Introduction to Accounting

and Business
 After studying
this chapter, you Objectives
should be able to:
1. Describe the nature of a business.
2. Describe the role of accounting in business.
3. Describe the importance of business ethics and
the basic principles of proper ethical conduct.
4. Describe the profession of accounting.
5. Summarize the development of accounting
principles and relate them to practice.
6. State the accounting equation and define each
element of the equation.
 Objectives
7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
8. Describe the financial statements of a
corporation and explain how they interrelate.
9. Use the ratio of liabilities to stockholders’
equity to analyze the ability of a business to
withstand poor business conditions.
 Types of Businesses
Manufacturing Business

Product
General Motors Cars, trucks, vans
Intel Computer chips
Boeing Jet aircraft
Nike Athletic shoes and apparel
Coca-Cola Beverages
Sony Stereos and television
 Types of Businesses
Merchandising Business

Product
Wal-Mart General merchandise
Toys “R” Us Toys
Circuit City Consumer electronics
Lands’ End Apparel
Amazon.com Internet books, music, video
retailer
 Types of Businesses
Service Business

Product
Disney Entertainment
Delta Air Lines Transportation
Marriott Hotels Hospitality and lodging
Merrill Lynch Financial advice
Sprint Telecommunication
There are three types of
business organizations

 Proprietorship
 Partnership
 Corporation
A proprietorship Advantages
is owned by one • Ease in organizing
individual. • Low cost of
organizing
Disadvantage
Joe’s • Limited source of
financial resources
• Unlimited liability
 Advantages
A partnership is • More financial
owned by two or resources than a
more individuals. proprietorship.
• Additional
management skills.
Joe and Marty’s Disadvantage
• Unlimited liability.
 A corporation is
organized under state Advantage
or federal statutes as a • The ability to obtain
separate legal entity. large amounts of
resources by issuing
stocks.
J & M, Inc. Disadvantage
• Double taxation.
 Business Strategies

A business strategy is an integrated

set of plans and actions designed to
enable the business to gain an
advantage over its competitors, and
in doing so, to maximize its profits.
 Business Strategies
Under a low-cost strategy, a business
designs and produces products or
services of acceptable quality at a cost
lower than that of its competitors.
Under a differential strategy, a business
designs and produces products or services
that possess unique attributes or
characteristics which customers are willing
to pay a premium price.
 Business Stakeholders

A business stakeholder is a person or

entity having an interest in the
economic performance of the business.
 The Process of Providing
Information

STAKEHOLDERS
Internal: External:
Identify
Owners, Customers,
1 stake-
holders.
managers, creditors,
government
employees

Assess
stakeholders’
2 informational
needs.
 The Process of Providing
Information

Design the
Record accounting
economic Accounting
information
4 data about
business
Information
System
3 system to meet
stakeholders’
activities needs.
and events.
 The Process of Providing
Information
STAKEHOLDERS
Internal: External:
Owners, Customers,
managers, creditors,
employees government
Prepare
accounting
5 reports for
stakeholders.
Accounting
Information
System
 Profession of Accounting

Accountants employed by a business firm or

a not-for-profit organization are said to be
engaged in private accounting.

Accountants and their staff who provide

services on a fee basis are said to be
employed in public accounting.
Generally Accepted
Accounting
Principles (GAAP)
 What is a business
transaction?

A business transaction is an economic event or

condition that directly changes an entity’s financial
condition or directly affects its results of operations.
 Who Uses Accounting Data?
Internal Users
Management IRS

Human Resources Investors

There are two broad

groups of users of Labor Unions

Finance financial information:

internal users and
external users. Creditors
Marketing

SEC
Customers External
Users

SO 2 Identify the users and uses of accounting.

 Who Uses Accounting Data?
Common Questions Asked User

1. Can we afford to give our

Human Resources
employees a pay raise?
2. Did the company earn a
Investors
satisfactory income?
3. Do we need to borrow in the
Management
near future?
4. Is cash sufficient to pay
Finance
dividends to the stockholders?
5. What price for our product
Marketing
will maximize net income?
6. Will the company be able to
Creditors
pay its short-term debts?

SO 2 Identify the users and uses of accounting.

 The Building Blocks of Accounting

Financial Statements
Various users Balance Sheet
need financial Income Statement
Statement of Owner’s Equity
information Statement of Cash Flows

The accounting profession

has attempted to develop
Generally Accepted
a set of standards that Accounting Principles
are generally accepted (GAAP)
and universally practiced.

