CHAPTER 1

ACCOUNTING IN
ACTION

Accounting Principles, Eighth Edition

Chapter
1-1
 What
What is
is Accounting?
Accounting?

The purpose of accounting is to:

(1) identify,
identify record,
record and communicate the
economic events of an
(2) organization to
(3) interested users.

Chapter
1-2 LO 1 Explain what accounting is.
 What
What is
is Accounting?
Accounting?
Illustration 1-1
Three Activities Accounting process

The accounting process includes

the bookkeeping function.

Chapter
1-3
 Types of Accounting
 Financial Accounting (OUR CLASS)
 Information describing financial resources
(assets), obligations (liabilities), and activities of
an economic entity
(A $ picture of the company)
 Managerial Accounting
 Accounting information to assist in management
decisions
 Tax Accounting
 Accounting information specializing in income
tax returns

Chapter
1-4
 Who
Who Uses
Uses Financial
Financial Accounting
Accounting Data?
Data?
Internal Users
Management IRS
Human Investors
Resources

Labor
Unions
Finance Common Questions

Creditors
Marketing
Customers SEC
External
Users
Chapter
1-5
 Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Common Questions Asked User
1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income? Investors
3. Do we need to borrow in the
near future? Management
4. Is cash sufficient to pay
dividends to the stockholders? Finance
5. What price for our product
will maximize net income? Marketing
6. Will the company be able to
pay its short-term debts? Creditors
Chapter
1-6 LO 2 Identify the users and uses of accounting.
 The
The Building
Building Blocks
Blocks of
of Accounting
Accounting

Financial Statements
Various users Balance Sheet
need financial Income Statement
Statement of Owners’ Equity
information Statement of Cash Flows

The accounting profession

has attempted to develop a Generally Accepted
set of standards that Accounting
are generally accepted and Principles (GAAP)
universally practiced.

Chapter
1-7
 The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)

http://www.sec.gov/

Financial Accounting Standards Board (FASB)

http://www.fasb.org/

International Accounting Standards Board

(IASB) http://www.iasb.org/

Chapter
1-8
 The
The Building
Building Blocks
Blocks of
of Accounting
Accounting

Cost Principle (Historical) – dictates that companies

record assets at their cost.
Issues:
Reported at cost when purchased and also over the
time the asset is held.
Cost easily verified, whereas market value is often
subjective.
Fair value information may be more useful.

Chapter
1-9 LO 4 Explain generally accepted accounting principles and the cost principle.
 Assumptions
Assumptions
Stable Dollar Assumption – in the long run the dollar will remain stable
and does not lose purchasing power.
Objectivity Principle – describes asset valuations that are factual and
can be verified by independent experts.
Going Concern Principle – Assumption that the business will continue
operating in the future.
Monetary Unit Assumption– Assumption that only data that is expressed
in terms of money be included in the accounting records.
Economic (Business) Entity Assumption – requires that activities of the
entity (business) be kept separate and distinct from the activities of its
owner and all other economic entities.
Proprietorship.
Partnership. Forms of
Corporation.
Business Ownership
Chapter
1-10
 Forms
Forms of
of Business
Business Ownership
Ownership

Proprietorship Partnership Corporation

Generally owned Owned by two or Ownership

by one person. more persons. divided into
Often small shares of stock
Often retail and
service-type service-type Separate legal
businesses businesses entity organized
Owner receives under state
Generally
any profits, corporation law
unlimited
suffers any personal liability Limited liability
losses, and is
Partnership
personally liable
agreement
for all debts.
Chapter
1-11
 The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
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, Tyco, HealthSouth, AIG, and others.

Congress passed Sarbanes-Oxley Act of 2002.

Effective financial reporting depends on sound

ethical behavior.
Chapter
1-12 LO 3 Understand why ethics is a fundamental business concept .
 The
The Basic
Basic Accounting
Accounting Equation
Equation

Owners’
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.

Chapter
1-13
 The
The Basic
Basic Accounting
Accounting Equation
Equation

Owners’
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.
Assets
Resources a business owns.
Can be tangible and intangible
Provide future services or benefits.
Examples: Cash, Supplies, Equipment, Accounts
Chapter
1-14
Receivable, etc.
 The
The Basic
Basic Accounting
Accounting Equation
Equation

Owners’
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.
Liabilities

Claims against assets (debts and obligations).

