1

Introduction to
Accounting and
Business

1
After studying this chapter, you should be able to:

1. Describe the nature of a business and the

role of ethics and accounting in business.
2. Summarize the development of accounting
principles and relate them to practice.
3. State the accounting equation and define
each element of the equation.

2
After studying this chapter, you should be able to:

4. Describe and illustrate how business

transactions can be recorded in terms of the
resulting change in the basic elements of the
accounting equation.
5. Describe the financial statements of a
proprietorship and explain how they
interrelate.
3
 1-1

Objective
Objective 11
Describe the nature of a
business and the role of ethics
and accounting in business.

4
Types of Businesses 1-1

Service
ServiceBusiness
Business Service
Service
Plaza
Plaza Indonesia
Indonesia Realty
Realty Tbk.
Tbk. Shopping
Shopping mall
mall
Hotel
Hotel Sahid
Sahid Jaya
Jaya Tbk.
Tbk. Hospitality
Hospitality and
and
lodging
lodging
Bank
Bank Mandiri
Mandiri Tbk.
Tbk. Financial
Financial services
services
Garuda
Garuda Indonesia
Indonesia Transportation
Transportation
Indosat
Indosat Tbk.
Tbk. Telecommunication
Telecommunication

5
Types of Businesses 1-1

Merchandising
Merchandising Business
Business Product
Product
Matahari
Matahari Putra
Putra Prima
Prima Tbk.
Tbk. Clothes
Clothes and
and apparel
apparel
Hero
Hero Supermarket
Supermarket Tbk.
Tbk. Food
Food and
and groceries
groceries
Toko
Toko Gunung
Gunung Agung
Agung Tbk.
Tbk. Books
Books and
and stationeries
stationeries
Ace
Ace Hardware
Hardware Indonesia
Indonesia Tbk.
Tbk. Consumer
Consumer electronics
electronics
Alfa
Alfa Retailindo
Retailindo Tbk.
Tbk. Consumer
Consumer goods
goods

6
Types of Businesses 1-1

Manufacturing
Manufacturing Business
Business Product
Product
Sepatu
Sepatu Bata
Bata Tbk.
Tbk. Shoes
Shoes
Mustika
Mustika Ratu
Ratu Tbk.
Tbk. Cosmetics
Cosmetics
Gudang
Gudang Garam
Garam Tbk.
Tbk. Cigarettes
Cigarettes
Mayora
Mayora Indah
Indah Tbk.
Tbk. Food
Food and
and beverages
beverages
Kalbe
Kalbe Farma
Farma Tbk.
Tbk. Pharmaceutical
Pharmaceutical

7
Common Forms of Business Organizations 1-1

9 Proprietorship
9 Partnership
9 Corporation
9 Cooperatives

8
 1-1

A proprietorship (perusahaan perseorangan)

is owned by one individual and—
ƒ Most of Business entities in Indonesia is
proprietorship
ƒ Cost of organizing is low
ƒ Is limited to financial resources of the
owner.
ƒ Is used by small businesses.

9
 1-1

A partnership is similar to a proprietorship

except that it is owned by two or more
individuals and—
ƒ In Indonesia we know firma and CV as two
types of partnership. Firma and CV will be
discussed more in chapter 12.
ƒ Combines the skills and resources of more
than one person.

10
 1-1

A corporation is organized under

government statues as a separate legal
taxable entity and—

Continued
11
 1-1

ƒ Includes ownership divided into shares

of stock, sold to shareholders
(stockholders).
ƒ Is able to obtain large amounts of
resources by issuing stock.
ƒ Is used by large businesses.

12
 1-1
Cooperatives (Koperasi)

ƒ Is owned by a group of people (named as

member). Cooperatives mainly are
organized by and for member only. For
example Employee Cooperatives
(Koperasi Karyawan), Milk Farmer
Cooperatives (Koperasi Pengrajin Susu),
Batik Business Owner Cooperatives
(Koperasi Pengusaha Batik), and many
more
13
 1-1

A business stakeholder is a
person or entity having an
interest in the economic
performance and well-being
of a business.

14
 1-1

Capital market stakeholders

provide the major financing for the
business in order for the business to
begin and continue its operations.

