is an integrated

set of plans and actions designed to
enable the business to gain an
advantage over its competitors, and
in doing so, to maximize its profits.

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 Business
Business Strategies
Strategies

Under a low-cost strategy, a business

designs and produces products or
services of acceptable quality at a cost
lower than that of its competitors.
Wal-Mart
Southwest Airlines

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 Business
Business Strategies
Strategies

Under a differential strategy, a business

designs and produces products or services
that possess unique attributes or
characteristics which customers are willing
to pay a premium price.
Maytag
Tommy Hilfiger

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 Value
Value Chain
Chain of
of aa Business
Business
A value chain is the way a
business adds value for its
customers by processing inputs
into product or service.
Business Products or Customer
Inputs
Processes Services Value

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 Business
Business Ethics
Ethics

1. Avoid small ethical

Sound
Sound lapses.
Principles
Principles that
that 2. Focus on your long-
form
form the
the term reputation.
foundation
foundation for
for 3. You may expect to
ethical
ethical suffer adverse personal
behavior
behavior consequences for
holding to an ethical
position.
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 The Basic Accounting Equation

Owner’s
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership claims.

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State the accounting equation, and define its components.
 The Basic Accounting Equation

Owner’s
Assets = Liabilities +
Equity

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

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State the accounting equation, and define its components.
 The Basic Accounting Equation

Owner’s
Assets = Liabilities +
Equity

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

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State the accounting equation, and define its components.
 The Basic Accounting Equation

Owner’s
Assets = Liabilities +
Equity

Owners’ Equity
 Ownership claim on total assets.
 Referred to as residual equity.
 Common stock and retained earnings.

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State the accounting equation, and define its components.
 The
The Accounting
Accounting Equation
Equation

Assets = Liabilities + Owner’s Equity

The
The resources
resources
owned
owned byby aa
business
business

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 The
The Accounting
Accounting Equation
Equation

Assets = Liabilities + Owner’s Equity

The
The rights
rights of
of the
the
creditors,
creditors, which
which
represent
represent debts
debts ofof
the
the business
business

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 The
The Accounting
Accounting Equation
Equation

Assets = Liabilities + Owner’s Equity

The
The rights
rights of
of the
the
owners
owners

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 The Basic Accounting Equation

Owner’s
Equity

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.

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State the accounting equation, and define its components.
 The Basic Accounting Equation

Owner’s
Equity

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.

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State the accounting equation, and define its components.
 The Basic Accounting Equation

Owner’s
Equity

Dividends are the distribution of cash or other assets to Owners.

Dividends reduce retained earnings. However, dividends are not an
expense.

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State the accounting equation, and define its components.
 Classify the following items as issuance of stock, dividends,
revenues, or expenses. Then indicate whether each item
increases or decreases Owners’ equity.

Classification Effect on Equity

1. Rent expense Expense Decrease

2. Service revenue Revenue Increase

3. Dividends Equity Decrease

4. Salaries expense Expense Decrease

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State the accounting equation, and define its components.
 Indicate whether each of the following is identified with (1)
an asset, (2) a liability, or (3) owner’s equity:

a. accounts payable
b. cash
c. fees earned
d. land
e. supplies
f. wages expense
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 Using the Accounting Equation

Transactions are a business’s economic events recorded

by accountants.
 Not all activities represent transactions.

 Each transaction has a dual effect on the accounting

equation.

 The two sides of the accounting equation are always

equal.

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Analyze the effects of business transactions on the accounting equation.
 Using the Accounting Equation

Expanded accounting equation

Owner’s Equity

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Analyze the effects of business transactions on the accounting equation.
 Effects
Effects of
of Transactions
Transactions on
on Owner’s
Owner’s Equity
Equity
Owner’s Equity

Decreased by Increased by

Owner’s Owner’s
withdrawals investments
Expenses Revenues

Net
income
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 What is a business
transaction?

A business transaction is an economic event or

condition that directly changes an entity’s financial
condition or directly affects its results of operations.
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 Transaction Analysis

Important!!!
1. Each transaction is analyzed in terms of its effect on:
• The 3 components of the basic accounting equation
• Specific items within each component
2. The 2 sides of equation must always be equal.

