Transcript Slide 1
HFT 2401
Chapter 1
Introduction to Accounting
Accounting – A Means to an End
Provides answers to questions
How much cash do we have
What was our payroll cost
When did we buy a piece of equipment & at
what cost
What is our food cost
What is our revenue
What are our expenses
What did we keep (net income)
American Accounting Association
defines accounting as
“The process of identifying,
measuring, and communicating
economic information to permit
informed judgments and decisions
by users of that information”
The Accounting Process
1) Observe events in
order to identify the
events that are of a
financial nature –
monetary terms
2) Requires the
recording, classifying,
and summarizing these
events.
3) Produces various
financial statements for
internal & external users.
4) Communication
Bookkeeping vs. Accounting
Bookkeeping – records & classifies transactions
Accounting – summarizes and interprets
100
East
West
North
50
0
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
Branches of Accounting
Financial Accounting – Revenues,
expenses, assets & liabilities
Cost Accounting – Record, classify,
allocate & report current & prospective
costs. Used mainly in manufacturing
Managerial Accounting – Analyzes &
provides information to management to
enhance controls
Branches of Accounting
Tax Accounting – Prepare & file tax
returns
Auditing – Reviews and evaluates
documents, records and control systems
Accounting Systems – Information
systems
Organizations that Influence
Accounting
AICPA
FASB
SEC
IRS
Forms of Business Organizations
Sole Proprietorship
Partnerships
Limited Partnerships
Limited Liability
Companies (LLC)
Corporations
Sole Proprietorship
Easiest to organize / dissolve
Legally not a separate business – liability
issues
It is separate for accounting purposes, however
Owner not paid a salary or wage - withdrawals
Partnerships
Two or more people joined together in a non-
corporate manner for conducting business. Can
use a written or oral agreement
Partnerships
Advantages
Greater financial
strength
Does not pay taxes
Shares liability
Greater
management
strength
Disadvantages
Partners are taxed
on profits regardless
of cash distribution
Limits decision
making process
Unlimited legal
liability
Limited Partnerships
Offers liability protection to limited
partners
General Partner(s) – responsible for debts
of the partnership
Limited Partner(s) – may not actively
participate in the day to day operations of
the business
Agreement must be written
Limited partners liability is limited to the
amount of their investment
Corporations
A legal entity created by
a state or other political
authority
Characteristics
An exclusive name
Continued existence
independent of
stockholders
Paid in capital
represented by shares
of stock
Overall control vested
in its directors
Corporations
Advantages
Shareholders liability
limited to amount of
investment
Owners are taxed on
distributed profits
(dividends)
Employee equity
participation (ESOP)
Lower tax rates
Corporation
continues on in
perpetuity
Disadvantages
Double taxation
Ownership control
Other Forms Of Business
Organization
S-Corp
Eliminates double
taxation
Limited to 75
shareholders
Only one class of
stock
Shareholders pay
taxes
Limited Liability
Company (LLC)
May have unlimited
number of owners
May have a single
owner
Not restricted to one
class of stock
Principles of Accounting
Cost
Business Entity
Continuity of the Business Unit
Unit of Measurement
Objective Evidence
Full Disclosure
Consistency
Matching
Conservatism
Materiality
Cost Principle
States that when a transaction is
recorded, the transaction price
(cost) establishes the accounting
value
Business Entity
Statements are based on the concept
that each business maintains its own
accounts, & that these accounts are
separate from other interests of the
owners
Continuity of the Business Unit
The assumption that the business
will continue indefinitely
Unit of Measurement
All transactions are expressed
in monetary terms
Objective Evidence
Accounting records are based on
objective evidence ( invoices,
checks, cash register receipts)
Full Disclosure
Financial statements must provide all
information pertinent to interpretation of
the financial statements
Consistency
The same accounting method from
time period to time period
Matching
Match revenues with expenses
Cash versus accrual
Conservatism
Recognize expenses as soon as
possible, but delay recognition of
revenues until they are sure
Materiality
Events or information must be
accounted for if they make a
difference to the financial
statements
Overview of Financial Statements
Balance Sheet
Income Statement
Statement of Cash Flows
Fundamentals of Accounting
Balance Sheet
Assets (Things Owned)
= Liabilities ( Obligations )
+ Equity
( Residual Claims on Assets )
Fundamentals of Accounting
Income Statement
Revenues
- Expenses
= Net Income (Loss)
Temporary Accounts are Netted and Closed to Equity
(retained earnings)
Cash vs Accrual
Cash Basis Accounting
Recognize revenue or expense when cash
received or disbursed
Accrual Basis Accounting
Recognize revenue when earned
Recognize expense when incurred
Fundamental Equation
Assets = Liabilities + Owners Equity
Assets = Liabilities
+ Permanent OE
+ Temporary OE
Assets = Liabilities
+ Permanent OE
+ Revenue
- Expenses
Assets
Resources owned by a business
Common characteristic – the capacity to
provide future benefit or service
Use for the purpose production,
consumption and exchange of goods or
services
Future economic benefits results in cash
inflows
Liabilities
Claims against assets
Creditors
Existing debts and obligations
Accounts payable
Notes payable
Wages payable
Sales, Real Estate and Income Taxes
payable
Equity
Claims of the owners on the assets
Corporations
Paid in capital
Retained earnings
Revenues
Expenses
Dividends
Revenues
> Expenses = Net Income
Revenues < Expenses = (Net Loss)
Transactions
Transactions defined: economic events of the
enterprise recorded
Each transaction may be internal or external
Each transaction must identify the specific
items affected and the net change on each item
Each transaction has a dual effect on the
accounting equation
The two sides of the accounting equation must
always equal
Effects of Transactions on the
Accounting Equation
Increase in an asset
Decrease in another asset
Increase in a liability
Increase in owners equity
Increase in a liability
Increase in an asset
Decrease in another liability
Decrease in owners equity
Increase in owners equity
Increase in an asset
Decrease in liability
Homework Assignment
Problem 1
Problem 4
Problem 5
Problem 9
Problem 12