15
 1-1

Product or service market

stakeholders include customers
who purchase the business’s
products or services as well as
the vendors who supply inputs to
the business.
16
 1-1

Government stakeholders have an

interest in the economic
performance of a business.
Provincial governments collect
taxes from businesses within their
jurisdiction.

17
 1-1

Internal stakeholders include

individuals employed by the
business. Managers have an
incentive to maximize the
economic value of the business.
Employees have an interest
because their jobs depend on it.
18
 1-1

The moral principles that guide

the conduct of individuals are
called ethics.

19
 1-1

The answer to
“What went 1. Individual
wrong for these character
companies?” 2. Firm culture
(Exhibit 2) 3. Laws and
involves three enforcement
factors.

20
 1-1

Accounting can be defined as an

information system that provides
reports to stakeholders about the
economic activities and
condition of a business.

21
 1-1
The process by which accounting provides
information to business stakeholders is as follows:
ƒ Identify stakeholders.
ƒ Assess stakeholders’ information needs.
ƒ Design the accounting information system to
meet stakeholders’ needs.
ƒ Record economic data about business
activities and events.
ƒ Prepare accounting reports for stakeholders.
22
1-1

23
23
 1-1

Financial accounting is primarily concerned

with the recording and reporting of economic
data and activities for a business.

Managerial accounting uses both financial

accounting and estimated data to aid
management in running day-to-day
operations and in planning future operations.
24
 1-1

Accountants employed by a business firm or

a not-for-profit organization are said to be
employed in private accounting.

Accountants and their staff who provide

services on a fee basis are said to be
employed in public accounting.

25
 1-2

Objective
Objective 22

Summarize the development

of accounting principles and
relate them to practice.
26
 1-2

The business entity concept

limits the economic data in
the accounting system to
data related directly to the
activities of the business.

27
 1-2

The cost concept is the

basis for entering the
exchange price, or cost
of an acquisition in the
accounting records.

28
 1-2

The objectivity concept

requires that the accounting
records and reports be based
upon objective evidence.

29
 1-2

The unit of measure

concept requires that
economic data be
recorded in rupiah.

30
 1-2

Example Exercise 1-1

On August 25, Bengkel Agung Jaya extended an offer of
Rp125,000,000 for land that had been priced for sale at
Rp150,000,000. On September 3, Bengkel Agung Jaya accepted the
seller’s counteroffer of Rp137,000,000. On October 20, the land was
assessed at a value of Rp98,000,000 for property tax purposes. On
December 4, Bengkel Agung Jaya was offered Rp160,000,000 for
the land by a national retail chain. At what value should the land be
recorded in Bengkel Agung Jaya’s records?

Follow My Example 1-1

Rp137,000,000. Under the cost concept, the land should be
recorded at the cost to Bengkel Agung Jaya.
31
 1-3

Objective
Objective 33
State the accounting
equation and define each
element of the equation.

32
The Accounting Equation 1-3

Assets = Liabilities + Owner’s Equity

The resources
owned by a
business

33
The Accounting Equation 1-3

Assets = Liabilities + Owner’s Equity

The rights of the

creditors, which
represent debts
of the business

34
The Accounting Equation 1-3

Assets = Liabilities + Owner’s Equity

The rights of the

owners

35
 1-3
Example Exercise 1-2
Asep Sunarya is the owner and operator of Pasti Sukses, a motivational consulting
business.
The At theaccounts
following end of its accounting
appear inperiod, Decembertrial
the adjusted 31, 2007, PastiofSukses has
balance
assets of Rp800,000,000 and liabilities of Rp350,000,000. Using the accounting
Hindsight Consulting. Indicate whether each account would be
equation, determine the following amounts:
reported in the (a) current asset; (b) property, plant, and
a. Owner’s(c)
equipment; equity, as ofliability,
current December(d)
31, long-term
2007. liability; or (e)
b. Owner’s
owner’s equity,
equity as ofof
section December 31, 2008,31,
the December assuming
2007,that assets sheet
balance
increased by Rp130,000,000 and liabilities decreased by Rp25,000,000
of Hindsight Consulting.
during 2008.

