introduction to accounting

INTRODUCTION TO ACCOUNTING

Miss Savige

OVERVIEW Any thing in RED write down in your books

please

LEARNING INTENTIONS General understanding of accounting and

the language of business Knowledge and understanding of the five

types of account classification. Asset Liability Income Expenses Equity

ACCOUNTING CONCEPTS What do you think accounting is?

Bank statementsProfitTaxBusinessFinancial statements Management Partnership

The process or work of keeping financial accounts

COMMON PHRASES

The language of business. A means to communicate financial

information. A way to convey information about a

business to users.

OTHER DEFINITIONS

The production of information about an enterprise and the transmission of that information from people who have it to those who need It. – (Intermediate

Accounting, 2nd edition) The information system that measures

business activity, process the data into reports and communicates the results to decision makers. – (accounting 6th edition)

WHO USES ACCOUNTING?

Individuals Businesses (managers, owners) Investors Creditors Governments Tax authorities Non-profit organisations Others….

HOW THEY USE ACCOUNTING

Individuals manage bank accounts Evaluate jobs Decide whether they can afford something (e.g. a

car

Businesses Set goals Budgeting

Investors Whether to invest or not How much they will get in return if they invest

Creditors (e.g. Banks) If a company can make the loan repayments Report on predicted income

HOW THEY USE ACCOUNTING

Governments For making decisions regarding welfare

Tax authorities Tax is calculated using accounting information How much business have purchased and sold

Non-profit organisations The same way business do

Others. (employees, unions, etc.) Estimate wages Decipher business profit Influence potential decisions

REFLECTION write down two examples of who uses

accounting write an example of how you used

accounting within this month People who use accounting to manage

bank accounts are ________? Budgeting for products is used by

________ ? Why?

ACCOUNT CLASSIFICATION Accounting is based on 5 basic account

types Asset Liability Owners Equity Income/revenue Expenses

WHAT IS AN ASSET? An asset is a resource that a business/

person/ government owns and is expected to benefit them in the future.

something that is of a benefit

Examples?

WHAT IS AN ASSET Cash at bank Accounts receivable (paid by credit) Bills receivable (paid by certain date) Inventories (stock) Prepaid expenses Land buildings

DIFFERENT TYPES OF ASSETS Current assets

Assets that can be converted into cash or sold within the next 12 months

Land Property

Non-current assets Assets that are not current assets.

Equipment that is needed for the company to run

WHAT IS A LIABILITY

Economic obligations (debts) payable to an individual or an organisation outside the business

A responsibility or an obligation of arising from past transactions or events.

Examples?

WHAT IS A LIABILITY Accounts payable (opposite of accounts

receivable) Bills payable (opposite of bills

receivable) Accrued liabilities (sometimes called

accrued expense) Interest, salary

LEARNING INTENTION Demonstrate knowledge and understanding

of assets, liabilities, owners equity and the accounting equation.

Reminder Any thing in RED write down in your books

please

LIABILITY ASSETAccounts payable

Something that the company has paid for by credit and not cash

Bills payable

Unpaid bills

Accounts receivable A sale that was paid for

by credit and the company is yet to receive the payment e.g. cash

Bills receivable An invoice has been

sent out and a company is waiting for the payment

ACCRUED LIABILITY Accrued – to accumulate

- (benefit or sum of money) - received by someone in regular or increasing amounts

Accrued Liability is an expense that has been acquired but not yet paid in cash. (has not been paid therefore it is owed)

Wages – an employee has done the work but you haven't paid them yet.

Interest – the interest is continually rising but the company does not pay it until the end of the month

WHAT IS OWNERS EQUITY What the business is worth Owners equity is the difference between

the assets and the liabilities of a business and equals the amount of the owners investment in the business

What an owner invests in the company Owners equity = Assets – Liabilities

Examples?

