Presentation on theme: "Basic Accounting Concepts"— Presentation transcript:
1 Basic Accounting Concepts Businesses engage in activities that concentrate on financial worth, such as money, spending, expenses, mergers, and costs.What Accountants DoAccountants make meaningful and effective decisions based on up to date and accurate records of a company.Accounting is the process of recording, analyzing, and interpreting the financial or economic activities of a business.WHAT ACCOUNTANTS DOBusinesses can conduct hundreds—even thousands of transactions daily.Transactions include paying staff; paying bills, such as heat and electricity; and buying and storing inventory.Most businesses use accounting software packages, such as QuickBooks and Simply Accounting, to record and track financial information.
2 Basic Accounting Concepts Financial activities in business are recorded as transactions: recording something of value for something else of value.Bookkeeping is the recording of all transactions for a business in a specific format.Double-Entry BookkeepingThe 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.Double-entry BookkeepingA transaction could result in one increase offset by one decrease, two increases, or two decreases.An example would be if a business pays $80 for labour, it decreases cash while increasing expenses.
3 Basic Accounting Concepts Assetsthings of value that a business or person owns.Liabilitiesdebts or amounts of money that are owed to others by an individual or a business.Personal Equity or Net WorthA person’s assets, after all liabilities are deducted, is known as personal equity or net worth.ACCOUNTING AND INDIVIDUALSPersonal records or transactions can be recorded in a cheque register or on a computer program.An example of a preauthorized payment would be a utility bill deducted on a monthly basis from a chequing account.Always keeping accurate records ensures that individuals do not find themselves with insufficient funds.AssetsWhen you take ownership of something, even if you owe money on it, it becomes yours and it is an asset.LiabilitiesIndividuals and businesses may borrow money from financial or credit companies.Personal Equity or Net WorthSee equation below Owner’s Equity on the next slide.
4 Basic Accounting Concepts Owner’s EquityOwner’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 EquityBalance Sheet EquationsThe balance sheet equation can be expressed in two ways:1. To determine owner’s equity: Assets – Liabilities = Owner’s Equity2. To determine total assets: Assets = Liabilities + Owner’s EquityACCOUNTING AND BUSINESSESA balance sheet is a financial statement that shows the financial position of a business on a specific date.If the information on the balance sheet is correct, the left and right side will be equal.
5 Basic Accounting Concepts Cost Principle and DepreciationThe accounting practice of always recording an asset at the actual amount it costs the business is known as the cost principle. Even when an asset depreciates or loses value over time the asset value on the books remains the same.Mark’s Repair ShopHere 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) ($25 500)building and land ($ )Total Assets = $Mark’s Repair ShopAccounts receivable is the money owed to the business.
6 Basic Accounting Concepts Mark’s Repair ShopHere are Mark’s debts or liabilities.accounts payable ($7350)bank loan for truck ($11 050)mortgage payable (on building) ($ )Total Liabilities = $Equity calculation for Mark’s net worth can be calculated as follows:Assets – Liabilities = Owner’s Equity$ $ = $91 200ACCOUNTING AND INDIVIDUALSAccounts payable is the money that a business owes.Mortgage payable is the debt owed on a building.
7 Preparing Financial Statements Preparing a Balance SheetThe balance sheet shows the financial position on any given day of the business, and provides information about its assets, liabilities, and equity.Balance Sheet Equation MethodThe 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 groupsowner(s) of the business (owner’s equity)individuals or businesses owed money (liabilities)PREPARING FINANCAIL STATEMENTSOutsiders interested in the business could be lenders, government employees, and other business people.See Figure 9.1, “Types of Financial Statements”, on page 281.Preparing a Balance SheetOn any given day the balance sheet should be different, that is why it is like a snapshot.Balance Sheet Equation MethodIf the business did not have any debts the balance sheet equation would be: Assets = Owner’s Equity.
8 Preparing Financial Statements Step 1Statement HeadingsMark’s Repair ShopBalance SheetSeptember 30, 20__Assets LiabilitiesCash $ Accounts PayableAccountsReceivable Bank LoanSupplies Mortgage PayableParts Inventory Total Liabilities $EquipmentBuilding and Land Owner’s EquityMark Bianchet, Equity $ Total Liabilities andTotal Assets $ Owner’s EquityStep 2List AssetsStep 3List Liabilities(steps for preparing a valance sheet for Mark’s Repair Shop)Step 1: Fill in the Statement Heading: three-line header, centred, with who, what and whenStep 2: List the Assets: Assets should be listed in order of liquidity, the ability to convert an asset or investment into cash quickly and easily.Step 3: List the Liabilities: Liabilities are listed in order of maturity date, the date by which they must be repaid. The individuals and business under liabilities are often called creditors (a person or business that is owed money; one who lends money or sells on credit.Step 4: Calculate Owner’s Equity: Use the balance sheet equation Assets – Liabilities = Owner’s Equity to calculate the Mark’s equity in the business.$ $ = $91 200Step 5: Put It All Together: Using Steps 1 through 4, the balance sheet for Mark’s Repair Shop will be as shown.Step 4Calculate Owner’s EquityStep 5Put It All Together
9 Preparing Financial Statements Balance Sheet Report Form MethodComputer programs easily complete the balance sheet using an up-and-down column format rather than a side-by-side format.Preparing an Income StatementThe income statement is a financial statement that shows a business’s profit (or loss) over a stated period of time.The money, or the promise of money, received from the sale of goods or services is called revenue.Expenses are expenditures that help a business generate revenue.Balance Sheet Report Form MethodSee Figure 9.2, “Who Might Need to Review a Balance Sheet?”, on page 285.PREPARTING AN INCOME STATEMENTAn income statement is like a movie that shows what happened over a period of time (week, month, quarter, or year).Examples of expenses include salaries, advertising, maintenance, and utilities.
