9/8/2010

Chapter 1 - An
Introduction
to Accounting

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting provides information that is useful in answering questions about resource allocation

Should I invest money in IBM or
General
Motors?

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A market is a group of people or entities organized to exchange things of value.

Organizations need financial resources (money) to establish and operate their businesses.

Investors

Creditors

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In their most primitive form, physical resources are called natural resources. Owners of physical resources seek to sell those resources to profitable businesses which are able to pay higher prices and make repeat purchases.

Labor resources include both intellectual and physical labor.
Workers seek relationships with businesses that have high earnings potential because these businesses are better able to pay high wages.
1-

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Financial
Accounting

Focused on the needs of external users Managerial
Accounting

Focused on the needs of internal users Public
Accounting

Certified Public
Accountant (CPA)
Audit services
Tax services
Consulting services

Private
Accounting

Certified Management
Accountant (CMA)
Certified Internal Auditor
(CIA)

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Accountants establish measurement and reporting rules that businesses use to facilitate communication.

Generally Accepted
Accounting Principles

Financial accounting reports disclose the financial activities of particular individuals or organizations described as reporting entities. Each entity is treated as a separate reporting unit. Business

Owner

Bank

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LO 2
Construct an accounting equation using elements of financial statements terminology. 1.
2.
3.
4.
5.
6.
7.
8.

Assets
Liabilities
Equity
Contributed Capital
Revenue
Expenses
Distributions
Net Income

The elements represent broad categories.

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1. Assets — Cash, Equipment, Buildings, Land
2. Liabilities
3. Equity
4. Contributed Capital
5. Revenue
6. Expenses
7. Distributions
8. Net Income

Subclassifications of the elements are frequently called accounts.
Accounts are reported in the financial statements.

Claims on the assets are from two sources:
1. Creditors (liabilities)
2. Investors or owners (equity).

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Assets =

Liab.

$ 500 = $

Assets
$ 500

Debit
+

-

Assets
Credit
-

=

Equity

200 + $

Liab.
$

+

=

300

Equity

200 = $

Liabilities
Debit
Credit
+

300

+

Equity
Debit
-

Credit
+

Cash

Accounts Payable

Common Stock

Accounts
Receivable

Interest Payable

Paid in Capital

Salaries Payable

Retained Earnings

Unearned Revenue

Dividends (debit)

Note Payable

Revenue (credit)

Bonds

Expenses (debit)

Interest Receivable
Inventory
Prepaids (Rent)
Supplies
Land
Buildings

Gains (credit)

Losses (debit)

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 Exercise

1-5A (pg. 30) – Titles and
Accounts Appearing on F/S

 Exercise

1-6A (pg. 30) - Components of the Accounting Equations

 Exercise

1-7A (pg. 30) – Missing information in the accounting equations LO 3 and 4

LO 5

Record business events in general ledger accounts organized under an accounting equation.

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Event 1: Rustic Camp Sites (RCS) was formed on
January 1, 2011, when it acquired $120,000 cash from issuing common stock.
1. RCS increases assets
(cash).

Asset Source
Transaction

2. RCS increases stockholders’ equity
(common stock).
Assets
Acquired Cash through Stock Issue

Cash
+
120,000 +

Double-Entry
Bookkeeping

=
Land
n/a

=
=

Liab.

+

Stockholders' Equity

N. Pay. + n/a +

C. Stk.
+
120,000 +

Ret. Ear. n/a Recorded
Twice

Event 2: RCS