Introduction to Accounting and Business

Chapter 1

Student Version

Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting
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Learning Objective 1

1. Describe the nature of a business, the role of

accounting, and ethics in business.

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 LO 1
Nature of Business and Accounting

 A business is an organization in which basic

resources (inputs), such as materials and labor,
are assembled and processed to provide goods or
services (outputs) to customers.

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 LO 1
Nature of Business and Accounting

 The objective of most businesses is to earn a

profit.
 Profit is the difference between the amounts
received from customers for goods or services and
the amounts paid for the inputs used to provide
the goods or services.

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 LO 1
The Role of Accounting in Business

 Accounting can be defined as an information

system that provides reports to users about the
economic activities and condition of a business.

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 LO 1
The Role of Accounting in Business

 The process by which accounting provides

information to users is as follows:
 Identify users.
 Assess users’ information needs.
 Design the accounting information system to
meet users’ needs.
 Record economic data about business activities
and events.
 Prepare accounting reports for users.

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 LO 1
Managerial Accounting

 The area of accounting that provides internal

users with information is called managerial
accounting or management accounting.
 Managerial accountants employed by a business
are employed in private accounting.

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 LO 1
Financial Accounting

 The area of accounting that provides external

users with information is called financial
accounting.
 The objective of financial accounting is to provide
relevant and timely information for the decision-
making needs of users outside of the business.
 General-purpose financial statements are one
type of financial accounting report that is
distributed to external users.

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 LO 1
Role of Ethics in Accounting and Business

 The objective of accounting is to provide relevant,

timely information for user decision making.
 Accountants must behave in an ethical manner so
that the information they provide users will be
trustworthy and, thus, useful for decision making.
 Ethics are moral principles that guide the
conduct of individuals.

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 LO 1
Opportunities for Accountants

 Accountants and their staff who provide services

on a fee basis are said to be employed in public
accounting.
 Accountants employed by a business firm or a
not-for-profit organization are said to be
employed in private accounting.
 Public accountants who have met a state’s education,
experience, and examination requirements may
become Certified Public Accountants (CPAs).

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Learning Objective 2

1. Describe the nature of a business, the role of

accounting, and ethics in business.
2. Summarize the development of accounting
principles and relate them to practice.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 2
Generally Accepted Accounting Principles

 Financial accountants follow generally accepted

accounting principles (GAAP) in preparing
reports.
 Within the U.S., the Financial Accounting
Standards Board (FASB) has the primary
responsibility for developing accounting
principles.

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 LO 2
Generally Accepted Accounting Principles

 The Securities and Exchange Commission (SEC),

an agency of the U.S. government, has authority
over the accounting and financial disclosures for
companies whose shares of ownership (stock) are
traded and sold to the public.
 Many countries outside the United States use
generally accepted accounting principles adopted
by the International Accounting Standards Board
(IASB).

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 LO 2
Business Entity Concept

 Under the business entity concept, the activities of

a business are recorded separately from the
activities of its owners, creditors, or other
businesses.

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 LO 2
Proprietorship

 A proprietorship is  70% of business entities in

owned by one the U.S. are
individual. proprietorships.
 They are easy and cheap to
organize.
 Resources are limited to
those of the owner.
 Used by small businesses.

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 LO 2
Partnership

 A partnership is  10% of business

similar to a organizations in the U.S.
proprietorship except (combined with limited
that it is owned by liability companies) are
two or more partnerships.
individuals.  Combines the skills and
resources of more than
one person.

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 LO 2
Corporation

 A corporation is  Corporations generate 90%

organized under state or of business revenues.
federal statutes as a  20% of the business
separate legal taxable
entity.
organizations in the U.S.
are corporations.
 Ownership is divided into
shares, called stock.
 Issues stock.
 Used by large firms.

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 LO 2
Limited Liability Company (LLC)

 A limited liability  10% of business

company (LLC) organizations in the U.S.
combines the (combined with
attributes of a partnerships).
partnership and a  Often used as an
corporation. alternative to a
partnership.
 Has tax and legal liability
advantages for owners.

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 LO 2
Accounting Concept

 Under the cost concept, amounts are initially

recorded in the accounting records at their cost
or purchase price.

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 LO 2
Accounting Concepts

 The objectivity concept requires that the amounts

recorded in the accounting records be based on
objective evidence.
 Only the final agreed-upon amount is objective
enough to be recorded in the accounting records.

 The unit of measure concept requires that

economic data be recorded in dollars.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Learning Objective 3

1. Describe the nature of a business, the role of

accounting, and ethics in business.
2. Summarize the development of accounting
principles and relate them to practice.
3. State the accounting equation and define each
element of the equation.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
The Accounting Equation

 The resources owned by a business are its assets.

 The rights of creditors are the debts of the
business and are called liabilities.
 The rights of the owners are called owner’s
equity.
 The equation Assets = Liabilities + Owner’s
Equity is called the accounting equation.

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 LO 3
The Accounting Equation

Assets = Liabilities + Owner’s Equity

The resourcesThe rights ofThe rights of the

owned by creditors
a are the owners
business debts of the
business

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 4

1. Describe the nature of a business, the role of

accounting, and ethics in business.
2. Summarize the development of accounting
principles and relate them to practice.
3. State the accounting equation and define each
element of the equation.
4. Describe and illustrate how business transactions
can be recorded in terms of the resulting change
in the elements of the accounting equation.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Pencatatan dengan Persamaan Dasar Akuntansi

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 LO 4
Business Transaction

 A business transaction is an economic event or

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

Assets = Liabilities + Owner’s Equity

The resourcesThe rights ofThe rights of the

owned by creditors
a are the owners
business debts of the
business
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 4
Transaction A

On November 1, 2011, Chris Clark deposited

$25,000 in a bank account in the name of
NetSolutions.