Follow My Example 1-2

a. A = L + OE b. A = L + OE
Rp800,000,000 = Rp350,000,000 + OE Rp130,000,000 = –Rp25,000,000 + OE
OE = Rp450,000,000 OE = Rp155,000,000
OE on Dec. 31, 2008:
Rp605,000,000 (Rp450,000,000+Rp155,000,000)
36
36
 1-4

Objective
Objective 44
Describe and illustrate how
business transactions can be
recorded in terms of the resulting
change in the basic elements of the
accounting equation.
37
 1-4

A business transaction is an
economic event or condition that
directly changes an entity’s
financial condition or directly
affects its results of operations.

38
 1-4

@solusinet

On November 1, 2007, Cinta

Cita begins a business that will
be known as SolusiNet.

39
 1-4

Assets = Owner’s Equity

Cash Cinta Cita, Capital

=
25,000,000
25,000,000
a. Investment by Cinta
Cita

a. Cinta Cita deposits Rp25,000,000 in a

bank account in the name of SolusiNet
40
 1-4
(in Rp000)

Assets = Owner’s Equity

Cash + Land Cinta Cita, Capital
Bal. 25,000 = 25,000
b. –20,000 +20,000
Bal. 5,000 20,000 25,000

b. SolusiNet exchanged Rp20,000,000 for

land.
41
 1-4
(in Rp000)
Owner’s
Assets = Liabilities + Equity
Accounts Cinta Cita,
Cash + Supplies + Land Payable Capital
=
Bal. 5,000 20,000 25,000
c. +1,350 +1,350
Bal. 5,000 1,350 20,000 1,350 25,000
c. During the month, SolusiNet purchased
supplies for Rp1,350,000 and agreed to pay
the supplier in the near future (on 42
account).
 1-4

Beginning with entry (d) the

asset section will be shown
first, then the liabilities and
owner’s equity will be shown in
the following slide.

43
 1-4
(in Rp000)
Assets

Cash + Supplies + Land

Bal. 5,000 1,350 20,000
d. +7,500
Bal. 12,500 1,350 20,000

d. SolusiNet provided services to

customers, earning fees of Rp7,500,000
and received the amount in cash. 44
 1-4
(in Rp000)

Liabilities + Owner’s Equity

Accounts Cinta Cita, Fees
Payable + Capital + Earned
1,350 25,000 Bal.
+7,500 d.
1,350 25,000 7,500 Bal.

d. SolusiNet provided services to

customers, earning fees of Rp7,500,000
and received the amount in cash.
45
Expenses 1-4

The amounts used in earning revenue are

called expenses. Adding expenses to the
owner’s equity section results in a space
problem. To adjust for these added
headings, the word “Bal.” has been omitted
from Slides 48, 50, 52, and 54. The
bottom row in these four slides provides
the balances after each transaction.
46
 1-4
(in Rp000)
Assets
Cash + Supplies + Land
Bal. 12,500 1,350 20,000
e. –3,650
Bal. 8,850 1,350 20,000

e. SolusiNet paid the following expenses:

wages, Rp2,125,000; rent, Rp800,000;
utilities, Rp450,000; and miscellaneous,
Rp275,000. 47
 1-4
(in Rp000)

Liabilities + Owner’s Equity

Accounts Cinta Cita, Fees Wages Rent Utilities Misc.
Payable + Capital + Earned Expense Expense Expense Expense
1,350 25,000 7,500
–2,125 –800 –450 –275 e.
1,350 25,000 7,500 –2,125 –800 –450 –275

e. SolusiNet paid the following expenses: wages,

Rp2,125,000; rent, Rp800,000; utilities,
Rp450,000; and miscellaneous, Rp275,000.
48
 1-4
(in Rp000)

Assets
Cash + Supplies + Land
Bal. 8,850 1,350 20,000
f. –950
Bal. 7,900 1,350 20,000

f. SolusiNet paid Rp950,000 to

creditors during the month. 49
 1-4
(in Rp000)

Liabilities + Owner’s Equity

Accounts Cinta Cita, Fees Wages Rent Utilities Misc.
Payable + Capital + Earned Expense Expense Expense Expense
1,350 25,000 7,500 –2,125 –800 –450 –275
–950 f.
400 25,000 7,500 –2,125 –800 –450 –275

f. NetSolutions paid Rp950,000 to

creditors during the month. 50
 1-4
(in Rp000)

Assets
Cash + Supplies + Land
Bal. 7,900 1,350 20,000
g. –800
Bal. 7,900 550 20,000

g. At the end of the month, the cost

of supplies on hand is Rp550,000,
so Rp800,000 of supplies were
used. 51
 1-4
(in Rp000)

Liabilities + Owner’s Equity

Accounts Cinta Cita, Fees Wages Rent Supplies Util. Misc.
Payable + Capital + Earned Exp. Exp. Exp. Exp. Exp.
400 25,000 7,500 –2,125 –800 –450 –275
–800 g.
400 25,000 7,500 –2,125 –800 –800 –450 –275

g. At the end of the month, the cost

of supplies on hand is
Rp550,000, so Rp800,000 of
supplies were used. 52
 1-4
(in Rp000)

Assets
Cash + Supplies + Land
Bal. 7,900 550 20,000
h. –2,000
Bal. 5,900 550 20,000

h. At the end of the month, Cinta

withdrew Rp2,000,000 in cash
from the business for personal
use. 53
 1-4
(in Rp000)

Liabilities + Owner’s Equity

Accounts Cinta Cita, Cinta Cita Fees Wages Rent Supplies Util. Misc.
Payable + Capital + Drawing Earned Exp. Exp. Exp. Exp. Exp.
400 25,000 7,500 –2,125 –800 –800 –450 –275
–2,000 h.
400 25,000 –2,000 7,500 –2,125 –800 –800 –450 –275

h. At the end of the month, Cinta

withdrew Rp2,000,000 in cash from
the business for personal use.
54
 1-4

Owner’s Equity

Increased by Decreased by

Owner’s Owner’s
investments withdrawals
Revenues Expenses

55
 1-4

Example Exercise 1-3

Simatupang Express is owned and operated by Bonar
Simatupang. The following selected transactions were
completed by Simatupang Express during February:
1. Received cash from owner as additional investment,
Rp35,000,00.
2. Paid creditors on account, Rp1,800,000.
3. Billed customers for delivery services on account,
Rp11,250,000.
4. Received cash from customers on account, Rp6,740,000.
5. Paid cash to owners for personal use, Rp1,000,000.
Continued 56
 1-4

Example Exercise 1-3

Indicate the effect of each transaction on the accounting

equation elements (Assets, Liabilities, Owner’s Equity,
Drawing, Revenue, and Expense) by listing the numbers
identifying the transactions, (1) through (5). Also, indicate
the specific item within the accounting equation element
that is affected. To illustrate, the answer to (1) is shown
below.
(1) Asset (Cash) increases by Rp35,000,000; Owner’s
Equity (Bonar Simatupang, Capital) increases by
Rp35,000,000.
57
 1-4

Follow My Example 1-3

(2) Asset (Cash) decreases by Rp1,800,000; Liability

(Accounts Payable) decreases by Rp1,800,000.
(3) Asset (Accounts Receivable) increases by Rp11,250,000;
Revenue (Simatupang Express) increases by
Rp11,250,000.
(4) Asset (Cash) increases by Rp6,740,000; Asset (Accounts
Receivable) decreases by Rp6,740,000.
(5) Asset (Cash) decreases by Rp1,000,000; Owner’s Equity
(Bonar Simatupang, Drawing) increases by Rp1,000,000.
For Practice: PE 1-3A, PE 1-3B 58
 1-5

Objective
Objective 55
Describe the financial
statements of a proprietorship
and explain how they
interrelate.
59
 1-5

Accounting reports, called

financial statements,
provide summarized
information to the owner.

60
 1-5

The income statement is

a summary of the revenue
and expenses for a
specific period of time,
such as a month or a year.

