1. Accounting

2. What is Accounting? The system used by an organization to keep a record of all of the money that comes in and goes out of the business The system used by an organization to keep a record of all of the money that comes in and goes out of the business

3. Why are records important? Records are important because they show the financial success of the company and are a good reference for future decisions Records are important because they show the financial success of the company and are a good reference for future decisions

4. Generally Accepted Accounting Principles GAAP Accounting records are kept according to strict principles and rules. This allows for uniformity so that businesses can be compared and it makes the information more accessible to most people Accounting records are kept according to strict principles and rules. This allows for uniformity so that businesses can be compared and it makes the information more accessible to most people

5. The Financial Statement Accounting records are published in the form of financial statements which are formal documents that use a standard format to provide key information about a company’s financial position. Accounting records are published in the form of financial statements which are formal documents that use a standard format to provide key information about a company’s financial position.

6. GAAPs Business Entity concept: the finances of a business are kept separate from the personal ones of the owner Business Entity concept: the finances of a business are kept separate from the personal ones of the owner Time Period Concept: use time periods of equal and appropriate length to measure the health of the business – usually financial statements show the whole business year Time Period Concept: use time periods of equal and appropriate length to measure the health of the business – usually financial statements show the whole business year

7. GAAPs Cost Principle: the actual cost of a business purchase is recorded as the cost in the books Cost Principle: the actual cost of a business purchase is recorded as the cost in the books Consistency Principle: Accountants must apply the same rules, methods, and procedures from one financial period to the next Consistency Principle: Accountants must apply the same rules, methods, and procedures from one financial period to the next

8. Financial Statements The purpose of financial statements is to provide accurate information on a regular basis, according GAAPs The purpose of financial statements is to provide accurate information on a regular basis, according GAAPs Statements may be produced for different time lengths. For example: daily, weekly, monthly, quarterly, yearly Statements may be produced for different time lengths. For example: daily, weekly, monthly, quarterly, yearly

9. Fiscal Year A period of 12 consecutive months, at the end of which the business produces its annual financial statements A period of 12 consecutive months, at the end of which the business produces its annual financial statements This does not have to follow the calendar year This does not have to follow the calendar year For example, Redeemer uses the school year as its’ ‘fiscal’ year For example, Redeemer uses the school year as its’ ‘fiscal’ year

10. Why a financial statement Businesses (sole proprietorships, partnerships, and companies) are required by law to produce financial statements to verify income for income tax purposes Businesses (sole proprietorships, partnerships, and companies) are required by law to produce financial statements to verify income for income tax purposes They are used by business owners and managers, investors, lenders, and government They are used by business owners and managers, investors, lenders, and government Also, if a business is trying to borrow money, the bank will always ask for a recent financial statement Also, if a business is trying to borrow money, the bank will always ask for a recent financial statement

11. Personal Balance Sheet A balance sheet is a statement of net worth A balance sheet is a statement of net worth Net worth is the difference between what you own (assets) and what you (liabilities) Net worth is the difference between what you own (assets) and what you (liabilities) Net Worth = Assets-Liabilities or Net Worth = Assets-Liabilities or Assets = Liabilities + Net Worth Assets = Liabilities + Net Worth This is called the FUNDAMENTAL ACCOUNTING EQUATION

12. FUNDAMENTAL ACCOUNTING EQUATION The two sides of must balance The two sides of must balance Have a look at page 219 – Have a look at page 219 – Homework: Homework: Page 219 #1-4 Page 219 #1-4