WHAT IS OWNERS EQUITY Capital – What an owner invest in a

company (money, land, buildings) Drawings – what an owner removes

from the company Revenues (income) Expenses

Covered further down

WHICH IS WHICH? Classify each of the following as assets,

liabilities or Owners equityAccounts payableLoan from bankOwners interest in the businessFurnitureMoney owed by JackCash at bankStock / inventory Rent – that you have to paySalaries

EQUATIONS Assets = Liabilities + owners equity

A = L + OE The accounting equation

Owners equity = Assets – Liabilities OE = A – L

Liabilities = Assets - Owners equity L = A - OE

OWNERS EQUITY = ASSETS - LIABILITIES

OE = A - L John Smith the owner of the tuckshop wants

to know his investment in the business. Use the above equation to work out the total value.Cash at bank $ 500Loan from PNC comity $ 200Accounts payable $ 50Accounts Receivable $ 70Value of stock $ 80Value of fridge $ 200

AssetsCash at bank $ 500Accounts Receivable +$

70Value of stock +$

80Value of fridge +$

200=$

850

Loan from PNC comity $ 200Accounts payable +$ 50

=$ 250

Answer $ 600

ASSETS = LIABILITIES +OWNERS EQUITY

A = L + OE John Smith the owner of the tuckshop wants

to know the value of the assets. Use the accounting equation to work out the total value.Amount owed to jack $100Cost of bread $ 20Loan from PNC $300Amount owing by Ms Schmidt $ 10New fridge monthly repayment $ 50 John smiths Investment $ 500

LEARNING INTENTION Demonstrate knowledge and understanding

of income/revenue and expenses as well as how assets, liabilities and owners equity, work in the accounting equation.

Reminder Any thing in RED write down in your books

please

UNDERSTANDING THE ACCOUNTING EQUATION Total assets must always equal total

liabilities plus owners equity

1. If the owner puts $20,000 in a business where does that money go (what account does it go into)?

2. If the business buys furniture on credit what type of account is being used?

(WRITE DOWN WHAT YOU THINK THE ANSWERS ARE)

1. The money goes into cash at bank Equal reaction on the other side

2. Created a liability but also gained an asset Created liability through buying something on

credit Gained an asset through obtaining furniture

A = L + OE John Smith the owner of the tuckshop wants

to know the value of the assets. Use the accounting equation to work out the missing asset value.Amount owed to jack $100Cost of bread $ 20Loan from PNC $300Amount owing by Ms Schmidt $ 10New fridge monthly repayment $ 50 John smiths Investment $ 500

WHAT IS INCOME/REVENUE The total amount of all revenues and

other gains received in an accounting period.

Can enhance an asset can decrease a liability

(does not include money put in by the owner)

Increase the economic benefit

Examples?

LEARNING INTENTION Demonstrate knowledge and understanding

of income/revenue and expenses as well as how assets, liabilities and owners equity, work in the accounting equation.

Reminder Any thing in RED write down in your books

please

WHAT ARE EXPENSES The result of decreasing asset or

increasing liabilities is called an expense. An expense occurs from the cost of delivering services to clients.

Decreases economic benefit Does not include distributions of equity

participants

TYPES OF EXPENSES Office rent Salaries for

employees Advertising Water, electricity

gas insurance Supplies (used) Cash expenses Depreciation

}ONLY BECOME EXPENSES

WHEN PAID

WHAT IS DEPRECIATION The devaluing of something

E.g. Apple Iphone 3 cheaper now because over time more advance products have came out

E.g. Wear an tear, a brand new car as soon as it is use is worth less than it was originally

The result of decreasing an asset or increasing liabilities is called an expense. An expense occurs from the cost of delivering services to clients.

SUMMARY The Basic Accounting Elements:Asset

Something a business owns or controls that is of benefit.

Liability Obligation to settle debts in the future

Owners’ Equity Owners’ interest in the company

Revenue/Income Operations of the company that increase

assets and economic resources

Expense Decrease in economic resources and assets.

