Accounting in Business

Chapter 1

Wild and Shaw

Financial and Managerial Accounting
8th Edition

Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Chapter 1 Learning Objectives
CONCEPTUAL
C1 Explain the purpose and importance of accounting.
C2 Identify users and uses of, and opportunities in, accounting.
C3 Explain why ethics are crucial to accounting.
C4 Explain generally accepted accounting principles and define and apply several accounting
principles.
C5 Appendix 1B Identify and describe the three major activities of organizations.

ANALYTICAL
A1 Define and interpret the accounting equation and each of its components.
A2 Compute and interpret return on assets.
A3 Appendix 1A—Explain the relation between return and risk.

PROCEDURAL
P1 Analyze business transactions using the accounting equation.
P2 Identify and prepare basic financial statements and explain how they interrelate.

© McGraw-Hill Education  2
 Learning Objective C1

Explain the purpose and

importance of accounting.

© McGraw-Hill Education  3
 1-4

Importance of Accounting Exhibit

1.1

For example, the sale Keep a chronological Prepare reports such as

by Apple of an iPhone. log of transactions. financial statements.

Accounting is an information and measurement system that identifies,

records, and communicates an organization’s business activities.

© McGraw-Hill Education  4
Learning Objective C1: Explain the purpose and importance of accounting.
 Learning Objective C2

Identify users and uses of, and

opportunities in, accounting.

© McGraw-Hill Education  5
 1-6

Users of Acccounting Information

Accounting is called the language of business because all organizations
set up an accounting information system to communicate data to help
people make better decisions. Accounting serves many users who can
be divided into two groups: external users and internal users.

• Lenders • Research and development managers

• External auditors • Purchasing managers
• Shareholders • Human resource managers
• Board of directors • Marketing managers
• Regulators • Production managers

Learning Objective C2: Identify users and uses of, and opportunities in, accounting. © McGraw-Hill Education  6
 1-7

Opportunities in Accounting
Exhib
it
1.2

Accounting information is in all aspects of our lives. When

we earn money, pay taxes, invest savings, budget
earnings, and plan for the future, we use accounting.

Learning Objective C2: Identify users and uses of, and opportunities in, accounting. © McGraw-Hill Education  7
 Learning Objective C3

Explain why ethics

are crucial to accounting.

© McGraw-Hill Education  8
 1-9

Ethics – A Key Concept Exhib

it
1.5
The goal of accounting is to provide useful information for
decisions. For information to be useful, it must be trusted.
This demands ethics in accounting. Ethics are beliefs that
distinguish right from wrong. They are accepted standards of
good and bad behavior.

Learning Objective C3: Explain why ethics are crucial to accounting.

© McGraw-Hill Education  9
 1 - 10

Fraud Triangle
Three factors must exist for a person to commit fraud:
opportunity, pressure, and rationalization.

Envision a way to commit Fails to see the criminal

fraud with a low perceived nature of the fraud or
risk of getting caught justifies the action

Must have some pressure to

commit fraud, like unpaid bills
© McGraw-Hill Education  10
Learning Objective C3: Explain why ethics are crucial to accounting.
 1 - 11

Sarbanes–Oxley (SOX)
• Congress passed the Sarbanes–Oxley Act to help stop
financial abuses at companies that issue public stock.
• SOX requires documentation and verification of internal
controls and emphasizes effective internal controls.
• Failure to comply can lead to penalties and criminal
prosecution of executives.

Learning Objective C3: Explain why ethics are crucial to accounting.

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 1 - 12

Dodd-Frank Wall Street Reform and Consumer Protection Act

This act has two important provisions:

1. Clawback provision, which mandates
recovery of excessive pay
and
2. Whistleblower provision whereby the SEC
will pay whistleblowers 10% to 30% of
sanctions exceeding $1,000,000.

Learning Objective C3: Explain why ethics are crucial to accounting.

© McGraw-Hill Education  12
 Learning Objective C4

Explain generally accepted

accounting principles and
define and apply several
accounting principles.

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 1 - 14

Generally Accepted
Accounting Principles (GAAP)
Financial accounting is governed by concepts and rules known
as generally accepted accounting principles (GAAP). GAAP aims
to make information relevant, reliable, and comparable.

Reliable information is
trusted by users.

Relevant information Comparable information

affects decisions is helpful in contrasting
of users. organizations.

Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education 14
 1 - 15

International Standards
In today’s global economy, there is increased demand by external
users for comparability in accounting reports.

International Accounting International Financial

Standards Board (IASB) Reporting Standards (IFRS)

Issues International Identify preferred accounting

Financial Reporting practices
Standards (IFRS)

15
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education 
 1 - 16

Conceptual Framework

Exhib
it
1.6

Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education  16
 1 - 17

Principles, Assumptions and

Constraint
Exhib
it
1.7

General principles are the Specific principles are detailed rules

assumptions, concepts, and used in reporting business
guidelines for preparing financial transactions and events.
statements.

Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education  17
 1 - 18

Accounting Principles
Measurement Principle Revenue Recognition Principle
(Cost Principle) 1. Recognize revenue when goods or
Accounting information is based on services are provided to customers
actual cost. Actual cost is and
considered objective. 2. at an amount expected to be
received from the customer.

Expense Recognition Principle Full Disclosure Principle

(Matching Principle) A company reports the details behind
A company records its expenses financial statements that would impact
incurred to generate the revenue users’ decisions in the notes to the
reported. financial statements.

Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education  18
 1 - 19

Accounting Assumptions
Going-Concern Assumption Monetary Unit Assumption
The business is presumed to Transactions and events are
continue operating instead of being expressed in monetary, or
closed or sold. money, units.

Business Entity Assumption Time Period Assumption

A business is accounted for The life of a company
separately from other business can be divided into time periods,
entities, including its owner. such as months and years.

Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education  19
 1 - 20

Proprietorship, Partnership,
and Corporation

Here are some of the major attributes of sole proprietorships,

partnerships, corporations and limited liability companies (LLC):

Exhib
it
1.8

Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education  20
 Accounting Constraint
Cost-benefit
Only information with benefits of
disclosure greater than the cost
need be disclosed.

Materiality
Only information that would
influence the decisions of a
reasonable person need be
disclosed.

21
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education 
 Learning Objective A1

Define and interpret the

accounting equation and each
of its components.

© McGraw-Hill Education  22
 1 - 23

Business Transaction and Accounting

The Accounting Equation

Assets = Liabilities + Equity

Expanded Accounting Equation:

Net Income
Learning Objective A1: Define and interpret the accounting equation and each of its components. © McGraw-Hill Education  23
 Learning Objective P1

Analyze business transactions

using the accounting equation.

© McGraw-Hill Education  24
 Transaction 1:
Investment by Owner
Chas Taylor invests $30,000 cash to
start a corporation named FastFoward.
The accounts involved are:
(1) Cash (asset)
(2) Common Stock (equity)

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  25
 Accounting Equation 1
Chas Taylor invests $30,000 cash to start
the business, Fast Forward.
Assets = Liabilities + Equity
Accounts Notes Common
Cash Supplies Equipment Payable Payable Stock
(1) $ 30,000 $ 30,000

$ 30,000 $ - $ - $ - $ - $ 30,000

$ 30,000 = $ 30,000

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  26
 Transaction 2:
Purchase Supplies for Cash
Company purchased supplies paying
$2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  27
 Accounting Equation 2
Company purchased supplies paying
$2,500 cash.
Assets = Liabilities + Equity
Accounts Notes Common
Cash Supplies Equipment Payable Payable Stock
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
Accounting Equation
must remain in
balance!!
$ 27,500 $ 2,500 $ - $ - $ - $ 30,000

$ 30,000 = $ 30,000

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  28
 Transaction 3:
Purchase Equipment for Cash
Purchased equipment for $26,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  29
 Accounting Equation 3
Purchased equipment for $26,000 cash.
Assets = Liabilities + Equity
Accounts Notes Common
Cash Supplies Equipment Payable Payable Stock
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
(3) (26,000) $ 26,000 Accounting Equation
still remains in
balance!!
$ 1,500 $ 2,500 $ 26,000 $ - $ - $ 30,000

$ 30,000 = $ 30,000

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  30
 Transaction 4:
Purchase Supplies on Credit
Purchased supplies of $7,100 on credit.

