Chapter 1
Accounting Concepts and Procedures
Chapter Overview
The chapter begins with an introduction to accounting and the organizational forms of business: sole
proprietorships, partnerships, corporations, and limited liability companies. Learning Unit 1-1 has assets,
liabilities, and equities defined and explained through examples and the accounting equation. Learning
Unit 1-2 illustrates the steps necessary to prepare a balance sheet. Learning Unit 1-3 expands the
accounting equation to include revenues, expenses, and withdrawals. Each element of the equation is
further defined. A variety of transactions are analyzed along with their impact on the accounting
Learning Objectives
After studying Chapter 1, your students should gain proficiency in the following:
1. Explain Accounting, Business, and the Accounting Equation.
2. Prepare a Balance Sheet.
3. Record Transactions into the Expanded Accounting Equation.
Chapter 1 Assignment Grid
Estimated Level
Learning Time in of
Assignment Topic(s) Unit(s) Minutes Difficulty
10 Account categories 3 5 Easy
11 Account categories 3 5 Easy
12 Expenses 3 5 Medium
13 Income statement 4 5 Easy
14 Statement of owner’s equity 4 5 Easy
9 Preparing Financial Statements 4 5 Easy
Exercises (Set A)
1A-1 Accounting Equation 1 5 Easy
1A-2 Accounting Equation 1 5 Easy
1A-3 Balance Sheet 2 10 Easy
1A-4 Accounting Equation – Expanded 3 15 Medium
1A-5 Financial Statements 4 20 Medium
Exercises (Set B)
1B-1 Accounting Equation 1 5 Easy
Problems (Set A)
1A-1 Accounting Equation 1 15 Easy
1A-2 Balance Sheet 2 15 Medium
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Problems (Set B)
1B-1 Accounting Equation 1 15 Easy
1B-2 Balance Sheet 2 15 Medium
Financial Report Problem
Reading Amazon’s Annual Report 2 5 Easy
Keeping It Real
Learning Unit 1-1: Accounting, Business, and the Accounting
Equation
Summary: Accounting is the language of business. It provides financial information to users and helps
the decision making process. The accounting process analyzes, records, classifies, summarizes, reports,
and interprets financial information for decision makers. The four main categories of business
organizations are (1) sole proprietorships, (2) partnerships, (3) corporations, and limited liability
Key Concepts: Accounting, sole proprietorship, partnership, corporation, limited liability company,
service company, merchandise company, manufacturer, generally accepted accounting principles,
Lecture Outline:
1) Accounting is the language of business. It provides information to managers, owners, investors,
government agencies, and others inside and outside the organization.
2) Businesses can be classified into one of four types of organizations:
a) Sole Proprietorships are businesses that have one owner.
i) Easy to form
ii) Owner can lose personal assets to meet obligations of business
iii) Ends with death of owner or closing of business
b) Partnerships are businesses that have at least two owners.
i) Easy to form
c) Corporations are businesses owned by stockholders.
i) More difficult to form
d) Limited Liability Company (LLC)
i) More difficult to form
ii) Limited liability or limited personal risk – members’ loss is limited to their investment in the
company
iii) May end with death of member
3) Businesses can be classified into service, merchandise, and manufacturing businesses.
a) Service company – Business that provides a service
4) Accounting (also called the accounting process) is a system that measures the activities of a business
in financial terms, provides written reports and financial statements about those activities, and
communicates these reports to decision makers and others. It does this by performing the following
functions:
a) Analyzing: looking at what happened in the past and how the business was affected
b) Recording: Putting the information into the accounting system
c) Classifying: Grouping all the same activities (e.g. all purchases) together
5) Difference between Bookkeeping and Accounting
Bookkeeping is the recording function of the accounting process. Accounting uses the bookkeeping
6) The accounting equation illustrates the relationship between assets, liabilities, and equities.
a) Assets are properties (resources) of value owned by a firm: Assets = Liabilities + Owner’s Equity
7) A business transaction is an event that affects the financial position of a business and may be
reliably recorded.
8) The accounting equation must balance after each business transaction is recorded.
Teaching Tips/Strategy: The instructor may begin by discussing the accounting goals and the
relationship with the business activities. In addition, the instructor can present the accounting function and
how it helps business organizations identify key activities and help on the decision making process. To
Teaching Tips/Strategy: Utilize a group-based activity to aid in explaining the accounting equation
elements. Present familiar business organizations and identify what assets and liabilities they are likely to
Learning Unit 1-2: The Balance Sheet
Summary: The balance sheet or statement of financial position shows the financial position of a business
as of a particular date. The balance sheet figures represent the basic accounting equation. The assets
appear on the left-hand side of the statement while liabilities and owner’s equity appear on the right-hand
side
Key Concepts: Balance sheet
Lecture Outline:
The balance sheet is a statement, as of a particular date, that shows the amount of assets owned by a
business as well as the amount of claims (liabilities and owner’s equity) against these assets. Statement of
financial position is another name for a balance sheet. The proper form for the balance sheet contains:
a) Heading: the company name, the statement name, the statement date
b) Shows assets, liabilities, and equity amounts
Teaching Tips/Strategy:
The Exercise 1A-3 is an excellent exercise to present and prepare a step-by-step balance sheet during
lecture. Use the Figure 1-7 as reference for the proper presentation.
