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CHAPTER 1
INTRODUCTION TO ACCOUNTING
AND BUSINESS
CLASS DISCUSSION QUESTIONS
- The objective of most businesses is to maximize profits. Profit is the difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide those goods or services. 2. The stakeholders of a business normally include owners, managers, employees, customers, creditors, and the government.
- Simply put, the role of accounting is to provide information for managers to use in operating the business. In addition, accounting provides information to other stakeholders to use in assessing the economic performance and condition of the business.
- Three sound principles that form the foundation for ethical behavior are (1) avoid small ethical lapses, (2) focus on your long- term reputation, and (3) be willing to suffer adverse personal consequences for holding to an ethical position.
- Accountants serving a business firm, governmental agency, not-for-profit organization, etc., as an employee are engaged in private accounting. Accountants who provide accounting services to clients on a fee basis are engaged in public accounting.
- FASB stands for the Financial Accounting Standards Board. The FASB sets generally accepted accounting principles by first identifying specific issues in financial accounting. As these issues arise, the FASB conducts extensive research to identify the primary concerns involved and possible solutions. Generally, after issuing discussion memoranda and preliminary proposals and evaluating comments from interested parties, the Board issues Statements of Financial Accounting Standards. These standards become part of generally accepted accounting principles. To explain, clarify, or elaborate on existing standards, the Board also issues Interpretations , which have the same authority as the Standards. 7. No. The business entity concept limits the recording of economic data to transactions directly affecting the activities of the business. The payment of the interest of $3,500 is a personal transaction of Lynda Lyons and should not be recorded by Fast Delivery Service. 8. The land should be recorded at its cost of $97,500 to Neece Repair Service. This is consistent with the cost concept. 9. a. No. The offer of $400,000 and the increase in the assessed value should not be recognized in the accounting records. b. Cash would increase by $400,000, land would decrease by $350,000, and owner’s equity would increase by $50,000.
- The two principal rights to the properties of a business are liabilities (the rights of creditors) and owner's equity (the rights of the owner).
- The three elements of the accounting equation are assets, liabilities, and owner's equity.
- An account receivable is a claim against a customer for goods or services sold. An account payable is an amount owed to a creditor for goods or services purchased. Therefore, an account receivable in the records of the seller is an account payable in the records of the purchaser.
- The business incurred a net loss of $15,000.
- The business realized net income of $10,000.
- The two types of transactions that increase the owner’s equity of a proprietorship are revenue and an investment by the owner.
- The income statement presents a summary of the revenues and expenses of a business for a specific period of time. The statement of owner’s equity indicates the changes in owner’s equity that have occurred over a specific period of time. The balance sheet presents a listing of the assets, liabilities, 11
and owner's equity of a business as of a specific date. The statement of cash flows presents a summary of the cash receipts and cash payments of a business entity for a specific period of time.
- An income statement, a statement of owner’s equity, and a statement of cash flows are for a specific period of time. The balance sheet is for a specific date.
- Net income or net loss Owner’s equity at the end of the period
- The statement of cash flows reports cash flows from operating activities, investing activities, and financing activities. 22
Ex. 1–
a. $183,000 ($325,000 – $142,000) b. $230,000 ($183,000 + $84,000 – $37,000) c. $158,000 ($183,000 – $8,000 – $17,000) d. $275,500 ($183,000 + $75,000 + $17,500) e. Net income: $137,000 ($425,000 – $105,000 – $183,000)
Ex. 1–
a. owner's equity b. asset c. owner's equity d. asset e. liability f. asset
Ex. 1–
a. Increases assets and increases owner’s equity. b. Increases assets and increases owner’s equity. c. Increases assets and decreases assets. d. Decreases assets and decreases owner’s equity. e. Increases assets and increases liabilities.
Ex. 1–
a. (1) Total assets increased $50,000. (2) No change in liabilities. (3) Owner’s equity increased $50,000. b. (1) Total assets decreased $28,000. (2) Total liabilities decreased $28,000. (3) No change in owner’s equity.
