The Purpose of Accounting to provide financial information for decision making. Every accounting system must: Record the day-to-day financial activities of the business Summarize and report information in financial statements for analysis and decision making.
Unit 1: Financial Position Total value of Items owned Total owed to Creditors Personal Net worth - = Creditors – are people or businesses that extended credit when goods and services were purchased or who loaned money used to purchase possessions. Personal Net Worth – is the difference between the cost of items owned and the debts owed. Purpose: helps determine whether you should grant a loan or not
Calculating Financial Position Items owned by Lara ChariDebts owed to creditors by Lara Chari Cash Government Bonds Clothing Furniture Equipment Automobile $ 4 000 5 000 3 000 15 000 10 000 20 000 $57 000 Credit Card Debt Bank Loan $ 2 000 10 000 $12 000 Total value of Items owned Total owed to Creditors Personal Net worth - = $57 000 $12 000 $45 000 - =
Accounting Terminology Assets: are items of value owned by a business or person Liabilities: are the debts of a business or a person. 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)
Assets items of value owned by a person or business Something a person or business owns. Categories: 1.Cash - currency, cheques, money orders, bank deposits. 2.Accounts Receivable - total amount due from customers. 3.Government Bonds 4.Furniture 5.Office Equipment 6.Automobiles - cars, trucks 7.Land 8.Buildings
How does a business acquire these assets? 1.Borrowing 2.Investment by the owner(s) Creditor - a person/business to whom money or goods is owed. Debtor - a person/business who owes money or goods.
Borrowing = Debt = Liabilities Liabilities - the debts of a business or person. - something a business or person owes. Categories: 1.Loans 2.Accounts Payable - amounts owing to creditors for purchases of goods and services. 3.Mortgage - a long-term debt where the building or land is used as collateral for the debt.
Investment by the owner(s) = Owner ’ s Equity Owner’s Equity - claim of the owner against the asset of the business. 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. Personal Equity (Net Worth) - the difference between the cost of items owned and debts owed.
Questions 1-4 Page (12-13) Apply your knowledge
Balance 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 Equity = + A L OE = + Example: $57 000 $12 000 $45 000 = + $57 000 =
Balance Sheet – Template in Workbook See Figure 1.1 – Page 4 – Personal balance sheet
Business 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.
Company 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 side See Figure 1.2 A L OE = +
More Accounting Terminology Accounts Receivable: refers to the total amount due from debtors. (customers) Accounts payable: refers to the total amount owed to creditors for the purchase of goods and services by the business Mortgage Payable: time to repay is longer (typically larger in amount) “ASSET” “Liability ”
Balance Sheet Preparation Step 1: Prepare Statement Heading – Who, What, When? Step 2: List Assets Step 3: List Liabilities Step 4: Show Owner’s Equity - See Diagrams on Pages 7-8.
Facts to Remember 1) 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.
Order of Items on Balance Sheet Assets (two types) Liabilities – are 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 liquidity 2) Last a long time - listed in order of their useful life to the business, with the longest lasting listed first. See Examples Page 10
Cost Principle when 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)
Accounting Information is Used to Make Decisions: Accounting Information Creditors Government Investors Management Owners
Common 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 Totals 4) Opposite of #1 5) No Abbreviations. (unless in official name) 6) Accounting records must be neat & legible!
GAAP – Generally Accepted Accounting Principles 1)The Purpose of Accounting 2)The Business Entity Concept 3)The Cost Principle 4)Liquidity Order 5)Maturity Date Rule (standard accounting rules and guidelines) (details given for each one on page 20 in your textbook)