61
Income Statement 1-5
SolusiNet
Income Statement
For the Month Ended November 30, 2007
Fees earned Rp7 500 000
Expenses:
Wages expense Rp2 125 000
Rent expense 800 000
Supplies expense 800 000
Utilities expense 450 000
Miscellaneous expense 275 000
Total expenses 4 450 000
Net income Rp3 050 000

Net income is carried to the

statement of owner’s equity
62
 1-5

A statement of owner’s equity

is a summary of the changes
in the owner’s equity that
have occurred during a
specific period of time.

63
 Statement of Owner’s Equity 1-5

From the income statement

SolusiNet
Statement of Owner's Equity
For the Month Ended November 30, 2007
Cinta Cita, capital, November 1, 2007 Rp 0
Investment on November 1, 2007 Rp25 000 000
Net Income for November 3 050 000
Rp28 050 000
Less withdrawals 2 000 000
Increase in owner's equity 26 050 000
Cinta Cita, capital, November 30, 2007 Rp26 050 000

To the balance sheet

64
 1-5

A balance sheet is a list of

the assets, liabilities, and
owner’s equity as of a
specific date.

65
 Balance Sheet 1-5

SolusiNet
Balance Sheet
November 30, 2007
Assets Liablities
Cash Rp 5 900 000 Accounts Payable Rp 400 000
Supplies 550 000 Owner's Equity
Land 20 000 000 Cinta Cita, capital 26 050 000
Total Liabilities and
Total assets Rp26 450 000 Owner's equity Rp26 450 000

This amount is compared to the From the statement

net cash flow on the statement of of owner’s equity
cash flows 66
 1-5

A statement of cash flows

is a summary of the cash
receipts and payments for
a specific period of time.

67
Statement of Cash Flows 1-5
SolusiNet
Statement of Cash Flows
For the Month Ended November 30, 2007
Cash flows from operating activities
Cash received from customers Rp 7 500 000
Deduct cash payments for expense and
payments to creditors 4 600 000
Net cash flow from operating activities Rp 2 900 000
Cash flows from investing activities
Cash payments for purchase of land (20 000 000)
Cash flows from financing activities
Cash received as owner's investmentsRp25 000 000
Deduct cash withdrawal by owner 2 000 000
Net cash flow from financing activities 23 000 000
Net cash flow and November 30, 2007, cash balance Rp 5 900 000

This amount should match

Cash on the balance sheet. 68
Income Statement 1-5

The income statement reports the

revenues and expenses for a period of
time based on the matching concept.
This concept is applied by matching the
expenses with the revenue generated
during a period by those expenses.

69
 1-5

The excess of revenue over

the expenses is called net
income or net profit. If the
expenses exceed the revenue,
the excess is a net loss.

70
 1-5

Example Exercise 1-4

The assets and liabilities of Cimande Travel Service at April 30,
2008, the end of the current year, and its revenue and expenses
for the year are listed below. The capital of the owner, Adam
Kuncoro, was Rp80,000,000 at May 1, 2007, the beginning of the
current year.
Accounts payable Rp 12,200,000 Miscellaneous expense Rp 12,950,000
Accounts receivable 31,350,000 Office expense 63,000,000
Cash 53,050,000 Supplies 3,350,000
Fees earned 263,200,000 Wages expense 131,700,000
Land 80,000,000

Prepare an income statement for the current year ended April

30, 2008.
71
 1-5

Follow My Example 1-4

CIMANDE TRAVEL SERVICE
INCOME STATEMENT
For the Year Ended April 30, 2008
Fees earned Rp263,200,000
Expenses:
Wages expense Rp131,700,000
Office expense 63,000,000
Miscellaneous expense 12,950,000
Total expenses 207,650,000
Net income Rp 55,550,000

72
For practice: PE 1-4A, PE 1-4B
Statement of Owner’s Equity 1-5

The statement of owner’s

equity reports the changes in
the owner’s equity for a period
of time. It is prepared after the
income statement.

73
 1-5

Example Exercise 1-5

Using the data for Cimande Travel Service shown
in Example Exercise 1-4, prepare a statement of
owner’s equity for the current year ended April 30,
2008. Adam Kuncoro invested an additional
Rp50,000,000 in the business during the year and
withdrew cash of Rp30,000,000 for personal use.