Ex. 1–
- increase
- increase
- decrease
- decrease
Ex. 1–
- c 6. a
- d 7. e
- c 8. a
- e 9. e
- c 10. e
Ex. 1–
a. (1) Sale of catering services for cash, $15,000. (2) Purchase of land for cash, $2,000. (3) Payment of expenses, $11,250. (4) Purchase of supplies on account, $500. (5) Withdrawal of cash by owner, $1,500. (6) Payment of cash to creditors, $5,300. (7) Recognition of cost of supplies used, $800. b. ($5,050) ($950 – $6,000) c. $1,450 ($30,700 – $29,250) d. $2,950 ($15,000 – $11,250 – $800) e. $1,450 ($2,950 – $1,500)
Ex. 1–
It would be incorrect to say that the business had incurred a net loss of $7,250. The excess of the withdrawals over the net income for the period is a decrease in the amount of owner’s equity in the business.
DOUMA COMPANY
SURGERY SERVICES
In each case, solve for a single unknown, using the following equation: Owner’s equity (beginning) + Investments – Withdrawals + Revenues Decrease in owner's equity....................................................... $ (14,000) Deduct decrease due to net loss ($115,000 – $122,500)........ (7,500)
- Ex. 1– - For the Month Ended June 30, Statement of Owner’s Equity
- Meg Douma, capital, June 1, 2003.............................. $317,
- Net income for the month............................................ $91,
- Less withdrawals.......................................................... 15,
- Increase in owner’s equity.......................................... 76,
- Meg Douma, capital, June 30, 2003............................ $393,
- Ex. 1– - For the Month Ended April 30, Income Statement
- Fees earned.................................................................. $165,
- Wages expense......................................................... $71, Operating expenses:
- Rent expense............................................................ 25,
- Supplies expense..................................................... 3,
- Miscellaneous expense............................................ 2,
- Total operating expenses.................................... 102,
- Net income.................................................................... $ 63,
- Ex. 1– - I. Owner's equity at end of year ($745,000 – $325,000)............. $420, – Expenses = Owner’s equity (ending) - Owner's equity at beginning of year ($600,000 – $360,000). 240, - Increase in owner's equity......................................................... $180, - Deduct increase due to net income ($197,750 – $108,000). 89, - $ 90, - Add withdrawals......................................................................... 40, - Additional investment in the business................................ (a) $130, - II. Owner's equity at end of year ($175,000 – $55,000)............... $120, - Owner's equity at beginning of year ($125,000 – $65,000).... 60, - Increase in owner's equity......................................................... $ 60, - Add withdrawals......................................................................... 8, - $ 68, - Deduct additional investment................................................... 25, - Increase due to net income....................................................... $ 43, - Add expenses............................................................................. 32, - Revenue................................................................................... (b) $ 75,
- III. Owner's equity at end of year ($90,000 – $80,000)................. $ 10, - Owner's equity at beginning of year ($100,000 – $76,000).... 24, - Deduct additional investment................................................... 10, $ (6,500)
- IV. Owner's equity at end of year ($310,000 – $170,000)............. $140, Withdrawals from the business............................................ (c) $ (16,500) - Add decrease due to net loss ($140,000 – $160,000)............. 20, - $160, - Add withdrawals......................................................................... 75, - $235, - Deduct additional investment................................................... 50, - $185, - Add liabilities at beginning of year.......................................... 150, - Assets at beginning of year.................................................. (d) $335,
Ex. 1–
Balance sheet: b, c, e, f, h, i, j, l, m, n, o Income statement: a, d, g, k
Ex. 1–
- c–financing activity
- b–investing activity
- a–operating activity
- a–operating activity
Ex. 1–
- All financial statements should contain the name of the business in their heading. The statement of owner’s equity is incorrectly headed as “Lynn Soby” rather than Aspen Realty. The heading of the balance sheet needs the name of the business.
- The income statement and statement of owner’s equity cover a period of time and should be labeled “For the Month Ended March 31, 2003.”
- The year in the heading for the statement of owner’s equity should be 2003 rather than 2002.
- The balance sheet should be labeled as of “March 31, 2003,” rather than “For the Month Ended March 31, 2003.”
- In the income statement, the miscellaneous expense amount should be listed as the last operating expense.
- In the income statement, the total operating expenses are incorrectly subtracted from the sales commissions, resulting in an incorrect net income amount. The correct net income should be $3,625.00. This also affects the statement of owner’s equity and the amount of Lynn Soby, capital, that appears on the balance sheet.
