Fundamental Accounting Principles

17th Edition
Larson Wild Chiappetta

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 Accounting in
Chapter
Business

1
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 Importance of Accounting
is a
Accounting Identifies
system that

Records

information
Relevant Communicates
that is

Reliable
to help users make
Comparable better decisions.

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 Accounting Activities
 Identifying  Recording
Business Business
Activities Activities

Communicating
Business
Activities

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 Users of Accounting Information

External Users Internal Users

•Lenders •Consumer Groups •Managers •Sales Staff

•Shareholders •External Auditors •Officers •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
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 Users of Accounting Information

External Users Internal Users

Financial accounting provides Managerial accounting provides

external users with financial information needs for internal
statements. decision makers.

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 Opportunities in Accounting
Financial Managerial Taxation
•Preparation •General accounting •Preparation
•Analysis •Cost accounting •Planning
•Auditing •Budgeting •Regulatory
•Regulatory •Internal auditing •Investigations
•Consulting •Consulting •Consulting
•Planning •Controller •Enforcement
•Criminal •Treasurer •Legal services
investigation •Strategy •Estate planning

•Lenders •FBI investigators

•Consultants •Market researchers
•Analysts •Systems designers
Accounting- •Traders •Merger services
related •Directors •Business valuation
•Underwriters •Human services
•Planners •Litigation support
•Appraisers •Entrepreneurs
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 Accounting Jobs by Area

Private
accounting
Public 60%
accounting
25%

Government,
not-for-profit,
& education
15%

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 Ethics—A Key Concept

Ethics

Beliefs that
Accepted
distinguish
standards of
right from
good and bad
wrong
behavior

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 Guidelines for Ethical Decision Making
 Identify  Analyze  Make ethical
ethical concerns options decision

Use personal Consider all Choose best

ethics to good and bad option after
recognize ethical consequences. weighing all
concern. consequences.
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 Generally Accepted Accounting
Principles
Financial accounting practice is governed by
concepts and rules known as generally accepted
accounting principles (GAAP).

Relevant Affects the decision of

Information its users.

Reliable Information Is trusted by

users.

Comparable Is helpful in contrasting

Information organizations.
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 Setting Accounting Principles

Financial Accounting
Standards Board is the private
group that sets both broad and
specific principles.

The Securities and Exchange Commission is

the government group that establishes
reporting requirements for companies that
issue stock to the public.

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 Principles of Accounting

Objectivity Principle Cost Principle

Accounting information is Accounting information is
supported by independent, based on actual cost.
unbiased evidence.

Now Future
Going-Concern Principle
Reflects assumption that the
business will continue operating
instead of being closed or sold. © The McGraw-Hill Companies, Inc., 2005
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 Principles of Accounting

Revenue Recognition Principle

Monetary Unit Principle 1. Recognize revenue when it is
Express transactions and events in earned.
monetary, or money, units. 2. Proceeds need not be in cash.
3. Measure revenue by cash
received plus cash value of items
received.

Business Entity Principle

A business is accounted for
separately from other business
entities, including its owner.
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 Business Entity Forms

Proprietorship Partnership Corporation

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 Exh.
1.8

Characteristics of Businesses

Characteristics Proprietorship Partnership Corporation

Business entity yes yes yes
Legal entity no no yes
Limited liability no* no* yes
Unlimited life no no yes
Business taxed no no yes
One owner allowed yes no yes

* Proprietorships and partnerships that are set up as LLC’s

provide limited liability.

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 Corporation

Owners of a corporation are called

shareholders (or stockholders).

When a corporation issues only

one class of stock, we call it
common stock (or capital stock).
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 Accounting Equation

Assets = Liabilities + Equity

Liabilities
Assets & Equity

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 Assets

Cash
Accounts Notes
Receivable Receivable
Resources
owned or
Vehicles controlled
by a Land
company

Store Buildings
Supplies
Equipment
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 Liabilities

Accounts Notes
Payable Payable

Creditors’
claims on
assets
Taxes Wages
Payable Payable

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 Equity

Owner Owner
Investments Withdrawals

Owner’s
claims
on
assets

Revenues Expenses

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 Expanded Accounting Equation

Assets = Liabilities + Equity

Owner _ Owner _
Capital Withdrawals + Revenues Expenses

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 Transaction Analysis Equation
The accounting equation must remain in
balance after each transaction.

Assets = Liabilities + Equity

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 Transaction Analysis
J. Scott, the owner, contributed $20,000
cash to start the business.

The accounts involved are:

(1) Cash (asset)
(2) J. Scott, Capital (equity)

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 Transaction Analysis
J. Scott, the owner, contributed $20,000
cash to start the business.

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 Transaction Analysis
Purchased supplies paying $1,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)

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 Transaction Analysis
Purchased supplies paying $1,000
cash.

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 Transaction Analysis
Purchased equipment for $15,000
cash.

The accounts involved are:

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

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 Transaction Analysis
Purchased equipment for $15,000
cash.

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 Transaction Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.
The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)

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 Transaction Analysis
Purchased Supplies of $200 and
Equipment of $1,000 on account.

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 Transaction Analysis
Borrowed $4,000 from 1st American
Bank.
The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)

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 Transaction Analysis
Borrowed $4,000 from 1st American
Bank.

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 Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.

Now let’s look at transactions involving

revenue, expenses and withdrawals. © The McGraw-Hill Companies, Inc., 2005
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 Transaction Analysis
Rendered consulting services
receiving $3,000 cash.

The accounts involved are:

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

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 Transaction Analysis
Rendered consulting services
receiving $3,000 cash.

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 Transaction Analysis
Paid salaries of $800 to employees.

The accounts involved are:

(1) Cash (asset)
(2) Salaries expense (equity)

Remember that the balance in the salaries

expense account actually increases.
But, equity actually decreases because expenses
reduce equity.
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 Transaction Analysis
Paid salaries of $800 to employees.

Remember that expenses decrease equity.

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 Transaction Analysis
J. Scott withdrew $500 from the
business for personal use.
The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)

Remember that the balance in the J. Scott,

Withdrawals account actually increases.
But, equity actually decreases because
withdrawals reduce equity.
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 Transaction Analysis
J. Scott withdrew $500 from the
business for personal use.

Remember that withdrawals decrease equity.

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 Financial Statements
Let’s prepare the Financial Statements
reflecting the transactions we have recorded.

1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows

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 Net income is the
difference
between
Revenues and
Expenses.

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.

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 The net income
of $2,200
increases
Scott’s capital
by $2,200.

The Statement of
Owner’s Equity
explains changes
in equity from net
income (or net
loss) and from
owner investments
and withdrawals for
a period of time.
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The Balance Sheet
describes a
company’s
financial position
at a point in time.

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 The Statement of Cash Flows identifies cash
inflows and cash outflows over a period
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 Return on Assets (ROA)

Net income ÷ Average total assets

ROA is viewed as an
indicator of operating
efficiency.

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 End of Chapter 1

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