1 Chapter 9: Accounting Basic Accounting Concepts Businesses engage in activities that concentrate on financial worth, such as money, spending, expenses, mergers, and costs. What Accountants Do Accountants make meaningful and effective decisions based on up to date and accurate records of a company. Accounting is the process of recording, analyzing, and interpreting the financial or economic activities of a business. Financial activities in business are recorded as transactions: recording something of value for something else of value. Bookkeeping is the recording of all transactions for a business in a specific format. Double-Entry Bookkeeping The principle that each transaction involves two changes is known as double-entry bookkeeping: one increase results in one decrease, two increases results in two decreases, and so on.
Transcript
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Chapter 9: AccountingBasic Accounting Concepts
Businesses engage in activities that concentrate on financial worth, such as money, spending, expenses, mergers, and costs.
What Accountants DoAccountants make meaningful and effective decisions based on up to date and accurate records of a company.
Accounting is the process of recording, analyzing, and interpreting the financial or economic activities of a business. Financial activities in business are recorded as transactions: recording something of value for something else of value. Bookkeeping is the recording of all transactions for a business in a specific format.
Double-Entry BookkeepingThe principle that each transaction involves two changes is known as double-entry bookkeeping: one increase results in one decrease, two increases results in two decreases, and so on.
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Chapter 9: AccountingBasic Accounting Concepts
Accounting and IndividualsIndividuals need to keep accurate financial records. People often allow organizations to take preauthorized payments resulting in money taken automatically and on a regular basis from their bank accounts.
AssetsAssets are things of value that a business or person owns.
LiabilitiesLiabilities are debts or amounts of money that are owed to others by an individual or a business.
Personal Equity or Net WorthA person’s assets, after all liabilities are deducted, is known as personal equity or net worth.
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Chapter 9: AccountingBasic Accounting Concepts
Accounting and BusinessesA businesses’ assets and liabilities are used to calculate the net worth—the owner’s equity.
Owner’s EquityOwner’s equity is the owner’s investment in the business or the financial portion of the business that belongs to the owners or shareholders.
Assets – Liabilities = Owner’s Equity
Balance Sheet EquationsThe balance sheet equation can be expressed in two ways:1. To determine owner’s equity: Assets – Liabilities = Owner’s Equity2. To determine total assets: Assets = Liabilities + Owner’s Equity
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Chapter 9: AccountingBasic Accounting Concepts
Cost Principle and DepreciationThe accounting practice of always recording an asset at the actual amount it costs the business is known as the cost principle. Even when an asset depreciates or loses value over time the asset value on the books remains the same.
Mark’s Repair ShopHere are the assets of Mark’s Repair Shop.• cash in the business and in a bank account ($6500)• accounts receivable ($8100)• invoicing supplies ($500)• parts inventory ($4000)• business equipment (truck) ($25 500)• building and land ($175 000)
Total Assets = $219 600
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Chapter 9: AccountingBasic Accounting Concepts
Mark’s Repair ShopHere are Mark’s debts or liabilities. • accounts payable ($7350)• bank loan for truck ($11 050)• mortgage payable (on building) ($110 000)
Total Liabilities = $128 400
Equity calculation for Mark’s net worth can be calculated as follows: Assets – Liabilities = Owner’s Equity
The balance sheet, the income statement, and the statement of cash flow helps owners and managers keep track of the financial health of the business. The financial statements provide outsiders with accurate information about the business.
Preparing a Balance SheetThe balance sheet shows the financial position on any given day of the business, and provides information about its assets, liabilities, and equity.
Balance Sheet Equation MethodThe balance sheet gets its name because the left side of the equation (assets) always equals the right side (liabilities plus owner’s equity).Assets are owned by one of two groups
1. owner(s) of the business (owner’s equity)2. individuals or businesses owed money (liabilities)
Balance Sheet Report Form MethodComputer programs easily complete the balance sheet using an up-and-down column format rather than a side-by-side format.
Preparing an Income StatementThe income statement is a financial statement that shows a business’s profit (or loss) over a stated period of time.
The money, or the promise of money, received from the sale of goods or services is called revenue.
Expenses are expenditures that help a business generate revenue.
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Chapter 9: AccountingPreparing Financial StatementsIncome Statements for Service Businesses
Mark’s Repair ShopBalance Sheet
For the month ending September 30, 20__RevenueRepairs Revenue $ 9 900Total Revenue $ 9 900ExpensesSalaries $ 2 600Rent 2 000 Advertising 850Supplies 185Utilities 235Insurance 150Delivery Expense 770Total Expenses $ 6 790Net Income $ 3 110
Balance sheets for retail businesses are similar to those of service businesses. However, retail businesses need to take the cost of inventory (goods on hand to be sold) into account.
Income Statement Equations
Income statement equation for a service business.
Revenue – Expenses = Net Income
Income statement equation for a retail business.
Revenue – Cost of Goods Sold = Gross Profit Gross Profit – Expenses = Net Income
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Chapter 9: AccountingPreparing Financial StatementsIncome Statements and Inventory
Tracking of inventory is critical. It saves the retail business money and increases customer satisfaction. When a physical count of inventory is taken, it is compared to the on-going count that is usually maintained by computer systems.
Operating expenses are deductedfrom the gross profit to determinethe net profit.
Beginning Inventory, Jan.1, 20__ $50 000
Inventory Purchased +75 000
Costs of All Goods for Sale 125 000
Ending Inventory, Dec. 20__ - 40 000
Costs of Goods Sold 85 000
Sales Revenue $150 000
Cost of Goods profit - 85 000
Gross Profit 65 000
Gross Profit $65 000
Expenses - 25 000
Net Profit $40 000
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Chapter 9: AccountingBasic Accounting Concepts
Owner’s Equity AccountThe net profit is calculated first then transferred to the balance sheet as part of owner’s equity. Creditors and owners have claims on the assets of the business.
Preparing a Statement of Cash FlowCash flow is the movement of cash-in and cash-out of a business. The statement of cash flow is a summary of the cash-in and cash-out transactions of a business that helps to predict the amount of cash it needs to meet obligations.
000Add: Net Income $ 40 000C. Donahue, Capital, Dec. 31, 20__ $ 115 000
Projected Cash Flow Statement Mark’s Repair Shop
October 31, 20__Transaction In (+) Out (-)Investment Income +$ 500.00Accounts Receivables +750.00Equipment to be Sold +1 250.00Payroll Not Yet Paid -$
460.00 Loan Repayment -930.00Insurance Due -200.00Projected Cash Flow 910.00
“Capital” is added to identify the owner’s account
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Chapter 9: AccountingBasic Accounting Concepts
Ways to Increase Cash Flow A business must consider several ways to meet its obligations if cash flow is inefficient. A business might seek extra investments, reduce inventory purchases, and increase efforts to collect accounts receivables.
Cash-flow Implications of Credit and Debit CardsBusiness that allow customers to use a credit and/or debit card do not have wait for their money (accounts receivables); they receive their money (sales revenue) up front. Since these businesses take a long time to pay their own bills, they invest the customers’ cash to make more money.
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Chapter 9: AccountingBasic Accounting Concepts
Interpreting Financial StatementsFinancial statement information allows accountants to make recommendations to owners regarding future business decisions.Accountants compare data over a set period of time, usually two or more years.
A Final Measure of SuccessFor a business to be successful, the return on the owner’s investment should be equal to or greater than the return for a savings account, bond, or mutual fund.
