Introduction to Business and Accounting PDF

1. Proprietorship: Owned by one person, simple setup, owner Introduction to Business assumes all risks and benefits. and Accounting 2. Partnership: Two or more...

1. Proprietorship: Owned by one person, simple setup, owner Introduction to Business assumes all risks and benefits. and Accounting 2. Partnership: Two or more individuals share ownership, profits, and responsibilities. 1. Definition of a Business 3. Corporation: Legally distinct from A business is an organization its owners, ownership divided into providing goods or services in stock, limited liability for owners, exchange for money or other forms ability to raise funds through stock of value. issuance. The main goal of most businesses is 4. Limited Liability Companies to generate profit, which is (LLCs): Combines features of calculated as: partnerships and corporations. Stakeholders and the Role of Accounting Not-for-profit organizations operate with goals other than profit 1. Stakeholders in Business generation, such as fulfilling a social Individuals or entities with an interest mission. in a company’s operations and financial performance. Types of Stakeholders: 2. Types of Businesses ○ Internal Stakeholders: Owners, employees, Service Businesses: Provide managers. intangible services. ○ External Stakeholders: ○ Examples: H&R Block (tax Customers, suppliers, services), Time Warner government, investors, Cable. creditors. Merchandising Businesses: Sell ○ Capital Market tangible products purchased from Stakeholders: Investors and suppliers. creditors who provide ○ Examples: Banana Republic, financing. Dillard’s. Manufacturing Businesses: Convert raw materials into finished 2. Role of Accounting products. Referred to as the language of ○ Examples: Sylvania (light business, accounting provides bulbs), Toyota (cars). financial data to stakeholders for decision-making. 3. Business Ownership Forms Functions of accounting:  ○ Recording transactions. The Accounting Equation ○ Summarizing economic activities. The foundation of all accounting systems: ○ Reporting financial conditions and performance. Assets=Liabilities+Stockholders’ Equity Accounting information is categorized into: Definitions: ○ Managerial Accounting: For internal decision-makers Assets: Resources owned by a (e.g., budgets, performance business (e.g., cash, equipment, reports). land). ○ Financial Accounting: For Liabilities: Obligations to creditors external users (e.g., (e.g., accounts payable, loans). investors, regulators). Stockholders’ Equity: Owners' claims on assets, including investments and retained earnings. Accounting Principles and Examples of Transactions: Concepts Purchase Supplies on Credit: ○ Increases assets (supplies) 1. Fundamental Principles and liabilities (accounts payable). 1. Cost Concept: Pay a Liability: ○ Record assets at their ○ Decreases both assets purchase cost. (cash) and liabilities. ○ Prevents overvaluation Earn Revenue: based on subjective ○ Increases assets opinions. (cash/accounts receivable) 2. Objectivity Concept: and stockholders' equity ○ Financial information must be (retained earnings). based on verifiable and Pay Dividends: unbiased evidence. ○ Decreases both assets 3. Unit of Measurement: (cash) and stockholders’ ○ Transactions are recorded in equity. a consistent monetary unit International standards are set by (e.g., USD). the International Accounting Standards Board (IASB). 2. Accounting Standards Examples of Transactions: Governed by Generally Accepted Accounting Principles (GAAP). 1. Purchase Supplies on Credit:  ○ Increases assets (supplies) ○ Financing: Cash from and liabilities (accounts investors or loans. payable). 2. Pay a Liability: ○ Decreases both assets (cash) and liabilities. 3. Earn Revenue: Common Accounting ○ Increases assets Transactions (cash/accounts receivable) and stockholders' equity Examples and Their Effects on the (retained earnings). Equation: 4. Pay Dividends: ○ Decreases both assets 1. Receive Cash from Customers for (cash) and stockholders’ Services: equity. ○ Assets (Cash)↑↑ Stockholders’ Equity 1. Income Statement (Revenue) Reports revenues and expenses Pay Wages: over a period to calculate Net Income or Net Loss: ○ Assets (Cash)↓↓, Stockholders’ Equity Net Income=Revenues−Expenses (Expenses) 2. Statement of Retained Earnings Borrow Cash from a Bank: Tracks changes in retained earnings: ○ Assets (Cash)↑↑, Liabilities (Loan Payable) Retained Earnings (Ending)=Retained Earnings (Beginning)+Net Income−Dividends Key Concepts in the Adjusting Process 3. Balance Sheet 1. Accrual Basis vs. Cash Basis of Presents the company’s financial Accounting: position as of a specific date ○ Accrual Basis: Revenues are recorded when earned, 4. Statement of Cash Flows and expenses are recorded when incurred, regardless of Summarizes cash inflows and when cash is exchanged. outflows in three activities: (Required by GAAP) ○ Operating: Cash flows from ○ Cash Basis: Revenues and regular business activities. expenses are recorded only ○ Investing: Cash used in the purchase/sale of assets.  when cash is received or Adjusted by recognizing earned paid. (Not GAAP-compliant) revenue. 2. Importance of Adjustments: ○ Adjustments are made to Unearned Revenue $1,000 ensure financial statements reflect accurate revenues Service Revenue $1,000 and expenses for the period. Accrued Revenues: ○ Adjusting entries typically affect one income statement Revenue earned but not yet account and one balance received or recorded. sheet account. 3. Revenue Recognition Concept: Accounts Receivable $2,500 ○ Revenue is recorded when earned, not when cash is Service Revenue $2,500 received. ○ Ensures accurate matching Accrued Expenses: of revenues with the period Expenses incurred but not yet paid they relate to. or recorded (e.g., salaries payable). 4. Matching Concept: ○ Expenses must be recorded Salaries Expense $5,000 in the same period as the revenues they helped to Salaries Payable $5,000 generate. Depreciation: Types of Adjustments Systematic allocation of the cost of a 1. Prepaid Expenses (Deferred fixed asset over its useful life Expenses): (excluding land). ○ Payments made in advance for expenses (e.g., prepaid Depreciation Expense $1,000 insurance). Accumulated Depreciation $1,000 ○ Adjusted by transferring the expired portion to the expense account. Rent Expense $400 CHAPTER 3 Prepaid Rent $400 1. Key Differences: Service vs. Merchandising Unearned Revenue (Deferred Revenue): Businesses Cash received before revenue is Service Business: Provides earned (e.g., unearned services, records revenue for work subscriptions). performed.  Merchandising Business: Buys 1. Multi-Step Income Statement: and sells physical goods. ○ Includes Gross Profit: Gross ○ Key financial statement Profit=Net Sales−COMSs difference: Merchandising ○ Deducts operating expenses businesses report Cost of (Selling and Administrative) Merchandise Sold (COMS) to calculate Income from and Gross Profit. Operations. ○ Reports Other 2. Key Accounts for Income/Expenses Merchandising Businesses separately. 2. Single-Step Income Statement: 1. Merchandise Inventory: ○ All revenues and expenses ○ Asset account showing grouped together. inventory available for sale. ○ Gross Profit not separately ○ Updated differently under presented periodic and perpetual inventory systems. 5. Key Terminologies and Entries 2. Sales: Revenue from selling goods. 3. Cost of Merchandise Sold 1. Sales Discounts: (COMS): ○ Discount offered for early ○ Cost incurred to purchase payment (e.g., 2/10, n/30). goods sold during the period. ○ "2/10" means a 2% discount ○ Formula under Periodic if paid within 10 days. System: COMS=Beginning 2. Sales Returns and Allowances: Inventory+Net ○ Contra-revenue account for Purchases−Ending Inventory returned goods or discounts after sale. 3. Inventory Systems 3. Freight Terms: ○ FOB Shipping Point: Buyer 1. Periodic Inventory System: pays transportation; title ○ Updates inventory at the end passes at shipment. of the accounting period. ○ FOB Destination: Seller ○ Purchases recorded in pays transportation; title Purchases Account, not passes upon delivery. directly in Inventory. 2. Perpetual Inventory System: 7. Cost of Merchandise Sold ○ Continuous updates to (COMS) Calculation Merchandise Inventory and COMS. Periodic Inventory System: ○ Each sale reduces inventory and records COMS. 1. Add beginning inventory and net purchases: Net 4. Multi-Step vs. Single-Step Purchases=Purchases−Returns/Allo wances−Discounts+Freight-In. Income Statement Adjustments for Shrinkage Debit (Dr): Increases Assets and Expenses; decreases Liabilities, Physical inventory < recorded Revenues, and Equity. inventory indicates shrinkage. Credit (Cr): Increases Liabilities, Revenues, and Equity; decreases Adjustment: Assets and Expenses. bash Copy code Cost of Merchandise Sold $XX Key Normal Balances Merchandise Inventory $XX Assets & Expenses: Debit. Liabilities, Revenues, & Equity: 9. Financial Impact Credit. 