Accounting

1. 1-1 LO 1 Explain what accounting is.
Purpose of accounting is to:
1. identify,
2. record, and
3. communicate
the economic events of an organization to interested users.
What is Accounting?

2. 1-2
Three Activities
LO 1 Explain what accounting is.
Illustration 1-1
Accounting process
The accounting process includes
the bookkeeping function.
What is Accounting?

3. 1-3 LO 2
Internal
Users
Illustration 1-2
Questions that internal
users ask
Who Uses Accounting Data

4. 1-4 LO 2
External
Users
Illustration 1-3
Questions that external
users ask
Who Uses Accounting Data

5. 1-5
Ethics are the standards of conduct by which one's actions
are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.
Question
LO 3 Understand why ethics is a fundamental business concept.
Ethics in Financial Reporting

6. 1-6
Various users
need financial
information
The accounting profession
has attempted to develop a
set of standards that are
generally accepted and
universally practiced.
Financial Statements
Balance Sheet
Income Statement
Statement of Owner’s Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting
Principles (GAAP)
LO 4 Explain generally accepted accounting principles.
Generally Accepted Accounting Principles

7. 1-7
Generally Accepted Accounting Principles (GAAP) - A set of
rules and practices, having substantial authoritative support, that
the accounting profession recognizes as a general guide for
financial reporting purposes.
Standard-setting bodies:
► Securities and Exchange Commission
(SEC)
► Financial Accounting Standards
Board (FASB)
► International Accounting Standards
Board (IASB)
Generally Accepted Accounting Principles
LO 4 Explain generally accepted accounting principles.

8. 1-8
Historical Cost Principle (or cost principle) dictates that
companies record assets at their cost.
Fair Value Principle states that assets and liabilities should
be reported at fair value (the price received to sell an asset or
settle a liability).
Generally Accepted Accounting Principles
Measurement Principles
LO 4 Explain generally accepted accounting principles.
Selection of which principle to follow
generally relates to trade-offs
between relevance and faithful
representation.

9. 1-9
Monetary Unit Assumption requires that companies
include in the accounting records only transaction data that can be
expressed in terms of money.
LO 5 Explain the monetary unit assumption
and the economic entity assumption.
Generally Accepted Accounting Principles
Assumptions
Economic Entity Assumption
requires that activities of the entity be
kept separate and distinct from the
activities of its owner and all other
economic entities.

10. 1-10
Proprietorship Partnership Corporation
 Owned by two or
more persons.
 Often retail and
service-type
businesses
 Generally
unlimited
personal liability
 Partnership
agreement
 Ownership
divided into
shares of stock
 Separate legal
entity organized
under state
corporation law
 Limited liability
 Generally owned
by one person.
 Often small
service-type
businesses
 Owner receives
any profits,
suffers any
losses, and is
personally liable
for all debts.
LO 5 Explain the monetary unit assumption
and the economic entity assumption.
Forms of Business Ownership

11. 1-11
Question
Combining the activities of Kellogg and General Mills would
violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
LO 5 Explain the monetary unit assumption
and the economic entity assumption.
Generally Accepted Accounting Principles

12. 1-12
A business organized as a separate legal entity under state law
having ownership divided into shares of stock is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
LO 5 Explain the monetary unit assumption
and the economic entity assumption.
Question
Generally Accepted Accounting Principles

13. 1-13
Provides the underlying framework for recording and
summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership claims.
Assets Liabilities
Owner’s
Equity
= +
LO 6 State the accounting equation, and define its components.
The Basic Accounting Equation

14. 1-14
Assets Liabilities
Owner’s
Equity
= +
 Resources a business owns.
 Provide future services or benefits.
 Cash, Supplies, Equipment, etc.
LO 6 State the accounting equation, and define its components.
Assets
The Basic Accounting Equation

15. 1-15
 Claims against assets (debts and obligations).
 Creditors - party to whom money is owed.
 Accounts payable, Notes payable, etc.
LO 6 State the accounting equation, and define its components.
Liabilities
The Basic Accounting Equation
Assets Liabilities
Owner’s
Equity
= +

16. 1-16
 Ownership claim on total assets.
 Referred to as residual equity.
 Investment by owners and revenues (+)
 Drawings and expenses (-).
LO 6 State the accounting equation, and define its components.
Owner’s Equity
The Basic Accounting Equation
Assets Liabilities
Owner’s
Equity
= +

