Chapter 1-Introduction to Accounting and Business

accounting equation

-Assets = Liabilities + Owner's Equity -Given any two amounts, the accounting equation may be solved for the third unknown amount. To illustrate, if the assets owned by a business amount to $100,000 and the liabilities amount to $30,000, the owner's equity is equal to $70,000, computed as follows: $100,000- $30,000= $70,000

financial accounting

-The area of accounting that provides external users with information -The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business.

assets

-The resources owned by a business -Examples: of assets include cash, land, buildings, and equipment

liabilities

-The rights of creditors are the debts of the business -The rights or claims to the assets are divided into two types: (1) the rights of creditors and (2) the rights of owners

owner's equity

-The rights of the owners -The rights of the owners of a proprietorship, partnership, or limited liability

Ethics

-moral principles that guide the conduct of individuals -The objective of accounting is to provide relevant, timely information for user decision making. -Accountants must behave in an ethical manner so that the information they provide users will be trustworthy and, thus, useful for decision making.

Service businesses

-provide services rather than products to customers. EX: Delta Air Lines (transportation services) The Walt Disney Company (entertainment services)

objectivity concept

-requires that the amounts recorded in the accounting records be based on objective evidence. -Only the final agreed-upon amount is objective enough to be recorded in the accounting records.

profit

-the difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services. -the objective of most businesses is to earn a profit

revenue

A business earns money by selling goods or services to its customers

time period concept

A concept of accounting that requires a company to report its economic activities on a regular basis for a specific period of time.

Public Company Accounting Oversight Board (PCAOB)

A new oversight body for the accounting profession that was established by the Sarbanes-Oxley Act.

public accounting

Accountants and their staff who provide services on a fee basis

Sarbanes-Oxley Act (SOX)

An act passed by Congress to restore public confidence and trust in the financial statements of companies.

Partnership

An unincorporated business form consisting of two or more persons conducting business as co-owners for profit.

The process by which accounting provides information to users is as follows:

Identify users -Assess users' information needs -Design the accounting information system to meet users' needs -Record economic data about business activities and events -Prepare accounting reports for users.

prepaid expenses

Items such as supplies that will be used in the business in the future are called prepaid expenses, which are assets.

Certified Public Accountants (CPAs)

Public accountants who have met a state's education, experience, and examination requirements

What went wrong for these managers and companies?

The answer to the preceding question normally involved one or both of the following two factors: -Failure of individual character -Culture of greed and ethical indifference

managerial accounting, or management accounting.

The area of accounting that provides internal users with information

Statement of Cash Flows: Cash Flows from Financing Activities

The cash flows from financing activities section reports the cash transactions related to cash investments by the owner, borrowings, and withdrawals by the owner.

Statement of Cash Flows: Cash Flows from Investing Activities

The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively permanent assets.

Statement of Cash Flows: Cash Flows from Operating Activities

The cash flows from operating activities section reports a summary of cash receipts and cash payments from operations.

net income, net profit, or earnings

The excess of the revenue over the expenses is called net income, net profit, or earnings. If expenses exceed revenue, the excess is a net loss.

account payable

The liability created by a purchase on account

matching concept

The matching concept is applied by "matching" the expenses incurred during a period with the revenue that those expenses generated.

stockholders' equity

The owners' equity in a corporation.

unit of measure concept

The unit of measure concept requires that economic data be recorded in dollars.

Financial Accounting Standards Board (FASB)

Within the U.S., the Financial Accounting Standards Board (FASB)has the primary responsibility for developing accounting principles

account form

a balance sheet lists the assets on the left and the liabilities and owner's equity on the right. It resembles the basic format of the accounting equation.

account receivable

a claim against a customer, which is an asset.

balance sheet

a list of the assets, liabilities, and owner's equity as of a specific date

statement of cash flows

a summary of the cash receipts and cash payments for a specific period of time. It consists of three sections: 1.operating activities 2.investing activities 3.financing activities

Securities and Exchange Commission (SEC)

an agency of the U.S. government, has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public.

business transaction

an economic event or condition that directly changes an entity's financial condition or its results of operations

General-purpose financial statements

are one type of financial accounting report that is distributed to external users.

Manufacturing businesses

convert basic inputs into products that are sold to customers. EX: Ford Motor Co. (cars, trucks, vans) Dell Inc. (personal computers)

Other examples of revenue

include rent, which is recorded as rent revenue, and interest, which is recorded as interest revenue.

ratio of liabilities to owner's equity

is useful in analyzing the ability of a company to pay its creditors. The ratio of liabilities to owner's equity is computed as follows: ratio of liabilities to owner's equity= Total liabilities/ Total owner equity (or total stockholder equity)

statement of owner's equity

reports the changes in the owner's equity for a period of time. It is prepared after the income statement because the net income or net loss for the period must be reported in this statement.

Merchandising businesses

sell products they purchase from other businesses to customers. EX: Wal-Mart Stores, Inc. (general merchandise) Amazon.com (general merchandise)

business entity concept

the activities of a business are recorded separately from the activities of its owners, creditors, or other businesses.

Guidelines for behaving ethically follow:

1.Identify an ethical decision by using your personal ethical standards of honesty and fairness. 2.Identify the consequences of the decision and its effect on others. 3.Consider your obligations and responsibilities to those who will be affected by your decision. 4.Make a decision that is ethical and fair to those affected by it.

limited liability company (LLC)

A business form consisting of one or more persons or entities filing an operating agreement with a state to conduct business with limited liability to the owners, yet treated as a partnership for tax purposes.

Corporation

A business organized under state or federal statutes as a separate business entity.

Proprietorship

A business owned by one person

private accounting

Accountants employed by a business firm, government, or a not-for-profit organization

financial statements

After transactions have been recorded and summarized, reports are prepared for users. The accounting reports providing this information

expenses

During the month, NetSolutions spent cash or used up other assets in earning revenue. Assets used in this process of earning revenue

generally accepted accounting principles (GAAP)

Generally accepted guidelines for the preparation of financial statements.

private accounting

Managerial accountants employed by a business are employed Examples of sensitive information might include information about customers, prices, and plans to expand the business.

International Accounting Standards Board (IASB)

Many countries outside the U.S. use generally accepted accounting principles adopted by the International Accounting Standards Board (IASB).

fees earned

Revenue from providing services

sales

Revenue from the sale of merchandise

cost concept

Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price. The cost concept also involves the objectivity and unit of measure concepts EX: -Aaron Publishers purchased a building on February 20, 2017, for $150,000. Other amounts related to this purchase -Price listed by seller on January 1, 20Y2 $160,000 Aaron Publishers' initial offer to buy on January 31, 20Y2 140,000 -Purchase price on February 20, 20Y2 150,000 -Estimated selling price on December 31, 20Y7 220,000 -Assessed value for property taxes, December 31, 20Y7 190,000 CONCLUSION: Under the cost concept, Aaron Publishers records the purchase of the building on February 20, 2017, at the purchase price of $150,000. The other amounts listed above have no effect on the accounting records.

business

an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.

Accounting

can be defined as an information system that provides reports to users about the economic activities and condition of a business.

income statement

reports the revenues and expenses for a period of time, based on the matching concept.