Introducing Business Accounting

GDB2013: Chapter 1
Business
is an organization in which basic
resources such as materials and
labor are assembled and processed
to provide goods and services to
customers.
Profit: Are the difference between
the amounts received from
customers for goods or services
provided and the amounts paid for
the inputs used to provide the
goods or services.
Types of Businesses
Merchandising sell products to
customers.
Types of Businesses
Manufacturing - change basic inputs
into products that are sold to
individual customers.
Types of Businesses
Service provide services rather
than products to customers.
Types of Business
Organization
Proprietorship
is owned by one individual
Comprises 70% of business organizations
in US
Cost of organizing is low
Limited financial resources
Used by small business
Types of Business
Organizations
Partnership
Is owned by two or more individuals.
Comprises 10% of business organizations
in the US
Combines the skills and resources of more
than one person
Types of Business
Organization
Corporation is organized under
companys Act as a separate legal
entity.
Generates 90% of the total dollars of
business receipted
Comprises 20% of the business
organizations
Includes ownership divided into shares of
stock
Used by large businesses
Ability to obtain large amounts of capital
Business Stakeholders
Is a person or entity that has an interest
in the economics performance of the
business.
Owners who have invested resources in the
business clearly have an interest in how well
the business performs.

Managers are those individuals who the

owners have authorized to operate the
business.
Employees provide services to the business
in exchange for their pay.
Customers, government, and creditors
also have a stake in the success of the
business
Business Stakeholders
Capital market stakeholders provide the
major financing for the business in order for the
business to begin and continue its operations
Product or service market stakeholders
include customers who purchase the business
products or services as well as the vendors who
supply inputs to the business
Government stakeholders have an interest
in the economic performance of the business.
Accounting
Is an information and measurement
system that identifies, records, and
communicates relevant, reliable and
comparable information about an
organizations business activities
Language of business
The Process of Accounting
Identify the
stakeholders
Assess stakeholders
information needs
Design the accounting
information system
Record economic data
about business activities
Prepare accounting
reports for stakeholders
Profession of Accounting
Financial Accounting
Is the area of accounting aimed at
serving external users by providing
then with financial statements.
External auditors attest to these
financial statements
Profession of Accounting
Managerial Accounting -
uses both financial
accounting and estimated
data to aid management
in running day-to-day
operations and in planning
future operations.
Internal uses.
Generally Accepted Accounting
Principles (GAAP)
Governs financial Financial
accounting Accounting
practice Standards Board
Purpose is to (FASB)
make information Private group that
in financial sets both broad
and specific
statements
principles
relevant, reliable,
and comparable Securities and
Exchange
Commission (SEC)
Principles of Accounting
General principles
Are the basic assumptions, concepts,
and guidelines for preparing financial
statements
Specific Principles
Are detailed rules used in reporting
business transactions and events
General Principles
Objectivity Cost principle
principle Means that
Means that accounting
accounting information is
information is based on actual
supported by cost
independent
unbiased evidence
General Principles
Going concern Monetary unit
principle principle
Means that Means that we can
accounting express
information transactions and
reflects an events in
assumption that monetary units
the business will
continue operating
General Principles
Revenue Three concepts
Recognition Revenue is recognized
when earned
principle Proceeds from selling
Provides guidance product and services
on when a need not be in cash
company must Revenue is measured
recognize revenue by the cash received
plus the cash value of
Recognize means any other items
to record it received.
General principles
Business entity principle
Means that a business is accounted for
separately from other business entities.
 Accounting Equation

