Accounting 1A
Class Notes
Chapter 1 – Introduction to Accounting and Business
Page 1
S. Aviles
Types of Business
• Service Business - Lawyer, Consultant, Doctor
• Merchandiser – Best Buy, Wal-Mart
• Manufacturer - Mattel, Coca Cola
Purpose of Accounting
• Provide Financial Information for decision making to:
External Users - Investors and Creditors (Financial Accounting)
Internal Users - Management (Managerial Accounting)
Regulators - IRS & SEC
• Guided by Generally Accepted Accounting Principles (USA) GAAP
• Professional Ethics- Fraud Triangle
Careers In Accounting
• Public Accounting
a) Tax, Audit, Consulting Services
• CPA Private Accounting
a) Bookkeeper / Accounting Clerk
b) Supervisor / Manager / Director
c) Controller
d) CFO / VP of Finance
• Government and Not For Profit
a) City County State Federal
b) Colleges
c) Charitable Organizations
Accounting 1A
Class Notes
Chapter 1 – Introduction to Accounting and Business
Page 2
S. Aviles
All accounting is based on one simple formula
ASSETS = LIABILITIES + OWNERS EQUITY
(Owned) (owed)
3 WAYS A COMPANY GETS ASSETS
1. Contributed
2. Borrowed
3. Earned
ASSETS = items OWNED by a business that will provide FUTURE BENEFIT
Examples: Money, merchandise, furniture, fixtures, machinery, buildings, land
LIABILITIES = DEBTS or obligations of a business OWED to others that can be paid with cash, goods,
or services. Examples: Accounts Payable, Notes Payable
OWNERS EQUITY (a.k.a. NET WORTH or CAPITAL) = Represents the amount by which the
businesses ASSETS EXCEED their LIABILITIES.
It TRACKS that which was:
CONTRIBUTED TO and DRAWN FROM the business by owners
Added to or subtracted from the business through historical EARNINGS/LOSS ACTIVITY
In BUSA100, you used proprietorships as the form of business, in this class we use corporations. The
major difference between the two for our purposes is in the Owner’s Equity section.
Expanding the Accounting Equation
REVENUE = Amount the business charges customers for the products or services it sells. Revenues
increase Assets and OE
EXPENSES = Amount expended as a result of the efforts made to produce revenues. Expenses will either
decrease assets or increase in liabilities. Expenses always reduce OE.
(expenses do not always reduce cash - rent expense/rent payable)
NET INCOME = REVENUE Greater Than EXPENSES (increases OE)
NET LOSS = REVENUE Less Than EXPENSES (decreases OE)
Accounting keeps track of where your funds
came from
(Contributed, Borrowed or Earned)
And
Where your funds went.
(Asset Purchases, Expenses)
Accounting 1A
Class Notes
Chapter 1 – Introduction to Accounting and Business
Page 3
S. Aviles
Net Income or Loss is always determined OVER A DEFINED SPAN OF TIME
Example: Net Income for the 12 months ended December 31, 2017.
DIVIDENDS & WITHDRAWALS (a.k.a. DRAWING) = Reduction in OE as a result of cash or other
assets being distributed to the owners for their personal use. (the opposite of Owner Investment)
ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY
ITEMS OWNED AMOUNTS OWED OWNERS INVESTMENT + RETAINED EARNINGS
Cash, Trucks Accts Payable Capital Stock Net Income
Less: Dividends
Revenue - recognized when earned. Regardless if customer pays now or later.
Expense - recognized when incurred, even if cash has not been paid
Indicate whether each of the following is identified with (1) an asset, (2) a liability, or (3) stockholders'
equity:
a) accounts payable
b) cash
c) fees earned
d) land
e) supplies
f) wages expense
Analyzing Business Transactions
1. What Happened
2. Which Accounts Are Affected
3. How is the Accounting Equation kept in balance
Examples:
1. Owner contributes a building valued at $90,000 and Cash of $10,000 to the business
2. Bought a PC for $5,000
3. Financed a truck through the bank for $20,000
4. Made his first Truck payment to the bank for $500
5. The Owner Withdrew $1,000 from the business for personal use
Accounting 1A
Class Notes
Chapter 1 – Introduction to Accounting and Business
Page 4
S. Aviles
Accounting 1A
Class Notes
Chapter 1 – Introduction to Accounting and Business
Page 5
S. Aviles
Accounting 1A
Class Notes
Chapter 1 – Introduction to Accounting and Business
Page 6
S. Aviles
Financial Statements
• After transactions have been recorded and summarized, reports are prepared for users.