SO 4 Explain generally accepted accounting principles and the cost principle.

The Building Blocks of Accounting

Cost Principle (Historical) – dictates that companies record

assets at their cost.
Issues:
Reported at cost when purchased and also over the time the asset is
held.
Cost easily verified, whereas market value is often subjective.
Fair value information may be more useful.

SO 4 Explain generally accepted accounting principles and the cost principle.

Assumptions

Monetary Unit Assumption – include in the accounting

records only transaction data that can be expressed in terms of money.

Economic Entity Assumption – requires that activities of the

entity be kept separate and distinct from the activities of its owner and
all other economic entities.
Proprietorship.
Partnership.
Corporation.

Forms of
Business Ownership

SO 5 Explain the monetary unit assumption

and the economic entity assumption.
Forms of Business Ownership

Proprietorship Partnership Corporation

Generally owned Owned by two or Ownership

by one person. more persons. divided into
Often small shares of stock
Often retail and
service-type service-type Separate legal
businesses businesses entity organized
Owner receives under state
Generally
any profits, corporation law
unlimited
suffers any personal liability Limited liability
losses, and is
Partnership
personally liable
agreement
for all debts.
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
 THE ACCOUNTING PROCESS

Communication

Accounting
Identification Recording Reports

Prepare accounting
reports

SOFTBYTE
Select economic events Record, classify Annual Report

(transactions) and summarize

Analyze and interpret

for users
 BASIC ACCOUNTING EQUATION

The Basic Accounting Equation

Assets = Liabilities + Owner’s Equity

The Basic Accounting Equation

Owner’s Equity
Assets = Liabilities +

Provides the underlying framework for recording and summarizing

economic events.

Assets

Resources a business owns.

Provide future services or benefits.
Cash, Supplies, Equipment, etc.

SO 6 State the accounting equation, and define

its components.
The Basic Accounting Equation

Owner’s Equity
Assets = Liabilities +

Provides the underlying framework for recording and summarizing

economic events.

Liabilities

Claims against assets (debts and obligations).

Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.

SO 6 State the accounting equation, and define

its components.
The Basic Accounting Equation

Owner’s Equity
Assets = Liabilities +

Provides the underlying framework for recording and summarizing

economic events.

Owner’s Equity

Ownership claim on total assets.

Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or Partnership).

SO 6 State the accounting equation, and define

its components.
 Owners’ Equity

Illustration 1-6

Revenues result from business activities entered into for the purpose of
earning income.
Common sources of revenue are: sales, fees, services, commissions, interest,
dividends, royalties, and rent.

SO 6 State the accounting equation, and define

its components.
 Owners’ Equity

Illustration 1-6

Expenses are the cost of assets consumed or services used in the process of
earning revenue.
Common expenses are: salaries expense, rent expense, utilities expense, tax
expense, etc.

SO 6 State the accounting equation, and define

its components.
 OWNER’S EQUITY AS
A BUILDING BLOCK

 Owner’s Equity is equal to total assets minus total

liabilities.
 Owner’s Equity represents the ownership claim
on total assets.
 Subdivisions of Owner’s Equity:
1 Capital or Investments by Owner
2 Drawing
3 Revenues
4 Expenses
 INVESTMENTS BY OWNERS
AS A BUILDING BLOCK

 Investments by Owner are the assets the owner

puts in the business.
 These investments increase owner’s equity.
 DRAWINGS AS A
BUILDING BLOCK

 Drawings are withdrawals of cash or other

assets by the owner for personal use.
 Drawings decrease owner’s equity.
 ILLUSTRATION 1-7
INCREASES AND DECREASES IN OWNER’S EQUITY

INCREASES DECREASES
Investments Withdrawals
by Owner by Owner

Owner’s
Equity
Revenues Expenses
 ILLUSTRATION 1-8
TRANSACTION IDENTIFICATION PROCESS

Purchase Answer Pay rent

computer telephone

Is the financial position (assets, liabilities, and

owner’s equity) of the company changed?

