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KChapter1•IntroductiontoAccountingandBusiness23KeyPoints1Describethenatureofabusiness.Abusinessisanorganizationinwhichbasicresources(inputs),suchasmaterialsandlabor,areassem-bledandprocessedtoprovidegoodsorservices(outputs)tocus-tomers.Theobjectiveofmostbusi-nessesistomaximizeprofits.Therearethreedifferenttypesofbusinessesthatareoperatedforprofit:manufacturing,merchandis-ing,andservicebusinesses.Abusi-nessisnormallyorganizedinoneofthefollowingforms:proprietor-ship,partnership,corporation,orlimitedliabilitycorporation.Abusi-nessstakeholderisapersonoren-tity(suchasanowner,manager,employee,customer,creditor,orthegovernment)whohasaninterestintheeconomicperformanceofthebusiness.2Describetheroleofaccountinginbusiness.Accountingisaninformationsystemthatprovidesreportstostakeholdersabouttheeconomicactivitiesandconditionofabusiness.Accountingisthe“languageofbusiness.”3Describetheimportanceofbusinessethicsandthebasicprinciplesofproperethicalconduct.Ethicsaremoralprinciplesthatguidetheconductofindividuals.Properethicalconductimpliesabehaviorthatconsiderstheimpactofone’sac-tionsonsocietyandothers.Soundethicalprinciplesinclude(1)avoid-ingsmallethicallapses,(2)focusingonyourlong-termreputation,and(3)beingwillingtosufferadversepersonalconsequencesforholdingtoanethicalposition.4Describetheprofessionofaccounting.Accountantsareengagedineitherpri-vateaccountingorpublicaccounting.Thetwomostcommonspecialized7Explainhowbusinesstransac-tionscanbestatedintermsoftheresultingchangesinthebasicelementsoftheaccount-ingequation.Allbusinesstransactionscanbestatedintermsofthechangeinoneormoreofthethreeelementsoftheaccountingequation.Thatis,theeffectofeverytransactioncanbestatedintermsofincreasesordecreasesinoneormoreoftheseelements,whilemaintainingtheequalitybetweenthetwosidesoftheequation.8Describethefinancialstate-mentsofaproprietorshipandexplainhowtheyinterrelate.Theprincipalfinancialstatementsofaproprietorshiparetheincomestatement,thestatementofowner’sequity,thebalancesheet,andthestatementofcashflows.Theincomestatementreportsaperiod’snetin-comeornetloss,whichalsoappearsonthestatementofowner’sequity.Theendingowner’scapitalreportedonthestatementofowner’sequityisalsoreportedonthebalancesheet.Theendingcashbalanceisreportedonthebalancesheetandthestatementofcashflows.9Usetheratioofliabilitiestoowner’sequitytoanalyzetheabilityofabusinesstowith-standpoorbusinessconditions.Theratioofliabilitiestoowner’seq-uityisusefulinanalyzingtheabil-ityofabusinesstopayitscreditors.Thelowertheratio,thebetterablethebusinessistowithstandpoorbusinessconditionsandstillfullymeetitsobligationstocreditors.fieldsofaccountingarefinancialac-countingandmanagerialaccounting.Otherfieldsincludecostaccounting,environmentalaccounting,taxac-counting,accountingsystems,inter-nationalaccounting,not-for-profitaccounting,andsocialaccounting.5Summarizethedevelopmentofaccountingprinciplesandrelatethemtopractice.Financialaccountantsfollowgener-allyacceptedaccountingprinciples(GAAP)inpreparingreportssothatstakeholderscancompareonecom-panytoanother.Accountingprin-ciplesandconceptsdevelopfromresearch,acceptedaccountingprac-tices,andpronouncementsofau-thoritativebodies.Currently,theFinancialAccountingStandardsBoard(FASB)istheauthoritativebodyhavingtheprimaryresponsi-bilityfordevelopingaccountingprinciples.Thebusinessentityconceptviewsthebusinessasanentitysep-aratefromitsowners,creditors,orotherstakeholders.Thebusinessen-titylimitstheeconomicdataintheaccountingsystemtothatrelateddi-rectlytotheactivitiesofthebusi-ness.Thecostconceptrequiresthatpropertiesandservicesboughtbyabusinessberecordedintermsofac-tualcost.Theobjectivityconceptre-quiresthattheaccountingrecordsandreportsbebaseduponobjec-tiveevidence.Theunitofmeasureconceptrequiresthateconomicdataberecordedindollars.6Statetheaccountingequationanddefineeachelementoftheequation.Theresourcesownedbyabusinessandtherightsorclaimstothesere-sourcesmaybestatedintheformofanequation,asfollows:AssetsLiabilitiesOwner’sEquity66124_c01_1-46.qxd11/10/036:26PMPage23IKChapter1•IntroductiontoAccountingandBusiness24IllustrativeProblemCecilJameson,Attorney-at-Law,isaproprietorshipownedandoperatedbyCecilJameson.OnJuly1,2005,CecilJameson,Attorney-at-Law,hasthefollowingassetsandliabilities:cash,$1,000;accountsreceivable,$3,200;supplies,$850;land,$10,000;accountspayable,$1,530.Officespaceandofficeequipmentarecurrentlybeingrented,pendingtheconstructionofanofficecomplexonlandpurchasedlastyear.BusinesstransactionsduringJulyaresummarizedasfollows:a.Receivedcashfromclientsforservices,$3,928.b.Paidcreditorsonaccount,$1,055.c.ReceivedcashfromCecilJamesonasanadditionalinvestment,$3,700.d.Paidofficerentforthemonth,$1,200.e.Chargedclientsforlegalservicesonaccount,$2,025.f.Purchasedofficesuppliesonaccount,$245.g.Receivedcashfromclientsonaccount,$3,000.h.ReceivedinvoiceforparalegalservicesfromLegalAidInc.forJuly(tobepaidonAugust10),$1,635.i.Paidthefollowing:wagesexpense,$850;answeringserviceexpense,$250;util-itiesexpense,$325;andmiscellaneousexpense,$75.j.Determinedthat