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Accounting and the Business Environment

Chapter 1

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Accounting as the basis for business


process - identifying, analyzing, recording, and communicating the economic and financial information about an organization Accounting is the means by which information about an enterprise is communicated and, thus, is sometimes called the language of business
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Types of Business Organizations


Service companies - provide services to customers Merchandise or retail companies sell products Manufacturing companies - make their own products

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Types of Business Organizations


Proprietorships Partnerships Corporations

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Organization Accountability
Fiduciary obligation to manage the resources of an organization responsibly Stakeholders investors, creditors, suppliers, employees, customers, government agencies, and investees

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Business Activities
Financing Investing Operating

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Accounting
Measures Processes Communicates Financial information to decision makers

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Financial vs. Managerial Accounting


Financial Accounting - for those outside of the company
Reports are called Financial Statements Prepared according to GAAP

Managerial Accounting
Helps managers plan, control, and make decisions

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GAAP
Generally Accepted Accounting Principles - established rules, principles, and concepts Formulated by Financial Accounting Standards Board (FASB)

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GAAP
Primary objective of financial accounting provide information that is useful for making investment and lending decisions

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Entity Concept
Accounting Entity organization that stands apart as a separate economic unit

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Reliability (Objectivity) Principle


Accounting information is based on the most reliable data available
Verifiable Free from bias Individuals would arrive at similar conclusions using same data

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Cost Principle
Acquired assets and services should be recorded at their actual cost (historical cost)

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Going Concern Concept


Assumes that the entity will remain in operation for the foreseeable future

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Assets
Economic resources, expected to benefit the business in the future
Cash Accounts receivable Merchandise inventory Furniture Land

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Claims to the Assets


Liabilities economic obligations payable to an individual or organization outside the business
Accounts payable Notes payable Salary payable

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Claims to the Assets


Owners Equity (capital) claim of business owner to the assets of the business

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The Accounting Equation

Assets

= Liabilities + Owners Equity

Economic Resources

Claims to Economic Resources


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Revenues
Amounts earned by delivering goods or services to customers
Sales revenue Service revenue Interest revenue Dividend revenue

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Expenses
Decrease in owners equity - occurs from using resources in the course of delivering goods or services to customers
Salary expense Rent expense Utilities expense Interest expense

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Net Income (Loss)


Revenues Expenses

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Components of Owners Equity


Revenues Beginning Balance of Owners Equity + Expenses =

Ending Owner Owner + Net Income = Balance of Investments Withdrawals (Net Loss) Owners Equity

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Transaction
An event that affects the financial position of a particular entity and can be recorded reliably

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Accounting for Business Transactions


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

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Financial Statements
Income statement Statement of owners equity Balance sheet Statement of cash flows

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Income Statement
Summary of an entitys revenues, expenses, and net income or net loss for a specific period Revenues - Expenses
Net Income: Revenues > Expenses Net Loss: Expenses > Revenues

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Statement of Owners Equity


Summary of changes in an entitys owners equity during a specific period Beginning owners equity + Owners investments + Net income - Net loss - Owners withdrawals Ending owners equity
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Balance Sheet
Reports the entitys assets, liabilities, and owners equity as of a specific date Assets = Liabilities + Owners Equity

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Statement of Cash Flows


Reports cash receipts and cash payments during a period
Operating Investing Financing

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K. Hobt, D.D.S. Income Statement For the Month Ended July 31, 2007 Revenue: Fees earned Expenses: Rent expense Net income
Double underline for your final answer
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Notice the proper heading

$7,000

1,000 $6,000

important to the reader of K. Hobt, capital, the financial reports

K. Hobt, D.D.S. Statement of Owners Equity income From statement Dates are For the Month Ended July 31, 2007
$ 0 60,000 6,000 $66,000 0 $66,000

July 1, 2007 Add: Investment by owner Net income for the month Subtotal Less: Withdrawals by owner K. Hobt, capital, July 31, 2007

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Details, Details
Note the headings for both of these statements
Name of company Name of financial statement For the period ended .

Both statements report activity over a period of time Final sums are double-underlined
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Details, Details
Negative amounts are presented in parentheses Net income is computed first because you need that number to complete the ending balance in owners equity When preparing a financial statement, clearly label each line in the statement
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Details, details
If you are using columnar paper, always start your number columns in the far right-hand column Numbers that are added or subtracted from each other should be in the same column

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K. Hobt, D.D.S Balance Sheet July 31, 2007


Assets Cash $10,000 Medical supplies 1,500 Notice the Land 55,000 proper Total assets
heading

From statement of owners equity

$ 66,500

Liabilities Accounts payable $500 Owners equity, M. Lange, capital 66,000 Total liabilities and owners equity $ 66,500

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Details, Details
Note - heading for the balance sheet is different from other statements Name of company Name of financial statement Date This statement reports what the company owns and who has claims to the assets at a specific point in time
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Exercise 1-20 1Hawkins Graphic Design Balance Sheet November 30, 2009 Assets Cash Accounts receivable Supplies Equipment $2,000 6,900 600 15,500 Liabilities Accounts payable Note payable Total liabilities Owners Equity A. Samuel, capital Total Assets $25,000 14,500 $2,500 8,000 $10,500

Total liabilities and owners equity $25,000


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Ethics
Audit
Examination of companys financial situation Performed by independent accountants (CPAs)

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Standards of Professional Conduct


AICPA Code of Professional Conduct for Accountants IMA Standards of Ethical Conduct

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End of Chapter 1

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