Accounting

Functions of a Business

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.

■ Accounting o The process of recording, analyzing, and

interpreting the financial or economic activities of a business.

■ 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

■ 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.

■ 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)

■ 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.

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.

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

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.

Assets - Liabilities

= Net Worth

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

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.

Balance Sheet

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

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

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

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

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

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

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

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)

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

Mark’s Repair ShopBalance Sheet

September 30, 20__Assets LiabilitiesCash $6 500 Accounts Payable $ 7 350AccountsReceivable 8 100 Bank Loan 11 050Supplies 500 Mortgage Payable 110

000Parts Inventory 4 000 Total Liabilities 128 400Equipment 25 500Building 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 1Statement Headings

Step 2List Assets Step 3

List Liabilities

Step 4Calculate Owner’s Equity

Step 5Put It All Together

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

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.