Four types of business organizations:

A business stakeholder is "a person or entity that has an interest in the economic performance of the business." Stakeholders include owners, managers, employees, customers, creditors, and various government agencies. These stakeholders use accounting data to gauge the economic performance of businesses.

The moral principles that guide the conduct of individuals are called ethics.

The role of accounting is to provide many different users with financial information to make economic decisions.

Profession of Accounting

Two fields of accounting:

• Financial accounting is primarily concerned with the recording and reporting of economic data and activities for a business.

• Managerial accounting uses both financial accounting and estimated data to aid management in running day-to-day operations and in planning future operations.

Employed in either public or private accounting:

Other acceptable forms:

Assets - Liabilities = Owner's Equity
Owner’s equity = Assets – Liabilities
Liabilities = Assets - Owner's equity
Assets = Owner's equity + Liabilities

Assets: resources owned by a business
Liability: the rights of the creditors, which represent debts of the business
Owner’s equity: the rights of the owners

The accounting equation must always remain in balance! If the equation does not balance, then there has been an error.

Example: A business buys a $20,000 delivery van by using $5,000 of the owner's money as a down payment and financing the rest.

Assets = Liabilities + Owner's Equity

$20,000 = $15,000 + 5,000

Example 2: If the assets owned by a business total $100,000 and liabilities total $50,000, the total for owner's equity is $50,000.

Assets = Liabilities + Owner's Equity

$100,000 = $50,000 + 50,000

The text defines a business transaction as "an economic event or condition that directly changes the entity’s financial position or directly affects its results of operations."

Key points:

1. The accounting equation must always stay in balance. Transactions may require additions to both sides, subtractions from both sides of the equation, or an addition and subtraction on the same side, but the equation must always balance.
2. Revenue represents the receipt of assets (cash or accounts receivable) for goods sold or services rendered. The receipt of assets from the owner is an investment by the owner.
3. Revenues are recognized when services are rendered, not when the cash is received.
4. Expenses are costs incurred in generating revenues. Purchases of assets, payments of liabilities, and owner’s withdrawals are not recorded as expenses.
5. The owner’s equity is increased by amounts invested by the owner and decreased by withdrawals by the owner. Owner’s equity is increased by revenues and decreased by expenses.

RECORDING BUSINESS

TRANSACTIONS

Jim's Lawn Care

1. Jim Hamilton began a lawn care business in May by depositing $800 in a business bank account.

2. Purchased lawnmowers and other lawn equipment on account, $1,000.

3. Paid cash for supplies, $50.

4. Performed lawn care services for credit customers and billed them $700.

5. Received $700 cash from the customers billed in #4.

6. Paid $1,000 cash for the lawn equipment purchased in #2.

7. Paid for an advertisement in a local newspaper, $150.

8. Performed lawn care services for cash customers and immediately received $420.

9. Paid wages to a part-time assistant, $85.

10. Performed lawn care services for credit customers and billed them $600.

11. Received an invoice from Gas-n-Go for gasoline purchased on account during May, $110. The invoice will not be paid until next month.

12. At the end of May, Jim withdrew $100 from the business for personal use.

RECORDING BUSINESS TRANSACTIONS

Interrelationships among Financial Statements: