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What is Accounting?A system that records the day to day financial
activities of a business
Summarizes information with Financial Statements
Provides information for decision making
Accounting vs. Bookkeeping
BOOKKEEPING
A method of recording day-to-day transactions for a
business in a specific format (the data, i.e. journal
entries, recording sales and expenses)
ACCOUNTING
The process of recording, analyzing, and interpreting
the economic activities of a business (turning data
into useful information, i.e. financial statements)
What do Accountants do, anyways?
Gather financial data
Prepare and collect records
Summarize and classify financial information
Prepare reports to help others make decisions
Establish controls to promote accuracy and honesty
Why is Accounting Important?
Accountability, Transparency People who handle cash in the company are responsible
for it; the business’ financial activities are not secretive, but open to public knowledge (for public corporations)
Budgeting This allows businesses to estimate its future sales and
expenses
Taxation Records must be kept in order to pay taxes
Why is Accounting Important?
Financial Statements
These are reports that summarize the financial
performance of a business
These reports indicate the business’ economic health
Annual Reports
Financial statements are presented to shareholders and
potential investors in the form of annual reports
An Information SystemWhat financial questions might you have about
your business?Is the business earning profit?Are selling prices too high/low?How much does ABC company owe me?What is the value of my inventory?How much did John Smith earn last year?Do we have enough money to pay our
bills?
An Information System
Who else may want financial information about
the business?
Government
Bankers
Lenders
Potential Investor
Do you ever want to own a business?
Accounting is the BACKBONE of BUSINESSWithout it, all the other functions of business fall
apartProvides accurate sales dataAffects marketing decisionsNeeded for keeping track of cashHow else would an owner know if they are making
money (PROFIT)?
Owning a BusinessIf you decide to operate your own business, you will
find yourself facing such accounting tasks as:
Banking
Payroll
Keeping track of amounts owed by and owed to
customers
Keeping track of amounts owed to the government
Producing an income statement for income tax
purposes
Let’s look at some important Accounting Terms
GAAP’s
Assets
Liabilities
Owner’s Equity (Personal Equity)
Fundamental Accounting Equation
GAAP’sGenerally Accepted Accounting Principles
These are the rules for AccountingThey are important because all Accountants must
follow them!
AssetsItems of value owned by a business or person
What are some examples of personal assets?
House
Car
Cash
RRSP’s
LiabilitiesThe debts of a business or person; what you
owe to others
What are some examples of personal liabilities?
Mortgage
$$ Owed to Parents
Credit cards
Bank Loan
School debt
Owner’s EquityThe net worth of a business (Owner’s Equity)
or person (Personal Equity)
It is the difference between the total assets and total liabilities of a business
Fundamental Accounting Equation
Assets = Liabilities + Owner’s Equity
OR
Assets – Liabilities = Owner’s Equity
A = L + OE OR A – L = OE
Think about it: Everything you own – Everything you owe = Your Net
Worth
Also called “The Balance Sheet Equation”
ActivityWhat’s your net worth?
Make a list of all of your assets and all of your liabilities
Calculate your total assets and your total liabilities by giving an approximate $ value to each one
Now calculate your net worth (personal equity) (remember the fundamental accounting equation)
Once completed, estimate your net worth 10 years from now. Repeat the steps above.THINK: Will I have a car? A house? What kind of car
– how much would it be worth? Will I have any student loans? Car loans? Approximately how much $$ would I have in the bank?
BE REALISTIC or… Have some fun with it!
Our 1st GAAPBusiness Entity Principle
Each business is considered a separate entity, and the financial data for the business should be kept separate from the owner’s personal financial data.
Balance SheetA financial statement that shows the
financial position of the business at a certain date
It lists assets, liabilities, and owner’s equity
A “freeze frame” or snapshot of what the business owns, owes and the owner’s invested interest.
The balance sheet does not indicate whether a business has made a profit, only whether it is financially strong.
Balance Sheet
Assets (Things owned) =
Liabilities (debts you owe)
+
Owners Equity (the owner’s share of the assets)
Balance Sheet - ExampleMr. Smith
Balance Sheet
September 5, 2013
Assets Liabilities
Cash $2,000.00 Credit Card $2,000.00
House 300,000.00 Car Loan 500.00
Car 5,000.00 Bank Loan 20,000.00
Household Items 5,000.00 Mortgage 200,000.00
Total Liabilities $222,500.00
Owner's Equity
Mr. Smith, Capital $89,500
Total Assets $312,000.00 Total Liabilities and Equity $312,000.00
Step 1 – Statement Heading
A Three Line Heading is Used
WHO? – The name of the individual, business or other organization
WHAT? – The name of the financial statement (in this case, the balance sheet)
WHEN? – The date on which the financial position is determined
Assets LiabilitiesCash 1 1 5 0 00 Accounts PayableAccounts Receivable Central Supply 1 3 5 0 00
B. Cava 2 0 0 0 00 Loan PayableK. Lincoln 1 4 0 0 00 Mercury Finance 25 1 7 0 00
Equipment 13 5 7 5 00 Total Liabilities 26 5 2 0 00Trucks 42 5 0 0 00
Owners' EquityJ . Hofner, Capital 34 1 0 5 00
Total Assets 60 6 2 5 00 Total Liabilities and Equity 60 6 2 5 00
Metropolitan MoversBalance Sheet
August 31, 2005
WHO? – The name of the individual, business or other organization
What?
When?
Step 2 – List AssetsAssets are listed on the left side of the page
The total of Assets must be on the same line as the total for Liabilities and Owner’s Equity
2 types of Assets:Short Term Assets: appear in order of liquidity
(how fast they can be converted to cash)For example: Cash, Accounts Receivable,
Office SuppliesLong Term Assets: appear in order of their useful
life to the business. Longest life comes first.For example: Land, Buildings, Equipment
Step 3 – List LiabilitiesThe liabilities are listed and totalled on the right
side of the page
Liabilities are listed according to maturity date, that is, the date they are due to be paid. i.e. Those that must be paid first are listed first
For example: Accounts Payable, Bank Loan, Mortgage
Step 4 – Show Owner’s Equity
Owner’s Equity is listed on the right side of the page, after the Liabilities section
Shows the Owner’s Capital, another word for equity
Mr. Smith
Balance Sheet
September 5, 2013
Assets Liabilities
Cash $2,000.00 Credit Card $2,000.00
House 300,000.00 Car Loan 500.00
Car 5,000.00 Bank Loan 20,000.00
Household Items 5,000.00 Mortgage 200,000.00
Total Liabilities $222,500.00
Owner's Equity
Mr. Smith, Capital $89,500
Total Assets $312,000.00 Total Liabilities and Equity $312,000.00
Accounts ReceivableAn Asset (short term)
It is the total amount due from debtors (people or businesses that owe a business money)
From purchasing goods or services from the business on creditOften due within 30 or 60 daysThe “seller” will have an Accounts Receivable
Accounts PayableA Liability (short term)
It is the total amount owed to creditors (people or businesses that we owe money to)
For the purchase of goods or services on creditOften due within 30 or 60 daysThe “buyer” will have an Accounts Payable
Our 2nd GAAPThe Cost Principle
Assets are shown on the balance sheet at the cost of their acquisition
The value of assets is never increased, even though the owner might think that the value of an asset has risen