Wey AP 8e Ch01 Revised

Chapter
1-1
CHAPTER 1
ACCOUNTING IN
ACTION
Accounting Principles, Eighth Edition

Chapter
1-2
Study
Study Objectives
Objectives
1. Explain what accounting is.
2. Identify the users and uses of accounting.
3. Understand why ethics is a fundamental business
concept.
4. Explain generally accepted accounting principles and
the cost principle.
5. Explain the monetary unit assumption and the economic
entity assumption.
6. State the accounting equation, and define assets,
liabilities, and owner’s equity.
7. Analyze the effects of business transactions on the
accounting equation.
8. Understand the four financial statements and how they
are prepared.
Chapter
1-3
Accounting
Accounting in
in Action
Action
Using
Using the
the
The
The Building
Building The
The Basic
Basic
What
What is
is Basic
Basic Financial
Financial
Blocks
Blocks of
of Accounting
Accounting
Accounting?
Accounting? Accounting
Accounting Statements
Statements
Accounting
Accounting Equation
Equation Equation
Equation
Three Ethics in Assets Transaction Income

activities financial Liabilities analysis statement
Who uses reporting Summary of Owner’s
Owner’s
accounting Generally equity transactions equity
data accepted statement
accounting Balance
principles sheet
Assumptions Statement of
cash flows
Chapter
1-4
What
What is
is Accounting?
Accounting?
The purpose of accounting is to:

(1) identify,
identify record,
record and communicate
the economic events of an
(2) organization to
(3) interested users.
Chapter
1-5 LO 1 Explain what accounting is.
What
What is
is Accounting?
Accounting?
Illustration 1-1
Three Activities Accounting
process
The accounting process includes

the bookkeeping function.
Chapter
1-6 LO 1 Explain what accounting is.
 Bookkeeping usually involves only the
recording of economic events. It is therefore just
one part of the accounting process.
 In total, accounting involves the entire process

of identifying, recording, and communicating
economic events.
Chapter
1-7
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Internal
Users Manageme IRS
nt Investors
Human
Resources
There are two broad
groups of users of Labor
financial information: Unions
Finance
internal users and
external users. Creditor
Marketin s
g SEC
Customer Externa
s l Users
Chapter
1-8 LO 2 Identify the users and uses of accounting.
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Common Questions Asked User
1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a

satisfactory income? Investors
3. Do we need to borrow in
the near future? Management
4. Is cash sufficient to pay
dividends to the stockholders? Finance
5. What price for our product

will maximize net income? Marketing
6. Will the company be able to

pay its short-term debts? Creditors
Chapter
1-9 LO 2 Identify the users and uses of accounting.
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Discussion Question
Q1. “Accounting is ingrained in our society and it
is vital to our economic system.” Do you agree?
Explain.
Chapter
1-10See notes
LO 3 page why ethics is a fundamental business concept .
for discussion
Understand
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Ethics In Financial Reporting

Standards of conduct by which one’s actions are
judged as right or wrong, honest or dishonest,
fair or not fair, are Ethics.
Recent financial scandals include: Enron,

WorldCom, HealthSouth, AIG, and others.
Congress passedSarbanes-Oxley Act of

2002.
Effective financial reporting depends on

Chapter
sound ethical behavior.
1-11 LO 3 Understand why ethics is a fundamental business concept .
Ethics
Ethics
Review Question
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.
Chapter
Ethics
Ethics
Review Question
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.
Chapter
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Financial Statements
Various users Balance Sheet
need financial Income Statement
Statement of Owner’s Equity
information Statement of Cash Flows
Note Disclosure
The accounting Generally

profession has Accepted
attempted to develop a
Accounting
set of standards that are
generally accepted and
Principles
universally practiced. (GAAP)
Chapter
1-14 LO 4 Explain generally accepted accounting principles and the
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Organizations Involved in Standard

Setting:
Securities and Exchange Commission (SEC)

http://www.sec.gov/
Financial Accounting Standards Board

http://www.fasb.org/
(FASB)
http://www.iasb.org/
International Accounting Standards Board

Chapter
1-15 (IASB)
LO 4 Explain generally accepted accounting principles and the
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Cost Principle (Historical) – dictates that

companies record assets at their cost.
Issues:
Reported at cost when purchased and also over
the time the asset is held.
Cost easily verified, whereas market value is
often subjective.
Fair value information may be more useful.
Chapter
1-16 LO 4 Explain generally accepted accounting principles and the
Assumptions
Assumptions
Monetary Unit Assumption – 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.
Proprietorship.
Forms of
Partnership. Business
Corporation. Ownership
Chapter LO 5 Explain the monetary unit
1-17
assumption and the economic
Forms
Forms of
of Business
Business Ownership
Ownership
Proprietorshi
Partnership Corporation
p
Generally Owned by two Ownership
owned by one or more divided into
person. persons. shares of stock
Often small Often retail and Separate legal
service-type service-type entity
businesses businesses organized
Owner receives under state
Generally
any profits, corporation law
unlimited
suffers any personal Limited liability
losses, and is liability
personally
Chapter Partnership
LO 5 Explain the monetary unit
1-18 liable for all
agreementassumption and the economic
Assumptions
Assumptions
Review 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.

