 Accountants are responsible for answering questions surrounding the financial side of business  Accountants make sure records of a business are up to date and accurate  Information accountants keep will be used to make meaningful and effective business decisions in a timely manner  Profits or loss will determine what decisions businesses make

 Accounting is the process of recording, analyzing, and interpreting the economic activities of a business  Any business activity that involves money is a transaction

 A transaction occurs when something of value is exchanged for something else of value  Examples:  A business pays an employee $80 in exchange for 8 hours of work  A customer buys a toner for a computer printer in exchange for $150  A clothing manufacturer sells 100 sweaters to a retail outlet in exchange for $5000  The monetary part of these exchanges can be paid by cash, cheque, or on credit

 Businesses can conduct thousands of transactions a day  Example: Think about the number of sales a grocery store makes on a Saturday  In addition to sales business conduct many other types of monetary exchanges on a regular basis  Examples: Paying staff, paying bills such as heat and electricity, purchasing equipment needed to operate the business, paying taxes, and buying and selling store inventory

 Bookkeeping is recording of all the transactions a business makes  Today, most accounting is done electronically  Computer programs such as QuickBooks and Simply Accounting two popular accounting computer programs

 Most businesses use a double entry bookkeeping system  Double entry bookkeeping is based on the principle that each transaction involves two changes  A transaction could result in one increase offset by one decrease, two increases, or two decreases  Examples:  When a business pays $80 for labour it decreases its cash $80 while increases its expenses $80 (increase, decrease)  When a business borrows $10,000 from the bank it increases its cash $10,000 and increases the amount owing to the bank $10,000 (increase, increase)  If a business pays $500 towards its mortgage it decreases its cash $500 and decreases the amount owing on the mortgage $500 (decrease, decrease)

 People as well as businesses must keep accurate financial records  Many people record personal transactions using a cheque book or a computer program  Many personal transactions today are made with a debit card, credit card, or through a preauthorized payment  A preauthorized payment occurs when you have given prior permission for someone else to automatically take money from your bank account, usually on a regular basis  Example: Your power bill could be preauthorized and therefore the amount owing be deducted by the power company from your chequing account  Increasing the value of an account is done through a deposit which many are done electronically today  Individuals must keep good records of deposits and withdrawals to make sure you do not write cheques on an account that does not have insufficient funds to cover the cheque

 Individuals will also determine their net worth  Net worth is the value of everything you own after everything you owe, known as debts, are paid  Own – Owe = Net Worth

 An asset is something of value that is owned by a person or business  An asset is a resource controlled by an individual as a result of past events and from which future economic benefits are expected to flow  If you own a bicycle it is considered an asset, even if it was given to you  Even if you owe money on a bicycle you purchased it is still considered an asset

 Examples of business assets:  Cash the business has in the bank  Money owed to a business by customers – known as accounts receivable  Supplies on hand needed to operate the business such as pens and paper  Equipment, such as a computer, and vehicles needed to operate the business  Buildings and Land  Merchandise inventory

 Sometimes you have to borrow money to acquire assets  When you purchase assets of higher value, such as a car, you may have to borrow money from the bank to do so  The result of borrowing money on credit is known as debt  Liabilities are debts or amounts that are owed to others

 If you purchased a stereo for $150, giving $50 as a down payment, you have a debt, or liability, of $100  Remember though, the stereo is still your asset valued at $150, even though you have not fully paid for it yet  As the stereo gets old, it will lose some of its value, but that does not mean it is not useful to you

 Liabilities of a business can include:  Debts owed to another business – known as Accounts Payable  Money borrowed from the bank  Mortgage on the building you business operates in – known as Mortgage Payable

 If you can put a dollar figure on what you own and if you know how much money you owe you can calculate your personal equity  Personal equity or net worth is what you would have left if you paid all your debts

 You can calculate a person’s or business’ net worth using this formula  Assets – Liabilities = Net Worth  Sonia calculated her total assets at $1400 and her debts at $300  $ $300 = $1100  Sonia’s net worth is $1100

 Like people, businesses also have assets and liabilities  Accounts use this information to calculate the net worth of the business – the owner’s equity

 There are many types of business ownerships with either one owner (sole proprietorships) or potentially several owners (partnerships, corporations, cooperatives, and franchises)  Owner’s equity is the net worth of the business

 Owner’s equity is calculated the same way as it is for an individual  Assets – Liabilities = Owner’s Equity  Because shareholders own corporations, owners equity is referred to as shareholder’s equity

 Accountants using these terms form what is known as the balance sheet equation  This equation can be expressed in two ways depending on what part of the equation is unknown

 To determine the owner’s equity use:  Assets – Liabilities = Owner’s Equity  To determine the total assets use:  Assets = Liabilities + Owner’s Equity

 A balance sheet is one of the financial statements used in business and is used by accountants to show the financial position of that business on a particular date  Assets = Liabilities + Owner’s Equity is the formula used to set up a balance sheet  If the information on the balance sheet is correct the left side and the right side will balance, that is, be equal in value

 Mark’s Repair Shop has the following assets and liabilities: Assets – Liabilities = Owner’s Equity $219,000 - $128,400 = $91,200 AssetsValueLiabilitiesValue Cash$6500Accounts Payable$7350 Accounts Receivable$8100Bank Loan$11,050 Supplies$500Mortgage Payable$110,000 Parts Inventory$4000 Equipment and Truck$25,500 Building and Land$175,000 Total Assets$219,000Total Liabilities$128,400

 Assets will increase and decrease in value over time but balance sheets are not set up for this  The cost principle is where the value of assets are always recorded as the actual amount they originally cost the business regardless if the owner believes the assets have increased or decreased in value  An asset can be sold for more than the value it was purchased for  Depreciation is where an asset loses value over time, but the original value will remain “in the books”