INTRODUCTION TO ACCOUNTING
GENERAL INFORMATION FOR COMPLETING THE CLASS
The following is a summary of the twelve chapters that you will be completing this semester. Be sure that you are taking the time to read and STUDY each chapter. It is important to go through each of the examples in the book and to complete the Review Quiz. Spending time reading and understanding before you start the homework assignment will help you to complete in the exercises and case problems with more understanding. Please ask questions to clarify questions that you may have on any assignment or concept. Be sure to check your answers in the notebooks before turning in your assignments. There are PowerPoint slides on the “I” drive that you may want to review before taking your exams or as reinforcement to your reading.
The Nature of Accounting
Accounting is the process of recording, summarizing, analyzing, and interpreting financial (moneyrelated) activities to permit individuals and organizations to make informed judgments and decisions. By law all businesses must keep accounting records. Decisions are based on accounting information for profit and non-profit companies alike.
There are different forms of business organizations:
Private business—object is to earn a profit
Sole Proprietorship—owned by one person
Partnership—co-owned by two or more persons
Corporation—owned by investors called stockholders (The business—not the owners—are responsible for the company’s obligations.)
There are different types of business organizations:
Service business—doctors, lawyers, barber shop, etc.
Merchandising business—purchases goods for resale
Manufacturing business—produces a product to sell
THE ELEMENTS OF ACCOUNTING
Assets are items with money value that are owned by a business. Some examples are: cash, accounts receivable (selling goods or services on credit), equipment (office, store, delivery, etc.), and supplies (office, store, delivery, etc.).
Liabilities are debts owed by the business. Paying cash is often not possible or convenient, so businesses purchase goods and services on credit. The name of the account used is Accounts Payable. Another type of liability is Notes Payable. This is a formal written promise to pay a specific amount of money at a definite future date.
The difference between Assets and Liabilities is Owner’s Equity. The can also be called capital, proprietorship, or net worth.
Introduction to Accounting I
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THE ACCOUNTING EQUATION (Study the examples in the book, p. 5) Assets = Liabilities + Owner’s Equity
This equation must always balance!
BUSINESS TRANSACTIONS AND THE ACCOUNTING EQUATION
A transaction is any activity that changes the value of a firm’s assets, liabilities, or owner’s equity. Each transaction has a dual effect on the basic accounting elements. A transaction may affect more than two accounts in a transaction. This is called a combined entry. Withdrawal (Drawing) is the removal of business assets for personal use by the owner. This transaction decreases the asset taken and the value of the business.
Each transaction increases or decreases (or both) the basic elements in the accounting equation. The effect of recording a business transaction must always leave the two sides of the accounting equation in balance.
To understand how a transaction affects the accounting equation, go through each of the examples in the textbook. Be sure to pay attention to the “Notes” and “Cautions” that are given. FINANCIAL STATEMENTS
Summaries of financial activities are called financial statements which are prepared on a regular basis at the end of an accounting period. The accounting period typically is one year; however, it can be any length of time for which records are maintained. Usually the minimum is one month and the maximum length of time is one year for...
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