17. 1-17
 Investments by owner are the assets the owner puts into the
business.
 Revenues result from business activities entered into for the
purpose of earning income.
 Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
Illustration 1-6
LO 6 State the accounting equation, and define its components.
Owner’s Equity
Increases in Owner’s Equity

18. 1-18
 Drawings An owner may withdraw cash or other assets for
personal use.
 Expenses are the cost of assets consumed or services used in
the process of earning revenue.
 Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.
Illustration 1-6
LO 6 State the accounting equation, and define its components.
Owner’s Equity
Decreases in Owner’s Equity

19. 1-19
Transactions are a business’s economic events recorded
by accountants.
 May be external or internal.
 Not all activities represent transactions.
 Each transaction has a dual effect on the accounting
equation.
LO 7 Analyze the effects of business transactions on the accounting equation.
Using the Accounting Equation

20. 1-20
Illustration: Are the following events recorded in the accounting
records?
Event
Purchase
computer
Criterion Is the financial position (assets, liabilities, or
owner’s equity) of the company changed?
Pay rent
Record/
Don’t Record
LO 7 Analyze the effects of business transactions on the accounting equation.
Using the Accounting Equation
Discuss
guided trip
options with
customer

21. 1-21
Transaction (1): Ray Neal decides to open a computer programming
service which he names Softbyte. On September 1, 2014, Ray Neal
invests $15,000 cash in the business.
LO 7
Transaction Analysis

22. 1-22
Transaction (2): Purchase of Equipment for Cash. Softbyte purchases
computer equipment for $7,000 cash.
LO 7
Transaction Analysis

23. 1-23
Transaction (3): Softbyte purchases for $1,600 from Acme Supply
Company computer paper and other supplies expected to last several
months. The purchase is made on account.
LO 7
Transaction Analysis

24. 1-24
Transaction (4): Softbyte receives $1,200 cash from customers for
programming services it has provided.
LO 7
Transaction Analysis

25. 1-25
Transaction (5): Softbyte receives a bill for $250 from the Daily News
for advertising but postpones payment until a later date.
LO 7
Transaction Analysis

26. 1-26
Transaction (6): 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.
LO 7
Transaction Analysis

27. 1-27
Transaction (7): Softbyte pays the following expenses in cash for
September: store rent $600, salaries of employees $900, and utilities
$200.
LO 7
Transaction Analysis

28. 1-28
Transaction (8): Softbyte pays its $250 Daily News bill in cash.
LO 7
Transaction Analysis

29. 1-29
Transaction (9): Softbyte receives $600 in cash from customers who
had been billed for services [in Transaction (6)].
LO 7
Transaction Analysis

30. 1-30
Transaction (10): Ray Neal withdraws $1,300 in cash from the
business for his personal use.
LO 7
Transaction Analysis
Illustration 1-8
Tabular summary of
Softbyte transactions

31. 1-31
Companies prepare four financial statements :
Balance
Sheet
Income
Statement
Statement
of Cash
Flows
Owner’s
Equity
Statement
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements

32. 1-32
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Question

33. 1-33
Net income is needed to determine the
ending balance in owner’s equity.
Illustration 1-9
Financial statements and
their interrelationships
Financial Statements
LO 8

34. 1-34
The ending balance in owner’s equity is
needed in preparing the balance sheet
Financial Statements
Illustration 1-9
LO 8

35. 1-35
The balance sheet and income statement are
needed to prepare statement of cash flows.
Financial Statements
Illustration 1-9
LO 8

36. 1-36 LO 8 Understand the four financial statements and how they are prepared.
 Reports the revenues and expenses for a specific period
of time.
 Lists revenues first, followed by expenses.
 Shows net income (or net loss).
Financial Statements
Income Statement

37. 1-37 LO 8 Understand the four financial statements and how they are prepared.
 Reports the changes in owner’s equity for a specific
period of time.
 The time period is the same as that covered by the
income statement.
Financial Statements
Owner’s Equity Statement

38. 1-38 LO 8 Understand the four financial statements and how they are prepared.
 Reports the assets, liabilities, and owner’s equity at a
specific date.
 Lists assets at the top, followed by liabilities and owner’s
equity.
 Total assets must equal total liabilities and owner’s equity.
 Is a snapshot of the company’s financial condition at a
specific moment in time (usually the month-end or year-
end).
Financial Statements
Balance Sheet

