Accounting Principles, 9th Edition

Weygandt • Kieso • Kimmel

Chapter 1

Accounting in Action

February 1, 2024 1-42 1

HISTORY OF ACCOUNTING
Luca Pacioli is the father of Accounting.
In the year 1494: “Summa de Arithmetica
Geometrica and Proportioni et Proportionlita”
– every thing on Arithmetic, Geometry and a
section on Accounting entitled “De Computes
et Scriptures” .
It was again republished separately in 1504 in
Tuscany under the title “ La Scucla Perfetta de
Mercanti” –”The Perfect School of Merchant”.

February 1, 2024 1-42 2

John Wiley & Sons, Inc. © 2005
 WHAT IS ACCOUNTING?
• Accounting is an information system that:
• Identifies
• Records
• Communicates the economic events of an
organization to interested users
• Financial Statements are:
• 1. An Income Statement
• 2. A Statement of Owners Equity
• 3. A Balance Sheet
• 4. A Statement of Cash Flows

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 THE ACCOUNTING
PROCESS

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 Definition of Accounting:

According to the American Institute of

Certified Public
Accountants(AICPA) :“Accounting is the art
of recording , classifying, and summarizing
in a significant manner and in terms of
money transactions and event which are in
part at least of a financial character and
interpreting the result thereof.”
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 BOOKKEEPING VS.
ACCOUNTING

•Accounting
Includes bookkeeping
Also includes much more

•Bookkeeping
The recording of economic events
One part of accounting

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 THE ACCOUNTING PROFESSION
•Public Accountants
Service to the general public through the services they
perform.( Eg, Auditing, Taxation and Management
Consulting)
•Private Accountants
Individuals in companies involved in activities including
cost and tax accounting, Budgeting, AIS, and internal
auditing.
•Not For Profit Accountants
Reporting and control for government units, foundations,
hospitals, labor unions, colleges/universities, and
charities.

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 THE BUILDING BLOCKS OF ACCOUNTING
• Ethics
Standards by which actions are judged as right or wrong,
honest or dishonest.
• Generally Accepted Accounting Principles (GAAP ) : May be
described as broad rules adopted by the accounting
profession as guide in measuring, recording and reporting
of financial affairs and activities of a business.)
Established by the F.A.S.B and the S.E.C.
• Financial Accounting Standards Board (FASB) and
Securities and Exchange Commission (SEC)
• The FASB has the responsibility for developing
accounting principles in the United States.

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 1. MONETARY UNIT ASSUMPTIONS
• Only transaction data expressed in terms of money can
be included in the accounting records
Example: employee satisfaction and percent of division
wise employees are not transactions that should be
included in the financial records.

Customer Satisfaction

Percentage of division
wise Employees
Should be included
in accounting records Salaries paid

February 1, 2024 1-42 9

2. ECONOMIC ENTITY ASSUMPTION

Activities of the entity kept separate

and distinct from the activities of the owner
and all other economic entities.
Example: BMW activities
can be distinguished from
those of other car
manufacturers such as Mercedes.

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 3. COST PRINCIPLE
• The cost principle dictates that assets be
recorded at their cost.
• Cost is used because it is both relevant and
reliable.
4. Time Period Assumption

Economic life of a business divided into

artificial time periods.

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 BUSINESS ENTERPRISES
•Proprietorship
Owned by one person.

Partnership
Owned by two or more persons.

Corporation
Organized as a separate legal entity under state
corporation law and having ownership divided into
transferable shares of stock.

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 ACCOUNTING MODELS:

1.Financial Position Model: Assets =

Liabilities + Owner’s equity

2. Results of Operations Model: Revenue –

Expenses = Net Income

3. Changes in Financial Position Model: Funds

inflows – Funds outflows = Net Changes in
Funds
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 BASIC ACCOUNTING
EQUATION

Assets = Liabilities + Owner’s Equity

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 ASSETS AS A BUILDING
BLOCK

• Assets are resources owned by a

business.
• They are used in carrying out such
activities as production,
consumption and exchange.
• Examples: Plant and Machinery,
Cash, Building, Land etc.
February 1, 2024 1-42 15
 LIABILITIES AS A
BUILDING BLOCK
• Liabilities

• are creditor claims against assets

• are existing debts and obligations
• Examples: Accounts Payable, Notes
Payable, Mortgage, etc.

