Fundamental Accounting Principles 17th Edition Larson Wild Chiappetta
Accounting in Business Chapter 1
is a system that information that is Importance of Accounting Accounting Identifies Records Relevant Communicates Reliable to help users make better decisions. Comparable
Accounting Activities • Identifying Business Activities • Recording Business Activities • Communicating Business Activities
Internal Users External Users • Lenders • Shareholders • Governments • Consumer Groups • External Auditors • Customers • Managers • Officers • Internal Auditors • Sales Staff • Budget Officers • Controllers Users of Accounting Information
External Users Financial accounting provides external users with financial statements. Users of Accounting Information Internal Users Managerial accounting provides information needs for internal decision makers.
Financial Managerial Taxation • Preparation • Analysis • Auditing • Regulatory • Consulting • Planning • Criminal investigation • General accounting • Cost accounting • Budgeting • Internal auditing • Consulting • Controller • Treasurer • Strategy • Preparation • Planning • Regulatory • Investigations • Consulting • Enforcement • Legal services • Estate planning • Lenders • Consultants • Analysts • Traders • Directors • Underwriters • Planners • Appraisers • FBI investigators • Market researchers • Systems designers • Merger services • Business valuation • Human services • Litigation support • Entrepreneurs Accounting-related Opportunities in Accounting
Ethics Ethics—A Key Concept Beliefs that distinguish right from wrong Accepted standards of good and bad behavior
Guidelines for Ethical Decision Making • Make ethical decision • Identify ethical concerns • Analyze options Use personal ethics to recognize ethical concern. Consider all good and bad consequences. Choose best option after weighing all consequences.
Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Is helpful in contrasting organizations. Generally Accepted Accounting Principles Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Setting Accounting Principles Financial Accounting Standards Board is the private group that sets both broad and specific principles. The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public.
Now Future Objectivity Principle Accounting information is supported by independent, unbiased evidence. Cost Principle Accounting information is based on actual cost. Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. Principles of Accounting
Revenue Recognition Principle • Recognize revenue when it is earned. • Proceeds need not be in cash. • Measure revenue by cash received plus cash value of items received. Monetary Unit Principle Express transactions and events in monetary, or money, units. Business Entity Principle A business is accounted for separately from other business entities, including its owner. Principles of Accounting
Proprietorship Partnership Corporation Business Entity Forms
Exh. 1.8 Characteristics of Businesses * * * Proprietorships and partnerships that are set up as LLC’s provide limited liability.
Owners of a corporation are called shareholders (or stockholders). When a corporation issues only one class of stock, we call it common stock (or capital stock). Corporation
= + Assets Liabilities Equity Accounting Equation Liabilities & Equity Assets
Assets Cash Accounts Receivable Notes Receivable Resources owned or controlled by a company Vehicles Land Buildings Store Supplies Equipment
Liabilities Accounts Payable Notes Payable Creditors’ claims on assets Wages Payable Taxes Payable
Equity Owner Withdrawals Owner Investments Owner’s claims on assets Revenues Expenses
Assets Liabilities Equity _ _ = + Owner Capital Owner Withdrawals + Revenues Expenses Expanded Accounting Equation
The accounting equation must remain in balance after each transaction. = + Assets Liabilities Equity Transaction Analysis Equation
The accounts involved are: (1) Cash (asset) (2) J. Scott, Capital (equity) Transaction Analysis J. Scott, the owner, contributed $20,000 cash to start the business.
Transaction Analysis J. Scott, the owner, contributed $20,000 cash to start the business.
The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction Analysis Purchased supplies paying $1,000 cash.
Transaction Analysis Purchased supplies paying $1,000 cash.
The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis Purchased equipment for $15,000 cash.
Transaction Analysis Purchased equipment for $15,000 cash.
Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account. The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability)
Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account.
Transaction Analysis Borrowed $4,000 from 1st American Bank. The accounts involved are: (1) Cash (asset) (2) Notes payable (liability)
Transaction Analysis Borrowed $4,000 from 1st American Bank.
Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Now let’s look at transactions involving revenue, expenses and withdrawals.
Transaction Analysis Rendered consulting services receiving $3,000 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity)
Transaction Analysis Rendered consulting services receiving $3,000 cash.
Transaction Analysis Paid salaries of $800 to employees. The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Remember that the balance in the salaries expense account actually increases. But, equity actually decreases because expenses reduce equity.
Transaction Analysis Paid salaries of $800 to employees. Remember that expenses decrease equity.
Transaction Analysis J. Scott withdrew $500 from the business for personal use. The accounts involved are: (1) Cash (asset) (2) J. Scott, Withdrawals (equity) Remember that the balance in the J. Scott, Withdrawals account actually increases. But, equity actually decreases because withdrawals reduce equity.
Transaction Analysis J. Scott withdrew $500 from the business for personal use. Remember that withdrawals decrease equity.
Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded. • Income Statement • Statement of Owner’s Equity • Balance Sheet • Statement of Cash Flows
Net income is the difference between Revenues and Expenses. The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.
The net income of $2,200 increases Scott’s capital by $2,200. The Statement of Owner’s Equity explains changes in equity from net income (or net loss) and from owner investments and withdrawals for a period of time.
The Balance Sheet describes a company’s financial position at a point in time.
The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.
Return on Assets (ROA) Net income ÷ Average total assets ROA is viewed as an indicator of operating efficiency.