Introduction to Accounting and Business

1. 1 Introduction to Accounting and Business Student Version

2. 1 1 Describe the nature of a business, the role of accounting, and ethics in business. 1-2

3. Manufacturing BusinessProduct General Motors Corp. Cars, trucks, vans Merchandising BusinessProduct Wal-Mart General merchandise 1 Types of Businesses ServiceBusinessService Delta Air Lines Transportation services

4. 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.

5. 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.

6. 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.

7. 1 Role of Ethics in Accounting and Business Ethics are moral principles that guide the conduct of individuals.

8. 2 Summarize the development of accounting principles and relate them to practice. 1-8

9. 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.

10. 2 Business Entity Concept A proprietorship is owned by one individual. • 70% of business entities in the United States. • Easy and cheap to organize. • Resources are limited to those of the owner. • Used by small businesses.

11. 2 Business Entity Concept Acorporationis organized under state or federal statutes as a separate legal taxable entity. • Generates 90% of business revenues. • 20% of the business organizations in the United States. • Ownership is divided into shares called stock. • Can obtain large amounts of resources by issuing stocks. • Used by large businesses.

12. 2 Business Entity Concept A limited liability company(LLC) combines attributes of a partnership and a corporation. • 10% of business organizations in the United States (combined with partnerships). • Often used as an alternative to a partnership. • Has tax and legal liability advantages for owners.

13. 2 Cost Concept Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price.

14. 2 Objectivity Concept The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence.

15. 2 Unit of Measure Concept The unit of measure concept requires that economic data be recorded in dollars.

16. 3 State the accounting equation and define each element of the equation. 1-16

17. The rights of the owners The rights of the creditors are the debts of the business. The resources owned by a business 3 The Accounting Equation Assets = Liabilities + Owner’s Equity

18. 4 Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation. 1-18

19. 4 Business Transaction A business transaction is an economic event or condition that directly changes an entity’s financial condition or its results of operations.

20. 4 Transaction A On November 1, 2009, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation.

21. CASH 25,000 a. 4 Transaction A (continued) Stockholders’ Equity Assets = CAPITAL STOCK 25,000 =

22. 4 Transaction B On November 5, 2009, NetSolutions paid $20,000 for the purchase of land as a future building site.

23. b. –20,000 +20,000 4 Transaction B (continued) Stockholders’ Equity Assets = CASH + LAND 25,000 CAPITAL STOCK 25,000 = Bal. Bal. 5,000 20,000 25,000

24. 4 Transaction C On November 10, 2009, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future.

25. 4 Transaction C (continued) Stockholders’ Liabilities + Equity Assets = ACCOUNTS CAPITAL PAYABLE + STOCK CASH + SUPPLIES + LAND 5,000 20,000 25,000 = Bal. c. +1,350 +1,350 Bal. 5,000 1,350 20,000 1,350 25,000

26. 4 Transaction D On November 18, 2009, NetSolutions received cash of $7,500 for providing services to customers. A business earns money by selling goods or services to its customers. This amount is called Revenue.

27. 4 Transaction D (continued) Assets CASH + SUPPLIES + LAND 5,000 1,350 20,000 Bal. d. +7,500 Bal. 12,500 1.350 20,000

28. 4 Transaction D (continued) Liabilities + Stockholders’ Equity ACCOUNTS CAPITAL FEES PAYABLE + STOCK + EARNED 1,350 25,000 Bal. d. +7,500 Bal. 1,350 25,000 7,500

29. 4 Transaction E On November 30, 2009, NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous,$275.

30. 4 Transaction E (continued) Assets CASH + SUPPLIES + LAND 12,500 1,350 20,000 Bal. e. –3,650 Bal. 8,850 1.350 20,000

31. 4 Transaction E (continued) Liabilities + Stockholders’ Equity ACCOUNTS CAPITAL FEES WAGES RENT UTIL. MISC. PAYABLE + STOCK + EARNED – EXP. – EXP. – EXP. – EXP. 1,350 25,000 7,500 Bal. e. –2,125 –800 –450 –275 Bal. 1,350 25,000 7,500 –2,125 –800 –450 –275

32. 4 Transaction F On November 30, 2009, NetSolutions paid creditors on account, $950.

33. 4 Transaction F (continued) Assets CASH + SUPPLIES + LAND 8,850 1,350 20,000 Bal. f. –950 Bal. 7,900 1.350 20,000

34. 4 Transaction F (continued) Liabilities + Stockholders’ Equity ACCOUNTS CAPITAL FEES WAGES RENT UTIL. MISC. PAYABLE + STOCK + EARNED – EXP. – EXP. – EXP. – EXP. 1,350 25,000 7,500 Bal. f. –950 Bal. 400 25,000 7,500 –2,125 –800 –450 –275

35. 4 Transaction G On November 30, 2009, Chris Clark determined that the cost of supplies on hand at the end of the period was $550.

36. 4 Transaction G (continued) Assets CASH + SUPPLIES + LAND 7,900 1,350 20,000 Bal. g. –800 Bal. 7,900 550 20,000

37. 4 Transaction G (continued) Liabilities + Stockholders’ Equity ACCOUNTS CAPITAL FEES WAGES RENT SUP. UTIL. MISC. PAYABLE + STOCK + EARNED – EXP. – EXP. – EXP. – EXP. – EXP. 400 25,000 7,500 –2,125 –800 –450 –275 Bal. g. –800 Bal. 400 25,000 7,500 –2,125 –800 –800 –450 –275

38. 4 Transaction H On November 30, 2009, NetSolutions pays $2,000 to stockholders (Chris Clark) as dividends.

39. 4 Transaction H (continued) Assets CASH + SUPPLIES + LAND 7,900 550 20,000 Bal. h. –2,000 Bal. 5,900 550 20,000

40. 4 Transaction H (continued) Liabilities + Stockholders’ Equity ACCTS. CAPITAL, DIVI- FEES WAGES RENT SUP. UTIL. MISC. PAY. + STOCK – DENDS + EARNED – EXP. – EXP. – EXP. – EXP. – EXP. 400 25,000 7,500 –2,125 –800 –800 –450 –275 Bal. h. –2,000 Bal.400 25,000 –2,000 7,500 –2,125 –800 –800 –450 –275

41. 5 Describe the financial statements of a corporation and explain how they interrelate. 1-41

42. 5 Income Statement The incomestatement reports the revenues and expenses for a period of time, based on the matching concept.

43. 5 Matching Concept The matching concept is applied by matching the expenses with the revenue generated during a period by those expenses.

44. 5 The excess of revenue over the expenses is called net income or net profit.If the expenses exceed the revenue, the excess is a net loss.

45. 5 Exhibit 6 Financial Statements for NetSolutions Net income is carried to the retained earnings statement.

46. 5 Exhibit 6 Financial Statements for NetSolutions (continued) From the income statement To the balance sheet

47. 5 Exhibit 6 Financial Statements for NetSolutions (continued) This amount is compared to the net cash flow on the statement of cash flows. From the retained earnings statement

48. 5 Exhibit 6 Financial Statements for NetSolutions (continued) This amount should match Cash on the balance sheet.