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Analyze the effects of business transactions on the accounting equation.
 Describe how the following business transactions affect the
three elements of the accounting equation.
a. Invested cash in business.
b. Received cash for services performed.
c. Paid for utilities used in the business.
d. Purchased supplies for cash.
e. Purchased supplies on account.

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 Illustration: NetSolutions

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

Assets = Owner’s Equity

Cash Chris Clark, Capital
=
a. + 25,000 + 25,000

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Analyze the effects of business transactions on the accounting equation.
 b. NetSolutions
b. NetSolutions paid
paid $20,000
$20,000 for
for the
the
purchase of
purchase of land
land as
as aa future
future building
building site.
site.

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

1-38
Analyze the effects of business transactions on the accounting equation.
 c. During
c. During the
the month,
month, NetSolutions
NetSolutions purchased
purchased
supplies for
supplies for $1,350
$1,350 and
and agreed
agreed toto pay
pay the
the
supplier in
supplier in the
the near
near future
future (on
(on account).
account).
Owner’s
Assets = Liabilities + 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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Analyze the effects of business transactions on the accounting equation.
 d. NetSolutions
d. NetSolutions received
received cash
cash of
of $7,500
$7,500 for
for
providing services
providing services to
to customers
customers

Assets
= Liabilities + Owner’ Equity
A/P + C.Clark, + Fees
Cash + Supplies + Land
Capital Earned
Bal.5,000 1,300 20,000 = 1,350 25,000

+7,500
h + 7,500
+7,500
Bal. 12,500 1,300 20,000 1,350 25,000 7,500

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Analyze the effects of business transactions on the accounting equation.
 e. NetSolutions
e. NetSolutions paid
paid the
the following
following
expenses: wages,
expenses: wages, $2,125;
$2,125; rent,
rent, $800;
$800;
utilities, $450;
utilities, $450; and
and miscellaneous,
miscellaneous, $275.$275.
Assets
= Liabilities + Owner’ Equity
A/P + C.Clark, +Fees -Wage.-Rent –Utilities-Misc
Cash + Supplies + Land
Capital Earned Exp. Exp. Exp. Exp.
Bal. 12,500 1,300 20,000
= 1,350 25,000 7,500

h. -3,650 -2,125 -800 -450 -275

Bal. 8,850 1,300 20,000
1,350 25,000 7,500 -2,125 -800 -450 -275

1-41
Analyze the effects of business transactions on the accounting equation.
 f.f. NetSolutions
NetSolutions paid
paid $950
$950 to
to
creditors during
creditors during the
the month.
month.

Assets
= Liabilities + Owner’ Equity
A/P + C.Clark, + Fees - Wage.- Rent –Utilities -Misc
Cash + Supplies + Land
Capital Earned Exp. Exp Exp. Exp.
Bal. 8,850 1,300 20,000 = 1,350 25,000 7,500 -2,125 -800 -450 -275

H . -950 -950
Bal. 7,900 1,300 20,000
400 25,000 7,500 -2,125 -800 -450 -275

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Analyze the effects of business transactions on the accounting equation.
 g. Chris
g. Chris Clark
Clark determined
determined thet
thet the
the
cost of
cost of supplies
supplies on
on hand
hand at
at the
the
end of
end of the
the month
month was
was $550
$550
Assets
= Liabilities + Owner’ Equity
A/P +C.Clark +Fees -Wage.-Rent - Supplies –Utilities-Misc
Cash + Supplies+ Land
Capital Earned Exp. Exp. Exp. Exp. Exp.
Bal.7,900 1,350 20,000 = 400 25,000 7,500 -2,125 -800 -450 -275
h. -800 h -800

Bal. 7,900 550 20,000 400 25,000 7,500 -2,125 -800 -800 -450 -275

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Analyze the effects of business transactions on the accounting equation.
 h. At
h. At the
the end
end of
of the
the month,
month, Chris
Chris
withdrew $2,000
withdrew $2,000 in
in cash
cash from
from the
the
business for
business for personal
personal use.
use.
Assets
= Liabilities + Owner’ Equity
A/P +C.Clark-C.Clark, +Fees -Wage.-Rent-Supplies –Utilities-Misc
Cash + Supplies+ Land
Capital Drawing Earned Exp. Exp. Exp. Exp. Exp.
Bal.7,900 550 20,000 = 400 25,000 7,500 -2,125 -800 -450 -275
-2,000
h. -2,000
Bal. 5,900 550 20,000 400 25,000 -2,000 7,500 -2,125 -800 -450 -275

1-44
Analyze the effects of business transactions on the accounting equation.
 Transaction Analysis
Transaction (1). Investment by Stockholders. Ray and Barbara
Neal decides to open a computer programming service which he
names Softbyte. On September 1, 2014, they invest $15,000 cash in
exchange for common stock.