1-19
Assumptions
Assumptions
Review 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.

1-20
Forms
Forms of
of Business
Business Ownership
Ownership
Review Question
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.

1-21
Forms
Forms of
of Business
Business Ownership
Ownership
Review Question
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.

1-22
The
The Basic
Basic Accounting
Accounting Equation
Equation
Owner’s
Assets = Liabilities +
Equity
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.
Chapter LO 6 State the accounting equation, and

1-23
define assets, liabilities, and owner’s
The
The Basic
Basic Accounting
Accounting Equation
Equation
Owner’s
Equity

Asset
s
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
1-24
The
The Basic
Basic Accounting
Accounting Equation
Equation
Owner’s
Equity

Liabiliti
es
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
1-25
The
The Basic
Basic Accounting
Accounting Equation
Equation
Owner’s
Equity

Owner’s
Equity
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or
Partnership).
1-26
Owners’
Owners’ Equity
Equity
Illustration 1-6
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
Chapter rent. LO 6 State the accounting equation, and
1-27
Owners’
Owners’ Equity
Equity
Illustration 1-6
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.
1-28
Using
Using The
The Basic
Basic Accounting
Accounting
Equation
Equation
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.
Chapter LO 7 Analyze the effects of business

1-29
transactions on the accounting
Transactions
Transactions (Question?)
(Question?)
Q1-15: Are the following events recorded in the
accounting records? Owner
Supplies An withdraws
Even are employee cash for
t purchased is hired. personal use.
on account.
Criterio Is the financial position (assets, liabilities,

n or owner’s equity) of the company
changed?
Record/
Don’t
Record
1-30
Transactions
Transactions
Discussion Question
Q18. In February 2008, Paula King invested
an additional $10,000 in her business, King’s
Pharmacy, which is organized as a
proprietorship. King’s accountant, Lance
Jones, recorded this receipt as an increase in
cash and revenues. Is this treatment
appropriate? Why or why not?

1-31See notes page for discussion
Transactions
Transactions (Problem)
(Problem)
P1-1A: Barone’s Repair Shop was started on May 1
by Nancy. Prepare a tabular analysis of the
following transactions for the month of May.
1. Invested $10,000 cash to start the repair

shop.
Assets Liabilities Equity
Accounts Accounts Barone,
Cash + Receivable + Equipme = Payable + Capital
nt
1. +10,00 +10,00 Investme
0 0 nt

1-32
Transactions
(Problem)
2. Purchased equipment for $5,000 cash.
nt
1. +10,00 +10,00 Investme
0
2. -5,000 +5,000 0 nt

1-33
Transactions
(Problem)
3. Paid $400 cash for May office rent.
nt
1. +10,00 +10,00 Investme
0
2. -5,000 +5,000 0 nt
3. -400 -400 Expense

1-34
Transactions
(Problem)
4. Received $5,100 from customers for repair
service. Assets Liabilities Equity
nt
1. +10,00 +10,00 Investme
0
2. -5,000 +5,000 0 nt
3. -400 -400 Expense
4. +5,100 +5,100 Revenu
e

1-35
Transactions
(Problem)
5. Withdrew $1,000 cash for personal use.
nt
1. +10,00 +10,00 Investme
0
2. -5,000 +5,000 0 nt
3. -400 -400 Expense
4. +5,100 +5,100 Revenu
5. -1,000 -1,000 e
Drawing
s

1-36
Transactions
(Problem)
6. Paid part-time employee salaries of
$2,000. Assets Liabilities Equity
nt
1. +10,00 +10,00 Investme
0
2. -5,000 +5,000 0 nt
3. -400 -400 Expense
4. +5,100 +5,100 Revenu
5. -1,000 -1,000 e
Drawing
6. -2,000 -2,000 s
Expense

1-37
Transactions
(Problem)
7. Incurred $250 of advertising costs, on
account. Assets Liabilities Equity
nt
1. +10,00 +10,00 Investme
0
2. -5,000 +5,000 0 nt
3. -400 -400 Expense
4. +5,100 +5,100 Revenu
5. -1,000 -1,000 e
Drawing
6. -2,000 -2,000 s
Expense
7. +250 -250 Expense

1-38
Transactions
(Problem)
8. Provided $750 of repair services on account.
nt
1. +10,00 +10,00 Investme
0
2. -5,000 +5,000 0 nt
3. -400 -400 Expense
4. +5,100 +5,100 Revenu
5. -1,000 -1,000 e
Drawing
6. -2,000 -2,000 s
Expense
7. +250 -250 Expense
8. +750 +750 Revenu
e

1-39
Transactions
(Problem)
9. Collected $120 cash for services previously
billed. Assets Liabilities Equity
nt
1. +10,00 +10,00 Investme
0
2. -5,000 +5,000 0 nt
3. -400 -400 Expense
4. +5,100 +5,100 Revenu
5. -1,000 -1,000 e
Drawing
6. -2,000 -2,000 s
Expense
7. +250 -250 Expense
8. +750 +750 Revenu
9. +120 -120 e
6,820 + 630 + 5,000 = 250 +
12,200
1-40
Financial
Statements
Companies
Companies prepare
prepare four
four financial
financial statements
statements
from
from the
the summarized
summarized accounting
accounting data:
data:
Owner’s
Income Statemen
Equity Balance
Statemen t of Cash
Statemen Sheet
t Flows
t
Chapter
1-41 LO 8 Understand the four financial statements and how they are
Financial
Statements
Review 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.
Chapter
Financial
Statements
Income
Statement
Barone’s Repair Shop
I ncome Statement
Reports the revenues
For the Month Ended May 31, 2008 and expenses for a
Revenues: specific period of time.
S er vice r evenue $ 5,850
Expenses: Net income – revenues
S alar y expense 2,000
Rent expense 400
exceed expenses.
A dver tising expense 250
T otal expenses 2,650 Net loss – expenses
Net income $ 3,200 exceed revenues.
Chapter
Financial
Statements
Owner’s Equity
Income Statement
Statement
Barone’s Repair Shop Barone’s Repair Shop
I ncome Statement Owner' s Equity Statement
For the Month Ended May 31, 2008 For the Month Ended May 31, 2008
Revenues: Barone' s, Capital May 1 $ -