Creditors - party to whom money is owed.
Examples: Accounts payable, Notes payable, etc.
Chapter
1-15
 The
The Basic
Basic Accounting
Accounting Equation
Equation

Owners’
Assets = Liabilities +
Equity

Provides the underlying framework for recording and

summarizing economic events.
Owners’ Equity

Ownership claim on total assets.

Capital, Drawings, etc. (Proprietorship or
Partnership).

Chapter
1-16
 Owners’
Owners’ Equity
Equity
Illustration 1-6

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.
Chapter
1-17
 Owners’
Owners’ Equity
Equity
Illustration 1-6

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.
Chapter
1-18
 Using
Using The
The Basic
Basic Accounting
Accounting Equation
Equation

Transactions are a business’s economic events

recorded by accountants. (IE: Purchasing an Asset)

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the

accounting equation.

Chapter
1-19
 Transactions
Transactions (Question?)
(Question?)
Q1-15: Are the following events recorded in the
accounting records? Owner
Supplies are An employee withdraws
Event purchased is hired. cash for
on account. personal use.

Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?

Record/
Don’t Record

Chapter LO 7 Analyze the effects of business transactions

1-20
on the accounting equation.
 Transactions
Transactions

Discussion Question
Q18. In February, Paula King invested an
additional $10,000 in her business, King’s
Pharmacy, which is organized as a proprietorship.
King’s accountant, Lance Jones, recorded this
receipt as an increase in cash and revenues. Is
this treatment appropriate? Why or why not?

Chapter
1-21
 Transactions
Transactions (Problem)
(Problem)
P1-1A: Barone’s Repair Shop was started on May 1 by Nancy.
Prepare a tabular analysis of the following transactions for the
month of May. (Mention if the transaction is an Investment,
Drawings, Revenue, Expense.)
1. Invested $10,000 cash to start the repair shop.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment

Chapter
1-22
 Transactions
Transactions (Problem)
(Problem)
2. Purchased equipment for $5,000 cash.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000

Chapter LO 7 Analyze the effects of business transactions

1-23
on the accounting equation.
 Transactions
Transactions (Problem)
(Problem)
3. Paid $400 cash for May office rent.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense

Chapter LO 7 Analyze the effects of business transactions

1-24
on the accounting equation.
 Transactions
Transactions (Problem)
(Problem)
4. Received $5,100 from customers for repair service.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue

Chapter LO 7 Analyze the effects of business transactions

1-25
on the accounting equation.
 Transactions
Transactions (Problem)
(Problem)
5. Withdrew $1,000 cash for personal use.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings

Chapter LO 7 Analyze the effects of business transactions

1-26
on the accounting equation.
 Transactions
Transactions (Problem)
(Problem)
6. Paid part-time employee salaries of $2,000.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense

Chapter LO 7 Analyze the effects of business transactions

1-27
on the accounting equation.
 Transactions
Transactions (Problem)
(Problem)
7. Incurred $250 of advertising costs, on account.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense

Chapter LO 7 Analyze the effects of business transactions

1-28
on the accounting equation.
 Transactions
Transactions (Problem)
(Problem)
8. Provided $750 of repair services on account.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. +750 +750 Revenue

Chapter LO 7 Analyze the effects of business transactions

1-29
on the accounting equation.
 Transactions
Transactions (Problem)
(Problem)
9. Collected $120 cash for services previously billed.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipment = Payable + Capital
1. +10,000 +10,000 Investment
2. -5,000 +5,000
3. -400 -400 Expense
4. +5,100 +5,100 Revenue
5. -1,000 -1,000 Drawings
6. -2,000 -2,000 Expense
7. +250 -250 Expense
8. +750 +750 Revenue
9. +120 -120
6,820 + 630 + 5,000 = 250 + 12,200
Chapter LO 7 Analyze the effects of business transactions
1-30
on the accounting equation.
  Demonstration Workbook
 1-2
 1-7A
 1-4A-B (when completed check that A=L+OE

Chapter
1-31