Yes No Yes

Don’t
Recor Recor
Recor
d d
d
 Which of the following is not a step in the
accounting process?
a. Identification. c. Recording.
b. Economic entity. d. Communication.
Presented below is the basic accounting equation.
Determine the missing amounts.
Assets = Liabilities + Owner’s Equity
 a. $90,000 $50,000 ?
 b. ? $44,000 $70,000
 c. $94,000 ? $53,000
Given the accounting equation, answer each of
the following questions.
a. The liabilities of Berber Company are
$120,000 and the owner’s equity is
$230,000. What is the amount of Berber
Company’s total assets?
b. The total assets of Berber Company are
$190,000 and its owner’s equity is $89,000.
What is the amount of its total liabilities?
c. The total assets of Berber Company are
$900,000 and its liabilities
As of December 31, 2020, Kent Company
has assets of $3,500 and owner’s equity of
$2,000. What are the liabilities for Kent
Company as of December 31, 2020?
a. $1,500. c. $2,500.
b. $1,000. d. $2,000
At the beginning of the year, Gilles Company had total
assets of $800,000 and total liabilities of $300,000.
Answer the following questions.
 a. If total assets increased $150,000 during the year
and total liabilities decreased $60,000, what is the
amount of owner’s equity at the end of the year?
 b. During the year, total liabilities increased $100,000
and owner’s equity decreased $70,000. What is the
amount of total assets at the end of the year?
 c. If total assets decreased $80,000 and owner’s equity
increased $120,000 during the year, what is the
amount of total liabilities at the end of the year?
At the beginning of the year, Ortiz Company
had total assets of $900,000 and total liabilities
of $440,000. Answer the following questions.
a. If total assets decreased $100,000 during the year
and total liabilities increased $80,000 during the year,
what is the amount of owner’s equity at the end of the
year?
b. During the year, total liabilities decreased $100,000
and owner’s equity increased $200,000. What is the
amount of total assets at the end of the year?
c. If total assets increased $50,000 during the year and
owner’s equity increased $60,000 during the year, what is
the amount of total liabilities at the end of the year?
 Indicate whether each of the following items is an asset (A), liability
(L), or part of owner’s equity (OE).
a.______ Accounts receivable d. _______Supplies
b. ______Salaries and wages payable e.______ Owner’s capital
c. ________Equipment f._______ Notes payable
 Classify each of the following items as owner’s drawings (D),
revenue (R), or expense (E).
a. _____Advertising expense e. _______Owner’s drawings
b. _____Service revenue f. ________Rent revenue
c._____ Insurance expense g. ________Utilities expense
d.______ Salaries and wages expense
 TRANSACTION ANALYSIS
TRANSACTION 1

 Ray Neal decides to open a computer programming

service.
 On September 1, he invests $15,000 cash in the business,
which he names Softbyte.
BANK

Softbyte
 TRANSACTION ANALYSIS
TRANSACTION 1 SOLUTION

Assets = Liabilities + Owner’s Equity

R. Neal,
Cash Capital
(1) +15,000 = +15,000 Investment

There is an increase in the asset Cash,

$15,000, and an equal increase in the owner’s
equity, R. Neal, Capital, $15,000.
 TRANSACTION ANALYSIS
TRANSACTION 2

Softbyte purchases computer equipment for $7,000 cash.

 TRANSACTION ANALYSIS
TRANSACTION 2 SOLUTION

A sse ts = L ia b ilitie s + O w n e r ’s E q u ity

R . N e a l,
C a sh + E q u ip m e n t = C a p ita l
O ld B a l. $ 1 5 ,0 0 0 $ 1 5 ,0 0 0
(2) -7,000 +$7,000
N e w B a l. $ 8 ,0 0 0 + $ 7 ,0 0 0 = $ 1 5 ,0 0 0

$ 1 5 ,0 0 0

Cash is decreased $7,000, and the asset

Equipment is increased $7,000.
 TRANSACTION ANALYSIS
TRANSACTION 3

 Softbyte purchases for $1,600 from Acme Supply Company

computer paper and other supplies expected to last several
months.
 Acme agrees to allow Softbyte to pay this bill next month,
in October.
 This transaction is referred to as a purchase on account or
a credit purchase.
Acme Supply
Company

Softbyte
 TRANSACTION ANALYSIS
TRANSACTION 3 SOLUTION

A sse ts = L ia b ilitie s + O w n e r ’s E q u ity

A c c o u n ts R . N e a l,
C a sh + S u p p lie s + E q u ip m e n t = P a y a b le + C a p ita l
O ld B a l. $ 8 ,0 0 0 $ 7 ,0 0 0 $ 1 5 ,0 0 0
(3) +$1,600 +$1,600
N e w B a l. $ 8 ,0 0 0 + $ 1 ,6 0 0 + $ 7 ,0 0 0 = $ 1 ,6 0 0 + $ 1 5 ,0 0 0

$ 1 6 ,6 0 0 $ 1 6 ,6 0 0

The asset Supplies is increased $1,600, and the liability

Accounts Payable is increased by the same amount.
 TRANSACTION ANALYSIS
TRANSACTION 4

 Softbyte receives $1,200 cash from customers for

programming services it has provided.
 This transaction represents the Softbyte’s principal
revenue-producing activity.

