Post on 17-Jan-2016
Accounting
Functions of a Business
Basic Accounting Concepts
■ Businesses engage in activities that concentrate on financial worth, such as money, spending, expenses, mergers, and costs
■ Accountants make meaningful and effective decisions based on up to date and accurate records of a company.
■ Accounting o The process of recording, analyzing, and
interpreting the financial or economic activities of a business.
■ Two types of accounting:1) Financial - process of recording and
analyzing info, about the finances of an organization; used by many (gov., shareholders, customers, suppliers, etc.) to make decisions about the company.
2) Management - accounting practices used in a co. to make Internal decisions about the company
■ Financial activities in business are recorded as transactions: recording something of value for something else of value(i.e company pays employee $9 for an hour of work)
■ Bookkeeping is the recording of all transactions for a business in a specific format.
■ 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 (i.e. if company pays $10 for labour, it decreases its cash balance while increasing its expenses)
■ Generally Accepted Accounting Principles (GAAPs) - guidelines developed by professional accountants for the way accounting records and financial statements are prepared. Financial records are presented in a standard form.
Financial Statements■ Formal documents that use a standard
format to provide the key information about a company's financial position.
■ They provide accurate information on a regular basis; may be each week, month or quarter or fiscal year.
■ All business organizations are required by law to produce financial statements to verify income for income tax purposes.
Accurate Financial Statements
1. help a company to remain profitable
2. help a company recover
3. identify and deal with problems
4. provide comparisons from fiscal year to fiscal year
Fiscal Year: a period of 12 consecutive months, it does not always run from Jan-Dec
Accounting and Individuals■ Individuals need to keep accurate financial
records and to do this they need to know key information
■ Assets are things of value that a business or person owns.
■ Liabilities are debts or amounts of money that are owed to others by an individual or a business.
■ A person’s assets, after all liabilities are deducted, is known as personal equity or net worth.
Assets - Liabilities
= Net Worth
Accounting and Businesses
■ Like individuals, businesses have assets and liabilities.
■ A businesses’ assets and liabilities are used to calculate the net worth—the owner’s equity
Balance Sheet■ A statement of net worth on a certain
date—the difference between what you own (assets) and what you owe (liabilities), sometimes called personal or owner’s equity.
■ A snapshot of the financial history of a business at a particular moment in time.
Balance Sheet
Owner’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 (or net worth)
■ Business is growing if Owner’s Equity increases
■ Owner draws salary from Owner’s Equity
Balance Sheet Equations
The balance sheet equation can be expressed in two ways:
1. To determine owner’s equity: Assets – Liabilities = Owner’s Equity
2. To determine total assets: Assets = Liabilities + Owner’s Equity
*These are called the fundamental accounting equation: the two sides must balance
Keys Terms: Balance Sheet
■ Accounts Receivable: An asset—money owed to a business by customers
■ Accounts Payable: A liability—debts the business owes to another business
■ Mortgage Payable: A liability—a mortgage on a building
Example: Mark’s Repair Shop
Here 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
Mark’s Repair Shop
Here 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
Mark’s Repair Shop
Equity calculation for Mark’s owner’s equity can be calculated as follows:
Assets – Liabilities = Owner’s Equity
$219 600 - $128 400 = $91 200
Preparing Financial Statements
Balance Sheets:■ The balance sheet shows the financial
position on any given day of the business, and provides information about its assets, liabilities, and equity.
■ Who might see a balance sheet? Creditors, investors, owners, government
Balance Sheet Equation Method
■ The 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• owner(s) of the business (owner’s equity)• individuals or businesses owed money
(liabilities)
Five Steps to Creating a
Balance Sheet 1. Fill out the Statement Heading – Who? What?
When?2. List the Assets – list assets according to liquidity
(how easy to convert asset into cash)3. List the liabilities – list liabilities in order by maturity
date (the date by which they must be repaid)4. Calculate Owner’s Equity – Use the balance sheet
equation (Assets - Liabilities = Owner’s Equity)5. Put it all Together – Using all the information from
steps 1-4 create the sheet
Mark’s Repair ShopBalance Sheet
September 30, 20__Assets LiabilitiesCash $6 500 Accounts Payable $ 7 350AccountsReceivable 8 100 Bank Loan 11 050Supplies 500 Mortgage Payable 110
000Parts Inventory 4 000 Total Liabilities 128 400Equipment 25 500Building and Land 175 000 Owner’s Equity
Mark Bianchet, Equity 91 200 Total Liabilities and
Total Assets $ 219 600 Owner’s Equity $ 219 600
Step 1Statement Headings
Step 2List Assets Step 3
List Liabilities
Step 4Calculate Owner’s Equity
Step 5Put It All Together
IMPORTANT!!!!■ Never use abbreviations■ Never have corrections or changes
appear on final version■ Always take care to line up figures and
dollar signs■ Always underline totaling a column and
double underline a final total■ Remember this is a formal document
Balance Sheet Report Form Method■ Computer programs easily
complete the balance sheet using an up-and-down column format rather than a side-by-side format.