4The Purpose of Accounting to provide financial information for decision making.Every accounting system must:Record the day-to-day financial activities of the businessSummarize and report information in financial statements for analysis and decision making.
5Unit 1: Financial Position Purpose: helps determine whether you should grant a loan or notTotal value of Items owned-Total owed to CreditorsPersonal Net worth=Creditors – are people or businesses that extended credit when goods and services werepurchased or who loaned money used to purchase possessions.Personal Net Worth – is the difference between the cost of items owned and the debtsowed.
6Calculating Financial Position Items owned by Lara ChariDebts owed to creditors by Lara ChariCashGovernment BondsClothingFurnitureEquipmentAutomobile$ 4 0005 0003 00015 00010 00020 000$57 000Credit Card DebtBank Loan$ 2 00010 000$12 000Total value of Items owned-Total owed to CreditorsPersonal Net worth=-$57 000=$12 000$45 000
7Accounting Terminology Assets: are items of value owned by abusiness or personLiabilities: are the debts of a business or aperson.Personal equity: is a person’s net worth.(a positive net worth is good…the greater the value, the more likely you will get a loan)
8Assets items of value owned by a person or business Something a person or business owns.Categories:Cash - currency, cheques, money orders, bank deposits.Accounts Receivable - total amount due from customers.Government BondsFurnitureOffice EquipmentAutomobiles - cars, trucksLandBuildings
9How does a business acquire these assets? BorrowingInvestment by the owner(s)Creditor - a person/business to whom money or goods is owed.Debtor - a person/business who owes money or goods.
10Borrowing = Debt = Liabilities Liabilities - the debts of a business or person.- something a business or person owes.Categories:LoansAccounts Payable - amounts owing to creditors for purchases of goods and services.Mortgage - a long-term debt where the building or land is used as collateral for the debt.
11Investment by the owner(s) = Owner’s Equity Owner’s Equity - claim of the owner against the asset of the business.Personal Equity (Net Worth) - the difference between the cost of items owned and debts owed.
13Balance Sheet Equation - The financial position of a person or a business can be stated in the form of a balance sheet equation: (basis for much of the accounting theory you will learn)Assets=Liabilities+Owner’s EquityA=L+OEExample:$57 000=$12 000+$45 000=$57 000$57 000
14Balance Sheet – Template in Workbook See Figure 1.1 – Page 4 – Personal balance sheet
16Business Entity Principle Requires that each business be considered a separate entity, and that the financial data for the business be kept separate from the owner’s personal financial data.
17Company Balance Sheet = + is a formal report or statement that shows the financial position of the business at a certain date.Left side must equal the Right sideSee Figure 1.2A=L+OE
18More Accounting Terminology Accounts Receivable: refers to the total amount duefrom debtors. (customers)Accounts payable: refers to the total amount owedto creditors for the purchase ofgoods and services by the businessMortgage Payable: time to repay is longer (typicallylarger in amount)“ASSET”“Liability”“Liability”
19Balance Sheet Preparation Step 1: Prepare Statement HeadingWho, What, When?Step 2: List AssetsStep 3: List LiabilitiesStep 4: Show Owner’s Equity- See Diagrams on Pages 7-8.
20Facts to Remember1) Totals of the left and right side must be written on the same line. 2) No abbreviations. 3) No corrections. 4) Dollar sign should be aligned and placed: - beside the first figure in each column - beside the final total on both sides of the statement.
21Order of Items on Balance Sheet See Examples Page 10Order of Items on Balance SheetAssets (two types)Liabilitiesare listed according to the date they are due to be paid, that it, their maturity date.From shortest to longest term.Ex: Accounts Payable (30 days), Bank Loan (1-5 years),Mortgage Payable (within 25 years)1) Last a short time- listed in order of their liquidity2) Last a long time- listed in order of their useful life to the business, with the longest lasting listed first.
22Cost Principlewhen an asset is obtained, its value is recorded at the actual cost to the business.(does not rise…even if it is thought that the value of the asset has increased)
23Accounting Information is Used to Make Decisions: CreditorsGovernmentInvestorsManagementOwnersCreditorsCompanies considering to extend credit – want to know what liquid assets are available to meet payments.Governmentpolicy decision making, statistical reports, taxationInvestorsFinancial position (protect investment)OwnersMonitor financial position
24Common Recording Practices 1) Ruled Accounting Paper – dollar signs, commas, spaces, and decimals are not used.2) Single Line – Addition or Subtraction.3) Double Line – Final Totals4) Opposite of #15) No Abbreviations. (unless in official name)6) Accounting records must be neat & legible!
25GAAP – Generally Accepted Accounting Principles (standard accounting rules and guidelines)The Purpose of AccountingThe Business Entity ConceptThe Cost PrincipleLiquidity OrderMaturity Date Rule(details given for each one on page 20 in your textbook)