Softbyte
 TRANSACTION ANALYSIS
TRANSACTION 4 SOLUTION

Assets = Liabilities + Owner’s Equity

Accounts R. Neal,
Cash + Supplies + Equipment = Payable + Capital
Old Bal. $8,000 $1,600 $7,000 $1,600 $15,000
(4) +1,200 +1,200 Service Revenue
New Bal. $9,200 + $1,600 + $7,000 = $1,600 + $16,200

$17,800 $17,800

Cash is increased $1,200, and R. Neal,

Capital is increased $1,200.
 TRANSACTION ANALYSIS
TRANSACTION 5

Softbyte receives a bill for $250 from the Daily News

for advertising but postpones payment of the bill until
a later date.

Softbyte Bill

Dail New
y s
 TRANSACTION ANALYSIS
TRANSACTION 5 SOLUTION

A ssets = L ia b ilitie s + O w n e r ’s E q u ity

A ccou n ts R . N e a l,
C ash + S u p p lie s + E q u ip m e n t = P a y a b le + C a p ita l
O ld B a l. $ 9 ,2 0 0 $ 1 ,6 0 0 $ 7 ,0 0 0 $ 1 ,6 0 0 $ 1 6 ,2 0 0
(5) +250 -250 Advertising
NExpense
e w B a l. $ 9 ,2 0 0 + $ 1 ,6 0 0 + $ 7 ,0 0 0 = $ 1 ,8 5 0 + $ 1 5 ,9 5 0

$ 1 7 ,8 0 0 $ 1 7 ,8 0 0

Accounts Payable is increased $250, and R.

Neal, Capital is decreased $250.
 TRANSACTION ANALYSIS
TRANSACTION 6

 Softbyte provides $3,500 of programming services

for customers.
 Cash of $1,500 is received from customers, and the
balance of $2,000 is billed on account.

Softbyte
Bill
 TRANSACTION ANALYSIS
TRANSACTION 6 SOLUTION

A ssets = L ia b ilitie s + O w n e r ’s E q u ity

A cco u n ts A cco u n ts R . N e a l,
C ash + R e c e iv a b le + S u p p lie s + E q u ip m e n t = P a y a b le + C a p ita l
O ld B a l. $ 9 ,2 0 0 $ 1 ,6 0 0 $ 7 ,0 0 0 $ 1 ,8 5 0 $ 1 5 ,9 5 0
(6) +1,500 +2,000 +3,500 Service
N Revenue
e w B a l. $ 1 0 ,7 0 0 + $ 2 ,0 0 0 + $ 1 ,6 0 0 + $ 7 ,0 0 0 = $ 1 ,8 5 0 + $ 1 9 ,4 5 0

$ 2 1 ,3 0 0 $ 2 1 ,3 0 0

Cash is increased $1,500; Accounts Receivable is increased

$2,000; and R. Neal, Capital is increased $3,500.
 TRANSACTION ANALYSIS
TRANSACTION 7

Expenses paid in cash for September are store rent

$600, salaries of employees $900, and utilities $200.

$600

$900
Softbyte

$200
 TRANSACTION ANALYSIS
TRANSACTION 7 SOLUTION

A sse ts = L ia b ilitie s + O w n e r ’s E q u ity

A c c o u n ts A c c o u n ts R . N e a l,
C a sh + R e c e iv a b le + S u p p lie s + E q u ip m e n t = P a y a b le + C a p ita l
O ld B a l. $ 1 0 ,7 0 0 $ 2 ,0 0 0 $ 1 ,6 0 0 $ 7 ,0 0 0 $ 1 ,8 5 0 $ 1 9 ,4 5 0
(7) -1,700 -600 Rent Exp.
-900 Salaries Exp.
-200 Salaries Exp.
N e w B a l. $ 9 ,0 0 0 + $ 2 ,0 0 0 + $ 1 ,6 0 0 + $ 7 ,0 0 0 = $ 1 ,8 5 0 + $ 1 7 ,7 5 0

$ 1 9 ,6 0 0 $ 1 9 ,6 0 0

Cash is decreased $1,700 and R. Neal, Capital is decreased by the

same amount.
 TRANSACTION ANALYSIS
TRANSACTION 8

Softbyte pays its $250 Daily News advertising bill in

cash.