39. 1-39
Which of the following financial statements is prepared as of
a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Question

40. 1-40
Account Name
Debit / Dr. Credit / Cr.
 Record of increases and decreases
in a specific asset, liability, equity,
revenue, or expense item.
 Debit = “Left”
 Credit = “Right”
Account
An account can be
illustrated in a T-
account form.
LO 1 Explain what an account is and how it helps in the recording process.
The Account

41. 1-41
Double-entry system
► Each transaction must affect two or more accounts to
keep the basic accounting equation in balance.
► Recording done by debiting at least one account and
crediting another.
► DEBITS must equal CREDITS.
LO 2 Define debits and credits and explain their use
in recording business transactions.
Debits and Credits
The Account

42. 1-42
Account Name
Debit / Dr. Credit / Cr.
If Debit amounts are greater than Credit amounts, the
account will have a debit balance.
$10,000 Transaction #2
$3,000
$15,000
8,000
Transaction #3
Balance
Transaction #1
Debits and Credits
LO 2 Define debits and credits and explain their use
in recording business transactions.

43. 1-43
Account Name
Debit / Dr. Credit / Cr.
$10,000 Transaction #2
$3,000
Balance
Transaction #1
$1,000
8,000 Transaction #3
If Debit amounts are less than Credit amounts, the
account will have a credit balance.
Debits and Credits
LO 2 Define debits and credits and explain their use
in recording business transactions.

44. 1-44
 Assets - Debits should exceed
credits.
 Liabilities – Credits should
exceed debits.
 Normal balance is on the
increase side.
Chapter
3-23
Assets
Assets
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-24
Liabilities
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Debits and Credits
LO 2 Define debits and credits and explain their use
in recording business transactions.

45. 1-45
 Owner’s investments and
revenues increase owner’s equity
(credit).
 Owner’s drawings and expenses
decrease owner’s equity (debit).
Chapter
3-25
Debit / Dr. Credit / Cr.
Normal Balance
Owner’s Capital
Chapter
3-23
Owner’s Drawing
Debit / Dr. Credit / Cr.
Normal Balance
Chapter
3-25
Debit / Dr. Credit / Cr.
Normal Balance
Owner’s Equity
Debits and Credits
LO 2
Helpful Hint Because
revenues increase owner’s
equity, a revenue account
has the same debit/credit
rules as the Owner’s
Capital account. Expenses
have the opposite effect.

46. 1-46
Chapter
3-27
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Expense
Expense
Chapter
3-26
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Revenue
Revenue
Debits and Credits
LO 2 Define debits and credits and explain their use
in recording business transactions.
 The purpose of earning revenues
is to benefit the owner(s).
 The effect of debits and credits on
revenue accounts is the same as
their effect on Owner’s Capital.
 Expenses have the opposite
effect: expenses decrease owner’s
equity.

47. 1-47
Chapter
3-23
Assets
Assets
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-27
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Expense
Expense
Normal
Balance
Credit
Normal
Balance
Debit
Debits/Credits Rules
Chapter
3-24
Liabilities
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-25
Debit / Dr. Credit / Cr.
Normal Balance
Owner’s Equity
LO 2
Chapter
3-26
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Revenue
Revenue

48. 1-48
Balance Sheet Income Statement
= + -
Asset Liability Equity Revenue Expense
Debit
Credit
Debits/Credits Rules
LO 2 Define debits and credits and explain their use
in recording business transactions.

49. 1-49
Debits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.
Debits/Credits Rules
Question
LO 2 Define debits and credits and explain their use
in recording business transactions.

50. 1-50
Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and equity.
c. assets, liabilities, and owner’s drawing.
d. assets, owner’s drawing, and expenses.
Debits/Credits Rules
Question
LO 2 Define debits and credits and explain their use
in recording business transactions.

