1. Accounting Functions of a Business

2. Basic Accounting Concepts ■ Businesses engage in activities that concentrate on financial worth, such as money, spending, expenses, mergers, and costs ■ Accountants make meaningful and effective decisions based on up to date and accurate records of a company.

3. ■Accounting o The process of recording, analyzing, and interpreting the financial or economic activities of a business.

4. ■Two types of accounting: 1) Financial - process of recording and analyzing info, about the finances of an organization; used by many (gov., shareholders, customers, suppliers, etc.) to make decisions about the company. 2) Management - accounting practices used in a co. to make Internal decisions about the company

5. ■ Financial activities in business are recorded as transactions: recording something of value for something else of value(i.e company pays employee $9 for an hour of work) ■ Bookkeeping is the recording of all transactions for a business in a specific format.

6. ■ 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 (i.e. if company pays $10 for labour, it decreases its cash balance while increasing its expenses)

7. ■ Generally Accepted Accounting Principles (GAAPs) - guidelines developed by professional accountants for the way accounting records and financial statements are prepared. Financial records are presented in a standard form.

8. Financial Statements ■ Formal documents that use a standard format to provide the key information about a company's financial position. ■ They provide accurate information on a regular basis; may be each week, month or quarter or fiscal year. ■ All business organizations are required by law to produce financial statements to verify income for income tax purposes.

9. Accurate Financial Statements 1. help a company to remain profitable 2. help a company recover 3. identify and deal with problems 4. provide comparisons from fiscal year to fiscal year Fiscal Year: a period of 12 consecutive months, it does not always run from Jan-Dec

10. Accounting and Individuals ■ Individuals need to keep accurate financial records and to do this they need to know key information ■ Assets are things of value that a business or person owns. ■ Liabilities are debts or amounts of money that are owed to others by an individual or a business. ■ A person’s assets, after all liabilities are deducted, is known as personal equity or net worth.

11. Assets - Liabilities = Net Worth

12. Accounting and Businesses ■ Like individuals, businesses have assets and liabilities. ■ A businesses’ assets and liabilities are used to calculate the net worth—the owner’s equity

13. Balance Sheet ■ A statement of net worth on a certain date—the difference between what you own (assets) and what you owe (liabilities), sometimes called personal or owner’s equity. ■ A snapshot of the financial history of a business at a particular moment in time.

14. Balance Sheet

15. 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 (or net worth) ■ Business is growing if Owner’s Equity increases ■ Owner draws salary from Owner’s Equity

16. 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 *These are called the fundamental accounting equation: the two sides must balance

17. Keys Terms: Balance Sheet ■ Accounts Receivable: An asset—money owed to a business by customers ■ Accounts Payable: A liability—debts the business owes to another business ■ Mortgage Payable: A liability—a mortgage on a building

18. Example: 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 ($175 000) Total Assets = $219 600

19. Mark’s Repair Shop Here are Mark’s debts or liabilities. ■ accounts payable ($7350) ■ bank loan for truck ($11 050) ■ mortgage payable (on building) ($110 000) Total Liabilities = $128 400

20. Mark’s Repair Shop Equity calculation for Mark’s owner’s equity can be calculated as follows: Assets – Liabilities = Owner’s Equity $219 600 - $128 400 = $91 200

21. Preparing Financial Statements Balance Sheets: ■ The balance sheet shows the financial position on any given day of the business, and provides information about its assets, liabilities, and equity. ■ Who might see a balance sheet? Creditors, investors, owners, government

22. 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)

23. Five Steps to Creating a Balance Sheet 1.Fill out the Statement Heading – Who? What? When? 2.List the Assets – list assets according to liquidity (how easy to convert asset into cash) 3.List the liabilities – list liabilities in order by maturity date (the date by which they must be repaid) 4.Calculate Owner’s Equity – Use the balance sheet equation (Assets - Liabilities = Owner’s Equity) 5.Put it all Together – Using all the information from steps 1-4 create the sheet

24. Mark’s Repair Shop Balance Sheet September 30, 20__ Assets Liabilities Cash $6 500 Accounts Payable $ 7 350 Accounts Receivable 8 100 Bank Loan 11 050 Supplies 500 Mortgage Payable 110 000 Parts Inventory 4 000 Total Liabilities 128 400 Equipment 25 500 Building and Land 175 000 Owner’s Equity Mark Bianchet, Equity 91 200 Total Liabilities and Total Assets $ 219 600 Owner’s Equity $ 219 600 Step 1 Statement Headings Step 2 List Assets Step 3 List Liabilities Step 4 Calculate Owner’s Equity Step 5 Put It All Together

25. IMPORTANT!!!! ■ Never use abbreviations ■ Never have corrections or changes appear on final version ■ Always take care to line up figures and dollar signs ■ Always underline totaling a column and double underline a final total ■ Remember this is a formal document

26. 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.