Chapter 1 Introduction to Accounting and Business Business is an organization in which basic resources such as materials and labor are assembled and processed to provide goods and services to customers Profit Are the difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide the goods or services some business operates for other goals than profit Types of Business Merchandising sell products to customers Manufacturing change basic inputs into products that are sold to individual customers Service provide services rather than products to customers Types of Business Organization Proprietorship is owned by one individual Comprises 70 of business organizations in US Cost of organizing is low Limited financial resources Used by small business Partnership is owned by two or more individuals Comprises 10 of business organizations in the US Combines the skills and resources of more than one person Prepared by Maria Mari Fall 2007 Page 1 of 11 1 Chapter 1 Introduction to Accounting and Business Corporation is organized under state or federal statutes as a separate legal entity Generates 90 of the total dollars of business receipted Comprises 20 of the business organizations Includes ownership divided into shares of stock Used by large businesses Ability to obtain large amounts of capital Limited liability corporation LLC Combines the attributes of a partnership and a corporation I that it is organized as a corporation Can elect to be taxed as a partnership Popular alternative to a partnership Has tax and liability advantages to the owners Business Stakeholders Is a person or entity that has an interest in the economics performance of the business Owners who have invested resources in the business clearly have an interest in how well the business performs Managers are those individuals who the owners have authorized to operate the business Employees provide services to the business in exchange for their pay Customers government and creditors also have a stake in the success of the business Capital market stakeholders provide the major financing for the business in order for the business to begin and continue its operations Prepared by Maria Mari Fall 2007 Page 2 of 11 2 Chapter 1 Introduction to Accounting and Business Product or service market stakeholders include customers who purchase the business products or services as well as the vendors who supply inputs to the business Government stakeholders have an interest in the economic performance of the business Internal stakeholders include individuals employed by the business The Role of Ethics in Business Ethics moral principles that guide the conduct of individuals Failure of ethics caused by o Individual character o Firm culture o Laws and enforcement The Role of Accounting in Business Accounting is an information system that provides reports to stakeholders about the economic activities and condition of a business The process by which the accountant provides information to business stakeholders is as follows 1 2 3 4 5 Identify the stakeholders Assess stakeholders information needs Design the accounting information system Record economic data about business activities Prepare accounting reports for stakeholders Prepared by Maria Mari Fall 2007 Page 3 of 11 3 Chapter 1 Introduction to Accounting and Business Profession of Accounting 1 Financial Accounting primarily concerned with the recording and reporting of economic data and activities for a business External uses 2 Managerial Accounting uses both financial accounting and estimated data to aid management in running day to day operations and in planning future operations Internal uses Accountants are employed either in Private Accounting accountants employed by a business firm or a not for profit organization a Management accountants http www imanet org b Controller i Certified Management Accountants c Internal Accountants i Certified Internal Auditor http www theiia org 3 Public Accounting accountants and their staffs who provide services on a fee basis a Certified Public Accountants Http www aicpa org Prepared by Maria Mari Fall 2007 Page 4 of 11 4 Chapter 1 Introduction to Accounting and Business Generally Accepted Accounting Principles GAAP A set of rules for the preparation of accounting information Financial Accounting Standards Board FASB the authoritative body that has the primary responsibility for developing accounting principles Accounting Principles and Concepts Business Entity Concept The activities of a business are recorded separately from the activities of the stakeholders Limits the economic data in the accounting system to data related directly to the activities of the business The Cost Concept Is the concept that states that assets are entered at their cost Prepared by Maria Mari Fall 2007 Page 5 of 11 5 Chapter 1 Introduction to Accounting and Business Objectivity concept requires that the accounting records and reports be based upon the objective evidence Unit of measure concept requires that economic data be recorded in dollars The Accounting Equation Assets Liabilities Owner s Equity The accounting equation must always hold true Assets Liabilities and Owner s Equity ASSETS resources owned by the business Cash Accounts receivable amounts owed by customers Prepaid expense assets to be used in the future supplies prepaid insurance Merchandise Inventory merchandise for sale in the course of business Equipment Land Building LIABILITIES rights of creditors or debts of the business Accounts payable amount owed to creditors Dividends payable amounts owed to shareholders Accrued expenses Mortgage payable Notes payable Prepared by Maria Mari Fall 2007 Page 6 of 11 6 Chapter 1 Introduction to Accounting and Business OWNER S EQUITY SHAREHOLDER S EQUITY rights of owners Assets minus Liabilities Capital stock investment by shareholders Retained earnings earnings kept in the business Dividends distribution of income to shareholders Business Transactions and the Accounting Equation Business transactions an economic event or condition that directly changes an entity s financial condition or directly affects its results of operations Transactions a Pat deposits 15 000 in a bank account in return for shares of stock Assets Cash 15 000 Liabilities Stockholder s Equity Capital stock 15 000 Transactions b Purchased land for cash 10 000 Assets Liabilities Stockholder s Equity Cash Land Capital stock 15 000