ACTIVITY TOGETHER If John Smith has the following assets

and liabilities what is the owners equityCash at Bank $

1,000Loan from bank $

4,000Accounts payable $ 500Accounts receivable $

8,000 Inventories $ 2,000Furniture $

3,500

ANSWER Assets - Liabilities = Owners

equity

Cash at bank Loan from bank$1,000 $4,000

Accounts receivable Accounts payable$8,000 $ 500

Inventories $2,000

Furniture$3,500

Total

$14,500 - $4,500 =$10,000

ACTIVITY 1 (LEFT SIDE DO)

John Smith gives you the following list of items. Use the accounting equation to determine the total value of assets Money owing to Tim $

1,000 Value of stock $ 8,000 Loan from bank $ 1,000 Amount owing from Jack $ 1,000

New Equipment $ 3,000 Vehicle's value $15,000 John Smiths investment

$25,000

Accounts payable ?

Accounts receivable ?

Prepaid rent ?

Company Car ?

Paid for food ?

Received money for services ?

Owner took money out ?

Paid employees Income ?

Tax owing ?

Drawings ?

Cash at bank ?

Paid for new stock ?

Capital ?

Interest earned ?

ACTIVITY 2 (RIGHT SIDE DO)

E

L

R/I

A

OEConsider using excel

ACTIVITY 1 (RIGHT SIDE DO)

John Smith gives you the following list of items. Use the accounting equation to determine the total value of assets Money owing to Tim $

1,000 Value of stock $ 8,000 Loan from bank $ 1,000 Amount owing from Jack $ 1,000

New Equipment $ 3,000 Vehicle's value $15,000 John Smiths investment

$25,000

Accounts payable ?

Accounts receivable ?

Prepaid rent ?

Company Car ?

Paid for food ?

Received money for services ?

Owner took money out ?

Paid employees Income ?

Tax owing ?

Drawings ?

Cash at bank ?

Paid for new stock ?

Capital ?

Interest earned ?

ACTIVITY 2 (LEFT SIDE DO)

E

L

R/I

A

OE

NOW DO THE OTHER ACTIVITY

L

ACTIVITY 1 ANSWER Assets = $ .

ACTIVITY 2 ANSWER

?

?

?

?

?

?

?

?

?

?

?

?

?

?

ACTIVITY 1 ANSWER Assets = $27,000 .

ACTIVITY 2 ANSWER

L

A

A

A

E

R/I

OE

E

L

OE

A

E

OE

R/I

GAME TIME Fill in the blank Capital is what an owner . . in a company. Drawings is what an owner . . from the company

L

Accounting is . . (please circle)Income/revenue Increases the T F

economic benefitExpenses Increases the economic benefit T F Owners equity is the difference between the .

. and the . . of a business and equals the amount of the . . Investment in the business

Two examples of an Asset. 1 .

2 . Two examples of a Liability. 1 .

2 . Two examples of Owners equity. 1 .

2 . Two examples of an Expense 1 .

2 . Two examples of Income/revenue 1 .

2 . What is the Accounting equation? . . Fill in the Blank. An asset is something a business . . or

controls that is of . . (please circle) Is budgeting in accounting? T F Accounts are the only people who use accounting T F Non Current assets are sold within 12 months. T F I owe John Smith money, that is an asset T F Accounts payable is the opposite of accounts receivable T F Owners equity = Assets + Liabilities T F Liabilities = Assets - Owners equity T F Total assets must always equal total liabilities plus T F

owners equity

LEARNING INTENTION Demonstrate knowledge and understanding

of revenue and expenses as well as how assets, liabilities and owners equity, work in the accounting equation.