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 OWNER’S EQUITY AS A BUILDING
BLOCK
• Owner’s Equity = total assets minus total
liabilities. (A - L = O.E.)
• Owner’s Equity represents the ownership
claim to total assets.
• Subdivisions of Owner’s Equity:
1 Capital or Investments by Owner (+)
2 Drawing (-)
3 Revenues (+)
4 Expenses (-)
February 1, 2024 1-42 17
 REVENUES AS A
BUILDING BLOCK
• Revenues
• gross increases in owner’s equity from business
activities entered into for the purpose of earning
income

• may result from sale of merchandise, services,

rental of property, or lending money

• usually result in an increase in an asset

February 1, 2024 1-42 18

 EXPENSES AS A BUILDING BLOCK
Expenses

• Decreases in owner’s equity that result

from operating the business

• cost of assets consumed or services used

in the process of earning revenue

• examples: utility expense, rent expense,

supplies expense, and tax expense

February 1, 2024 1-42 19

 INCREASES AND
DECREASES IN OWNER’S
EQUITY
•INCREASES DECREASES

Investments Withdrawals
by Owner Owner’s by Owner

Equity
Revenues Expenses

February 1, 2024 1-42 20

 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.

February 1, 2024 1-42 21

 TRANSACTION ANALYSIS
TRANSACTION 1 SOLUTION

• Assets = Liabilities + Owner’s Equity

Cash R. Neal, Capital

+ 15,000 Investment + 15,000

$15,000 = $15,000

There
Thereisisan
anincrease
increasein
inthe
theasset
assetCash,
Cash,
$15,000,
$15,000,and
andananequal
equalincrease
increaseininthe
theowner’s
owner’s
equity,
equity,R.
R.Neal,
Neal,Capital,
Capital,$15,000.
$15,000.
February 1, 2024 1-42 22
 TRANSACTION ANALYSIS
TRANSACTION 2

• Softbyte purchases computer

equipment for $7,000 cash.

February 1, 2024 1-42 23

TRANSACTION ANALYSIS
TRANSACTION 2 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Equipment = + R. Neal, Capital
• Old
• $15,000 = $15,000
• (2) - 7,000 + 7,000______________________________
• New
• $ 8,000 + $7,000 = $15,000

Cash is decreased by $7,000 and the asset

Equipment is increased by $7,000.

February 1, 2024 1-42 24

TRANSACTION ANALYSIS
TRANSACTION 3

• Softbyte purchases supplies expected to last for several

months for $1,600 from Acme Supply Company.

• 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
February 1, 2024 1-42 25
 TRANSACTION ANALYSIS
TRANSACTION 3 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old $8,000 + $7,000 = $15,000
• (3) _____ + $1,600 _______ + $1,600 ________
• New $8,000 + $1,600 + $7,000 = + $1,600 + $15,000
•
• $16,600 $16,600

The
Theasset
assetSupplies
Suppliesisisincreased
increasedby
by$1,600,
$1,600,and
andthe
theliability
liability
Accounts
AccountsPayable
Payableisisincreased
increasedby
bythe
thesame
sameamount.
amount.

February 1, 2024 1-42 26

 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.

February 1, 2024 1-42 27

TRANSACTION ANALYSIS
TRANSACTION 4 SOLUTION
• Assets = Liabilities + Owner’s Equity
• Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old $8,000 + $1,600 + $7,000 = $1,600 + $15,000
• (4) + 1,200 _____ _____ _______________ + 1,200
• New $9,200 + $1,600 + $7,000 = $1,600 $16,200

• $17,800 $17,800

Cash
Cashisisincreased
increasedby
by$1,200
$1,200and
andR.
R.Neal,
Neal,Capital
Capitalisis
increased
increasedbyby$1,200.
$1,200.

February 1, 2024 1-42 28

 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.

February 1, 2024 1-42 29

 TRANSACTION ANALYSIS
TRANSACTION 5 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old $9,200 + $1,600 + $7,000 = $1,600 + $16,200
• (5) ___Advertising Expense__ + 250 _- 250
• New $9,200 + $1,600 + $7,000 = $1,850 + $15,950

•
• $17,800 $17,800

Accounts
AccountsPayable
Payableisisincreased
increasedby
by$250
$250and
andR.
R.
Neal,
Neal,Capital
Capitalisisdecreased
decreasedbyby$250.
$250.

February 1, 2024 1-42 30

 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.