The accounts involved are:

(1) Supplies (asset)
(2) Accounts Payable (liability)

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  31
 Accounting Equation 4
Purchased Supplies of $7,100 on credit.
Assets = Liabilities + Equity
Accounts Notes Common
Cash Supplies Equipment Payable Payable Stock
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
(3) (26,000) $ 26,000
Accounting Equation still
(4) 7,100 $ 7,100
remains in balance!!
$ 1,500 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000

$ 37,100 = $ 37,100

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  32
 Transaction Analysis: Revenues,
Expenses and Withdrawals

Now, let’s look at transactions involving

revenues, expenses and dividends.

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  33
 Transaction 5:
Provide Services for Cash
Provided consulting services to a customer
and received $4,200 cash right away.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  34
 Accounting Equation 5
Provided consulting services to a customer
and received $4,200 cash right away.

Assets = Liabilities + Equity

Accounts Notes Common
Cash Supplies Equipment Payable Payable Stock Revenue
Bal. $ 1,500 $ 9,600 $ 26,000 $ 7,100 $ 30,000
(5) 4,200 $ 4,200

$ 5,700 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000 $ 4,200

$ 41,300 = $ 41,300

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  35
 Transactions 6 and 7:
Payment of Expenses in Cash
Paid rent of $1,000 and
salaries of $700 to employees.
The accounts involved are:
(1) Cash (asset)
(2) Rent expense (equity)
(3) Salaries expense (equity)
Remember that the balance in the Expense accounts actually increase.

But, total Equity decreases, because expenses reduce equity.

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  36
 Accounting Equation 6 and 7
Paid rent of $1,000 and
salaries of $700 to employees.
Assets = Liabilities + Equity
Accounts Notes Common
Cash Supplies Equipment Payable Payable Stock Revenue Expenses
Bal. $ 5,700 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200
(6) (1,000) (1,000)
(7) (700) $ (700)

$ 4,000 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000 $ 4,200 $ (1,700)

$ 39,600 = $ 39,600

Remember that expenses decrease equity.

Learning Objective P1: Analyze business transactions using the accounting equation.
© McGraw-Hill Education  37
 Transaction 8:
Provide Services and Facilities for Credit
Provided consulting services of $1,600 and rents
facilities for $300 to a customer for credit.

The accounts involved are:

(1) Accounts receivable (asset)
(2) Consulting Revenues (equity)
(3) Rental Revenue (equity)

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  38
 Accounting Equation 8
Provided consulting services of $1,600 and rents
facilities for $300 to a customer for credit.

Assets = Liabilities + Equity

Accounts Accounts Common
Cash Receivable Supplies Equipment Payable Stock Revenue Expenses
Bal. $ 4,000 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (1,700)
(8) 1,900 $ 1,600
300

$ 4,000 $ 1,900 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 6,100 $ (1,700)

$ 41,500 = $ 41,500

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  39
 Transaction 9:
Receipt of Cash from Accounts Receivable
Client in transaction 8 pays $1,900 for consulting
services.

The accounts involved are:

(1) Cash (asset)
(2) Accounts receivable (asset)

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  40
 Accounting Equation 9
Client in transaction 8 pays $1,900 for consulting services.

Assets = Liabilities + Equity

Accounts Accounts Common
Cash Receivable Supplies Equipment Payable Stock Revenue Expenses
Bal. $ 4,000 1,900 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (1,700)
(9) 1,900 (1,900) $ 1,600
300

$ 5,900 0 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 6,100 $ (1,700)

$ 41,500 = $ 41,500

Learning Objective P1: Analyze business transactions using the accounting equation.
© McGraw-Hill Education  41
 Transaction 10:
Payment of Accounts Payable
FastForward pays $900 as partial payment for
supplies purchased in transaction 4.

The accounts involved are:

(1) Cash (asset)
(2) Accounts payable (liability)

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  42
 Accounting Equation 10
FastForward pays $900 as partial payment for supplies
purchased in transaction 4.
Assets = Liabilities + Equity
Accounts Accounts Common
Cash Receivable Supplies Equipment Payable Stock Revenue Expenses
Bal. $ 5,900 0 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (1,700)
(10) (900) (900) $ 1,600
300

$ 5,000 0 $ 9,600 $ 26,000 $ 6,200 $ 30,000 $ 6,100 $ (1,700)

$ 40,600 = $ 40,600

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  43
 Transaction 11:
Payment of Cash Dividend to Owner
Owner withdraws $200 cash for personal use.
The accounts involved are:
(1) Cash (asset)
(2) Dividends (equity)
Remember that the Dividends account actually increases (just like our
Expense accounts).

