ACCOUNTING

ACCOUNTING• The system used by an organization

to keep a record of all the money that comes in and goes out of a business.

– This includes payments received from customers, the purchase of a new computer or paying wages to an employee

MYTHS ABOUT ACCOUNTING

• You do not need to be great at math to do well in accounting

• You need to be able to use the basic functions of a calculator and to be able to read and interpret what is happening

RULES OF THE GAME

• Just like any sport or game accountants have a set of rules they must follow

• These standards are called “IFRS” which stands for International Financial International Financial Reporting Standards Reporting Standards

• These are worldwide standards that accountants must follow

2 BASIC PURPOSES OF ACCOUNTING

• To keep track of the financial state of the company

• To use the financial statements to compare financial activities of a company with previous years or with other companies

WHAT IS A FINANCIAL STATEMENT?

• They are formal documents that use a standard format to provide key information about a company’s financial position

• Goal is to provide accurate information on a regular basis about the company’s financial health

Financial StatementsWe will be learning how to create

the two main financial statements:Balance Sheets

ANDIncome

Statements

Fiscal Year12 consecutive months at the end of

which the business produces its annual financial statements. Doesn’t have to follow a calendar year– Example: Feb 1, 2013 – Jan 31, 2014

PERSONAL BALANCE SHEET

• A balance sheet is a statement of net worth– Net worth: is the difference between

what you OWNOWN and what you OWEOWE

• Assets Assets are things you OWNOWN

• Liabilities Liabilities are things you OWEOWE

REALLY IMPORTANT STUFF

THE FUNDAMENTAL ACCOUNTING EQUATION:

ASSETS = LIABILITIES + OWNER’S EQUITY

(A=L+OE)

Bad accounting joke #1: Why are accountants so smooth? Because they use A=L+OE

THE BALANCE SHEET FOR A

BUSINESS

THE BALANCE SHEET

• a snapshot of a business’s financial affairs at a single point in time – It tells a company what it owns and

what it owes as at a specific day

WHAT IS THE DIFFERENCE BETWEEN A PERSONAL & A BUSINESS BALANCE SHEET?

• The difference is that net worth is now called owner’s equity

• Net worth is how much one person is worth in terms of money

• Owner’s equity is how the owner invested when starting the business plus all the profits/losses from previous years

THE FUNDAMENTAL ACCOUNTING EQUATION

(AGAIN…)

ASSETS = LIABILITIES + OWNER’S EQUITY

SOME TYPES OF ASSETS• The purpose of any asset is to earn the

company money

• Accounts Receivable (A/R) – is money for which a company has billed its customers, but has not yet received

(You’ve sold something, just haven’t been paid yet)

SOME TYPES OF LIABILITIES

• The most common liability is ACCOUNTS PAYABLE

• Account Payable – is the money that the business owes to other business that supply it with services/goods

(You’ve bought something, just haven’t paid for it yet)

ORDER OF ACCOUNTS

• Assets: Listed in order of LIQUIDITY, meaning the order in which the assets can be converted into cash. – “Bank” or “Cash” is the most liquid– “A/R” are usually next– Vehicles, Equipment, Land follow

• Liabilities: Listed in the order in which they are normally paid- A/P would be first, then longer loans

(car, bank), then really long term loans like mortgages

ORDER OF ACCOUNTS

Fast Forward Computer Repair ServicesBalance Sheet

as at April 24, 20--AssetsCash $ 7400Account Receivable

16000Supplies 1600Equipment 6000Motor Vehicles 14000

Total Assets $45000

LiabilitiesAccount Payable $ 3100Loan Payable 5100Total liabilities $ 8200

Owner’s EquityAlex, Capital $36800

Total Liabilities& Owner’s Equity

$45000

THE INCOME STATEMENT

THE INCOME STATEMENT

• Reports a company’s revenues and expenses for a fiscal period

• Allows us to answer some questions that were not answered by the balance sheet such as “is this business profitable?”

SOME IMPORTANT TERMSREVENUE: money earned by a variety of sources

For example: sale of goods or services

EXPENSES: is the money a company must spend in order to provide their goods or serviceFor example: rent, employee salaries

Net Income: Revenue – Expenses (when revenue is bigger then expenses..if expenses are bigger it’s called a Net Loss)

Revenue Computer Repair Income $ 40000 Computer Sales 20000Total Revenue

$_60000_______

Expenses Advertising Expense $3000 Bank Charges 500 Maintenance Expense 450 Telephone Expense 50 Total Expenses

__4000______Net Income (Loss)

$___56000_____

Fast Forward Computer Repair ServicesIncome Statement

For the Year ended December 31,20--

WHO USES FINANCIAL

STATEMENTS?• Owners & Managers– Need accurate information to make

decisions for the business– They could ask: Are our expenses

reasonable?, Should we charge more for our product? Etc.

• Investors– Is this business profitable?, do I want to

invest in this business?

• Lenders– Will this company be able to pay me

back the money I loan them?

• Government– Is this company paying me the right

amount of tax?

WHO USES FINANCIAL

STATEMENTS contd.