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1 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accounting and theBusiness
EnvironmentChapter
1
1 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 1
Use accounting vocabulary
for decision making.
1 - 3©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
is an information system that...is an information system that...
measures business activities,measures business activities,
processes information, and...processes information, and...
communicates financial information.communicates financial information.
Accounting...
1 - 4©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
is called the language of business.is called the language of business.
Accounting...
€
1 - 5©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
External usersmake decisionsabout the entity.
External usersmake decisionsabout the entity.
Internal usersmake decisionsfor the entity.
Internal usersmake decisionsfor the entity.
Users of Accounting Information
1 - 6©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Management AccountingManagement Accounting
Financial AccountingFinancial Accounting
Fields of Accounting
1 - 7©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Public Sector(SEC)
Public Sector(SEC)
Private Sector(FASB)
Private Sector(FASB)
Private Sector(AICPA) (IMA)
Private Sector(AICPA) (IMA)
GAAPGAAP
The Authority Underlying Accounting
1 - 8©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
AICPA’s Code ofProfessional
Conduct
AICPA’s Code ofProfessional
Conduct
Standards ofEthical
Conduct of theInstitute of
ManagementAccountants
Standards ofEthical
Conduct of theInstitute of
ManagementAccountants
Standards of Professional Conduct
1 - 9©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
ProprietorshipsProprietorships
PartnershipsPartnerships
CorporationsCorporations
Types of Business Organizations
1 - 10©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
ProprietorshipsProprietorships
What are some advantages?– total undivided authority– no restrictions on type of business – must
be legal What are some disadvantages?– unlimited liability– limitation on size – fund raising power
1 - 11©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Partnerships
What are some advantages?– better credit standing – possibly– more brain power, but consultation with
partners required What are some disadvantages?– unlimited personal liability for general
partners– need for written partnership agreement
1 - 12©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Corporations
What are some advantages?– separate legal existence– limited liability of stockholders– transferability of ownership relatively easy What are some disadvantages?– taxes – possible double taxation– extensive governmental regulation
1 - 13©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 2
Apply accountingconcepts and
principlesto business situations.
1 - 14©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
To provide information usefulfor making investment and
lending decisions
To provide information usefulfor making investment and
lending decisions
Generally AcceptedAccounting Principles
What is the primary objective of financial reporting?
1 - 15©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Entity Concept Example
Assume that John decides to open up a gas station and coffee shop.
The gas station made $250,000 in profits, while the coffee shop lost $50,000.
1 - 16©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Entity Concept Example
How much money did John make? At a first glance, we would assume that
John made $200,000. However, by applying the entity concept we
realize that the gas station made $250,000 while the coffee shop lost $50,000.
1 - 17©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Information mustbe reasonably
accurate.
Information mustbe reasonably
accurate.
Information mustbe free from bias.Information mustbe free from bias.
Information must report what
actually happened.
Information must report what
actually happened.
Individuals wouldarrive at similar
conclusions usingsame data.
Individuals wouldarrive at similar
conclusions usingsame data.
The Reliability (Objectivity) Principle
1 - 18©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Assets and servicesacquired
should be recordedat their actual cost.
Assets and servicesacquired
should be recordedat their actual cost.
The Cost Principle
1 - 19©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The entity will continueto operate in the future.The entity will continueto operate in the future.
The Going Concern Concept
1 - 20©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The dollar’s purchasingpower is relatively
stable.
The dollar’s purchasingpower is relatively
stable.
The Stable-Monetary-Unit Concept
1 - 21©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 3Objective 3
Use the accounting equationto describe an organization’s
financial position.
1 - 22©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
EconomicResources
Claims toEconomicResources
The Accounting Equation
Assets = Liabilities + Owner’s Equity
1 - 23©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Assets
What is an asset? It is something a company owns which
has future economic value.– land– building– equipment– goodwill
1 - 24©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Liability
What is a liability? It is something a company owes.– money– service – legal retainers– product – magazines
1 - 25©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Owner’s Equity
What is owner’s equity? It is what’s left of the assets after liabilities
have been deducted.– the same as net assets– the owner’s claim on the entity’s assets
1 - 26©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Transactions that AffectOwner’s Equity
OWNER’S EQUITYINCREASES
OWNER’S EQUITYDECREASES
Owner Investmentsin the Business
Revenues Expenses
Owner Withdrawalsfrom the Business
Owner’s Equity
1 - 27©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Revenues
What are revenues? They are amounts received or to be received
from customers for sales of products or services.
