Chapter 1- The Language of Business

1 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

Accounting and theBusiness

EnvironmentChapter

1


Objective 1

Use accounting vocabulary

for decision making.


is an information system that...is an information system that...

measures business activities,measures business activities,

processes information, and...processes information, and...

communicates financial information.communicates financial information.

Accounting...


is called the language of business.is called the language of business.

Accounting...


Management AccountingManagement Accounting

Financial AccountingFinancial Accounting

Fields of Accounting


Public Sector(SEC)

Public Sector(SEC)

Private Sector(FASB)

Private Sector(FASB)

Private Sector(AICPA)

Private Sector(AICPA)

GAAPGAAP

The Authorities Underlying Accounting


External usersmake decisionsabout the entity.

External usersmake decisionsabout the entity.

Internal usersmake decisionsfor the entity.

Internal usersmake decisionsfor the entity.

Users of Accounting Information


ProprietorshipsProprietorships

PartnershipsPartnerships

CorporationsCorporations

Types of Business Organizations


Objective 2

Apply accountingconcepts and

principlesto business situations.


© 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison & Horngren 1-10

BASIC ACCOUNTING PRINCIPLES AND CONCEPTS

Generally accepted accounting principles (GAAP) are The rules that govern how accountants operate Based upon a conceptual framework written by

the Financial Accounting Standards Board (FASB)


To provide information usefulfor making investment and

lending decisions

To provide information usefulfor making investment and

lending decisions

Generally AcceptedAccounting Principles

What is the primary objective of financial reporting?


The Entity Concept Example

Assume that John decides to open up a gas station and coffee shop.

The gas station made $250,000 in profits, while the coffee shop lost $50,000.


The Entity Concept Example

How much money did John make? At a first glance, we would assume that

John made $200,000. However, by applying the entity concept we

realize that the gas station made $250,000 while the coffee shop lost $50,000.


Information mustbe reasonably

accurate.

Information mustbe reasonably

accurate.

Information mustbe free from bias.Information mustbe free from bias.

Information must report what

actually happened.

Information must report what

actually happened.

Individuals wouldarrive at similar

conclusions usingsame data.

Individuals wouldarrive at similar

conclusions usingsame data.

The Reliability (Objectivity) Principle


Assets and servicesacquired

should be recordedat their actual cost.

Assets and servicesacquired

should be recordedat their actual cost.

The Cost Principle


The entity will continueto operate in the future.The entity will continueto operate in the future.

The Going Concern Concept


The dollar’s purchasingpower is relatively

stable.

The dollar’s purchasingpower is relatively

stable.

The Stable-Monetary-Unit Concept


Objective 3Objective 3

Use the accounting equationto describe an organization’s

financial position.


EconomicResources

Claims toEconomicResources

The Accounting Equation

Assets = Liabilities + Owner’s Equity


Assets

What is an asset? It is something a company owns which

has future economic value.– land– building– equipment– goodwill


Liability

What is a liability? It is something a company owes.– money– service – legal retainers– product – magazines


Owner’s Equity

What is owner’s equity? It is what’s left of the assets after liabilities

have been deducted.– the same as net assets– the owner’s claim on the entity’s assets

Paid-in capital Retained earnings


Transactions that AffectOwner’s Equity

OWNER’S EQUITYINCREASES

OWNER’S EQUITYDECREASES

Owner Investmentsin the Business

Revenues Expenses

Owner Withdrawalsfrom the Business

Owner’s Equity


Revenues

What are revenues? They are amounts received or to be received

from customers for sales of products or services.

– sales– performance of services– rent– interest


ExpensesExpenses

What are expenses? They are amounts that have been paid or will

be paid later for costs that have been incurred to earn revenue.

– salaries and wages– utilities– supplies used– advertising


Objective 4Objective 4Objective 4Objective 4

Use the accounting equation to analyze business transactions.


Accounting for Business Transactions

What is a transaction? It is any event that both affects the financial

position of the business and can be reliably recorded.



1 Gay Gillen invests $30,000 to begin Gay Gillen eTravel.

2 Gillen purchases an office location, paying $20,000 in cash.

3 She buys office supplies, agreeing to pay $500 in 30 days.

4 She earns and collects $5,500 revenues.



5 Gillen performs services, and the client agrees to pay $3,000 within one month.

6 During the month, she pays $3,100 for expenses incurred.

7 Gillen pays $300 to the store from which she purchased $500 worth of supplies.

What is the effect of these transactions on the accounting equation?


Owner’s Assets = Liabilities + Equity

1) Cash + $30,000 + $30,0002) Cash – 20,000

Land + 20,0003) Supplies + 500 + 5004) Cash + 5,500 + 5,5005) Receivable + 3,000 + 3,0006) Cash – 3,100 – 3,1007) Cash – 300 – 300 Totals + $35,600 + 200 + $35,400




Notice that the equation always stays in balance.

Each transaction affects at least two accounts, sometimes more.

Some transactions affect only one side of the equation; some affect both sides.



Other transactions that took place were as follows:

The business collected $1,000 from the client.

She sold some land at cost for $9,000. She withdrew $2,100 from the business.


End of Chapter 1

Chapter 1- The Language of Business

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