Softbyte

Dail New
y s
 TRANSACTION ANALYSIS
TRANSACTION 8 SOLUTION

A ssets = L ia b ilitie s + O w n e r ’s E q u ity

A ccou n ts A ccou n ts R . N e a l,
C ash + R e c e iv a b le + S u p p lie s + E q u ip m e n t = P a y a b le + C a p ita l
O ld B a l. $ 9 ,0 0 0 $ 2 ,0 0 0 $ 1 ,6 0 0 $ 7 ,0 0 0 $ 1 ,8 5 0 $ 1 7 ,7 5 0
(8) -250 -250
N e w B a l. $ 8 ,7 5 0 + $ 2 ,0 0 0 + $ 1 ,6 0 0 + $ 7 ,0 0 0 = $ 1 ,6 0 0 + $ 1 7 ,7 5 0

$ 1 9 ,3 5 0 $ 1 9 ,3 5 0

Cash is decreased $250 and Accounts Payable is decreased by

the same amount.
 TRANSACTION ANALYSIS
TRANSACTION 9

The sum of $600 in cash is received from

customers who have previously been billed
for services (in Transaction 6).

Softbyte
 TRANSACTION ANALYSIS
TRANSACTION 9 SOLUTION

A ssets = L ia b ilitie s + O w n e r ’s E q u ity

A cco u n ts A cco u n ts R . N e a l,
C ash + R e c e iv a b le + S u p p lie s + E q u ip m e n t = P a y a b le + C a p ita l
O ld B a l. $ 8 ,7 5 0 $ 2 ,0 0 0 $ 1 ,6 0 0 $ 7 ,0 0 0 $ 1 ,6 0 0 $ 1 7 ,7 5 0
(9) +600 -600
N e w B a l. $ 9 ,3 5 0 + $ 1 ,4 0 0 + $ 1 ,6 0 0 + $ 7 ,0 0 0 = $ 1 ,6 0 0 + $ 1 7 ,7 5 0

$ 1 9 ,3 5 0 $ 1 9 ,3 5 0

Cash is increased $600 and Accounts Receivable

is decreased by the same amount.
 TRANSACTION ANALYSIS
TRANSACTION 10

Ray Neal withdraws $1,300 in cash from

the business for his personal use.

$1,300
Softbyte
 TRANSACTION ANALYSIS
TRANSACTION 10 SOLUTION

A ssets = L ia b ilitie s + O w n e r ’s E q u ity

A ccou n ts A ccou n ts R . N e a l,
C ash + R e c e iv a b le + S u p p lie s + E q u ip m e n t = P a y a b le + C a p ita l
O ld B a l. $ 9 ,3 5 0 $ 1 ,4 0 0 $ 1 ,6 0 0 $ 7 ,0 0 0 $ 1 ,6 0 0 $ 1 7 ,7 5 0
(10) -1,300 -1,300 Drawings
N e w B a l. $ 8 ,0 5 0 + $ 1 ,4 0 0 + $ 1 ,6 0 0 + $ 7 ,0 0 0 = $ 1 ,6 0 0 + $ 1 6 ,4 5 0

$ 1 8 ,0 5 0 $ 1 8 ,0 5 0

Cash is decreased $1,300 and R. Neal, Capital is decreased by the

same amount.
Transactions Analysis
Illustration 1-8
Summary of Transactions Tabular summary of
Softbyte transactions
 FINANCIAL STATEMENTS
After transactions are identified, recorded, and summarized,
4 financial statements are prepared from the summarized
accounting data:
1 An income statement presents the revenues and expenses
and resulting net income or net loss for a specific period of
time.
2 An owner’s equity statement summarizes the changes in
owner’s equity for a specific period of time.
3 A balance sheet reports the assets, liabilities, and owner’s
equity at a specific date.
4 A statement of cash flows summarizes information
about the cash inflows (receipts) and outflows
(payments) for a specific period of time.
Transactions Analysis
Illustration 1-8
Summary of Transactions Tabular summary of
Softbyte transactions
 ILLUSTRATION 1-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE
Income Statement
For the Month Ended September 30, 2002
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income 2,750