February 1, 2024 1-42 31

 TRANSACTION ANALYSIS
TRANSACTION 6 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old
• $ 9,200 + $1,600 + $7,000 = $1,850 + $15,950
• (6) + 1,500 + 2,000 + 3,500
• New
• $10,700 + $2,000 + $1,600 + $7,000 = $1,850 + $19,450

• $21,300 $21,300

Cash
Cashisisincreased
increasedby
by$1,500;
$1,500;Accounts
AccountsReceivable
Receivableisisincreased
increased
by
by$2,000,
$2,000,and
February andR.
R.Neal,
Neal,Capital
1, 2024 Capitalisisincreased
increasedby
1-42 by$3,500.
$3,500. 32
 TRANSACTION ANALYSIS
TRANSACTION 7

•Expenses
Expenses paid
paid in
in cash for September
cash for September areare store
store
rent,
rent, $600
$600;; employees’
employees’ salaries,
salaries, $900
$900;; and
and
utilities,
utilities, $200
$200..

February 1, 2024 1-42 33

 TRANSACTION ANALYSIS
TRANSACTION 7 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old
• $10,700 + $2,000 + $1,600 + $7,000 = $1,850 + $19,450
• (7) - 1,700 Rent Expense - 600
• Salaries Expense - 900
• Utilities Expense - 200
• New
• $ 9,000 + $2,000 + $1,600 + $7,000 = $1,850 + $17,750

• $19,600 $19,600
Cash
Cashisisdecreased
decreasedby
by$1,700
$1,700and
andR.
R.Neal,
Neal,Capital
Capitalisisdecreased
decreased
by
bythe
thesame
sameamount.
February
amount.
1, 2024 34

1-42
 TRANSACTION ANALYSIS
TRANSACTION 8

• Softbyte pays its $250 Daily

News advertising bill in cash.

February 1, 2024 1-42 35

 TRANSACTION ANALYSIS
TRANSACTION 8 SOLUTION
• Assets = Liabilities + Owner’s Equity
• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old
• $9,000 + $2,000 + $1,600 + $7,000 = $1,850 + $17,750
• (8)- 250 - 250 .
• New
• $8,750 + $2,000 + $1,600 + $7,000 = $1,600 + $17,750

• $19,350 $19,350

Both
BothCashCashand
andAccounts
AccountsPayable
Payableare
aredecreased
decreasedby
by
$250.
$250. Since
Sincethe
theexpense
expensewas
waspreviously
previouslyrecorded,
recorded,
ititisisnot
notrecorded
recordednow.
now.
February 1, 2024 1-42 36
 TRANSACTION ANALYSIS
TRANSACTION 9

•The sum of $600 in cash is received from

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

February 1, 2024 1-42 37

 TRANSACTION ANALYSIS
TRANSACTION 9 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital
• Old
• $8,750 + $2,000 + $1,600 + $7,000 = $1,600 + $17,750
• (9) + 600 - 600 .
• New
• $9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $17,750
•

$19,350 $19,350

Cash
Cashisisincreased
increasedbyby$600
$600and
andAccounts
AccountsReceivable
Receivableisis
decreased
decreasedby bythe
thesame
sameamount.
amount. R.
R.Neal,
Neal,Capital
Capitalisisnot
not
increased
increasedbecause
February
becausethe
1, 2024
therevenue
revenuewas
wasalready
alreadyrecorded.
1-42
recorded. 38
TRANSACTION ANALYSIS
TRANSACTION 10

•Ray Neal withdraws $1,300 in

cash from the business for his
personal use.

February 1, 2024 1-42 39

 TRANSACTION ANALYSIS
TRANSACTION 10 SOLUTION

• Assets = Liabilities + Owner’s Equity

• Cash + Accts. Rec. + Supplies + Equip = Accts. Pay. + R. Neal, Capital
• Old
• $9,350 + $1,400 + $1,600 + $7,000 = $1,600 + $17,750
• (10) - 1,300 Drawing - 1,300
• New
• $8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $16,450

• $18,050 $18,050

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

amount. This is not an expense, but rather a withdrawal of owner’s equity.
February 1, 2024 1-42 40
 FINANCIAL STATEMENTS
•Four financial statements are prepared from the
summarized accounting data:
• Income Statement
revenues and expenses and resulting net income or net loss for
a specific period of time

• Owner’s Equity Statement

changes in owner’s equity for a specific period of time

• Balance Sheet
assets, liabilities, and owner’s equity at a specific date

• Statement of Cash Flows

cash inflows (receipts) and outflows (payments) for a specific period of time

February 1, 2024 1-42 41

 Thank YOU

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