Fundamental Accounting Principles

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Fundamental Accounting Principles

• 17th Edition
• Larson Wild Chiappetta

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Accounting in Business
Chapter
1
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Importance of Accounting
Accounting
Identifies
Records
Communicates
Relevant
Reliable
to help users make better decisions.
Comparable
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Accounting Activities

• Identifying Business Activities

• Recording Business Activities

• Communicating Business Activities

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Users of Accounting Information
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Users of Accounting Information
Internal Users
Managerial accounting provides information needs
for internal decision makers.
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Opportunities in Accounting
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Accounting Jobs by Area
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EthicsA Key Concept
Beliefs that distinguish right from wrong
Accepted standards of good and bad behavior
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Guidelines for Ethical Decision Making

• Make ethical decision

• Identify ethical concerns

• Analyze options

Use personal ethics to recognize ethical concern.
Consider all good and bad consequences.
Choose best option after weighing all
consequences.
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Generally Accepted Accounting Principles
Financial accounting practice is governed by
concepts and rules known as generally accepted
accounting principles (GAAP).
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Setting Accounting Principles
Financial Accounting Standards Board is the
private group that sets both broad and specific
principles.
The Securities and Exchange Commission is the
government group that establishes reporting
requirements for companies that issue stock to
the public.
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Principles of Accounting
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Principles of Accounting
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Business Entity Forms
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Characteristics of Businesses
Exh. 1.8


Proprietorships and partnerships that are set
up as LLCs provide limited liability.
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Corporation
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Accounting Equation
Liabilities Equity
Assets
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Assets
Cash
Notes Receivable
Accounts Receivable
Resources owned or controlled by a company
Vehicles
Land
Buildings
Store Supplies
Equipment
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Liabilities
Notes Payable
Accounts Payable
Creditors claims on assets
Wages Payable
Taxes Payable
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Equity
Owner Withdrawals
Owner Investments
Owners claims on assets
Revenues
Expenses
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Expanded Accounting Equation
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Transaction Analysis Equation

• The accounting equation must remain in balance
  after each transaction.

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Transaction Analysis

• The accounts involved are
• (1) Cash (asset)
• (2) J. Scott, Capital (equity)

J. Scott, the owner, contributed 20,000 cash to
start the business.
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Transaction Analysis
J. Scott, the owner, contributed 20,000 cash to
start the business.
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Transaction Analysis
Purchased supplies paying 1,000 cash.

• The accounts involved are
• (1) Cash (asset)
• (2) Supplies (asset)

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Transaction Analysis
Purchased supplies paying 1,000 cash.
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Transaction Analysis
Purchased equipment for 15,000 cash.

• The accounts involved are
• (1) Cash (asset)
• (2) Equipment (asset)

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Transaction Analysis
Purchased equipment for 15,000 cash.
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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)

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Transaction Analysis
Purchased Supplies of 200 and Equipment of
1,000 on account.
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Transaction Analysis
Borrowed 4,000 from 1st American Bank.

• The accounts involved are
• (1) Cash (asset)
• (2) Notes payable (liability)

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Transaction Analysis
Borrowed 4,000 from 1st American Bank.
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Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Now lets look at transactions involving revenue,
expenses and withdrawals.
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Transaction Analysis
Rendered consulting services receiving 3,000
cash.

• The accounts involved are
• (1) Cash (asset)
• (2) Revenues (equity)

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Transaction Analysis
Rendered consulting services receiving 3,000
cash.
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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.
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Transaction Analysis
Paid salaries of 800 to employees.
Remember that expenses decrease equity.
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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.
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Transaction Analysis
J. Scott withdrew 500 from the business for
personal use.
Remember that withdrawals decrease equity.
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Financial Statements

• Lets prepare the Financial Statements reflecting
  the transactions we have recorded.

1. Income Statement
2. Statement of Owners Equity
3. Balance Sheet
4. Statement of Cash Flows

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Net income is the difference between Revenues and
Expenses.
The income statement describes a companys
revenues and expenses along with the resulting
net income or loss over a period of time due to
earnings activities.
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The net income of 2,200 increases Scotts
capital by 2,200.

The Statement of Owners Equity explains changes
in equity from net income (or net loss) and from
owner investments and withdrawals for a period of
time.
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The Balance Sheet describes a companys financial
position at a point in time.
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The Statement of Cash Flows identifies cash
inflows and cash outflows over a period of time.
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Return on Assets (ROA)
Net income Average total assets
ROA is viewed as an indicator of operating
efficiency.
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End of Chapter 1