- In the statement of owner’s equity, the additional investment should be added first to Lynn Soby, capital, as of March 1, 2003. The net income should be presented next, followed by the amount of withdrawals, which is subtracted from the net income to yield a net increase in owner’s equity.
- Accounts payable should be listed as a liability on the balance sheet.
- Accounts receivable and supplies should be listed as assets on the balance sheet.
- The balance sheet assets should equal the sum of the liabilities and owner’s equity.
Ex. 1–22 Concluded
Corrected financial statements appear as follows: ASPEN REALTY Income Statement For the Month Ended March 31, 2003 Sales commissions............................................................. $37, Operating expenses: Office salaries expense............................................... $23, Rent expense................................................................ 7, Automobile expense.................................................... 1, Supplies expense......................................................... 225 Miscellaneous expense............................................... 550 Total operating expenses........................................ 33, Net income........................................................................... $ 3, ASPEN REALTY Statement of Owner’s Equity For the Month Ended March 31, 2003 Lynn Soby, capital, March 1, 2003..................................... $ 7, Additional investment during March................................. $ 1, Net income for March.......................................................... 3, $ 5, Less withdrawals during March......................................... 1, Increase in owner’s equity.................................................. 4, Lynn Soby, capital, March 31, 2003................................... $11, ASPEN REALTY Balance Sheet March 31, 2003 Assets Liabilities Cash.................................. $ 2,350 Accounts payable........... $ 2, Accounts receivable........ 10, Supplies............................ 1,325 Owner’s Equity Lynn Soby, capital.......... 11, Total liabilities and Total assets...................... $13,875 owner’s equity............ $13,
PROBLEMS
Prob. 1–1A
Owner’s Assets = Liabilities + Equity Accounts Accounts Linda Neece, Cash + Receivable + Supplies = Payable + Capital a. +10,000 +10,000 Investment b. + 1,150 + 1, Bal. 10,000 1,150 1,150 10, c. + 4,500 + 4,500 Fees earned Bal. 14,500 1,150 1,150 14, d. – 2,500 – 2,500 Rent expense Bal. 12,000 1,150 1,150 12, e. – 675 – 675 Bal. 11,325 1,150 475 12, f. + 3,250 + 3,250 Fees earned Bal. 11,325 3,250 1,150 475 15, g. – 1,755 – 980 Auto expense
- 775 Misc. expense Bal. 9,570 3,250 1,150 475 13, h. – 1,500 – 1,500 Salaries exp. Bal. 8,070 3,250 1,150 475 11, i. – 935 – 935 Supplies exp. Bal. 8,070 3,250 215 475 11, j. – 1,000 – 1,000 Withdrawal Bal. 7,070 3,250 215 475 10,
- Owner's equity is the right of owners to the assets of the business. These rights are increased by owner’s investments and revenues and decreased by owner's withdrawals and expenses.
Prob. 1–2A
FLY AWAY TRAVEL AGENCY
Income Statement For the Year Ended December 31, 2003 Fees earned.......................................................................... $ 117, Operating expenses: Wages expense............................................................ $35, Rent expense................................................................ 27, Utilities expense........................................................... 10, Supplies expense......................................................... 2, Miscellaneous expense............................................... 1, Total operating expenses........................................ 76, Net income........................................................................... $ 40,
FLY AWAY TRAVEL AGENCY Statement of Owner’s Equity For the Year Ended December 31, 2003 Ryan Stecker, capital, January 1, 2003.............................. $14, Net income for the year....................................................... $40, Less withdrawals................................................................. 30, Increase in owner’s equity.................................................. 10, Ryan Stecker, capital, December 31, 2003........................ $25,
FLY AWAY TRAVEL AGENCY Balance Sheet December 31, 2003 Assets Liabilities Cash.................................. $ 7,200 Accounts payable........... $ 3, Accounts receivable........ 19, Supplies............................ 1,865 Owner’s Equity Ryan Stecker, capital..... 25, Total liabilities and Total assets...................... $ 28,565 owner’s equity............ $ 28,
Prob. 1–4A