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 LO 4
Transaction B

On November 5, 2011, NetSolutions paid

$20,000 for the purchase of land as a future
building site.

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 LO 4
Transaction C

On November 10, 2011, NetSolutions purchased

supplies for $1,350 and agreed to pay the
supplier in the near future.

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 LO 4
Transaction C

 The liability created by a purchase on account is

called an account payable.
 Items such as supplies that will be used in the
business in the future are called prepaid expenses,
which are assets.

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 LO 4
Transaction D

On November 18, 2011, NetSolutions received cash of

$7,500 for providing services to customers. A business
earns money by selling goods or services to its
customers. This amount is called revenue.

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 LO 4
Transaction D

 Revenue from providing services is recorded as

fees earned.
 Revenue from the sale of merchandise is record
as sales.
 Other examples of revenue include rent, which is
recorded as rent revenue, and interest, which is
recorded as interest revenue.
 An account receivable is a claim against a
customer, which is an asset.

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 LO 4
Transaction E

During the month, NetSolutions spent cash or

used up other assets in earning revenue. Assets
used in this process of earning revenue are
called expenses.

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 LO 4
Transaction E

On November 30, 2011, NetSolutions paid the

following expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.

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 LO 4
Transaction F

On November 30, 2011, NetSolutions paid

creditors on account, $950.

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 LO 4
Transaction G

On November 30, 2011, Chris Clark

determined that the cost of supplies on hand at
the end of the period was $550.

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 LO 4
Transaction H

On November 30, 2011, Chris Clark withdrew

$2,000 from NetSolutions for personal use.

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 Trial Balance
Akun Kiri Kanan Akun Kiri Kanan
(Debit) (Kredit) (Debit) (Kredit)
Cash 5.900 Cash 5.900
Supplies 550 Supplies 550
Land 20.000 Land 20.000
Accounts Payable 400 Accounts Payable 400
Chris Clark, Capital 25.000 Chris Clark, Capital 25.000
Chris Clark, Drawing -2.000 Chris Clark, Drawing 2.000
Fees Earned 7.500 Fees Earned 7.500
Wages Expense -2.125 Wages Expense 2.175
Rent Expense -800 Rent Expense 800
Supplies Expense -800 Supplies Expense 800
Utilities Expense -450 Utilities Expense 450
Misc. Expense -275 Misc. Expense 275
Total Total

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 TERIMA KASIH

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Learning Objective 5

1. Describe the nature of a business, the role of accounting,

and ethics in business.
2. Summarize the development of accounting principles and
relate them to practice.
3. State the accounting equation and define each element of
the equation.
4. Describe and illustrate how business transactions can be
recorded in terms of the resulting change in the elements
of the accounting equation.
5. Describe the financial statements of a proprietorship and
explain how they interrelate.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 5
Financial Statements

 After transactions have been recorded and

summarized, reports are prepared for users. The
accounting reports providing this information are
called financial statements.

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 LO 5
Income Statement

 The income statement reports the revenues and

expenses for a period of time, based on the
matching concept.
 The matching concept is applied by “matching”
the expenses incurred during a period with the
revenue that those expenses generated.
 The excess of the revenue over the expenses is
called net income, net profit, or earnings. If
expenses exceed revenue, the excess is a net loss.

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 LO 5
Statement of Owner’s Equity and the Balance Sheet

 The statement of owner’s equity reports the

changes in the owner’s equity for a period of
time.
 It is prepared after the income statement because
the net income or net loss for the period must be
reported in this statement.
 A balance sheet is a list of the assets, liabilities,
and owner’s equity as of a specific date.

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 LO 5
Statement of Cash Flows

 A statement of cash flows is a summary of the

cash receipts and cash payments for a specific
period of time.
 It consists of three sections:
(1) operating activities
(2) investing activities
(3) financing activities

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 LO 5
Cash Flows

 The cash flows from operating activities section

reports a summary of cash receipts and cash
payments from operations.
 The cash flows from investing activities section
reports the cash transactions for the acquisition
and sale of relatively permanent assets.

 The cash flows from financing activities section

reports the cash transactions related to cash
investments by the owner, borrowings, and
withdrawals by the owner.
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Learning Objective 6
1. Describe the nature of a business, the role of accounting, and
ethics in business.
2. Summarize the development of accounting principles and
relate them to practice.
3. State the accounting equation and define each element of the
equation.
4. Describe and illustrate how business transactions can be
recorded in terms of the resulting change in the elements of
the accounting equation.
5. Describe the financial statements of a proprietorship and
explain how they interrelate.
6. Describe and illustrate the use of the ratio of liabilities to
owner’s equity in evaluating a company’s financial
condition.
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 LO 6
Ratio of Liabilities to Owner’s Equity

Ratio of Liabilities Total Liabilities

=
to Owner’s Equity Total Owner’s Equity (or Total
Stockholders’ Equity)

Ratio of Liabilities $400

= = 0.015
to Owner’s Equity $26,050

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Introduction to Accounting and Business

The End

Student Version

Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.