But, total Equity decreases because dividends cause equity to go

down!!

Learning Objective P1: Analyze business transactions using the accounting equation.
© McGraw-Hill Education  44
 Accounting Equation 11
Owner withdraws $200 cash for personal use.

Assets = Liabilities + Equity

Accounts Accounts Common
Cash Receivable Supplies Equipment Payable Stock Dividends Revenue Expenses
Bal. $ 5,000 0 $ 9,600 $ 26,000 $ 6,200 $ 30,000 $ 4,200 (1,700)
(11) (200) (200) $ 1,600
300

$ 4,800 0 $ 9,600 $ 26,000 $ 6,200 $ 30,000 $ (200) $ 6,100 $ (1,700)

$ 40,400 = $ 40,400

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  45
 Summary of Transactions Exhib
it
1.9

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education  46
 Learning Objective P2

Identify and prepare basic

financial statements and explain
how they interrelate.

© McGraw-Hill Education  47
 1 - 48

Financial Statements
The four financial statements and their purposes are:
1. Income statement — describes a company’s revenues and
expenses and computes net income or loss over a period of
time.
2. Statement of retained earnings — explains changes in
retained earnings from net income (or loss) and from any
dividends over a period of time.
3. Balance sheet — describes a company’s financial position
(types and amounts of assets, liabilities, and equity) at a
point in time.
4. Statement of cash flows — identifies cash inflows (receipts)
and cash outflows (payments) over a period of time.

© McGraw-Hill Education  48
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 Exhibit 1.10: Financial Statements and Their Links – Part 1 1 - 49

(cont. next slide)

49
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate. © McGraw-Hill Education 
 Exhibit 1.10: Financial Statements and Their Links – Part 2 1 - 50

50
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate. © McGraw-Hill Education 
 Learning Objective A2

Compute and interpret return

on assets.

© McGraw-Hill Education  51
 1 - 52

Return on Assets
Return on assets (ROA) is stated in ratio form as net
income divided by the average total assets invested.

Net income
Return on assets =
Average total assets

Exhib
it
1.12

Learning Objective A2: Compute and interpret return on assets.

© McGraw-Hill Education  52
 Learning Objective A3

Appendix 1A
Explain the relation
between return and risk.

53
© McGraw-Hill Education 
 1 - 54

Appendix 1A
Return and Risk Analysis
Many different Risk is the uncertainty Exhib
returns may be about the return we will it
reported. earn. 1A.1

The lower the risk, the lower our expected return.

ROA
Interest return on
savings accounts.
Interest return on
corporate bonds.

Learning Objective A3: Explain the relation between return and risk. © McGraw-Hill Education  54
 1 - 55

Learning Objective C5

Appendix 1B
Identify and describe the
three major activities of
organizations.

55
© McGraw-Hill Education 
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Financing Activities

One of the three major types of business activities:

Financing activities provide the means organizations use to

pay for resources such as land, buildings, and equipment to
carry out plans.

 Owner financing—resources contributed by the owner

along with any income the owner leaves in the
organization.
 Nonowner financing—resources contributed by creditors
(lenders).

Learning Objective C5: Identify and describe the three major activities of organizations. © McGraw-Hill Education  56
 1 - 57

Investing Activities

One of the three major types of business activities:

Investing activities are the acquiring and disposing of

resources (assets) that an organization uses to acquire and
sell its products or services.

 Asset management—determining the amount and type

of assets for operations.
 Assets—invested amounts.
 Liabilities—creditors’ claims.
 Equity—owner’s claim.

Learning Objective C5: Identify and describe the three major activities of organizations. © McGraw-Hill Education  57
 1 - 58

Operating Activities
One of the three major types of business activities:

Operating activities involve using resources to research,

develop, purchase, produce, distribute, and market
products and services.

 Strategic management—the process of determining

the right mix of operating activities for the type of
organization, its plans, and its market.

Learning Objective C5: Identify and describe the three major activities of organizations. © McGraw-Hill Education  58
 1 - 59

Activities of Organizations
Exhib
it
1B.1

Learning Objective C5: Identify and describe the three major activities of organizations. © McGraw-Hill Education  59
 1 - 60

End of Chapter 1

© McGraw-Hill Education  60