51. 1-51
Illustration 2-11
Assets Liabilities
=
Basic
Equation
Expanded
Basic
Equation
+
Summary of Debits/Credits Rules
Relationship among the assets, liabilities and owner’s equity
of a business:
The equation must be in balance after every transaction.
For every Debit there must be a Credit.
LO 2 Define debits and credits and explain their use
in recording business transactions.
Owner’s Equity

52. 1-52
Business documents, such as a sales slip, a check, a bill, or
a cash register tape, provide evidence of the transaction.
LO 3 Identify the basic steps in the recording process.
Illustration 2-12
Analyze each transaction Enter transaction in a journal Transfer journal information to
ledger accounts
Steps in the Recording Process

53. 1-53
 Book of original entry.
 Transactions recorded in chronological order.
 Contributions to the recording process:
1. Discloses the complete effects of a transaction.
2. Provides a chronological record of transactions.
3. Helps to prevent or locate errors because the debit and
credit amounts can be easily compared.
LO 4 Explain what a journal is and how it helps in the recording process.
The Journal
Steps in the Recording Process

54. 1-54
Journalizing - Entering transaction data in the journal.
LO 4 Explain what a journal is and how it helps in the recording process.
Illustration: On September 1, Ray Neal invested $15,000 cash in
the business, and Softbyte purchased computer equipment for
$7,000 cash.
Account Title Ref. Debit Credit
Date
Cash
Owner’s Capital
Sept. 1 15,000
15,000
General Journal
Equipment
Cash
7,000
7,000
Illustration 2-13
Steps in the Recording Process

55. 1-55
Simple and Compound Entries
LO 4 Explain what a journal is and how it helps in the recording process.
Illustration: On July 1, Butler Company purchases a delivery truck
costing $14,000. It pays $8,000 cash now and agrees to pay the
remaining $6,000 on account.
Account Title Ref. Debit Credit
Date
Equipment
Cash
July 1 14,000
8,000
General Journal
6,000
Accounts payable
Illustration 2-14
Steps in the Recording Process

56. 1-56
 General Ledger contains the entire group of accounts
maintained by a company.
LO 5 Explain what a ledger is and how it helps in the recording process.
Illustration 2-15
The Ledger
Steps in the Recording Process

57. 1-57 LO 5 Explain what a ledger is and how it helps in the recording process.
Illustration 2-16
Steps in the Recording Process
Standard Form of Account

58. 1-58
Posting –
process of
transferring
amounts from
the journal to
the ledger
accounts.
Illustration 2-17
LO 6 Explain what posting is and how it helps in the recording process.
Steps

59. 1-59
Accounts and account numbers arranged in sequence in which
they are presented in the financial statements.
LO 6 Explain what posting is and how it helps in the recording process.
Illustration 2-18
Chart of Accounts

60. 1-60
LO 6
Follow these steps:
1. Determine what
type of account is
involved.
2. Determine what
items increased or
decreased and by
how much.
3. Translate the
increases and
decreases into
debits and credits.
Illustration 2-19
The Recording Process Illustrated

61. 1-61
The Recording Process Illustrated
LO 6
Illustration 2-20

62. 1-62
The Recording Process Illustrated
LO 6
Illustration 2-21

63. 1-63
The Recording Process Illustrated
LO 6
Illustration 2-22

64. 1-64
The Recording Process Illustrated
LO 6
Illustration 2-23

65. 1-65
The Recording Process Illustrated
Illustration 2-24
LO 6

66. 1-66
The Recording Process Illustrated
Illustration 2-25
LO 6

67. 1-67
LO 6
Illustration 2-26
The Recording Process Illustrated

68. 1-68
The Recording Process Illustrated
LO 6
Illustration 2-27

69. 1-69
The Recording Process Illustrated
LO 6
Illustration 2-28

70. 1-70
Summary of
Journalizing
and Posting
LO 6
Illustration 2-29

71. 1-71
Illustration 2-30
LO 6

72. 1-72 LO 7 Prepare a trial balance and explain its purposes.
Illustration 2-31
Trial Balance

73. 1-73
The trial balance may balance even when
1. a transaction is not journalized,
2. a correct journal entry is not posted,
3. a journal entry is posted twice,
4. incorrect accounts are used in journalizing or posting, or
5. offsetting errors are made in recording the amount of a
transaction.
LO 7 Prepare a trial balance and explain its purposes.
Trial Balance
Limitations of a Trial Balance

74. 1-74
A trial balance will not balance if:
a. a correct journal entry is posted twice.
b. the purchase of supplies on account is debited to Supplies
and credited to Cash.
c. a $100 cash drawing by the owner is debited to Owner’s
Drawing for $1,000 and credited to Cash for $100.
d. a $450 payment on account is debited to Accounts
Payable for $45 and credited to Cash for $45.
LO 7 Prepare a trial balance and explain its purposes.
Trial Balance
Question