Assets = Liabilities + Stockholders Equity

What
business What
What the business owes! business
owns! is worth!
Assets
resources owned by the business
Such as:
Cash
Accounts receivable amounts owed
by customers
Prepaid expense assets to be used
in the future {supplies, prepaid
insurance}
Merchandise Inventory
merchandise for sale in the course of
business
Equipment
Land
Building
Liabilities
rights of creditors or debts of
the business
Accounts payable amount
owed to creditors
Dividends payable amounts
owed to shareholders
Accrued expenses
Mortgage payable
Notes payable
Stockholders Equity
Assets minus Liabilities
Capital stock
investment by shareholders
Retained earnings
earnings kept in the business
Dividends
distribution of income to
shareholders
Revenues & Expenses
Revenue Expenses
income from the cost of doing
operation of the business
business Salaries expense
Sales Rent expense
Fees earned Depreciation
Commission expense
income Miscellaneous
Increase retained expense
earnings Decrease retained
Results from earnings
operations Cost of doing
business
Financial Statements
Four financial statements are
prepared for external and internal
use
Prepared in specific order
Income Statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
 Income Statement
Income Statement a summary of revenue
and expenses for a specific period of time.
Formula:
Revenue minus Expenses = Net income (Net
losses)
 Income Statement

This amount is transferred to

the Statement of Retained
Earnings
Retained earnings statement
a summary of the changes in the
earnings retained in the corporation for
a specific period of time.
Formula:
Beginning Retained Earnings
+ Net income
- Dividends
= Ending Retained earnings
 Retained earnings statement

Transferred to Balance Sheet

Balance Sheet
a list of assets, liabilities,
stockholders equity for a specific
date
Assets = Liabilities + Stockholders
Equity
Balance Sheet

Same as net cash flows

Statement of Cash Flows
Statement of cash flows a
summary of the cash receipts and
cash payments for a specific
period of time.
Operations + Investing +Financing
Statement of Cash Flows
 1-4

On November 1, 2007, Chris

Clark organizes a corporation
that will be known as
NetSolutions.
 1-4

Stockholders
Assets = Equity
Cash Capital Stock
= 25,000
a. 25,000

a. Chris Clark deposits $25,000 in a bank

account in the name of NetSolutions in
return for shares of stock in the
corporation. 41
 1-4

Stock issued to owners

(stockholders), such as Chris
Clark, is referred to as
capital stock. The owners
equity in a corporation is
called stockholders equity.
 1-4

Stockholders
Assets = Equity
Cash + Land Capital Stock
Bal. 25,000 = 25,000
b. 20,000 +20,000
Bal. 5,000 20,000 25,000

b. NetSolutions exchanged $20,000 for land.

43
 1-4
Stockholders
Assets = Liabilities + Equity
Accounts Capital
Cash + Supplies + Land Payable + Stock
=
Bal. 5,000 20,000 25,000
c. +1,350 +1,350
Bal. 5,000 1,350 20,000 1,350 25,000

c. During the month, NetSolutions purchased

supplies for $1,350 and agreed to pay the
supplier in the near future (on account). 44
 1-4

Beginning with transaction (d)

the asset section will be shown
first, then the liabilities and
stockholders equity will be
shown in the following slide.
 1-4

Assets

Cash + Supplies + Land

Bal. 5,000 1,350 20,000
d. +7,500
Bal. 12,500 1,350 20,000

d. NetSolutions provided services to

customers, earning fees of $7,500 and
received the amount in cash. 46
 1-4

Liabilities + Stockholders Equity

Accounts Capital Fees
Payable + Stock + Earned
1,350 25,000 Bal.
+7,500 d.
1,350 25,000 7,500 Bal.

d. NetSolutions provided services to

customers, earning fees of $7,500 and
received the amount in cash.
47
Expenses 1-4

The amounts used in earning revenue are

called expenses. Expenses are assets that
have been used up, consumed, or expired.
Adding expenses to the stockholders equity
section results in a space problem. To adjust
for these added headings, the word Bal. has
been omitted from Slides 50, 52, 54, and 56.
The bottom row in these four slides provides
the balances after each transaction.
 1-4