Owner’s Assets = Liabilities + Equity Accounts Dori French, Cash + Supplies = Payable + Capital a. + 5,000 + 5,000 Investment b. +1,250 +1, Bal. 5,000 1,250 1,250 5, c. – 850 – 850 Bal. 4,150 1,250 400 5, d. + 16,200 + 16,200 Sales commissions Bal. 20,350 1,250 400 21, e. – 2,000 – 2,000 Rent expense Bal. 18,350 1,250 400 19, f. – 4,500 – 4,500 Withdrawal Bal. 13,850 1,250 400 14, g. – 2,250 – 1,900 Auto expense
- 350 Misc. expense Bal. 11,600 1,250 400 12, h. – 4,250 – 4,250 Salaries expense Bal. 7,350 1,250 400 8, i. – 650 – 650 Supplies expense Bal. 7,350 600 400 7,
DEAL REALTY Income Statement For the Month Ended March 31, 20— Sales commissions............................................................. $16, Operating expenses: Office salaries expense............................................... $4, Rent expense................................................................ 2, Automobile expense.................................................... 1, Supplies expense......................................................... 650 Miscellaneous expense............................................... 350 Total operating expenses........................................ 9, Net income........................................................................... $ 7,
Prob. 1–4A Concluded
DEAL REALTY
Statement of Owner’s Equity For the Month Ended March 31, 20— Dori French, capital, March 1, 20—................................... $ 0 Investment on March 1, 20—.............................................. $ 5, Net income for March.......................................................... 7, $12, Less withdrawals................................................................. 4, Increase in owner’s equity.................................................. 7, Dori French, capital, March 31, 20—................................. $7, DEAL REALTY Balance Sheet March 31, 20— Assets Liabilities Cash.................................. $ 7,350 Accounts payable........... $ 400 Supplies............................ 600 Owner’s Equity Dori French, capital........ 7, Total liabilities and Total assets...................... $ 7,950 owner’s equity............ $ 7,
Prob. 1–5A Continued
Owner’s Assets = Liabilities + Equity Accounts Accounts Bea Cheever, Cash + Receivable + Supplies + Land = Payable + Capital Bal. 6,250 18,100 2,200 40,000 7,800 58, a. +15,750 +15,750 Dry cleaning sales Bal. 22,000 18,100 2,200 40,000 7,800 74, b. – 2,500 – 2,500 Rent expense Bal. 19,500 18,100 2,200 40,000 7,800 72, c. + 1,650 + 1, Bal. 19,500 18,100 3,850 40,000 9,450 72, d. – 5,100 – 5, Bal. 14,400 18,100 3,850 40,000 4,350 72, e. + 8,920 + 8,920 Dry cleaning sales Bal. 14,400 27,020 3,850 40,000 4,350 80, f. + 6,000 – 6,000 Dry cleaning expense Bal. 14,400 27,020 3,850 40,000 10,350 74, g. – 5,570 – 2,400 Wages expense
- 1,580 Truck expense
- 960 Utilities expense
- 630 Miscellaneous expense Bal. 8,830 27,020 3,850 40,000 10,350 69, h. +12,100 – 12, Bal. 20,930 14,920 3,850 40,000 10,350 69, i. – 1,350 – 1,350 Supplies expense Bal. 20,930 14,920 2,500 40,000 10,350 68, j. – 7,500 – 7,500 Withdrawals Bal. 13,430 14,920 2,500 40,000 10,350 60,
Prob. 1–5A Concluded
- a. PERSNICKETY DRY CLEANERS Income Statement For the Month Ended July 31, 20— Dry cleaning sales............................................................... $24, Operating expenses: Dry cleaning expense.................................................. $6, Rent expense................................................................ 2, Wages expense............................................................ 2, Truck expense.............................................................. 1, Supplies expense......................................................... 1, Utilities expense........................................................... 960 Miscellaneous expense............................................... 630 Total operating expenses........................................ 15, Net income........................................................................... $ 9, b. PERSNICKETY DRY CLEANERS Statement of Owner’s Equity For the Month Ended July 31, 20— Bea Cheever, capital, July 1, 20—...................................... $58, Net income for July............................................................. $9, Less withdrawals................................................................. 7, Increase in owner’s equity.................................................. 1, Bea Cheever, capital, July 31, 20—.................................... $60, c. PERSNICKETY DRY CLEANERS Balance Sheet July 31, 20— Assets Liabilities Cash.................................. $13,430 Accounts payable........... $10, Accounts receivable........ 14, Supplies............................ 2,500 Owner’s Equity Land.................................. 40,000 Bea Cheever, capital...... 60, Total liabilities and Total assets...................... $70,850 owner’s equity............ $70,