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 Transaction Analysis
Transaction (2). Purchase of Equipment for Cash. Softbyte
purchases computer equipment for $7,000 cash.

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 Transaction Analysis
Transaction (3). Purchase of Supplies on Credit. Softbyte
purchases for $1,600 from Acme Supply Company computer
paper and other supplies expected to last several months.

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 Transaction Analysis
Transaction (4). Services Provided for Cash. Softbyte
receives $1,200 cash from customers for programming services
it has provided.

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 Transaction Analysis
Transaction (5). Purchase of Advertising on Credit. Softbyte
receives a bill for $250 from the Daily News for advertising but
postpones payment until a later date.

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 Transaction Analysis
Transaction (6). Services Provided for Cash and Credit.
Softbyte provides $3,500 of programming services for customers.
The company receives cash of $1,500 from customers, and it bills
the balance of $2,000 on account.

1-50
 Transaction Analysis
Transaction (7). Payment of Expenses. Softbyte pays the
following expenses in cash for September: store rent $600,
salaries and wages of employees $900, and utilities $200.

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 Transaction Analysis
Transaction (8). Payment of Accounts Payable. Softbyte pays
its $250 Daily News bill in cash.

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 Transaction Analysis
Transaction (9). Receipt of Cash on Account. Softbyte
receives $600 in cash from customers who had been billed for
services [in Transaction (6)].

1-53
 Transaction Analysis
Transaction (10). Dividends. The corporation pays a dividend
of $1,300 in cash.

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 Financial Statements

Companies prepare four financial statements :

Retained Statement
Income Balance
Earnings of Cash
Statement Sheet
Statement Flows

1-55
Understand the four financial statements and how they are prepared.
 Financial Statements

Companies prepare four financial statements :

Retained Statement
Income Balance
Earnings of Cash
Statement Sheet
Statement Flows

Income statement—A summary of the revenue and

expenses for a specific period of time.
Ex: Income statement for the year ended 31 Dec 2012
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Understand the four financial statements and how they are prepared.
 Financial Statements

Companies prepare four financial statements :

Retained Statement
Income Balance
Earnings of Cash
Statement Sheet
Statement Flows

Retained Earnings Statement - A summary of the changes

in the retained earning for a specific period of time.
Ex: Retained Earnings Statement for the year ended 31 Dec
2012
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Understand the four financial statements and how they are prepared.
 Financial Statements

Companies prepare four financial statements :

Retained Statement
Income Balance
Earnings of Cash
Statement Sheet
Statement Flows

Balance sheet—A list of the assets, liabilities, and owner’s

equity as of a specific date.
Ex: Balance Sheet as at 31 Dec 2012
1-58
Understand the four financial statements and how they are prepared.
 Financial Statements

Companies prepare four financial statements :

Retained Statement
Income Balance
Earnings of Cash
Statement Sheet
Statement Flows

Statement of cash flows—A summary of the cash receipts

(inflows) and cash payments (outflows) for a specific period
of time.
Ex: Statement of cash flows for the year ended 31 Dec 2012
1-59
Understand the four financial statements and how they are prepared.
 Net income is needed to determine the
Financial Statements ending balance in retained earnings.

Matching
Concept

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Understand the four financial statements and how they are prepared.
 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.

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Understand the four financial statements and how they are prepared.
 The ending balance in retained earnings
Financial Statements is needed in preparing the balance sheet

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 The balance sheet and income statement are
Financial Statements needed to prepare statement of cash flows.

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 Review

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.

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Understand the four financial statements and how they are prepared.
 Review

If total assets increased $20,000 during a period and

total liabilities increased $12,000 during the same
period, the amount and direction (increase or decrease)
of the change in owner’s equity for that period is a(n):

A. $32,000 increase.
C. $8,000 increase.
B. $32,000 decrease.
D. $8,000

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Understand the four financial statements and how they are prepared.
 Homework

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