Introduction to

Accounting and
Business Chapter 1
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 Learning Objectives

• LO1: Describe the nature of a business and the role of

accounting and ethics in business.
• LO2: Summarize the development of accounting principles and
relate them to practice.
• LO3: State the accounting equation and define each element of
the equation.
• LO4: Describe and illustrate how business transactions can be
recorded in terms of the resulting change in the elements of the
accounting equation.

©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Nature of Business and Accounting

• A business is an organization in which basic

resources (inputs), such as materials and labor, are
assembled and processed to provide goods or services
(outputs) to customers.
• The objective of Loading…
most businesses is to earn a profit.
• Profit is the difference between the amounts received
from customers for goods or services and the amounts
paid for the inputs used to provide the goods or
services.

©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of Businesses

Service Businesses provide services rather than products to customers.

Company Service
Delta Air Lines Transportation services
The Walt Disney Company Entertainment services

Merchandising Businesses sell products they purchase from other

businesses to customers.
Company Product
Walmart General merchandise
[Link] Internet books, music, videos
Manufacturing Businesses change basic inputs into products that are
sold to customers.
Company Product
Ford Motor Co. Cars, trucks, vans
Dell Inc. Personal computers
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Role of Accounting in Business

• Accounting can be defined as an information system

that provides reports to users about the economic
activities and condition of a business.
• The process by which accounting provides
information to users is as follows: Loading…
o Identify users.
o Assess users’ information needs.
o Design the accounting information system to meet users’
needs.
o Record economic data about business activities and events.
o Prepare accounting reports for users.

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Managerial Accounting

• The area of accounting that provides internal users

with information is called managerial accounting, or
management accounting.
• Managerial accountants employed by a business are
employed in private accounting.

©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Financial Accounting

• The area of accounting that provides external users

with information is called financial accounting.
• The objective of financial accounting is to provide
relevant and timely information for the decision-
making needs of users outside of the business.
• General-purpose financial statements are one type
of financial accounting report that is distributed to
external users.

©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Accounting Equation
(slide 1 of 2)

• The resources owned by a business are its assets.

• The rights of creditors are the debts of the business
and are called liabilities.
• The rights of the owners are called owner’s equity.
• The equation Assets = Liabilities + Owner’s Equity
is called the accounting equation.

©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Accounting Equation
(slide 2 of 2)

The rights of creditors

are the debts of the
business

Assets = Liabilities + Owner’s Equity

The resources owned The rights of the

by a business owners

©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Example Exercise Accounting Equation
(slide 1 of 2)
John Joos is the owner and operator of You’re A Star, a
motivational consulting business. At the end of its accounting
period, December 31, 2018, You’re A Star has assets of $800,000
and liabilities of $350,000. Using the accounting equation,
determine the following amounts:
a. Owner’s equity as of December 31, 2018.
OE2018 = A2018 - L2018 = 800,000 – 350,000 = 450,000
b. Owner’s equity as of December 31, 2019, assuming that assets
increased by $130,000 and liabilities decreased by $25,000
during 2019.
A2019 = 800,000 + 130,000 = 930,000
L2019 = 350,000 – 25,000 = 325,000
OE2019 = 930,000 – 325,000 = 605,000

©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Example Exercise Accounting Equation
(slide 2 of 2)

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©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Business Transactions and
the Accounting Equation

• A business transaction is an economic event or

condition that directly changes an entity’s financial
condition or its results of operations.

©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Owner’s Equity
Illustration 1-6

Increases in Owner’s Equity

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.
Owner’s Equity
Illustration 1-6

Decreases in Owner’s Equity

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.
 • A business earns money by selling goods or services
①
to its customers. This amount is called revenue.
②• Revenue from providing services is recorded as fees
earned.
③• Revenue from the sale of merchandise is recorded as
sales.
• Other examples of revenue include rent, which is
recorded as rent revenue, and interest, which is
recorded as interest revenue.
 Y
• Receivables are all money claims against other
-

entities, including people, business firms, and other

organizations.
⑧Typeot prepaid expense!
• The Supplies account is an asset because the supplies

>
-

purchased have not been used yet. Items such as

supplies that will be used in the business in the future
are called prepaid expenses, which are assets.
rent , insurance , phone Gill ----
et2

• A prepaid expense is an asset until it has been used

-

up in the business operations. depends on

usage 2
time
!
• The liability created by a purchase on account is
called an account payable. Accounts payable are
 promises by a business to pay for a good or service
Transaction Analysis
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
Transaction (2): Purchase of Equipment for Cash. Softbyte purchases
computer equipment for $7,000 cash.

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

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

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

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

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

LO 7
Example Exercise Transactions
(slide 1 of 2)

Salvo Delivery Service is owned and operated by Joel Salvo. The following
selected transactions were completed by Salvo Delivery Service during
February: of Cash

1. Received cash from owner as additional investment, $35,000. e+ Capital owner

- Cash
2. Paid creditors on account, $1,800.
-

Acct Payable e - ·

-> Reu +
3. Billed customers for delivery services on account, $11,250. -> Acct Receivable + .

Cash
4. Received cash from customers on account, $6,740. e+ - Acct Receivable -
.

5. Paid cash to owner for personal use, $1,000. -> Cash -

-- owners drawing
Indicate the effect of each transaction on the accounting equation elements
(Assets, Liabilities, Owner’s Capital, Drawing, Revenue, and Expense). Also
indicate the specific item within the accounting equation element that is
affected. To illustrate, the answer to (1) follows:

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Example Exercise Transactions
(slide 2 of 2)

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©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.