Net income of $2,750 shown on the income statement is added

to the beginning balance of owner’s capital in the owner’s
equity statement.
 ILLUSTRATION 1-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2002
Capital, September 1 $ –0–
Add: Investments $ 15,000
Net income 2,750 17,750
17,750
Less: Drawings 1,300
Capital, September 30 $ 16,450

Net income of $2,750 is determined from the information in the

owner’s equity column of the Summary of Transactions
(Illustration 1-7).
 ILLUSTRATION 1-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2002
Capital, September 1 $ –0–
Add: Investments $ 15,000
Net income 2,750 17,750
17,750
Less: Drawings 1,300
Capital, September 30 $16,450

Net income of $2,750 carried forward from the income statement to the
owner’s equity statement. The owner’s capital of $16,450 at the end of
the reporting period is shown as the final total of the owner’s equity
column of the Summary of Transactions (Illustration 1-7).
 ILLUSTRATION 1-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE
Balance Sheet
September 30, 2002
Assets
Cash $ 8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $ 18,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable $ 1,600
Owner’s equity
16,450
R. Neal, capital
Total liabilities and owner’s equity $ 18,050

Owner’s capital of $16,450 at the end of the reporting period

shown in the owner’s equity statement is shown on the
 ILLUSTRATION 1-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE
Balance Sheet
September 30, 2002
Assets
Cash $ 8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $ 18,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable $ 1,600
Owner’s equity

R. Neal, capital
Total liabilities and owner’s equity $ 18,050

Cash of $8,050 on the balance sheet is reported on the statement of

cash flows.
 ILLUSTRATION 1-11
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE
Statement of Cash Flows
For the Month Ended September 30, 2002
Cash flows from operating activities
Cash receipts from revenues $ 3,300
Cash payments for expenses (1,950)
Net cash provided by operating activities 1,350
Cash flows from investing activities
Purchase of equipment (7,000)
Cash flows from financing activities
Investment by owners $ 15,000
Withdraws by owners (1,300)
Net cash provided by financing activities 13,700
Net increase in cash 8,050
Cash at the beginning of the period –0–
Cash at the end of the period $ 8,050

Cash of $8,050 on the balance sheet and statement of cash flows is

shown as the final total of the cash column of the Summary of
 problem 1
Transactions made by Virmari & Co., a public accounting firm, for
the month of August are shown below. Prepare a tabular analysis
which shows the effects of these transactions on the expanded
accounting equation,
1. The owner invested $25,000 cash in the business.
2. The company purchased $7,000 of office equipment on credit.
3. The company received $8,000 cash in exchange for services
performed.
4. The company paid $850 for this month’s rent.
5. The owner withdrew $1,000 cash for personal use
 problem 2
Cecil Jameson, Attorney-at-Law, is a proprietorship owned
and operated by Cecil Jameson. On July 1, 2005, Cecil
Jameson, Attorney-at-Law, has the following assets and
liabilities: cash, $1,000; accounts receivable, $3,200;
supplies, $850; land, $10,000; accounts payable, $1,530.
Office space and office equipment are currently being
rented, pending the construction of an office complex on
land purchased last year. Business transactions during July
are summarized as follows:
a. Received cash from clients for services, $3,928.
b. Paid creditors on account, $1,055.
c. Received cash from Cecil Jameson as an additional
investment, $3,700.
d. Paid office rent for the month, $1,200.
e. Charged clients for legal services on account, $2,025.
f. Purchased office supplies on account, $245.
g. Received cash from clients on account, $3,000.
h. Received invoice for paralegal services from Legal Aid
Inc. for July (to be paid on August 10), $1,635.
i. Paid the following: wages expense, $850; answering
service expense, $250; utilities expense, $325; and
miscellaneous expense, $75.
j. Determined that the cost of office supplies on hand was
$980; therefore, the cost of supplies used during the month
was $115.
 problem 2

