Power Notes Introduction to Accounting and Business 1. Nature of a Business 2. The Role of Accounting in Business 3. Business Ethics 4. Profession of Accounting 5. Generally Accepted Accounting Principles 6. Assets, Liabilities, and Owner’s Equity 7. Business Transactions 8. Financial Statements 9. Financial Analysis and Interpretation Learning Objectives
Living in the Information Age Data Communication News Commentary Facts Access
Living in the Information Age Data Communication News Timeliness Independence Freedom-of-Expression Commentary Facts Access
Products Business Services Business and Investment Goal Profit Sells/provides Profit
Land and Building Accounting Information Labor and Equipment Accounting Information Factors of production are the means businesses use to make profit.
Business Profit Amounts earned from selling products or services Costs incurred with sales Amounts earned from sales less expenses incurred
ServiceBusinessService The Walt Disney Company Entertainment Delta Air Lines Transportation Marriott International Hotels Hospitality and lodging Bank of America Corporation Financial services XM Satellite Radio Satellite radio 0 1-1 Types of Businesses
Merchandising BusinessProduct Wal-Mart General merchandise GameStop Corporation Video games and accessories Best Buy Consumer electronics Gap Inc. Apparel Amazon.com Internet books, music, video 0 1-1 Types of Businesses
Manufacturing BusinessProduct General Motors Corp. Cars, trucks, vans Samsung Cell phones Dell Inc. Personal computers Nike Athletic shoes and apparel The Coca-Cola Company Beverages Sony Corporation Stereos and televisions 0 1-1 Types of Businesses
Business Sally’s Grocery Proprietorship Partnership Corporation Exh. 1.4 Forms of Organization Law Offices
0 1-1 Common Forms of Business Organizations • Proprietorship • Partnership • Corporation • Limited liability company
0 1-1 A proprietorshipis owned by one individual and— • Comprises 70% of business organizations in the United States. • Requires low cost of organizing. • Is limited to financial resources of the owner. • Is used by small businesses.
0 1-1 A partnershipis similar to a proprietorship except that it is owned by two or more individuals and— • Comprises 10% of business organizations in the United States. • Combines the skills and resources of more than one person.
0 1-1 A corporationis organized under state or federal statues as a separate legal taxable entity and— • Generates 90% of the total dollars of business receipts received. • Comprises 20% of the businesses. Continued
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
0 1-1 • Includes ownership divided into shares of stock, sold to shareholders (stockholders). • Is able to obtain large amounts of resources by issuing stock. • Is used by large businesses.
0 1-1 A limited liability company(LLC)combines attributes of a partnership and a corporation in that it is organized as a corporation. However, a limited liability corporation can elect to be taxed as a partnership and— • Is a popular alternative to a partnership. • Has tax and liability advantages to the owners.
Nonbusiness Government Nonprofit Private Exh. 1.4 Forms of Organization
Libraries Army Museums Hospitals Colleges Schools Airports Cities Prisons Shelters Nonbusiness Organization Accounting for these organizations is usually a fund-based system, but the basic principles are similar to accounting for business organizations.
1 The Role of Accounting in Business Accountingcan be defined as aninformation system that provides reports to users about the economic activities and condition of a business.
Focus of Accounting • Identifying Economic Events • Recording Economic Events • Reporting and Analyzing Economic Events
is a system that information that is Influence of Accounting Accounting Identifies Records Relevant Communicates Reliable to help users make better decisions. Comparable
1 The process by which accounting provides information to users is as follows: • Identify users. • Assess users’ informational needs. • Design the accounting information system to meet users’ needs. • Record economic data about business activities and events. • Prepare accounting reports for users.
Accounting — An Information Process Identification of Users
Users of Accounting Information • investors • creditors • regulators • customers • competitors Financial Accounting EXTERNAL USERS
Users of Accounting Information • investors • creditors • regulators • customers • competitors • owners • managers • employees Financial Accounting EXTERNAL USERS ManagerialAccounting INTERNAL USERS
1 Financial Accounting The area of accounting that provides external users with information is calledfinancial accounting. The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business.
1 Managerial Accounting The area of accounting that provides internal users with information is called managerial accounting. The objective of managerial accounting is to provide relevant and timely information for managers’ and employees’ decision-making needs.
Accounting — An Information Process Identification of Users User Information Needs Accounting System
Accounting — An Information Process Identification of Users User Information Needs Economic Data and Activities Accounting System
Accounting — An Information Process Identification of Users User Information Needs Economic Data and Activities Accounting System Reports
User Decisions Accounting — An Information Process Identification of Users User Information Needs Economic Data and Activities Accounting System Reports
1 Exhibit 1 Users of Accounting Information
1 Role of Ethics in Accounting and Business Ethicsare moral principles that guide the conduct of individuals.
Ethics Ethics and Social Responsibility Beliefs that separate right from wrong Often coincide with laws Accepted standards of good and bad behavior
Guidelines for Ethical Decision Making • Make Ethical Decision • Identify Ethical Issues • Analyze Options Use personal ethics to recognize ethical issues. Consider both the good and bad consequences for all affected. Choose the best option after weighing all consequences.
2 Business Entity Concept Under the business entity concept, the activities of a business are recorded separately from the activities of its owners, creditors, or other businesses.
2 Cost Concept Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price.
2 Example Exercise 1-1 Cost Concept On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records? 1-28
For Practice: PE 1-1A, PE 1-1B Follow My Example 1-1 2 Example Exercise 1-1 (continued) $137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service. 1-29
2 Objectivity Concept The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence.
2 Unit of Measure Concept The unit of measure conceptrequires that economic data be recorded in dollars.
Fundamental Principles of Accounting Business Entity Principle A business is accounted for separately from its owner or owners. Objectivity Principle Financial statement information is supported by independent, unbiased evidence. Cost Principle Financial statements are based on actual costs incurred in business transactions. Going-Concern Principle A business continues operating instead of being closed or sold. Monetary Unit Principle Express transactions and events in monetary units.
The Accounting Equation Resources What are an organization’s resources called?
0 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business
The Accounting Equation Resources = Sources Assets What are the sources of the assets? Cost of resources used in the business
The Accounting Equation Resources = Sources Liabilities Assets Owner’s Equity Resources supplied by creditors and owners Cost of resources used in the business
0 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business
0 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners
3 Example Exercise 1-2 Accounting Equation John Joos is the owner and operator of You’re A Star, a motivational consulting business. At the end of its accounting period, December 31, 2009, You’re A Star has assets of $800,000 and liabilities of $350,000. Using the accounting equation, determine the following amounts: • Owner’s equity, as of December 31, 2009. • b. Owner’s equity, as of December 31, 2010, assuming that assets increased by $130,000 and liabilities decreased by $25,000 during 2010. 1-34