Fundamental Accounting Principles Wild/Larson/Chiappetta18th Edition
Chapter 1 Accounting in Business
Conceptual Chapter Objectives C1: Explain the purpose and importance of accounting in the information age C2: Identify users and uses of accounting C3: Identify opportunities in accounting and related fields C4: Explain why ethics are crucial in accounting C5: Explain the meaning of GAAP, and define and apply several key accounting principles C6: Appendix 1B: Identify and describe the three major activities in organizations
Analytical Chapter Objectives A1: Define and interpret the accounting equation and each of its components A2: Analyze business transactions using the accounting equation A3: Compute and interpret return on assets A4: Appendix 1A: Explain the relation between return and risk
Procedural Chapter Objectives P1: Identify and prepare basic financial statements and explain how they interrelate
is a system that information that is Importance of Accounting C1 Accounting Identifies Records Relevant Communicates Reliable to help users make better decisions. Comparable
Accounting Activities C 1 • Identifying Business Activities • Recording Business Activities • Communicating Business Activities
Internal Users External Users • Lenders • Shareholders • Governments • Consumer Groups • External Auditors • Customers • Managers • Officers/Directors • Internal Auditors • Sales Staff • Budget Officers • Controllers Users of Accounting Information C 2
ExternalUsers Financial accountingprovides external users with financial statements. Users of Accounting Information C 2 Internal Users Managerial accounting provides information needs for internal decision makers.
Financial Managerial Taxation • Preparation • Analysis • Auditing • Regulatory • Consulting • Planning • Criminal investigation • General accounting • Cost accounting • Budgeting • Internal auditing • Consulting • Controller • Treasurer • Strategy • Preparation • Planning • Regulatory • Investigations • Consulting • Enforcement • Legal services • Estate plans • Lenders • Consultants • Analysts • Traders • Directors • Underwriters • Planners • Appraisers • FBI investigators • Market researchers • Systems designers • Merger services • Business valuation • Human services • Litigation support • Entrepreneurs Accounting-related Opportunities in Accounting C 3
Ethics Ethics—A Key Concept C 4 Beliefs that distinguish right from wrong Accepted standards of good and bad behavior
Guidelines for Ethical Decisions C 4 • Make ethical decision • Identify ethical concerns • Analyze options Use personal ethics to recognize ethical concern. Consider all good and bad consequences. Choose best option after weighing all consequences.
Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Is helpful in contrasting organizations. Generally Accepted Accounting Principles C 5 Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Setting Accounting Principles C 5 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. The International Accounting Standards Board (IASB) issues International Financial Reporting Standards that identify preferred accounting practices.
Now Future Objectivity Principle Accounting information is supported by independent, unbiased evidence. Cost Principle Accounting information is based on actual cost. Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. Principles of Accounting C 5
Revenue Recognition Principle • Recognize revenue when it is earned. • Proceeds need not be in cash. • Measure revenue by cash received plus cash value of items received. Monetary Unit Principle Express transactions and events in monetary, or money, units. Business Entity Principle A business is accounted for separately from other business entities, including its owner. Principles of Accounting C 5
Sole Proprietorship Partnership Corporation Business Entity Forms C 5
* * Characteristics of Businesses C 5 *Proprietorships and partnerships that are set up as LLCs provide limited liability.
Owners of a corporation are called shareholders (or stockholders). When a corporation issues only one class of stock, we call it capital stock. Corporation C 5
Accounting Equation A1 EQUITY = + Assets Liabilities Equity
Sarbanes-Oxley Act • Also known as SOX • Passed by Congress to help curb financial abuses at companies that sell stock to the public • Requires accounting oversight and stringent internal controls • Penalties include stock market delisting and criminal prosecution
Assets A1 Cash Accounts Receivable Notes Receivable Resources owned or controlled by a company Vehicles Land Buildings Store Supplies Equipment
Liabilities A1 Accounts Payable Notes Payable Creditors’ claims on assets Wages Payable Taxes Payable
Equity A1 Owner Investments CAPITAL
Assets Liabilities Equity _ _ = + Owner Capital Owner Withdrawals + Revenues Expenses = + Assets Liabilities Equity Owner's Equity Expanded Accounting Equation A1
The accounting equation MUST remain in balance after each transaction. = + Assets Liabilities Equity Transaction Analysis Equation A2
The accounts involved are: (1) Cash(asset) (2) Owner Capital(equity) Transaction Analysis A2 J. Scott invests $20,000 cash to start the business.
Transaction Analysis A2 J. Scott invests $20,000 cash to start the business.
The accounts involved are: (1) Cash(asset) (2) Supplies(asset) Transaction Analysis A2 Purchased supplies paying $1,000 cash.
Transaction Analysis A2 Purchased supplies paying $1,000 cash.
The accounts involved are: (1) Cash(asset) (2) Equipment(asset) Transaction Analysis A2 Purchased equipment for $15,000 cash.
Transaction Analysis A2 Purchased equipment for $15,000 cash.
Transaction Analysis A2 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)
Transaction Analysis A2 Purchased Supplies of $200 and Equipment of $1,000 on account.
Transaction Analysis A2 Borrowed $4,000 from 1st American Bank. The accounts involved are: (1) Cash(asset) (2) Notes payable(liability)
Transaction Analysis A2 Borrowed $4,000 from 1st American Bank.
Transaction Analysis A2 The balances so far appear below. Note that the Balance Sheet Equation is still in balance.
Transaction Analysis A2 Now, let’s look at transactions involving revenue, expenses and withdrawals.
Transaction Analysis A2 Provided consulting services receiving $3,000 cash. The accounts involved are: (1) Cash(asset) (2) Revenues(equity)
Transaction Analysis A2 Provided consulting services receiving $3,000 cash.
Transaction Analysis A2 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 decreases because expenses reduce equity.
Transaction Analysis A2 Paid salaries of $800 to employees. Remember that expensesdecreaseequity.
Transaction Analysis A2 A withdrawal of $500 is made by the owner. The accounts involved are: (1) Cash(asset) (2) Withdrawals(equity) Remember that the withdrawal account actually increases. But, total equitydecreases because the withdrawal reduces equity.
Transaction Analysis A2 A withdrawal of $500 is made by the owner. Remember that withdrawalsdecreaseequity.
Financial Statements P1 Let’s prepare the Financial Statements reflecting the transactions we have recorded. • Income Statement • Statement of Owner’s Equity • Balance Sheet • Statement of Cash Flows
Income Statement P1 Net income is the difference between Revenues and Expenses. The income statementdescribes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.
Statement of Owner’s Equity P1 The net income of $2,200 increases Owner's Equity by $2,200.
Balance Sheet P1 TheBalance Sheetdescribes a company’s financial position at a point in time.