The. accounting reports providing this information are called financial statements
• The primary financial statements of a corporation are the:
- Income statement
- Retained earnings statement
- Balance sheet
- Statement of cash flows
Indicate in the space provided by each item whether it would appear on the income statement
(IS), balance sheet (BS), or retained earnings statement (RE):
a. _____ Service Revenue g. ___ Accounts Receivable
b. _____ Utilities Expense h. ___ Common Stock
c. _____ Cash i. ___ Equipment
d. _____ Accounts Payable j. ___ Advertising Expense
e. _____ Supplies k. ___ Dividends
f. _____ Salaries and Wages Expense l. ___ Notes Payable
Accounting 1A
Class Notes
Chapter 1 – Introduction to Accounting and Business
Page 7
S. Aviles
On October 1, Ebony Ernst organized Ernst Consulting;
on October 3, the owner contributed $84,000 in assets
in exchange for its common stock to launch the
business. On October 31, the company’s records show
the following items and amounts. Use this information
to prepare an October income statement, retained
earnings statement, and balance sheet for the business.
Income Statement
Expenses:
Total expenses
Net income
Retained Earnings Statement
Retained earnings, Retained earnings,
Accounting 1A
Class Notes
Chapter 1 – Introduction to Accounting and Business
Page 8
S. Aviles
Balance Sheet
Assets Liabilities
Stockholders' Equity
Total stockholders' equity
Total assets Total liabilities and stockholders' equity
Accounting 1A
Class Notes
Chapter 1 – Introduction to Accounting and Business
Page 9
S. Aviles
Rivera Roofing Company, owned by Reyna Rivera, began operations in July and completed these transactions during that first month of operations.
July 1 Reyna Rivera invested $80,000 cash in the company in exchange for its common stock.
2 The company rented office space and paid $700 cash for the July rent.
3
The company purchased roofing equipment for $5,000 by paying $1,000 cash and agreeing to pay the
$4,000 balance in 30 days.
6 The company purchased office supplies for $600 cash.
8 The company completed work for a customer and immediately collected $7,600 cash for the work.
10 The company purchased $2,300 of office equipment on credit.
15 The company completed work for a customer on credit in the amount of $8,200.
17 The company purchased $3,100 of office supplies on credit.
23 The company paid $2,300 cash for the office equipment purchased on July 10.
25 The company billed a customer $5,000 for work completed; the balance is due in 30 days.
28 The company received $8,200 cash for the work completed on July 15.
30 The company paid an assistant’s salary of $1,560 cash for this month.
31 The company paid $295 cash for this month’s utility bill.
31 The company paid $1,800 cash in dividends to the owner (sole shareholder).
1. Use additions and subtractions within the table to show the dollar effects of each transaction
on individual items of the accounting equation. Show new balances after each transaction.
2. Prepare an income statement for the month ended July 31.
3. Prepare a retained earnings statement for the month ended July 31.
4. Prepare a balance sheet as of July 31.
5. What item appears on both the income statement and retained earnings statement
Accounting 1A
Class Notes
Chapter 1 – Introduction to Accounting and Business
Page 10
S. Aviles
Assets = Liabilities + Equity
Date Cash + Accounts
Receivable +
Office
Supplies +
Office
Equipment + Roofing
Equipment =
Accounts
Payable +
Common
Stock - Dividends + Revenues - Expenses
Accounting 1A
Class Notes
Chapter 1 – Introduction to Accounting and Business
Page 11
S. Aviles
Income Statement
Expenses:
Total expenses Net income
Retained Earnings Statement
Retained earnings, Retained earnings,
Balance Sheet
Assets Liabilities
Stockholders' Equity
Total stockholders' equity
Total assets Total liabilities and stockholders' equity