BUS 241 Video 1

Introduction to Accounting

• Definition of a Business: An organization that utilizes resources to provide goods or services to customers, who in turn pay for them.

• Profit: The difference between what customers pay and the input costs incurred to generate goods/services. The primary goal of most businesses is to earn a profit.

Types of Businesses

1. Service Businesses

• Provide services in exchange for a fee.

• Example: Delta Airlines (transportation services), Walt Disney Company (entertainment).

• Class Example: A lawn mowing service that charges customers for cutting grass.

2. Merchandising Businesses

• Purchase inventory and sell it at a higher price.

• Example: Walmart, which sells various goods purchased at wholesale prices, aiming for gross profit.

3. Manufacturing Businesses

• Convert raw materials into finished goods through an assembly process.

• Example: Ford Motor Company combines various materials (aluminum, steel, upholstery) to create vehicles.

Accounting Roles

• Purpose of Accountants: Provide economic information about a business to users.

• Types of Users:

  • Internal Users: Individuals within the organization using the information (e.g., management).

  • External Users: Individuals outside the organization relying on this information (e.g., investors, creditors).

Managerial Accounting

• Provides information exclusively for internal users.

• No fixed rules compared to financial accounting; reports cater to management's specific needs.

Financial Accounting

• Supplies information to external users through financial statements, adhering to Generally Accepted Accounting Principles (GAAP).

• Governed by the Financial Accounting Standards Board (FASB), which establishes GAAP.

Regulatory Bodies

• Securities and Exchange Commission (SEC): Sets rules for publicly traded companies on major stock exchanges (e.g., Disney, Ford, Microsoft).

• International Accounting Standards Board (IASB): Establishes guidelines for international accounting practices.

Business Entity Concept

• Definition: Distinction between personal and business finances; individuals must keep personal expenses separate from business records.

• Types of Business Entities:

  1. Proprietorship: Owned by one person, example includes the lawn mowing business.

  2. Partnership: Owned by two or more individuals; retains pass-through taxation benefits.

  3. Corporation: More complex, requires legal assistance to form, and has limited liability.

  4. Limited Liability Company (LLC): Combines aspects of partnerships and corporations, offering limited liability and pass-through taxation.

Pros and Cons of Business Structures

Sole Proprietorship and Partnership

• Advantages: Pass-through taxation; no entity level tax.

• Disadvantages: Unlimited personal liability for owners.

Corporation

• Advantages: Limited liability protection.

• Disadvantages: Complex to form and operates with double taxation (corporate level and personal level for dividends).

Limited Liability Company (LLC)

• Advantages: Combines limited liability with tax benefits of proprietorships and partnerships.

• Disadvantages: Subject to regulations concerning the number of members and revenue.

Cost Concept

• States that assets should be recorded at their actual purchase price.

• Example: If a business purchased property for $150,000, that is the recorded asset cost.

Business Transactions

• Defined as economic events influencing a business's financial situation.

• Examples: Earning from a service (e.g., mowing a lawn) or buying gas for business use.

Financial Statements Overview

1. Income Statement

• Reports revenues and expenses to show net income or net loss based on matching concept.

• Outcome: Revenues > Expenses = Net Income; Expenses > Revenues = Net Loss.

2. Statement of Owner’s Equity

• Tracks changes in owner's equity over a period, factoring in net income and withdrawals.

• Ends with a calculation of ending capital based on various equity changes.

3. Balance Sheet

• Summarizes assets, liabilities, and owner’s equity at a specific date.

• Follows accounting equation: Assets = Liabilities + Owner's Equity.

4. Statement of Cash Flows

• Acknowledged as one of the main financial statements but will be detailed in further study.

Example of Financial Statements

• Net Solutions Income Statement: Revenue of $7,500, expenses of $4,450, resulting in a net income of $3,050.

• Statement of Owner's Equity Example: Starting equity of $25,000, plus net income resulting in capital, minus owner's withdrawals leading to final capital calculation.

• Balance Sheet Example: Ends with total assets aligning with liabilities and owner's equity, confirming balance in financial records.