Assets
Cash + Supplies + Land
Bal. 12,500 1,350 20,000
e. 3,650
Bal. 8,850 1,350 20,000

e. NetSolutions paid the following

expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
49
 1-4

Liabilities + Stockholders Equity

Accounts Capital Fees Wages Rent Utilities Misc.
Payable + Stock + Earned + Exp. + Exp. + Exp. + Exp.
1,350 25,000 7,500
2,125 800 450 275 e.
1,350 25,000 7,500 2,125 800 450 275

e. NetSolutions paid the following expenses:

wages, $2,125; rent, $800; utilities, $450; and
miscellaneous, $275.
50
 1-4

Assets
Cash + Supplies + Land
Bal. 8,850 1,350 20,000
f. 950
Bal. 7,900 1,350 20,000

f. NetSolutions paid $950 to

creditors during the month.
51
 1-4

Liabilities + Stockholders Equity

Accounts Capital Fees Wages Rent Utilities Misc.
Payable + Stock + Earned + Expense + Expense + Expense + Expense
1,350 25,000 7,500 2,125 800 450 275
950 f.
400 25,000 7,500 2,125 800 450 275

f. NetSolutions paid $950 to

creditors during the month.
52
 1-4

Assets
Cash + Supplies + Land
Bal. 7,900 1,350 20,000
g. 800
Bal. 7,900 550 20,000

g. At the end of the month, the cost

of supplies on hand is $550, so
$800 of supplies were used. 53
 1-4

Liabilities + Stockholders Equity

Accounts Capital Fees Wages Rent Supplies Util. Misc.
Payable + Stock + Earned + Exp. + Exp. + Exp. + Exp. + Exp.
400 25,000 7,500 2,125 800 450 275
800 g.
400 25,000 7,500 2,125 800 800 450 275

g. At the end of the month, the cost

of supplies on hand is $550, so
$800 of supplies were used. 54
 1-4

Assets
Cash + Supplies + Land
Bal. 7,900 550 20,000
h. 2,000
Bal. 5,900 550 20,000

h. At the end of the month, NetSolutions

pays $2,000 to stockholder (Chris
Clark) as dividends.
55
 1-4

Dividends are distributions of

earnings to stockholders. You
should be careful not to confuse
dividends with expenses.
Dividends do not represent assets or
services used in the process of
earning revenues.
 1-4

Liabilities + Stockholders Equity

Accounts Capital Fees Wages Rent Supplies Util. Misc.
Payable + Stock + Dividends Earned + Exp. + Exp.+ Exp. + Exp. + Exp.
400 25,000 7,500 2,125 800 800 450 275
2,000 h.
400 25,000 2,000 7,500 2,125 800 800 450 275

h. At the end of the month, NetSolutions

pays $2,000 to stockholder (Chris Clark)
as dividends.
57
 1-4

Stockholders Equity

Increased by Decreased by

Investments by Dividends paid to

stockholders stockholders
Revenues Expenses

58
Retained Earnings 1-4

Retained earnings represent

stockholders equity created
from business operations
through revenue, expense,
and dividend transactions.
 NetSolutions 1-4
Retained Earnings
November Operations
(Revenue and Expense Transactions)
Fees Wages Rent Supplies Utilities Misc.
Earned Expense Expense Expense Expense Expense
+7,500
2,125 800 450 275
7,500 2,125 800 450 275
800
7,500 2,125 800 800 450 275

7,500 2,125 800 800 450 275

60
$3,050
 KE Enterprise; Practice question

Lets look at the Business transaction for KE Enterprise in March

2016.

1. For each transaction, explain the effect on Asset, Liabilities,

and/or Equity.
Example; Asset increase
Liability increase

2. State the item(s) affected in (asset, liability, equity) and

amount involve.
Example: Cash increase RM5,000
Bank loan increase RM5,000
Base on the analysis you have carried out, complete the worksheet
provided.

1. Put values in the appropriate column(s) for each transaction.

Make sure the equation is maintained every time you record
transaction.

1.