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LEARNING Identify the activities and users

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OBJECTIVE associated with accounting.

Accounting consists of three basic activities—it

u identifies,

u records, and

u communicates

the economic events of an organization to interested users.

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 Three Activities
Illustration 1-1
The activities of the accounting process

The accounting process includes

the bookkeeping function.

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 Who Uses Accounting Data

INTERNAL
USERS

Illustration 1-2
Questions that internal
users ask

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 Who Uses Accounting Data

EXTERNAL
USERS

Illustration 1-3
Questions that external
users ask
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 Measurement Principles

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).

Selection of which principle to follow

generally relates to trade-offs
between relevance and faithful
representation.

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 Assumptions

MONETARY UNIT ASSUMPTION requires that companies

include in the accounting records only transaction data that can be
expressed in terms of money.

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.

u Proprietorship
Forms of Business
u Partnership
Ownership
u Corporation

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LEARNING State the accounting equation, and define
3
OBJECTIVE its components.

Owner's
Assets = Liabilities +
Equity

Basic Accounting Equation

u Provides the underlying framework for recording and
summarizing economic events.

u Assets are claimed by either creditors or owners.

u If a business is liquidated, claims of creditors must be paid

before ownership claims.

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 Basic Accounting Equation

Owner's
Assets = Liabilities +
Equity

Assets
u Resources a business owns.
u Provide future services or benefits.

u Cash, Supplies, Equipment, etc.

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 Basic Accounting Equation

Owner's
Assets = Liabilities +
Equity

Liabilities
u Claims against assets (debts and obligations).

u Creditors (party to whom money is owed).

u Accounts Payable, Notes Payable, Salaries and Wages

Payable, etc.

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 Basic Accounting Equation

Owner's
Assets = Liabilities +
Equity

Owner's Equity
u Ownership claim on total assets.

u Referred to as residual equity.

u Investment by owners and revenues (+)
u Drawings and expenses (-).

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 Owner’s Equity Illustration 1-6
Expanded accounting
equation

Increases in Owner’s Equity

u Investments by owner are the assets the owner puts into the
business.

u 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.

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 Owner’s Equity Illustration 1-6
Expanded accounting
equation

Decreases in Owner’s Equity

u Drawings An owner may withdraw cash or other assets for
personal use.

u 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.

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 DO IT! 3 Owner's Equity Effects

Classify the following items as investment by owner, owner’s

drawings, revenue, or expenses. Then indicate whether each
item increases or decreases owner’s equity.

Classification Effect on Equity

1. Rent Expense Expense Decrease

2. Service Revenue Revenue Increase

3. Drawings Drawings Decrease

4. Salaries and Wages

Expense Decrease
Expense
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LEARNING Analyze the effects of business transactions
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OBJECTIVE on the accounting equation.

Transactions are a business’s economic events recorded

by accountants.

u May be external or internal.

u Not all activities represent transactions.

u Each transaction has a dual effect on the accounting

equation.

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 Transaction Analysis

Illustration: Are the following events recorded in the accounting

records?
Illustration 1-7
Discuss product
Purchase
Event design with Pay rent
computer
potential customer

Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?

Record/
Don’t Record

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LEARNING Describe the four financial statements
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OBJECTIVE and how they are prepared.

Companies prepare four financial statements :

Owner’s Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows

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 Financial Statements

Question
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.

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 Income Statement

u Reports the revenues and expenses for a specific

period of time.

u Lists revenues first, followed by expenses.

u Shows net income (or net loss).

u Does not include
investment and
withdrawal transactions
between the owner and
the business in
measuring net income.

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 Owner’s Equity Statement

u Reports the changes in owner’s equity for a specific

period of time.

u The time period is the same as that covered by the

income statement.

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 Balance Sheet

u Reports the assets, liabilities, and owner's equity at a

specific date.

u Lists assets at the top, followed by liabilities and owner’s

equity.

u Total assets must equal total liabilities and owner's

equity.

u Is a snapshot of the company’s financial condition at a

specific moment in time (usually the month-end or year-
end).

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 Statement of Cash Flows

u Information on the cash receipts and payments for a

specific period of time.

u Answers the following:

► Where did cash come from?

► What was cash used for?

► What was the change in the

cash balance?

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 Financial Statements

Question
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.

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 DO IT! 5 Financial Statement Items

Presented below is selected information related to Flanagan Company

at December 31, 2017. Flanagan reports financial information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000

(a) Determine the total assets of at December 31, 2017.

(b) Determine the net income reported for December 2017.
(c) Determine the owner’s equity at December 31, 2017.

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 DO IT! 5 Financial Statement Items

Presented below is selected information related to Flanagan Company

at December 31, 2017. Flanagan reports financial information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000

(a) Determine the total assets of at December 31, 2017.

The total assets are $27,000, comprised of

• Cash $8,000,
• Accounts Receivable $9,000, and
• Equipment $10,000.

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 DO IT! 5 Financial Statement Items

Presented below is selected information related to Flanagan Company

at December 31, 2017. Flanagan reports financial information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000

(b) Determine the net income reported for December 2017.

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 DO IT! 5 Financial Statement Items

Presented below is selected information related to Flanagan Company

at December 31, 2017. Flanagan reports financial information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000

(c) Determine the owner’s equity at December 31, 2017.

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