Introduction to Accounting Professor Eric Carstensen MiraCosta College http://www.miracosta.edu/instruction/accounting/index.html

What is Accounting? Merriam Webster: the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results Dictionary.com: the theory and system of setting up, maintaining, and auditing the books of a firm; art of analyzing the financial position and operating results of a business Investopedia: the systematic and comprehensive recording of financial transactions pertaining to a business, and it also refers to the process of summarizing, analyzing and reporting these transactions BusinessDictionary.com: a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information

Three Important Aspects: Identifying those transactions that impact the business, such as paying rent, earning revenues, borrowing cash and distributing earnings to owners Recording those transactions in appropriate ledgers and creating reports Communicating business information through the financial statements

Accounting - Continued What we will be covering is Financial Accounting, which is primarily concerned with producing the Financial Statements. These four statements are: Income Statement (P&L) Statement of Retained Earnings Balance Sheet Cash Flow Statement How we communicate business information is through these financial statements

What Kinds of Businesses use the Financial Statements? EVERY BUSINESS!

The Three Types of Businesses Service Business = provides services to customers for a fee (i.e., accountants, wedding planners, baby sitters, landscapers, etc.,) Merchandising Business = purchases merchandise to resell to customers (i.e., clothing store, grocery store, restaurant, auto parts store, bookstore, etc.,) Manufacturing Business = purchases raw materials and converts to finished goods (i.e., furniture builder, seamstress, smart phone maker, auto manufacturer, etc.,)

The Three Types of Business Formation Sole Proprietorship = a business owned and generally run by one person Partnership = a business of one or more proprietors Corporation = an entity separate from owners (referred to as shareholders or stockholders); ownership is proportional to investment

What to Expect Throughout These Videos We will be covering Financial Accounting as occurs within the corporate environment. We will be examining, first, service business and will later learn additional accounts for merchandising business. Manufacturing business financial statements are typically covered in a Managerial Accounting course. Our main focus in these initial videos will be the Accounting Cycle.

Why Focus on the Accounting Cycle? The nine steps of the Accounting Cycle are the basis for further study in Accounting courses. In my experience, those students that learn and understand these steps tend to be the most successful with the rest of their Accounting studies.

The Accounting Cycle Step 1: Analyze Transactions Step 2: Prepare Journal Entries Step 3: Post Entries to Ledgers Step 4: Prepare Unadjusted Trial Balance Step 5: Prepare and Post Adjusting Entries Step 6: Prepare Adjusted Trial Balance Step 7: Prepare Financial Statements Step 8: Prepare and Post Closing Entries Step 9: Prepare Post-Closing Trial Balance

The Accounting Equation Before we begin with the nine steps, we must cover one of the most important relationships in Accounting. The Accounting Equation serves as the backbone of what we call “double entry accounting” and for the Balance Sheet. We will employ a spreadsheet approach to help us learn about Analyzing Transactions, the first step in the cycle.

The Accounting Equation – Continued Assets = Liabilities + Owners' Equity An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. A liability is a claim against the assets, or legal obligations of a person or organization, arising out of past or current transactions or actions. Owner's equity represents the owner's investment in the business minus the owner's draws or withdrawals from the business plus the net income since the business began. A few selected examples of each type of account * Cash * Accounts Payable (A/P) * Paid In Capital (Owner * Accounts Receivable (A/R) * Unearned Revenue Investment, Common Stock) * Supplies * Notes Payable * Retained Earnings * Prepaid Insurance * Bank Loans * Equipment