S er vice r evenue $ 5,850 Add: I nvestment 10,000
Expenses: N et income 3,200
S alar y expense 2,000 13,200
Rent expense 400 Less: Dr awings 1,000
A dver tising expense 250 Barone' s, Capital May 31 $ 12,200
T otal expenses 2,650
Net income $ 3, 200
Net income is needed to determine
the ending balance in owner’s
equity.
Chapter
Financial
Statements
Owner’s Equity
Statement
Statement indicates Barone’s Repair Shop
Owner' s Equity Statement
the reasons why For the Month Ended May 31, 2008
owner’s equity has
Barone' s, Capital May 1 $ -
increased or decreased Add: I nvestment 10,000
during the period. N et income 3,200
13,200
Less: Dr awings 1,000
Barone' s, Capital May 31 $ 12,200
Chapter
Financial
Statements
Owners’ Equity
Balance Sheet Statement
Balance Sheet
Owner' s Equity Statement
May 31, 2008
For t he Mont h Ended May 31, 2008
Assets
Cash $ 6,820 Barone' s, Capit al May 1 $ -
A ccounts r eceivable 630 A dd: I nvestment 10 ,0 0 0
Equipment 5,000 N et income 3 ,2 0 0
T otal assets $ 12,450 13 ,2 0 0
Liabilities Less: Dr awings 1,0 0 0
A ccounts payable $ 250 Barone' s, Capit al May 31 $ 12, 200
Owner' s Equity
Bar one' s, capital 12,200
T otal liab. & equity $ 12,450 The ending balance in owner’s
equity is needed in preparing the
balance sheet
Chapter
Financial
Statements
Balance Sheet
Barone’s Repair Shop Reports the assets,
Balance Sheet liabilities, and owner’s
May 31, 2008
Assets
equity at a specific
Cash $ 6,820 date.
A ccounts r eceivable 630
Equipment 5,000 Assets listed at the
T otal assets $ 12,450
Liabilities
top, followed by
A ccounts payable $ 250 liabilities and owner’s
Owner' s Equity
equity.
Bar one' s, capital 12,200
T otal liab. & equity $ 12,450
Total assets must
Chapter
equal total liabilities
LO 8 Understand the four financial statements and how they are
1-47
and owner’s equity.
Financial
Statements
Statement of Cash
Balance Sheet Barone’s Repair Shop
Flows
Statement of Cash Flows
For the Month Ended May 31, 2008
Balance Sheet
Cash fl ow f rom operating activities
May 31, 2008
Cash r eceipts f r om r evenues $ 5,220
Assets
Cash paid f or expenses (2,400)
Cash $ 6, 820
Cash pr ovided by oper ations 2,820
A ccounts r eceivable 630 Cash fl ow f rom investing activitites
Equipment 5,000 Pur chase of equipment (5,000)
T otal assets $ 12,450 Cash fl ow f rom fi nancing activities
Liabilities I nvestment by owner s 10,000
A ccounts payable $ 250 Dr awings by owner s (1,000)
Owner' s Equity Cash pr ovided by fi nancing 9,000
Bar one' s, capital 12,200 Net increase in cash 6,820
T otal liab. & equity $ 12,450 Cash balance, May 1 -
Cash balance, May 31 $ 6, 820
Chapter
Financial
Statements
Statement of Cash
Information for a
Flows
specific period of Statement of Cash Flows
For the Month Ended May 31, 2008
time.
Cash fl ow f rom operating activities
Cash r eceipts f r om customer s $ 5,220
Answers
1. Where the
did cash Cash paid f or expenses (2,400)
following:
come from? Cash pr ovided by oper ations 2,820
Cash fl ow f rom investing activities
Pur chase of equipment (5,000)
2. What was cash
Cash fl ow f rom fi nancing activities
used for? I nvestment by owner s 10,000
Dr awings by owner s (1,000)
3. What was the Cash pr ovided by fi nancing 9,000
change in the cash Net increase in cash 6,820
Cash balance, May 1 -
balance? Cash balance, May 31 $ 6,820
Chapter
Financial
Statements
Review 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.
Chapter
Financial
Statements
Discussion Question
Q19. “A company’s net income appears
directly on the income statement and the
owner’s equity statement, and it is included
indirectly in the company’s balance sheet.”
Do you agree? Explain.
See notes
Chapter
1-51
page for discussion
LO 8 Understand the four financial statements and how they are
Accounting
Accounting Career
Career Opportunities
Opportunities
Public Accounting
Careers in auditing and taxation serving the general public.
Private Accounting
Careers in industry working in cost accounting, budgeting,
accounting information systems, and taxation.
Opportunities in Government
Careers with the IRS, the FBI, the SEC, and in public
colleges and universities.
Forensic Accounting
Careers with insurance companies and law offices to conduct
investigations into theft and fraud.
Chapter
1-52 LO 9 Explain the career opportunities in accounting.
Copyright
Copyright
Copyright © 2008 John Wiley & Sons, Inc. All rights

reserved. Reproduction or translation of this work beyond
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Copyright Act without the express written permission of
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the use of these programs or from the use of the
information contained herein.
Chapter
1-53

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Chapter

Accounting Principles, Eighth Edition

Three Ethics in Assets Transaction Income

The purpose of accounting is to:

The accounting process includes

 In total, accounting involves the entire process

2. Did the company earn a

5. What price for our product

6. Will the company be able to

Ethics In Financial Reporting

Recent financial scandals include: Enron,

Congress passedSarbanes-Oxley Act of

Effective financial reporting depends on

The accounting Generally

Organizations Involved in Standard

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board

International Accounting Standards Board

Cost Principle (Historical) – dictates that

Monetary Unit Assumption – include in the

Chapter LO 5 Explain the monetary unit

Chapter LO 5 Explain the monetary unit

Chapter LO 5 Explain the monetary unit

Chapter LO 5 Explain the monetary unit

Provides the underlying framework for

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership

Chapter LO 6 State the accounting equation, and

Provides the underlying framework for

Provides the underlying framework for

Provides the underlying framework for

Revenues result from business activities entered into

Expenses are the cost of assets consumed or

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the

Chapter LO 7 Analyze the effects of business

Criterio Is the financial position (assets, liabilities,

Chapter LO 7 Analyze the effects of business

1. Invested $10,000 cash to start the repair

Chapter LO 7 Analyze the effects of business

Chapter LO 7 Analyze the effects of business

Chapter LO 7 Analyze the effects of business

Chapter LO 7 Analyze the effects of business

Chapter LO 7 Analyze the effects of business

Chapter LO 7 Analyze the effects of business

Chapter LO 7 Analyze the effects of business

Chapter LO 7 Analyze the effects of business

Revenues: Barone' s, Capital May 1 $ -

Copyright © 2008 John Wiley & Sons, Inc. All rights

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