Intro to Fundamentals of Accounting (BAF 3M) What is Accounting? “Accounting is the language of business.” Art Lightstone 1

Accounting is also a system that… Identifies Records & Communicates Information that is… Relevant Reliable Comparable & Consistent To help users make better decisions Accounting is used by both Service businesses (e.g., UPS) and Merchandising businesses (e.g., Walmart).

Five Functions of Accounting Intro to Fundamentals of Accounting (BAF 3M) Five Functions of Accounting Gathering financial information. The business collects financial information about its activities. 3

Five Functions of Accounting Intro to Fundamentals of Accounting (BAF 3M) Five Functions of Accounting Preparing and collecting permanent records. Evidence of purchases, payments, payrolls, etc. 4

Five Functions of Accounting Intro to Fundamentals of Accounting (BAF 3M) Five Functions of Accounting Rearranging, summarizing and classifying financial information. With the goal of making information more user-friendly. 5

Five Functions of Accounting Intro to Fundamentals of Accounting (BAF 3M) Five Functions of Accounting Preparing information reports and summaries. Includes reports to managers, owners, banks and government. 6

Five Functions of Accounting Intro to Fundamentals of Accounting (BAF 3M) Five Functions of Accounting Establishing controls to promote accuracy and honesty among employees. Facilitates monitoring of employees and aims to ensure accurate financial data. 7

Users of Accounting Information Intro to Fundamentals of Accounting (BAF 3M) Users of Accounting Information Owners Managers Lenders Government Suppliers (creditors) Labour Unions Potential Investors 8

Intro to Fundamentals of Accounting (BAF 3M) Owners The owner has invested their own money in the business. They want to ensure that the business is running well and making a profit. Questions they may want answered... Is the business earning enough profit? Do we have enough money to expand? Do we have enough money to meet our own needs? Are the managers doing a good job of running the business? 9

Intro to Fundamentals of Accounting (BAF 3M) Managers The job of the manager is to ensure the business is operating efficiently and making money. A manager may ask... Is the business earning enough profit? Are results improving over previous years? Do any specific areas of operation raise concerns? What steps can I take to enhance the performance of the business? 10

Intro to Fundamentals of Accounting (BAF 3M) Lenders (e.g., banks) Business has an obligation to pay back the lender over a given time period. Lenders look at financial information to answer... Should we lend money to this business? Will they make enough to pay it back? How much do they owe to others? Will they be able to pay the interest on time? 11

Intro to Fundamentals of Accounting (BAF 3M) Government Governments use financial information to assess how much a company should pay in taxes or if they should provide funding to business for special projects. The government wants to know... How much tax should the business pay? Would the business help the economy if they were given a grant? Would they use any grant money wisely (e.g., to expand and hire more people)? 12

Suppliers (aka Creditors) Intro to Fundamentals of Accounting (BAF 3M) Suppliers (aka Creditors) Suppliers provide goods and services that are used to make products and run the business. Often a company will buy on credit – paying the supplier after 30 or 60 days. Suppliers will want to know... Will the company have enough money to pay their bills? How long will it take the company to pay us back? 13

Intro to Fundamentals of Accounting (BAF 3M) Labour Unions Labour unions negotiate on behalf of their members (employees of the business) for better benefits and pay. Unions want to know... Can the business afford to pay the employees more money? Is the company offering the employees enough job security? 14

Intro to Fundamentals of Accounting (BAF 3M) Potential Investors A potential investor examines companies, deciding which ones to invest in. Investors are seeking a high return on their investment and want to make sure that they place their money in a company that is performing well. Potential investors may ask... Should I invest my money in this business? Which company will give me the highest return on my investment? Should I buy shares (stock) in this company? 15

There are 7 steps in the Accounting Cycle. Business Transactions Journalizing (to the General Journal) Posting (to the General Ledger) Worksheet (including the Trial Balance & Adjusting Entries) Financial Statements (including the Income Statement & Balance Sheet) Closing Entries Post-Closing Trial Balance

The Accounting Cycle