k. Jameson withdrew $1,000 in cash from the business for

personal use.
Instructions
1. Determine the amount of owner’s equity (Cecil Jameson’s capital) as
of July 1, 2005.
2. State the assets, liabilities, and owner’s equity as of July 1 in
equation form similar to that shown in this chapter. In tabular form
below the equation, indicate the increases and decreases resulting from
each transaction and the new balances after each transaction. Explain
the nature of each increase and decrease in owner’s equity by an
appropriate notation at the right of the amount.
3. Prepare an income statement for July, a statement of owner’s equity
for July, and a balance sheet as of July 31, 2005.
Joan Robinson opens her own law offi ce on July 1, 2020. During the
fi rst month of operations, the following transactions occurred.
1. Joan invested $11,000 in cash in the law practice.
2. Paid $800 for July rent on offi ce space.
3. Purchased equipment on account $3,000.
4. Performed legal services for clients for cash $1,500.
5. Borrowed $700 cash from a bank on a note payable.
6. Performed legal services for client on account $2,000.
7. Paid monthly expenses: salaries and wages $500, utilities $300,
and advertising $100.
8. Joan withdrew $1,000 cash for personal use.
Instructions
a. Prepare a tabular summary of the transactions.
b. Financial Statement Prepare the income statement, owner’s
equity statement, and balance sheet at July 31, 2020, for Joan
Robinson, Attorney
Judi Salem opened a law offi ce on July 1, 2017. On July
31, the balance sheet showed Cash $5,000, Accounts
Receivable $1,500, Supplies $500, Equipment $6,000,
Accounts Payable $4,200, and Owner’s Capital $8,800.
During August, the following transactions occurred.
1. Collected $1,200 of accounts receivable.
2. Paid $2,800 cash on accounts payable.
3. Recognized revenue of $7,500 of which $3,000 is
collected in cash and the balance is due in September.
4. Purchased additional equipment for $2,000, paying $400
in cash and the balance on account.
5. Paid salaries $2,500, rent for August $900, and
advertising expenses $400.
6. Withdrew $700 in cash for personal use. 7. Received
$2,000 from Standard Federal Bank—money borrowed on
a note payable. 8. Incurred utility expenses for month on
account $270.
Instructions
(a) Prepare a tabular analysis of the August transactions beginning
with July 31 balances. The column headings should be as
follows: Cash + Accounts Receivable + Supplies + Equipment =
Notes Payable + Accounts Payable + Owner’s Capital 2-Owner’s
Drawings + Revenues - Expenses.
(b) Prepare an income statement for August, an owner’s equity
statement for August, and a balance sheet at August 31.
 Assignment
On April 1, Julie Spengel established Spengel’s Travel Agency. The
following transactions were completed during the month.
1. Invested $15,000 cash to start the agency.
2. Paid $600 cash for April offi ce rent.
3. Purchased equipment for $3,000 cash.
4. Incurred $700 of advertising costs in the Chicago Tribune, on
account.
5. Paid $900 cash for offi ce supplies.
6. Performed services worth $10,000: $3,000 cash is received from
customers, and the balance of $7,000 is billed to customers on
account.
7. Withdrew $600 cash for personal use.
8. Paid Chicago Tribune $500 of the amount due in transaction (4).
9. Paid employees’ salaries $2,500. 10. Received $4,000 in cash from customers
who have previously been billed in transaction (6).

Instructions
(a) Prepare a tabular analysis of the transactions using the following column
headings: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable,
Owner’s Capital, Owner’s Drawings, Revenues, and Expenses.
(b) From an analysis of the owner’s equity columns, compute the net income or net
loss
On November 1,
2005, Chris
Clark organized
a corporation
that will be
known as
NetSolutions.
a. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions in
return for shares of stock in the
corporation.

Assets = Owners’ Equity

Cash Capital Stock
=
a. 25,000 25,000 Investment by
stockholder
b. NetSolutions exchanged $20,000 for land.

Assets = Owners’ Equity

Cash + Land Capital Stock
Bal. 25,000 = 25,000
b. –20,000 +20,000
Bal. 5,000 20,000 25,000
 c. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay the
supplier in the near future (on account).
Owners’
Assets = Liabilities + Equity
Accounts Capital
Cash + Supplies + Land Payable Stock
=
Bal. 5,000 20,000 25,000
c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
 d. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
Owners’
Assets = Liab . + Equity
Accounts Capital Retained
Cash + Supplies + Land Payable + Stock + Earnings
Bal. 5,000 1,350 20,000 = 1,350 25,000
d. + 7,500 + 7,500
Bal. 12,500 1,350 20,000 1,350 25,000 7,500

Fees
earned
 e. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
Owners’
Assets = Liab . + Equity
Accounts Capital Retained
Cash + Supplies + Land Payable + Stock + Earnings
Bal. 12,500 1,350 20,000 1,350 25,000 7,500
e. – 3,650 –2,125
=
Expenses – 800
– 450
– 275
Bal. 8,850 1,350 20,000 1,350 25,000 3,850
 f. NetSolutions paid $950 to
creditors during the month.

