Opening Activity What do you OWN? What do you OWE? What I OWN – What I OWE = Personal Net Worth
Financial Position of an Individual or Company Cash equipment Furniture Automobile Building Credit card debt Suppliers Bank loan Mortgage
Accounting Process of recording, analyzing, and interpreting the economic activities of a business A record of all the MONEY coming IN and OUT
Examples of Money Flow Payment received by customers (debtors) Pays for services Pays for merchandise (goods) Payments made by business to other businesses (creditors) TRANSACTIONS business activity involving money
Accounting Accounting records follow strict rules called Generally Accepted Accounting Principles (GAAP) Using GAAP presents financial information in a standard format in order to compare financial information
The Importance of Accounting Accountability (employees accountable; receipts, invoices, etc.) Budgeting (forecasting) Taxation (paying taxes on profit/earnings; capital gains) Prepare financial statements Reports summarize business economic health to interested parties (stakeholders) Prepare annual reports Summary of years activity about company achieved goals, new product launches, sales, expansions, etc.
Two Types of Accounting: Financial accounting Recording companys financial position Financial position: financial status of a business with its owners and creditors Management accounting Used within a company to make decisions Ex. How much to charge for products?or Should the business expand?
Accounting Equation Example A company has the following: Assets: Cash $50,000 Building $100,000 Land $400,000 Supplies $10,000 Inventory $200,000 Liabilities: Accounts Payable $75,000 Bank Loan $350,000 Mortgage $150,000 What is the companys Owners Equity?
Accounting Equation Example Remember the Accounting Equation formula: A = L + O.E. Assets: $50,000 + $100,000 + $400,000 + $10,000 + $200,000 = Liabilities: $75,000 + $350,000 + $150,000 + Owners Equity
Accounting Equation Example A = L + O.E. Assets: $760,000 = Liabilities: $575,000 + Owners Equity $760,000 = $575,000 + O.E. $760,000 - $575,000 = O.E. $185,000 = O.E.
Accounting Equation Example Therefore, the company has $185,000 in Owners Equity. This number represents the value of assets that the owner has a claim to.