Accounting Principles 10th Chapter 1

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AccountingAccountingPrinciplesPrinciples1 thh EditionditionWeygandt Kieso Kimmel Trenholmeygandt Kieso Kimmel Trenholm


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CHAPTERCHAPTER

11

ACCOUNTING IN ACTIONACCOUNTING IN ACTION


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THETHE ACCOUNTING PROCESSACCOUNTING PROCESS


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Accounting

1. Includes bookkeeping

2. Includes much more such as the entire

process of identifying, recording, andcommunicating economic events.

Bookkeeping

1. Involves only the recording of economicevents

2. Is just one part of accounting

BOOKKEEPING DISTINGUISHEDBOOKKEEPING DISTINGUISHED

FROM ACCOUNTINGFROM ACCOUNTING

Accounting

1. Includes bookkeeping

2. Includes much more such as the entire

process of identifying, recording, and

communicating economic events.

Bookkeeping

1. Involves only the recording of economicevents

2. Is just one part of accounting


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Users of Accounting Information

Internal

Users

External

Users


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QUESTIONSQUESTIONS ASKED BY INTERNALASKED BY INTERNAL USERSUSERS

(Management)(Management)

Can we afford to give employeespay raises this year?

Is cash sufficient to pay bills?

What is the cost of manufacturing

each unit of product?

Which product line is the mostprofitable?


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Management Accounting

Management accounting provides internal

decision makers (management), who are charged

with achieving the goals of profitability and

liquidity, with information about operating,investing, and financing activities.

Examples are financial comparisons of operating

alternatives, projections of income from new salescampaigns, and forecasts of cash needs for the

next year.

Management accounting provides internal

decision makers (management), who are charged

with achieving the goals of profitability and

liquidity, with information about operating,investing, and financing activities.

Examples are financial comparisons of operating

alternatives, projections of income from new salescampaigns, and forecasts of cash needs for the

next year.


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External users

External users are individuals and organizationsoutside a company who want financial informationabout the company.

The two most common types of external users areinvestors and creditors.

Investors (owners) use accounting information tomake decisions to buy, hold, or sell ownership

shares of a company. Creditors (such as suppliers and bankers) use

accounting information to evaluate the risks ofgranting credit or lending money.

External users are individuals and organizationsoutside a company who want financial informationabout the company.

The two most common types of external users areinvestors and creditors.

Investors (owners) use accounting information tomake decisions to buy, hold, or sell ownership

shares of a company. Creditors (such as suppliers and bankers) use

accounting information to evaluate the risks ofgranting credit or lending money.


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Financial Accounting

Financial accounting generates reports andcommunicates them to external decisionmakers so they can evaluate how well the

business has achieved its goals. These reportsare called financial statements.

Financial statements report directly on thegoals of profitability and liquidity and areused extensively both inside and outside abusiness to evaluate the businesss success.

It varies according to the requirement of user.

Financial accounting generates reports andcommunicates them to external decisionmakers so they can evaluate how well the

business has achieved its goals. These reportsare called financial statements.

Financial statements report directly on thegoals of profitability and liquidity and areused extensively both inside and outside abusiness to evaluate the businesss success.

It varies according to the requirement of user.


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BUSINESS ENTERPRISESBUSINESS ENTERPRISES

A business owned by one person is generally aproprietorship (owners equity).

A business owned by two or more persons associated aspartners is a partnership (partners equity).

A business organized as a separate legal entity undercorporation law and having ownership divided intotransferable shares is called a corporation (shareholdersequity).

proprietorship (owners equity).

A business owned by two or more persons associated aspartners is a partnership (partners equity).

A business organized as a separate legal entity undercorporation law and having ownership divided intotransferable shares is called a corporation (shareholdersequity).


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BASICBASIC ACCOUNTING EQUATIONACCOUNTING EQUATION

The Basic Accounting Equation

Assets = Liabilities + Owners Equity


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ASSETS AS A BUILDING BLOCKASSETS AS A BUILDING BLOCK

Assets are resources owned by a business.

They are things of value used in carrying

out such activities as production andexchange.

Assets are resources owned by a business.

They are things of value used in carrying

out such activities as production andexchange.


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LIABILITIES AS A BUILDING BLOCKLIABILITIES AS A BUILDING BLOCK

Liabilities are claims against assets.

They are existing debts and obligations.


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Owners Equity is equal to total assets minustotal liabilities.

Owners Equity represents the ownership claim

on total assets. It is often referred to as residualequity.

Subdivisions of Owners Equity:

1. Investments by Owner

2. Drawings3. Revenues

4. Expenses

OWNERSOWNERS EQUITYEQUITY

Owners Equity is equal to total assets minustotal liabilities.