– sales– performance of services– rent– interest
1 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
ExpensesExpenses
What are expenses? They are amounts that have been paid or will
be paid later for costs that have been incurred to earn revenue.
– salaries and wages– utilities– supplies used– advertising
1 - 29©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 4Objective 4Objective 4Objective 4
Use the accounting equation to analyze business transactions.
1 - 30©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accounting for Business Transactions
What is a transaction? It is any event that both affects the financial
position of the business and can be reliably recorded.
1 - 31©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accounting for Business Transactions
1 Gay Gillen invests $30,000 to begin Gay Gillen eTravel.
2 Gillen purchases an office location, paying $20,000 in cash.
3 She buys office supplies, agreeing to pay $500 in 30 days.
4 She earns and collects $5,500 revenues.
1 - 32©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accounting for Business Transactions
5 Gillen performs services, and the client agrees to pay $3,000 within one month.
6 During the month, she pays $3,100 for expenses incurred.
7 Gillen pays $300 to the store from which she purchased $500 worth of supplies.
What is the effect of these transactions on the accounting equation?
1 - 33©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Owner’s Assets = Liabilities + Equity
1) Cash + $30,000 + $30,0002) Cash – 20,000
Land + 20,0003) Supplies + 500 + 5004) Cash + 5,500 + 5,5005) Receivable + 3,000 + 3,0006) Cash – 3,100 – 3,1007) Cash – 300 – 300 Totals + $35,600 + 200 + $35,400
Accounting for Business Transactions
1 - 34©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accounting for Business Transactions
Notice that the equation always stays in balance.
Each transaction affects at least two accounts, sometimes more.
Some transactions affect only one side of the equation; some affect both sides.
1 - 35©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accounting for Business Transactions
Other transactions that took place were as follows:
The business collected $1,000 from the client.
She sold some land at cost for $9,000. She withdrew $2,100 from the business.
1 - 36©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 5Objective 5
Prepare and usefinancial statements.
1 - 37©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
– are the finalproduct of the
accounting process.
– are the finalproduct of the
accounting process.
– tell how thebusiness is performing
and where it stands.
– tell how thebusiness is performing
and where it stands.
Financial Statements...
1 - 38©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Financial StatementsFinancial Statements
– income statement– statement of owner’s equity or retained
earnings– balance sheet– statement of cash flows
1 - 39©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 6Objective 6
Evaluate the performanceof business.
1 - 40©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Relationships Among the Statements:
Income StatementRevenue:
Fees earned $8,500
Expenses:
Salary expense $1,200
Utilities and telephone expense 400
Equipment rental expense 400
Office rent expense 1,100 3,100
Net income $5,400
1 - 41©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
G. Gillen, capital, April 1, 20xx $ 0
Contribution of capital 30,000
Net income $ 5,400
Cash distributions – 2,100
G. Gillen, capital, April 30, 20xx $33,300
Relationships Among the Statements:
Statement of Owner’s Equity
1 - 42©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Relationships Among the Statements:
Balance Sheet
Assets
Cash $ 20,000
Accounts receivable 2,000
Supplies 500
Land 11,000
Total assets $ 33,500
Liabilities
Accounts payable $ 200
Owner’s equity,
G. Gillen, capital 33,300
Total liabilities and
owner’s equity $33,500
1 - 43©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Relationships Among the Statements:
Statement Of Cash FlowsCash flows from operating activities:Cash receipts from services rendered $6,500Cash payments:
Supplies $ 300Operating expenses 3,100 3,400
Net cash flows fromOperating activities $3,100Cash flows from investing activitiesPurchase and sale of land
($11,000)
1 - 44©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cash Flows from Financing Activities:
Investment by Owner$30,000
Withdrawals 2,100
Net Cash Flows from Financing Activities$27,900
Cash at Beginning of Year 0
Cash at End of the Year $20,000
Relationships Among the Statements:
Statement Of Cash Flows
1 - 45©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
End of Chapter 1