Principles of Accounting I
ACC 03210
Welcome!
Dr. Eunju (Ivy) Lee
Chapter 1
Accounting in Business
• Accounting uses
• Ethics and accounting
• Transaction analysis
• Financial statements
Importance of Accounting
• Accounting is an information and measurement system that identifies, records,
and communicates an organization’s business activities.
• Accounting is called the language of business because it communicates data to
help people make better decisions.
Users of Accounting Information
• Shareholders • Purchasing managers
• Lenders • Human resource managers
• External auditors • Production managers
• Nonmanagerial employees • Research and development managers
• Regulators • Marketing managers
Opportunities in Accounting
Ethics in Accounting
The goal of accounting is to provide useful information for decisions.
For information to be useful, it must be trusted. This demands ethics
in accounting. Ethics are beliefs that distinguish right from wrong.
They are accepted standards of good and bad behavior.
Internal controls Auditors
Generally Accepted Accounting Principles (GAAP)
Financial accounting is governed by concepts and rules known
as generally accepted accounting principles (GAAP). GAAP
wants information to have relevance and faithful representation.
Relevant information affects Faithful representation
decisions of users. means information accurately
reflects business results.
• The Securities and Exchange Commission (SEC) is a U.S. government agency that oversees GAAP
by companies that sell stock and debt to the public.
• The SEC has provided authority to set GAAP to the Financial Accounting Standards Board (FASB).
International Standards
In today’s global economy, there is increased demand by external
users for comparability in accounting reports.
International Accounting Standards Board (IASB)
• Issues International Financial Reporting Standards (IFRS).
• Standards identify preferred accounting practices.
• Standards are similar to, but sometimes different from U.S. GAAP.
• FASB and IASB are working to reduce differences.
Proprietorship, Partnership, and Corporation
Accounting Equation
What it owns What it owes
Accounting Equation
Claims (by creditors) against The owner’s claim on assets, or
assets, which means they are the owner’s residual interest in
obligations to transfer assets the assets of a business after
Resources owned or controlled by a or provide products or subtracting liabilities
company and that have expected services to other entities
future benefits.
Receivable Payable
• An asset that promises a future • A liability that promises a
inflow of resources (e.g., accounts future outflow of resources
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Asset Accounts
Money and any funds that a bank accepts for deposit (coins, checks, money
Cash
orders, and checking account balances)
Promises of payment from customers to sellers. Accounts receivable are
Accounts Receivable
increased by credit sales or sales on credit.
Written promise of another entity to pay a specific sum of money on a
Notes Receivable
specified future date to the holder of the note.
Prepayments of future expenses. When the expenses are later incurred,
Prepaid Expense prepaid accounts are transferred to expense accounts.
(e.g., prepaid insurance, prepaid rent, and prepaid services)
Supplies Often grouped by purpose including office supplies and store supplies
Equipment Often grouped by purpose such as office equipment and store equipment
Building e.g., stores, offices, warehouses, and factories are assets
Land Reported separately from the buildings located on them
Liability Accounts
Promises to pay later, which usually come from purchases of merchandise
Accounts payable
for resale
Note payable Written promissory note to pay a future amount
Amounts owed that are not yet paid.
Accrued liabilities
(e.g., wages payable, taxes payable, interest payable)
A liability that is settled in the future when a company delivers its product
or services. When products and services are later delivered, unearned
Unearned revenue revenue is transferred to revenue.
(e.g., magazine subscriptions collected in advance by a publisher, rent
collected in advance by a landlord, and season ticket sales by sports teams)
Equity Accounts
Inflows of cash and other net assets from owner contributions. Owner
Owner, Capital
investments are not revenues of the business.
Outflows of cash and other assets to owners for personal use. Withdrawals
Owner, Withdrawals are not expenses of the business; they are simply the opposite of owner
investments.
Income generated from sales of products and services to customers.
Revenues Revenues always increase equity.
(e.g., sales, rent revenue, and interest revenue)
Costs of providing products and services to customers. Expenses always
decrease equity.
Expenses
(e.g., advertising expense, salaries expense, rent expense, utilities expense,
and insurance expense)
Expanded Accounting Equation
• Owner, Capital: inflows of cash and other net assets from owner contributions Increase equity
• Owner, Withdrawals: outflows of cash and other assets to owners for personal use Decrease equity
• Revenues: income generated from sales of products and services to customers Increase equity
• Expenses: costs of providing products and services to customers Decrease equity
Financial Statements
Income Statement
Statement of Owner’s Equity
Balance Sheet
Statement of Cash Flows
Exhibit 1.10: Financial Statements and Their Links – Part 1
Financial Statements and Their Links
Income
Statement
Statement of
Owner’s Equity
Balance Sheet
Income Statement and Statement of Owner’s Equity
Period of time
Period of time
Beginning balance
+ new owner investment
+ net income
- owner withdrawals
= ending balance
Statement of Owner’s Equity and Balance Sheet
Period of time
Point in time
Assets = Liabilities + Equity
Exhibit 1.10: Financial Statements and Their Links – Part 2
Balance Sheet & Statement of Cash Flows
SEC’s EDGAR Data for Financial Statements
• Companies are required to file financial statements electronically through the
SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.
• Anyone can access and download this information for free.
Return on Assets
Return on assets (ROA) is stated in ratio form as net income
divided by the average total assets invested.
Net income
Return on assets =
Average total assets
Example
End of Chapter 1