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Basic Accounting Concepts

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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 Do Accountants 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 DO Businesses 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 Bookkeeping The 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 Bookkeeping A 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
Assets things of value that a business or person owns. Liabilities debts or amounts of money that are owed to others by an individual or a business. Personal Equity or Net Worth A person’s assets, after all liabilities are deducted, is known as personal equity or net worth. ACCOUNTING AND INDIVIDUALS Personal 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. Assets When you take ownership of something, even if you owe money on it, it becomes yours and it is an asset. Liabilities Individuals and businesses may borrow money from financial or credit companies. Personal Equity or Net Worth See equation below Owner’s Equity on the next slide.

4 Basic Accounting Concepts
Owner’s Equity Owner’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 Equity Balance Sheet Equations The balance sheet equation can be expressed in two ways: 1. To determine owner’s equity: Assets – Liabilities = Owner’s Equity 2. To determine total assets: Assets = Liabilities + Owner’s Equity ACCOUNTING AND BUSINESSES A 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 Depreciation The 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 Shop Here 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 Shop Accounts receivable is the money owed to the business.

6 Basic Accounting Concepts
Mark’s Repair Shop Here 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 $ $ = $91 200 ACCOUNTING AND INDIVIDUALS Accounts payable is the money that a business owes. Mortgage payable is the debt owed on a building.

7 Preparing Financial Statements
Preparing a Balance Sheet The 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 Method The 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 groups owner(s) of the business (owner’s equity) individuals or businesses owed money (liabilities) PREPARING FINANCAIL STATEMENTS Outsiders 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 Sheet On any given day the balance sheet should be different, that is why it is like a snapshot. Balance Sheet Equation Method If the business did not have any debts the balance sheet equation would be: Assets = Owner’s Equity.

8 Preparing Financial Statements
Step 1 Statement Headings Mark’s Repair Shop Balance Sheet September 30, 20__ Assets Liabilities Cash $ Accounts Payable Accounts Receivable Bank Loan Supplies Mortgage Payable Parts Inventory Total Liabilities $ Equipment Building and Land Owner’s Equity Mark Bianchet, Equity $ Total Liabilities and Total Assets $ Owner’s Equity Step 2 List Assets Step 3 List 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 when Step 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. $ $ = $91 200 Step 5: Put It All Together: Using Steps 1 through 4, the balance sheet for Mark’s Repair Shop will be as shown. Step 4 Calculate Owner’s Equity Step 5 Put It All Together

9 Preparing Financial Statements
Balance Sheet Report Form Method Computer programs easily complete the balance sheet using an up-and-down column format rather than a side-by-side format. Preparing an Income Statement The 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 Method See Figure 9.2, “Who Might Need to Review a Balance Sheet?”, on page 285. PREPARTING AN INCOME STATEMENT An 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 Businesses Step 1 Statement Headings Mark’s Repair Shop Balance Sheet For the month ending September 30, 20__ Revenue Repairs Revenue $ Total Revenue $ Expenses Salaries $ Rent Advertising Supplies Utilities Insurance Delivery Expense Total Expenses $ Net Income $ Step 2 Organize Revenue Section Step 3 Organize Expenses Section INCOME 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 = $3 110 When 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 4 Calculate Net Income/Loss

11 Preparing Financial Statements
Income Statements for Retail Businesses Balance 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 Equations Income statement equation for a service business. Revenue – Expenses = Net Income Income statement equation for a retail business. Revenue – Cost of Goods Sold = Gross Profit Gross Profit – Expenses = Net Income Income Statement for Retail Businesses Inventory is the goods and materials kept on hand by a business. Income Statement Equations Gross 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 Inventory Tracking 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__ $50 000 Inventory Purchased Costs of All Goods for Sale Ending Inventory, Dec. 20__ Costs of Goods Sold Sales Revenue $ Cost of Goods profit Gross Profit Gross Profit $65 000 Expenses Net Profit $40 000 ACCOUNTING AND INDIVIDUALS A 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 deducted from the gross profit to determine the net profit.

13 Basic Accounting Concepts
“Capital” is added to identify the owner’s account Owner’s Equity Account The 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 Flow Cash 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 Equity C. Donahue, Capital, Jan. 1, 20__ $ Add: Net Income $ C. Donahue, Capital, Dec. 31, 20__ $ Projected Cash Flow Statement Mark’s Repair Shop October 31, 20__ Transaction In (+) Out (-) Investment Income +$ Accounts Receivables Equipment to be Sold Payroll Not Yet Paid $ Loan Repayment Insurance Due Projected Cash Flow PREPARING A STATEMENT OF CASH FLOW Sources 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.

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