1. Missed Adjustments: ○ Omitting freight-in understates inventory and Double-Entry System COMS. ○ Not recording sales Each transaction affects at least two discounts overstates accounts (one debit and one credit). revenue. Total debits must equal total credits. 2. Multi-Step Income Statement: ○ Shows a clear distinction between operating and non-operating income. Common Transactions 1. Investing Cash in Business: Chapter 2: Analyzing ○ Dr: Cash ○ Cr: Capital Stock Transactions Reviewer 2. Paying Rent: ○ Dr: Rent Expense Basic Concepts ○ Cr: Cash 3. Buying on Account: 1. Accounts: Records of increases ○ Dr: Asset (e.g., Supplies) and decreases in individual financial ○ Cr: Accounts Payable statement items. 4. Paying Accounts Payable: 2. Chart of Accounts: A structured list ○ Dr: Accounts Payable of a company’s accounts in financial ○ Cr: Cash statement order (Assets, Liabilities, 5. Receiving Cash for Services: Equity, Revenues, Expenses). ○ Dr: Cash ○ Cr: Fees Earned Rules of Debits and Credits T-Accounts Trial Balance Error: Incorrect column addition. Left side = Debit Posting Error: Wrong amount Right side = Credit posted. Account Balance Error: Balance Trial Balance entered in the wrong column. Summarizes the balances of all Key Concepts accounts to verify that debits = credits. 1. Accounting Cycle: Does not guarantee error-free ○ Series of steps performed to records. process transactions and prepare financial statements. ○ Key stages include analyzing transactions, journalizing, Common Errors posting to the ledger, preparing trial balances, 1. Transposition: Switching digits adjusting entries, and closing (e.g., $54 instead of $45). entries. 2. Slide Error: Misplacing a decimal 2. Financial Statements: point (e.g., $450 becomes $4,500). ○ The primary output of the 3. Omissions: Forgetting to post a accounting cycle. transaction. ○ Includes: Income Statement Statement of Retained Earnings Practice Questions Balance Sheet 1. What is the normal balance of Accounts Payable? ○ Answer: Credit. Steps in the Accounting Cycle 2. Record the payment of salaries: ○ Answer: 1. Analyze Transactions: Dr: Salaries Expense ○ Identify the financial effects Cr: Cash of transactions. 3. What happens if you post a debit to 2. Journalize Transactions: Accounts Payable? ○ Record in the general ○ Answer: It decreases the journal. liability. 3. Post to Ledger: ○ Transfer journal entries to general ledger accounts. 4. Prepare Unadjusted Trial Balance: Matching ○ Verify that total debits equal total credits. Match these errors to their descriptions:  5. Adjust Entries: ○ Examples: Capital Stock, ○ Record accrued revenues, Retained Earnings. expenses, and other adjustments. 6. Prepare Adjusted Trial Balance: ○ Ensure adjustments are Common Entries accurately posted. 7. Prepare Financial Statements: 1. Adjusting Entry for Prepaid Rent: ○ Use adjusted trial balance to ○ Debit: Rent Expense create reports: ○ Credit: Prepaid Rent Income Statement: 2. Closing Revenue Accounts: Revenues - Expenses ○ Debit: Fees Earned = Net Income/Loss. ○ Credit: Income Summary Balance Sheet: 3. Closing Expense Accounts: Assets = Liabilities + ○ Debit: Income Summary Equity. ○ Credit: Wages Expense, 8. Journalize & Post Closing Entries: Rent Expense, etc. ○ Close temporary accounts 4. Closing Dividends: (revenues, expenses, ○ Debit: Retained Earnings dividends) to Retained ○ Credit: Dividends Earnings. 9. Prepare Post-Closing Trial Balance: ○ Verify permanent accounts’ Worksheet and Trial Balance balances are accurate for the 1. Adjusted Trial Balance: next period. ○ Summarizes all accounts after adjustments. 2. Net Income/Loss on Worksheet: Key Financial Accounts ○ Difference between Income Statement Debit/Credit 1. Current Assets: Columns. ○ Examples: Cash, Accounts Receivable, Prepaid Expenses. 2. Property, Plant, and Equipment Practice Questions (PPE): 1. What is the last step of the ○ Examples: Land, Equipment, accounting cycle? Accumulated Depreciation. ○ Answer: Prepare the 3. Current Liabilities: post-closing trial balance. ○ Examples: Accounts 2. How are net income/loss and Payable, Unearned retained earnings related? Revenues. 4. Stockholders’ Equity:  ○ Answer: Net income increases retained earnings, while dividends decrease it. 3. Match these: ○ Prepaid Insurance: Current Asset ○ Unearned Fees: Current Liability ○ Depreciation Expense: Expense