As the exercise is finalized, comment on the various details of how the balance sheet has been presented
Learning Unit 1-3: The Accounting Equation Expanded: Revenue,
Expenses, and Withdrawals
Summary: As a part of doing business, all organizations earn revenue and incur expenses.
A service company earns revenue when it provides services to its clients. When revenue is earned, the
owner’s equity is increased. In effect, revenue is a subdivision of owner’s equity. A business’s expenses
are the costs the company incurs in carrying out necessary operations in its effort to generate revenue.
Expenses are also a subdivision of owner’s equity. When expenses are incurred, they decrease owner’s
Key Concepts: Cash basis, accrual basis, revenue, accounts receivable, expense, net income, net loss,
withdrawals, expanded accounting equation
Lecture Outline:
1) The accounting equation expands to include revenue, expenses, and withdrawals: Assets = Liabilities
+ Capital – Withdrawals + Revenue – Expenses.
a) Revenue is earned by a company when it provides services for its clients or sells goods to its
2) The owner’s equity portion of the accounting equation expands to illustrate beginning capital plus
additional investment from owners, plus revenues, less expenses, and less withdrawals.
3) Various transactions are used to illustrate the transactional effects on the accounting equation.
Teaching Tips/Strategy: Use as a lecture demonstration the“Success Coach” LU 1-3 Do It Right Now
Checkup” (end of the chapter) to reinforce the Learning Unit 1-3 concepts.
Learning Unit 1-4: The Three Financial Statements
Summary: The financial statements present how well the business has performed over a specific period
of time. An income statement is an accounting statement that shows business results in terms of revenue
and expenses. If revenues are greater than expenses, the report shows net income. If expenses are greater
than revenues, the report shows net loss. An income statement typically covers 1, 3, 6, or 12 months. The
statement shows the result of all revenues and expenses throughout the entire period and not just as of a
specific date. An example income statement for Jess Bora’s Computer Consulting business is shown in
Key Concepts: Income statement, statement of owner’s equity, ending capital
Lecture Outline:
2) The Income Statement is an accounting statement that shows business results in terms of revenue
and expenses for a specific time period. The proper form for the income statement:
a) Cannot cover more than one year
b) Heading – the company name, the statement name, the period covered by the statement
3) The Statement of Owner’s Equity shows changes in capital. Proper form for the statement of
owner’s equity includes:
4) The Balance Sheet illustrates the balance in the accounting equation: assets equal liabilities plus
owner’s equity. This statement was addressed earlier in the chapter.
Teaching Tips/Strategy: Use the Exercise 1A-5 as a classroom demonstration to reinforce the proper
form and procedures while completing financial statements. Explain the relationship between the
statements with an example such as an “Amazing Race” or “a scavenger hunt” game. The clues from the
statement are needed to complete the rest of the statements. The net income (income statement) is needed
for the statement of owner’s equity ending balance. The ending balance of the capital (statement of
owner’s equity) is needed to complete the equity section of the balance sheet.
Name Date Section
CHAPTER 1
TEN-MINUTE QUIZ
Circle the letter of the best response.
1. Select the accounts affected by the following transaction: TJ Rex invests $50,000 to open a music
store.
a. Assets and Owner’s Equity
b. Assets and Liabilities
c. Liabilities and Owner’s Equity
d. Capital and Owner’s Equity
2. Select the accounts affected by the following transaction: TJ Rex uses credit to buy musical
instruments to sell in the store.
a. Assets and Owner’s Equity
b. Assets and Liabilities
c. Liabilities and Owner’s Equity
d. Capital and Owner’s Equity
3. Select the accounts affected by the following transaction: TJ Rex provides guitar lessons for $25
cash.
a. Cash and Accounts Payable
b. Cash and Revenue
c. Accounts Receivable and Revenue
d. Cash and Expenses
4. Select the accounts affected by the following transaction: TJ Rex receives $100 for previous
lessons provided on account.
a. Cash and Accounts Receivable
b. Cash and Revenue
c. Accounts Receivable and Revenue
d. Cash and Expenses
5. Select the accounts affected by the following transaction: TJ Rex receives the utility bill but will
wait and pay it next month.
a. Cash and Accounts Receivable
b. Cash and Revenue
c. Accounts Receivable and Revenue
d. Accounts Payable and Expenses
6. Which of the following is not an asset?
a. Cash
b. Land
c. Mortgage Payable
d. Patents
7. Which of the following is reported on the balance sheet?
a. Accounts Payable
b. Fees Earned
c. Depreciation Expense
d. Withdrawals
8. Which of the following is represented on the income statement?
a. Cash received from sale of equipment
b. Accounts Payable
c. Office Equipment
d. Net loss
9. Which of the following will not appear on the statement of owner’s equity?
a. Net income
b. Withdrawals
c. Capital
d. Fees Earned
10. Which financial statement illustrates the accounting equation?
a. Statement of Owner’s Equity
b. Income Statement
c. Balance Sheet
d. Statement of Cash Flows
Answer Key to Chapter 1 Quiz