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Welcome to Accounting 211_ Chapter 1_ An Introduction Your

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					Welcome to Accounting 211!

Chapter 1: An Introduction

Your Instructor: Larry Stout
Hours: 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 decisions
Who are the users? Internal –
managers, supervisors, officers
   External – investors, creditors, tax
    authorities, customers, planners
What do they need to know (p.6)
     Bookkeeping vs.
       Accounting
Bookkeeping is the   Accounting is the
recording and        identification,
maintenance of       recording and
accounting           communication of
                     economic events to
information in a     interested users.
manual or            Accountants must
computerized         also analyze and
accounting system.   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 entities
 Government Accounting Standards Board
  (GASB) – state and local government
 Securities 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
debts
Partnership – owned by two or more persons:
Examples: retail/service companies: Limited life
and owners have unlimited liability for debts
Corporation – 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 owner
 Cash
 Furniture, computers, equipment

 Land and buildings

Revenues
   Sales, fees, services, interest, royalties,
    rent, commissions
Decreases in Owner’s
       Equity
Drawings or Withdrawals
   Owner pulls cash out of the business for
    personal use
Expenses
   Cost 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
    Expanded Accounting
         Equation
Assets        =   Liabilities     +        Equity



Owner     _     Owner                      _
Capital       Withdrawals   +   Revenues       Expenses
   Transaction Analysis
        Equation
The accounting equation must remain in balance
             after each transaction.

Assets     =     Liabilities    +    Equity
   Transaction Analysis
 In each succeeding example, identify whether the
      account balance increases or decreases.


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

        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.
                Assets            =       Liabilities       +    Equity
                                      Accounts     Notes        J. Scott,
      Cash   Supplies Equipment       Payable Payable           Capital
(1) $ 20,000                                                    $ 20,000




   $ 20,000 $      -     $   -        $    -   $      -         $ 20,000

            $ 20,000              =            $   20,000
  Transaction Analysis
 Purchased supplies paying $1,000
             cash.

The accounts involved are:
 (1) Cash (asset)
 (2) Supplies (asset)
        Transaction Analysis
      Purchased supplies paying $1,000
                  cash.
               Assets               =       Liabilities       +    Equity
                                        Accounts     Notes        J. Scott,
      Cash     Supplies Equipment       Payable Payable           Capital
(1) $ 20,000                                                      $ 20,000
(2)    (1,000) $ 1,000




   $ 19,000 $ 1,000 $        -          $    -   $      -         $ 20,000

             $ 20,000               =            $   20,000
Transaction Analysis
Purchased equipment for $15,000
            cash.


The accounts involved are:
 (1) Cash (asset)
 (2) Equipment (asset)
        Transaction Analysis
       Purchased equipment for $15,000
                   cash.
               Assets               =       Liabilities       +    Equity
                                        Accounts     Notes        J. Scott,
      Cash     Supplies Equipment       Payable Payable           Capital
(1) $ 20,000                                                      $ 20,000
(2)    (1,000) $ 1,000
(3)  (15,000)           $ 15,000


   $   4,000 $ 1,000 $    15,000        $    -   $      -         $ 20,000

             $ 20,000               =            $   20,000
   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.
               Assets                =       Liabilities        +    Equity
                                         Accounts     Notes         J. Scott,
      Cash     Supplies Equipment        Payable Payable            Capital
(1) $ 20,000                                                        $ 20,000
(2)    (1,000) $ 1,000
(3)  (15,000)           $ 15,000
(4)                200       1,000       $ 1,200

   $   4,000 $ 1,200 $     16,000        $ 1,200 $        -         $ 20,000

              $ 21,200               =             $   21,200
   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.
               Assets                =       Liabilities        +    Equity
                                         Accounts     Notes         J. Scott,
      Cash     Supplies Equipment        Payable Payable            Capital
(1) $ 20,000                                                        $ 20,000
(2)    (1,000) $ 1,000
(3)  (15,000)           $ 15,000
(4)                200       1,000       $ 1,200
(5)     4,000                                    $      4,000
    $ 8,000 $ 1,200 $ 16,000             $ 1,200 $      4,000       $ 20,000

              $ 25,200               =             $   25,200
      Transaction Analysis
    The balances so far appear below. Note that the
      Balance Sheet Equation is still in balance.
              Assets             =        Liabilities       +    Equity
                                     Accounts Notes             J. Scott,
      Cash Supplies Equipment        Payable Payable            Capital
Bal. $ 8,000 $ 1,200 $ 16,000        $ 1,200 $ 4,000            $ 20,000




    $ 8,000 $ 1,200 $   16,000       $   1,200 $    4,000       $ 20,000

            $ 25,200             =              $ 25,200

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.
                 Assets              =      Liabilities       +        Equity
                                         Accounts Notes           J. Scott,
      Cash   Supplies Equipment          Payable Payable           Capital Revenue
Bal. $ 8,000 $ 1,200 $ 16,000            $ 1,200 $ 4,000          $ 20,000
(6)    3,000                                                                $ 3,000


    $ 11,000 $    1,200 $   16,000       $ 1,200 $    4,000       $ 20,000 $ 3,000

             $ 28,200                =            $ 28,200
  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.
                 Assets              =      Liabilities       +                  Equity
                                         Accounts Notes            J. Scott,
      Cash    Supplies Equipment         Payable Payable           Capital   Revenue Expenses
Bal. $ 8,000 $ 1,200 $ 16,000            $ 1,200 $ 4,000          $ 20,000
(6)    3,000                                                                 $ 3,000
(7)     (800)                                                                        $    (800)

    $ 10,200 $    1,200 $   16,000       $ 1,200 $    4,000       $   20,000 $    3,000 $   (800)

              $ 27,400               =            $ 27,400




    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.
                                       Accounts Notes       J. Scott,   J. Scott,
      Cash    Supplies Equipment       Payable Payable      Capital Withdrawal Revenue Expenses
Bal. $ 8,000 $ 1,200 $ 16,000          $ 1,200 $ 4,000     $ 20,000
(6)    3,000                                                                       $ 3,000
(7)     (800)                                                                              $ (800)
(8)     (500)                                                         $      (500)
     $ 9,700 $ 1,200 $ 16,000          $ 1,200 $   4,000   $ 20,000 $        (500) $ 3,000 $ (800)

              $ 26,900             =           $ 26,900




  Remember that withdrawals decrease equity.
Financial Statements
Let’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
          Scott Company
        Income Statement
For Month Ended December 31, 2004
                                    Net income is the
                                       difference
Revenues:                                between
   Consulting revenue   $   3,000
Expenses:                            Revenues and
   Salaries expense           800      Expenses.
Net income              $   2,200




        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.
          Scott Company
        Income Statement
For Month Ended December 31, 2004
                                            The net income
                                               of $2,200
Revenues:                                     increases
   Consulting revenue      $    3,000
Expenses:
                                            Scott’s capital
   Salaries expense               800         by $2,200.
Net income                 $    2,200

 The Statement of                    Scott Company
  Owner’s Equity               Statement of Owner's Equity
 explains changes          For Month Ended December 31, 2004
 in equity from net
   income (or net       J. Scott, Capital, Dec. 1, 2004 $       -
   loss) and from       Plus: Investment by owner            20,000
owner investments             Net income                      2,200
and withdrawals for     Less: Withdrawals                       500
  a period of time.     J. Scott, Capital, Dec. 31, 2004 $   21,700
                                                   Scott Company
The Balance Sheet                            Statement of Owner's Equity
                                         For Month Ended December 31, 2004
    describes a
     company’s                       J. Scott, Capital, Dec. 1, 2004
                                     Plus: Investment by owner
                                                                        $      -
                                                                            20,000

 financial position                        Net income
                                     Less: Withdrawals
                                                                             2,200
                                                                               500
 at a point in time.                 J. Scott, Capital, Dec. 31, 2004   $   21,700



                         Scott Company
                         Balance Sheet
                        December 31, 2004

          Assets                        Liabilities & Equity
Cash           $    9,700   Accounts payable               $    1,200
Supplies            1,200   Notes payable                       4,000
Equipment          16,000   Total liabilities                   5,200
                            J. Scott, Capital                  21,700
Total assets   $   26,900   Total liabilities and equity $     26,900
                          Scott Company
                     Statement of Cash Flows
                For Month Ended December 31, 2004

 Cash flows from operating activities:
    Cash received from clients                $ 3,000
    Purchase of supplies                        (1,000)
    Cash paid to employees                        (800)
    Net cash provided by operating activities             $    1,200
 Cash flows from investing activities:
    Purchase of equipment                      (15,000)
    Net cash used in investing activities                     (15,000)
 Cash flows from financing activities:
    Investment by owner                         20,000
    Borrowed at bank                             4,000
    Withdrawal by owner                           (500)
    Net cash provided by financing activities                 23,500
 Net increase in cash                                     $    9,700
 Cash balance, December 1, 2004                                  -
 Cash balance, December 31, 2004                          $    9,700

  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 1
       Register 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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posted:10/15/2012
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