Owners Equity represents the ownership claim

on total assets. It is often referred to as residualequity.

Subdivisions of Owners Equity:

1. Investments by Owner

2. Drawings3. Revenues

4. Expenses


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Increase in Owners EquityIncrease in Owners Equity

Investments by owner are the assets put intothe business by the owner.

These investments in the business increaseowners equity.

Investments by owner are the assets put intothe business by the owner.

These investments in the business increaseowners equity.


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Revenues are the gross increases in owners equity

resulting from business activities entered into for

the purpose of earning income.

Revenues may result from sale of merchandise,

performance of services, rental of property, or

lending of money.

Revenues usually result in an increase in an asset.

Increase in Owners EquityIncrease in Owners Equity

Revenues are the gross increases in owners equity

resulting from business activities entered into for

the purpose of earning income.

Revenues may result from sale of merchandise,

performance of services, rental of property, or

lending of money.

Revenues usually result in an increase in an asset.


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Drawings are withdrawals of cash or other

assets by the owner for personal use.

Drawings decrease total owners equity.

Decrease in Owners EquityDecrease in Owners Equity


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Expenses are the decreases in owners equity that

result from operating the business.

Expenses are the cost of assets consumed orservices used in the process of earning revenue.

Examples of expenses include utility expense, rent

expense, and supplies expense.

Decrease in Owners EquityDecrease in Owners Equity

Expenses are the decreases in owners equity that

result from operating the business.

Expenses are the cost of assets consumed orservices used in the process of earning revenue.

Examples of expenses include utility expense, rent

expense, and supplies expense.


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INCREASESINCREASES AND DECREASES INAND DECREASES INOWNERS EQUITYOWNERS EQUITY

Investments

by Owner

Investments

by OwnerWithdrawals

by Owner

Withdrawals

by Owner

INCREASES DECREASES

Investments

by Owner

Investments

by Owner

RevenuesRevenues

Withdrawals

by Owner

Withdrawals

by Owner

ExpensesExpenses

Owners

Equity


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Expanded accounting equation


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TRANSACTION ANALYSISTRANSACTION ANALYSIS

Marc Doucet decides to open a computer

programming service.

BANK

Softbyt

e


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TRANSACTIONTRANSACTION 11


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Softbyte provides $3,500 of programming services for

customers. The company receives cash of $1,500 from

customers, and it bills the balance of $2,000 on account.


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Softbyte pays the following expenses in cash for September: store

rent $600, salaries and wages of employees $900, and utilities $200.

These payments result in an equal decrease in assets and expenses.Cash decreases $1,700, and the specific expense categories (Rent

Expense, Salaries and Wages Expense, and Utilities Expense)

decrease owners equity by the same amount.


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Softbyte pays its $250 Daily News bill in cash. The companypreviously [in Transaction (5)] recorded the bill as an increase in

Accounts Payable and a decrease in owners equity.


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Softbyte receives $600 in cash from customers who had been billed

for services [in Transaction (6)].


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Summary of Transaction


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Numerical


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Solution


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FINANCIAL STATEMENTSFINANCIAL STATEMENTS

After transactions are identified, recorded, and

summarized, four financial statements are

prepared from the summarized accounting data:

1. An income statement presents the revenues

and expenses and resulting net income or net loss

of a company for a specific period of time.

2. A statement of owners equity summarizes thechanges in owners equity for a specific period of

time.

After transactions are identified, recorded, and

summarized, four financial statements are

prepared from the summarized accounting data:

1. An income statement presents the revenues

and expenses and resulting net income or net loss

of a company for a specific period of time.

2. A statement of owners equity summarizes thechanges in owners equity for a specific period of

time.


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FINANCIAL STATEMENTSFINANCIAL STATEMENTS

In addition to the income statement and statement ofowners equity, two additional statements are

prepared:

3. A balance sheet reports the assets, liabilities, and

owners equity of a business enterprise at a specificdate.

4. A cash flow statement summarizes information

concerning the cash inflows (receipts) and outflows

(payments) for a specific period of time.

These statements provide relevant financial data for

internal and external users.

In addition to the income statement and statement ofowners equity, two additional statements are

prepared:

3. A balance sheet reports the assets, liabilities, and

owners equity of a business enterprise at a specificdate.

4. A cash flow statement summarizes information

concerning the cash inflows (receipts) and outflows

(payments) for a specific period of time.

These statements provide relevant financial data for

internal and external users.


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Numerical


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Accounting Principles 10th Chapter 1