10 Preparing Financial Statements Income Statements for Service BusinessesStep 1Statement HeadingsMark’s Repair ShopBalance SheetFor the month ending September 30, 20__RevenueRepairs Revenue $Total Revenue $ExpensesSalaries $RentAdvertisingSuppliesUtilitiesInsuranceDelivery ExpenseTotal Expenses $Net Income $Step 2Organize Revenue SectionStep 3Organize Expenses SectionINCOME STATEMENT FOR SERVICE BUSINESSES(steps for preparing an income statement for mark’s Repair Shop for the month of September)Step 1: Fill in the Statement Heading: It answers the questions Who? What? And When?Step 2: Organize the Revenue Section: All sources of revenue should be listed.Step 3: Organize the Expenses Section: Larger expenses tend to go first, with all of September’s expenses listed.Step 4: Calculate Net Income or Net Loss: Using the information from Steps 2 and 3 and the equation for calculating profit (Total Revenue – Total Expenses) $ $6 790 = $3 110When expenses are shown on the income statement they should be matched with the revenue they generate.The matching principle states that accurate profit reporting can be done only if all the costs of dong business in a particular period are matched with the revenue generated during that period.Not following the matching principle might distort figures that business decisions are based on.See Table 9.1, “Matching Principle Example”, on page 289.Step 4Calculate Net Income/Loss
11 Preparing Financial Statements Income Statements for Retail BusinessesBalance sheets for retail businesses are similar to those of service businesses. However, retail businesses need to take the cost of inventory (goods on hand to be sold) into account.Income Statement EquationsIncome statement equation for a service business.Revenue – Expenses = Net IncomeIncome statement equation for a retail business.Revenue – Cost of Goods Sold = Gross Profit Gross Profit – Expenses = Net IncomeIncome Statement for Retail BusinessesInventory is the goods and materials kept on hand by a business.Income Statement EquationsGross profit, or gross margin, is the money left over after deducting the cost of goods sold from the revenue, but before deduction the business expenses that helped generate the revenue.The cost of goods sold is calculated by starting with the opening inventory figure (goods and services purchased in previous months but not yet used), adding the new purchases made during the period, and subtracting the inventory remaining at the end of the time period.
12 Preparing Financial Statements Income Statements and InventoryTracking of inventory is critical. It saves the retail business money and increases customer satisfaction. When a physical count of inventory is taken, it is compared to the on-going count that is usually maintained by computer systems.Beginning Inventory, Jan.1, 20__ $50 000Inventory PurchasedCosts of All Goods for SaleEnding Inventory, Dec. 20__Costs of Goods SoldSales Revenue $Cost of Goods profitGross ProfitGross Profit $65 000ExpensesNet Profit $40 000ACCOUNTING AND INDIVIDUALSA fiscal year, or business year, is any 12-month operating period.The fiscal year often, but not always, corresponds to the calendar year,; it could be January 1 to December 31, or April 1 to March 31.At the beginning of the fiscal year (Jan. 1, 20__) the shoe store had $ in inventory.The shoe store, through the year, buy $ worth of additional inventory.Over the whole year the store has a total of $ in inventory to sell.At the end of the twelve month period an actual physical count is done. There is $ in unsold inventory.Subtract the $ (ending inventory) from the $ (cost of all goods available for sale) and the cost of goods sold in $Remember the cost of goods sold is not the price the customer paid.The store collected $ in sales revenue (from goods sold) during the year.$ (cost of goods sold) is deducted from $ (sales revenue) and the gross profit is $ (this is the amount before deducting the business expenses that helped to generate the revenue).Expenses ($25 000) are deducted from gross profit ($65 000) and it results in net profit ($40 000).Net profit is the amount the storeowner can declare as income for income tax purposes.Operating expenses are deductedfrom the gross profit to determinethe net profit.
13 Basic Accounting Concepts “Capital” is added to identify the owner’s accountOwner’s Equity AccountThe net profit is calculated first then transferred to the balance sheet as part of owner’s equity. Creditors and owners have claims on the assets of the business.Preparing a Statement of Cash FlowCash flow is the movement of cash-in and cash-out of a business. The statement of cash flow is a summary of the cash-in and cash-out transactions of a business that helps to predict the amount of cash it needs to meet obligations.Owner’s EquityC. Donahue, Capital, Jan. 1, 20__ $Add: Net Income $C. Donahue, Capital, Dec. 31, 20__ $Projected Cash Flow StatementMark’s Repair ShopOctober 31, 20__Transaction In (+) Out (-)Investment Income +$Accounts ReceivablesEquipment to be SoldPayroll Not Yet Paid $Loan RepaymentInsurance DueProjected Cash FlowPREPARING A STATEMENT OF CASH FLOWSources of cash moving into a business could include sales, interest on investments, accounts receivable, the sale of capital equipment, new loans, and investments.Sources of expenditures, cash moving out of the business could include rent, payroll, accounts payable, interest payable, and insurance.