Introduction to Accounting

BAF3M

What is Accounting?Class Discussion

Are there any common misconceptions?

What ISN’T Accounting?

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

Why do we have Accounting?

The purpose:To provide financial 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

Class Work / HomeworkRead over pg. 6-10

pg. 13 Exercises 2 – 4, 5(b)

Day 2 Balance SheetTake up pg. 13 Ex 5(b)

pg. 14 Ex 6 + 7 in class

Take up Ex 6 + 7