Owners’
Assets = Liab . + Equity
Accounts Capital Retained
Cash + Supplies + Land Payable + Stock + Earnings
Bal. 8,850 1,350 20,000 = 1,350 25,000 3,850
f. – 950 – 950
Bal. 7,900 1,350 20,000 400 25,000 3,850
 g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies were used.
Owners’
Assets = Liab . + Equity
Accounts Capital Retained
Cash + Supplies + Land Payable + Stock + Earnings
Bal. 7,900 1,350 20,000 = 400 25,000 3,850
g. – 800 Supplies – 800
Expense
Bal. 7,900 550 20,000 400 25,000 3,050
 h. At the end of the month, NetSolutions
pays $2,000 to stockholders.

Owners’
Assets = Liab . + Equity
Accounts Capital Retained
Cash + Supplies + Land Payable + Stock + Earnings
Bal. 7,900 550 20,000 = 400 25,000 3,050
h. –2,000 Dividends –2,000
Bal. 5,900 550 20,000 400 25,000 1,050
Effects of Transactions on Owners’ Equity

Capital Stock
Increased by

Stockholders’
investments

+
 Effects of Transactions on Owners’ Equity

Retained Earnings

Decreased by Decreased by
Increased by

Revenues Expenses Dividends

+ – –
Accounting reports, called
financial statements,
provide summarized
information to the users.
 Financial Statements
 Income statement—A summary of the revenue
and expenses for a specific period of time.
 Retained earnings statement—A summary of
the earnings retained in the corporation for a
specific period of time.
 Balance sheet—A list of the assets, liabilities, and
stockholders’ equity as of a specific date.
 Statement of cash flows—A summary of the cash
receipts and disbursements for a specific period of
time.
 NetSolutions
Income Statement
For the Month Ended November 30, 2005
Fees earned $7 500 00
Operating expenses:
Wages expense $2 125 00
Rent expense 800 00
Supplies expense 800 00
Utilities expense 450 00
Miscellaneous expense 275 00
Total operating expenses Transfer this 4 450 00
Net income
amount to the $3 050 00
retained earnings
statement.
 NetSolutions
Retained Earnings Statement
For the Month Ended November 30, 2005
From the income
Net income for November $3 050 00
statement
Less dividends 2 000 00
Transferred to the
Retained earnings, November 30, 2005 $1 050 00
balance sheet
 NetSolutions
Balance Sheet
November 30, 2005
From the
Assets Liabilities
retained earnings
Cash $ 5 900 00 Accounts Payable
statement$ 400 00
Supplies 550 00 Stockholders’ Equity
Land 20 000 00 Capital Stock $25,000
Ret. Earnings l,050 26 050 00
Total liabilities and
Total assets $26 450 00 stockholder’s equity $26 450 00

This balance sheet presented

using the account form
 When the balance sheet displays
the liabilities and stockholders’
equity below the assets, the report
form is being used.
 NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
Cash flows from operating activities:
Cash received from customers $ 7 500 00
Deduct cash payments for expenses
and payments to creditors 4 600 00
Net cash flow from operating activities 2 900 00
Cash flows from investing activities:
Cash payment for acquisition of land (20 000 00 )
Cash flows from financing activities:
Cash received as owner’s investment $25 000 00
Deduct cash withdrawal by owner 2 000 00
Net cash flow from financing activities 23 000 00
Net cashShould
flow and Nov.
match 30, 2005
Cash on thecash bal. sheet
balance $ 5 900 00
 Statement of Cash Flows
Cash Flows from Operating Activities—This
section reports a summary of cash receipts and
cash payments from operations.
Cash Flows from Investing Activities—This section
reports the cash transactions for the acquisition and
sale of relatively permanent assets.
Cash Flows from Financing Activities—This
section reports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.
 Financial Analysis and
Interpretation
The ratio of liabilities to stockholders’ equity
allows bankers, creditors, and other stakeholders
a means of analyzing the corporation’s ability to
withstand poor business conditions.

Ratio of liabilities Total Liabilities

to stockholders’ =
Total stockholders’ equity
equity
 Financial Analysis and
Interpretation
Ratio of liabilities
$400
to stockholders’ =
equity $26,050

Ratio of liabilities
to stockholders’ = 0.015
equity
Chapter 1

The End