74
 1-5

Follow My Example 1-5

CIMANDE TRAVEL SERVICE
STATEMENT OF OWNER’S EQUITY
For the Year Ended April 30, 2008
Adam Kuncoro, capital, May 1, 2007 Rp 80,000,000
Additional investment by owner during year Rp 50,000,000
Net income for the year 55,550,000
Rp 105,550,000
Less withdrawals 30,000,000
Increase in owner’s equity 75,550,000
Adam Kuncoro, capital, April 30, 2008 Rp 155,550,000

75
For Practice: PE 1-5A, PE 1-5B
Balance Sheet 1-5

The balance sheet reports

the amounts of a firm’s
assets, liabilities, and
owner’s equity at the end
of a specific period.

76
 1-5

The account form of balance

sheet lists the assets on the left
and the liabilities and owner’s
equity on the right—similar to
design of an account.

77
 1-5

The report form of balance

sheet presents the liabilities
and owner’s equity sections
below the assets section.

78
 1-5
Example Exercise 1-6
Using the data for Cimande Travel Service shown in Example
Exercise 1-4 and 1-5, prepare the balance sheet as of April 30, 2008.

Follow My Example 1-6

CIMANDE TRAVEL SERVICE
BALANCE SHEET
April 30, 2008
Assets Liabilities
Cash Rp 53,050,000 Accounts payable Rp 12,200,000
Accounts receivable 31,350,000
Supplies 3,350,000 Owner’s Equity
Land 80,000,000 Adam Kuncoro, capital 155,550,000
Total assets Rp167,750,000 Total liab. & owner’s eq. Rp 167,750,000

For Practice: PE 1-6A, PE 1-6B 79

Statement of Cash Flows 1-5

The statement of cash flows

consists of three sections:
(1) Operating activities
(2) Investing activities
(3) Financing activities

80
 1-5

The cash flows from

operating activities section
reports a summary of cash
receipts and cash payments
from operations.

81
 1-5

The cash flows from investing

activities section reports the cash
transactions for the acquisition and sale
of relatively permanent assets.

82
 1-5

The cash flows from financing

activities section reports the
cash transactions related to cash
investments by the owner,
borrowings, and cash
withdrawals by the owner.

83
 1-5
Example Exercise 1-7
A summary of cash flows for Cimande Travel Service for the
year ended April 30, 2008, is shown below.
Cash receipts:
Cash received from customers Rp 251,000,000
Cash received from additional
investment of owner 50,000,000
Cash payments:
Cash paid for expenses 210,000,000
Cash paid for land 80,000,000
Cash paid to owner for personal use 30,000,000

The cash balance as of May 1, 2007, was Rp72,050,000.

Prepare a statement of cash flows for Cimande
Travel Service for the year ended April 30. 2008.
84
84
 1-5
Follow My Example 1-7
CIMANDE TRAVEL SERVICE
STATEMENT OF CASH FLOWS
For the Year Ended April 30, 2008
Cash flows from operating activities:
Cash received from customers Rp251,000,000
Deduct cash payments for expenses 210,000,000
Net cash flows from operating activities Rp 41,000,000
Cash flows from investing activities:
Cash payments for purchase of land (80,000,000)
Cash flows from financing activities:
Cash received from owner as investment Rp 50,000,000
Deduct cash withdrawals by owner 30,000,000
Net cash flows from financing activities 20,000,000
Net decrease in cash during year Rp (19,000,000)
Cash as of May 1, 2007 72,050,000
Cash as of April 30, 2008 Rp 53,050,000

85
85
For Practice: PE 1-7A, PE 1-7B
Interrelationships Among Financial Statements 1-5

‰ The income statement and the statement

of owner’s equity are interrelated.
Net income or net loss
appears on both statements.

86
 1-5

‰ The statement of owner’s equity and

the balance sheet are interrelated.
The owner’s capital at the end of the
period on the statement of owner’s
equity also appears on the balance
sheet as owner’s capital.

87
 1-5

‰ The balance sheet and the statement

of cash flows are interrelated.

The cash on the balance sheet also

appears as the end-of-period cash on
the statement of cash flows.

88