Welcome to Accounting 211!

Chapter 1: An Introduction

Your Instructor: Larry StoutHours: See syllabus

How to succeed in this course:

1. Don’t Fall Behind.2. Do the homework ON TIME.3. Attend Class!4. Participate!5. Don’t try to memorize – most of

the time, it won’t work! 6. Use all available resources.7. Bring lecture notes to class. 8. Don’t Fall Behind.

Why Study Accounting?

Manage your own business

Understand financial information

Get a job! Applications include:

Management, marketing, finance, real estate and government.

This course provides information which will be useful to you through your career and your life.

What you will learn in Chapter 1:

What accounting is and why it is important

The building blocks of accounting and how to use them

An introduction to financial statements

Accounting:Identifies, records and communicates economic events to interested users.Involves ethical decisionsWho are the users? Internal – managers, supervisors, officersExternal – investors, creditors, tax

authorities, customers, planners

What do they need to know (p.6)

Bookkeeping vs. Accounting

Bookkeeping is the recording and maintenance of accounting information in a manual or computerized accounting system.

Accounting is the identification, recording and communication of economic events to interested users. Accountants must also analyze and interpret reported information.

Ethics and Why They Are Important

Ethics are standards of conduct by which we are judged.

Example of Arthur Andersen and Enron

How to solve an ethical problem:Recognize it Identify and analyze the components of the

problem Identify the alternatives of each course of

action

Generally Accepted Accounting Principles (GAAP)

Accounting information should be:

Relevant

Reliable

Timely

GAAP Principles are promulgated (put forward) by:Financial Accounting Standards Board (FASB)

– profit and non-profit entitiesGovernment Accounting Standards Board

(GASB) – state and local governmentSecurities and Exchange Commission (SEC)

Example of principle is the cost principle p. 10

Important Assumptions

Monetary unit – accounting events can be expressed in terms of money, which is a (comparable) medium of exchange and a measure of value.

Economic entity – its activities are recorded and kept separate from those of its owner(s).

How businesses are organized (p.11)

Sole proprietorship – owned by one person. Examples: small service-type businesses. Limited life and owners have unlimited liability for debtsPartnership – owned by two or more persons: Examples: retail/service companies: Limited life and owners have unlimited liability for debtsCorporation – separate legal entity. Example: GM, Exxon-Mobil, Wal-Mart. Unlimited life and owners are protected from liability.

The Basic Accounting Equation

Assets = Liabilities + Equity

What do these terms mean?

Assets, Liabilities and Equity

Assets are the resources owned by the business and expected to provide future services or benefits

Liabilities are claims against assets or debts and obligations

Equity is the residual, or owner’s claim, on assets

Increases in Owner’s Equity

Investments by the ownerCashFurniture, computers, equipmentLand and buildings

RevenuesSales, fees, services, interest, royalties,

rent, commissions

Decreases in Owner’s Equity

Drawings or WithdrawalsOwner pulls cash out of the business for

personal use

ExpensesCost of assets consumed in the process of

earning revenue. Examples: wages, supplies, taxes, rent, interest

Net Income or Loss

If revenue is greater than expenses, the difference is net income, which increases equity

If revenue is less than expenses, the difference is net loss, which decreases equity

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Expanded Accounting Equation

RevenuesRevenues ExpensesExpensesOwner CapitalOwner Capital

Owner Withdrawals

Owner Withdrawals

_ + _

The accounting equation must remain in balance after each transaction.

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Transaction Analysis Equation

The accounts involved are:

(1) Cash (asset)

(2) J. Scott, Capital (equity)

J. Scott, the owner, contributed $20,000 cash to start the business.

Transaction AnalysisIn each succeeding example, identify whether the account

balance increases or decreases.

Transaction AnalysisJ. Scott, the owner, contributed $20,000

cash to start the business.

The accounts involved are:

(1) Cash (asset)

(2) Supplies (asset)

Transaction AnalysisPurchased supplies paying $1,000

cash.

Transaction AnalysisPurchased supplies paying $1,000

cash.

The accounts involved are:

(1) Cash (asset)

(2) Equipment (asset)

Transaction AnalysisPurchased equipment for $15,000

cash.

Transaction AnalysisPurchased equipment for $15,000

cash.

The accounts involved are:

(1) Supplies (asset)

(2) Equipment (asset)

(3) Accounts Payable (liability)

Transaction AnalysisPurchased Supplies of $200 and Equipment of $1,000 on account.

Transaction AnalysisPurchased Supplies of $200 and Equipment of $1,000 on account.

The accounts involved are:

(1) Cash (asset)

(2) Notes payable (liability)

Transaction AnalysisBorrowed $4,000 from 1st American

Bank.

Transaction AnalysisBorrowed $4,000 from 1st American

Bank.

Transaction AnalysisThe 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.

The accounts involved are:

(1) Cash (asset)

(2) Revenues (equity)

Transaction AnalysisRendered consulting services

receiving $3,000 cash.

Transaction AnalysisRendered consulting services

receiving $3,000 cash.

The accounts involved are:

(1) Cash (asset)

(2) Salaries expense (equity)

Transaction AnalysisPaid salaries of $800 to employees.

Remember that the balance in the salaries expense account actually increases.

But, equity actually decreases because expenses reduce equity.

Transaction Analysis

Remember that expenses decrease equity.

Paid salaries of $800 to employees.

The accounts involved are:

(1) Cash (asset)

(2) J. Scott, Withdrawals (equity)

Transaction AnalysisJ. Scott withdrew $500 from the

business for personal use.

Remember that the balance in the J. Scott, Withdrawals account actually increases.

But, equity actually decreases because withdrawals reduce equity.

Transaction Analysis

Remember that withdrawals decrease equity.

J. Scott withdrew $500 from the business for personal use.

Financial StatementsLet’s prepare the Financial Statements

reflecting the transactions we have recorded.

1. Income Statement

2. Statement of Owner’s Equity

3. Balance Sheet

4. 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 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.

Wow, this is a lot of stuff to remember!

Homework for Chapter 1Register on Wiley Plus!

Use the code provided with the new book or buy a code using the web

address in the syllabus!

Enter your information on the correct web site, then locate homework

assignments!

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