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Joan Ferreira Hostos Community College

Class Objectives

Explain what accounting is Identify users and uses of accounting Understand why ethics is a fundamental business concept Explain the meaning of generally accepted accounting principles and the cost principle

Objectives Cont.

Explain the difference between the cash method and the accrual method. State the basic accounting equation and explain the meaning of assets, liabilities, and owners equity. Analyze the effect of business transactions on the basic accounting equation

What is accounting?

Accounting is an information system that

Identifies Records Maintains Analyzes

Financial activities in a household, small business, company, non-profit organization, corporation, or government. the language of business."

Accounting is used for

Internal Users
Insolvency (can we pay our bills?) Budgeting and Planning (Can we give employees a raise?) Costs of goods/services sold (how much profit do I get from selling a shirt?) Profitability (what product/service is making money?)

What else?

Accounting is used for

External users
Profitability (is the company making money?) Benchmarking (how is the company performing against competition?) Credibility (would the company be able to pay me?) Legal Compliance (is the company paying taxes?) Assurance (is the company acting ethically?)

What else?

Bookkeeping vs. Accounting

Includes bookkeeping and so much more Record, organize, maintain, analyze, communicate


The recording of economic events. One part of accounting (record)

The Accounting Profession

Public Accountants

Service to the general public through the services they perform.

Bookkeeping, Tax Preparation, Consulting, Budgeting, Financial Reporting, Financial Analysis, Audit.

Private Accountants

Individuals in companies involved in activities including cost and tax accounting, systems, and internal auditing.

Not For Profit Accountants

Reporting and control for government units, foundations, hospitals, labor unions, universities, and charities.

Building blocks of Accounting


Standards by which actions are judged as right or wrong, honest or dishonest.

Generally Accepted Accounting Principles (GAAP

Established by the F.A.S.B and the S.E.C.


Monetary Unit
Only data that can be expressed in terms of money is included in the accounting records.

Economic Entity (as in separate)

Includes any organization or unit in society.

Basic Accounting Equation (HELLO)

What are Assets?

Assets are resources owned by a business. They are used in carrying out such activities as production, consumption and exchange.

(1) it must be owned by the organization, and (2) it must have money value.

Ownership and Money Value

OWNERSHIP is the exclusive right to possess, use, enjoy, and dispose of property. MONEY VALUE exists if a buyer is willing to pay money to a seller for the property. Which of these are assets?
Cash Automobile Rented Apartment Checks

Grocery List

Library Book On Loan



Postage Stamps


Prepare a list of ten assets that you personally own. Prepare a list of ten assets that a business organization would own

Types of Assets

Short Life (Current) vs. Long Life (Non-Current)


Cash and other assists that can be turn into cash. (< 1yr) Assets not used on the operation of organization but have value. (> 1yr) Long-term or long-life assets




No physical substance, but have value (long term)

Examples of Assets
Cash Receivables (Money people owe you) Office Building Furniture & Fixtures Office Equipment Office Supplies Inventory Vehicle Bond Purchases Copyright Franchise

Test your knowledge






What is the difference between office supplies and office equipment? A toner cartridge is considered an office supply, even though it is an integral part of the computer printer. why? Will we replace a typewriter as frequently as a typewriter ribbon? Why or why not? What type of asset is a supply? (Short-life or longlife?) What type of asset is a computer? (Short-life or long-life?)

Recognizing Ownership

CAPITAL (EQUITY) is the ownership of the assets of the business by the proprietor.
Seed money Machinery Purchased Supplies Cash Furniture


Ms. Taylor began a business on April I, 203, contributing to the business the following assets:
Cash $3,000 Office Supplies $275 Office Equipment $700 Furniture and Fixtures $2,100

Ms Taylor Ownership is:

Hint: Assets = Capital

Expressing Borrowed Assets

What if I borrow money to start my business? LIABILITY is defined as the ownership of the assets of a business by its creditors.

A creditor claims against assets Existing debts and obligations Assets = Capital (Owners Equity)

No Debt:


Assets = Liability + Owners Equity (Less Capital)

Examples of Liability (Debts)

Current Liabilities (less than 1 yr)

Accounts payable Invoiced bills Accrued liabilities not yet invoiced bills Accrued wages compensation earned but not yet paid. Deferred revenue money not yet earned. Taxes Payable Taxes that need to be paid

Long Term Liabilities

Debt. Debt that is owed for more than 1 year.

Test your knowledge

A sole proprietor has $14,000 in cash an borrows $6,000 more from the local credit union to start up a Child Care business.
How much cash does the sole proprietor has? Does that make him/her richer?

Recording Investments and Drawings

Investments are the assets the owner puts in the business increase owners equity

Purchase of a Car for the business Initial public offering of a Corporation. Investing in your Brothers Restaurant

Drawings are withdrawals of cash or other assets by the owner for personal use .

Your Brother returns your investment with interest. You take your car back from the company

Revenues and Expenses

Revenues increases in owners equity from business activities.

Sales receipts

Expenses decreases in owners equity that result from operating the business

Rent Payments Administrative Expenses Interest Expense

How is Owners Equity Affected?



Investments by Owner

Owners Equity

Withdrawals by Owner




A. L. Brandon is the owner of the Brandon Small Appliance Repair Shop. On January I, 2013, the assets, liabilities, and proprietor's capital in the business were:

Cash, $2,000; Accounts Receivable S400; Supplies, $5OO; Equipment $6,000; Accounts Payable, S900; A. L. Brandon Capital $8,000.

Lets first organize the beginning of year.

January Accounting Events

1. Paid $3OO of the outstanding accounts payable. 2. Received $100 on account (part payment) from customers. 3. Purchased $250 worth of supplies on account (on credit}. 4. Returned a defective piece of equipment that was purchased last month and received a cash refund of $1,200. 5. Borrowed $1,OOO from a supplier, giving word to repay the loan in thirty days. 6. Paid creditor $200 on account (part payment). 7. Purchased equipment for $800, giving $200 cash and promising to pay the balance in sixty days. 8. Bought supplies paying $65 cash. 9. Received a S250 check from customer on account.


Accounting is the art of organizing, maintaining. recording, and analyzing financial activities. Business transactions represent economic elements that affect the financial condition of the business. The position of the organization is represented by assets, liabilities, and capital. Assets represent anything that is owned and has money value.

Summary (cont)

Liabilities (debt) are the claims upon the assets of the business by its creditors. Liabilities may either be short-term or long-term obligations. Capital is the ownership of the assets of the business by the proprietor. The accounting equation is: ASSETS = LIABILITIES + CAPITAL

Next Class

What are financial statements? The Income Statement The Statement of Capital The Balance Sheet