Chapter 1 Condensed (Day 1)
I. What isAccounting?
II. The Four Basic Financial Statements
III. GenerallyAcceptedAccounting Principal (GAAP)
IV. Management vs. Auditors
V. Ethics, Reputation and Legal Liability
VI. Types of Business Entities
VII. Employment in theAccounting Profession
I. What isAccounting? Accounting in the Language of Business
A. The building block of any business is Transactions
i. Examples of Transactions when starting a business. The business…
1. Receives Cash from investors and Provides Ownership Shares
2. Receives Cash from banks and Provides a Promissory Note
agreeing to pay principal and interest at a future date.
3. Receives Property Plant and Equipment and Provides Cash or a
Promissory (Mortgage) Note
ii. Examples of Transactions in the ordinary course of a business
1. Receives Inventory and Provides Cash
2. Receives Cash from customers and Provides Goods or Services
B. The classification, grouping, and summarization of these business transactions in
a generally accepted manner is Accounting
C. Accounting System – collects and processes financial information about an
organization and reports that information to decision makers
i. Managerial accounting – accounting for internal decision makers
ii. Financial accounting – accounting for external decision makers (focus
of this text)
1 II. The Four Basic Financial Statements (Balance Sheet, Income Statement,
Statement of Retained Earnings, Statement of Cash Flows) - Financial Statements
provide a summary of all a company’s transactions.
WHO MAKES THE FINANCIAL STATEMENTS?
WHO USES THE FINANCIAL STATEMENTS?
A. BALANCE SHEET – reports the amount of assets, liabilities, and stockholders’
equity of an accounting entity at a point in time.
At December 31, 2010
(in thousands of dollars)
Cash $ 4,895
Accounts receivable 5,714
Plant and equipment 7,154
Total assets $ 27,261
Accounts payable $ 7,156
Notes payable 9,000
Total liabilities 16,156
Contributed capital 2,000
Retained earnings 9,105
Total stockholders' equity 11,105
Total liabilities and stockholders' equity $ 27,261
a. Heading includes: 1) name of the entity, 2) title of the statement, 3) specific date of
the statement, and 4) unit of measure
b. Accounting entity – organization for which financial data are to be collected; must be
c. Basic accounting equation:MEMORIZE )
A = L + SE
Assets = Liabilities + Stockholder’s Equity
Assets represent the Economic Resources of a Business.
Liabilities (Stockholder’s Equity) represent the Sources of Financing for Economic
Resources from Creditors (Stockholders)
Cash Accounts Payable
Short-Term Investment Accrued Expenses
Accounts Receivable Notes Payable
Notes Receivable Taxes Payable
Inventory (to be sold) Unearned Revenue
Supplies Bonds Payable
Intangibles Contributed Capital – the investment of cash
and other assets in the business by the owners
Retained Earnings – the amount of earnings
(profits) reinvested in the business (and thus
not distributed to stockholders in the form of
3 How is this Accounting Equation affected when the business
A. Buys a car for cash?
B. Borrows money from a bank?
C. Pays back bank?
D. Sells stock to shareholders?
B. INCOME STATEMENT – reports the revenues less the expenses of the
For the Year Ended December 31, 2010
(in thousands of dollars)