Demonstrate knowledge and understanding of who uses accounting

Reminder Any thing in RED write down in your books

please

WHO USES ACCOUNTING

Individuals

Businesses

Investors

Creditors

Governments

Tax authorities

Non-profit

organisations

Others. (employees,

unions, etc.)

manage bank accounts Evaluate jobs Decide whether they can afford

something (e.g. a car) Set goals Budgeting Whether to invest or not How much they will get in return if

they invest If a company can make the loan

repayments Report on predicted income For making decisions regarding

welfare Tax is calculated using accounting

information How much business have purchased

and sold The same way business do Estimate wages Decipher business profit Influences for potential decisions

Game time

Assets owners equity liabilities

ACTIVITY Show three ways the accounting

equation can be expressed (write them down)

A = L + OE

OE = A – L

L = A - OE

HOW TO WORK OUT A PROBLEM1. Write out the appropriate equation2. Decipher which classification it is

asking for3. List values under the equation4. Work out totals5. Work out missing value

ACTIVITY TOGETHER If John Smith has the following assets

and liabilities what is the owners equityCash at Bank $

2,000Bank Loan $ 3,500Accounts payable $ 600Accounts receivable $

7,100 Inventories $ 3,000Furniture $

1,700Land $ 8,000 Interest Payable $

200

ANSWER - $ 4,500Owners Equity = Assets - Liabilities

Cash at Bank Bank Loan $ 2,000 $ 3,500

Accounts receivable Accounts payable $ 600 $ 7,100Inventories Interest Payable $ 3,000 $ 200Furniture $ 1,700 Land $ 8,000

Totals $15, 300 - $10,800= $ 4500

ACTIVITY 1 John Smith gives you the

following list of items. Use the accounting equation to determine the total value of assets Money owing to Tim $

2,000 Value of stock $ 8,000 Loan from bank $ 1,500 Amount owing from Jack $ 3,500

New Equipment value $ 4,500

Vehicle's value $14,500 John Smiths investment

$29,000

Company Car ?

Accounts receivable ?

Accounts payable ?

Owner took money out ?

Cash at bank ?

Received money for services ?

Interest earned ?

Paid employees Income ?

Tax owing ?

Drawings ?

Prepaid rent ?

Paid for new stock ?

Paid for food ?

Capital ?

ACTIVITY 2

E

L

R/I

A

OE

YOUR TURN!

L

ACTIVITY 1 ANSWER Assets = $ .

ACTIVITY 2 ANSWER Company Car ?

Accounts receivable ?

Accounts payable ?

Owner took money out ?

Cash at bank ?

Received money for services ?

Interest earned ?

Paid employees Income ?

Tax owing ?

Drawings ?

Prepaid rent ?

Paid for new stock ?

Paid for food ?

Capital ?

ACTIVITY 1 ANSWER Assets = $ 32,500 .

ACTIVITY 2 ANSWER Company Car A

Accounts receivable A

Accounts payable L

Owner took money out OE

Cash at bank A

Received money for services R/I

Interest earned R/I

Paid employees Income E

Tax owing L

Drawings OE

Prepaid rent A

Paid for new stock E

Paid for food E

Capital OE

SCENARIO ACTIVITY John Smith invest $20,000 into the business, Cupcake

World as capital. Cupcake World also takes out a loan from the bank for $20,000. With the $40,000 the business buys $10,000 worth of inventories, $5,000 of furniture, a $15,000 motor vehicle and leaves the remaining money in the bank.

Make to following table in excel Fill out the values Work out totals

We are using excel to solve this problem!

SCENARIO ACTIVITY ANSWER

GAME TIME Fill in the blank Capital is what an owner . . in a company. Drawings is what an owner . . from the company

L

(please circle)Income/revenue Increases the economic benefit T F

Expenses Increases the economic benefit T F

Accounts are the only people who use accounting T F Owners equity is the difference between the . . and the . . of a business and equals the amount of the . . Investment in the business

Three examples of an Asset. 1 .

2 . 3 . Three examples of a Liability. 1 .

2 . 3 . Two examples of Owners equity. 1 .

2 . Three examples of an Expense 1 .

2 . 3 . Three examples of Income/revenue 1 .

2 . 3 . What is the Accounting equation? . . Fill in the Blank. An asset is something a business . . or controls that

is of . . (please circle) Is budgeting in accounting? T F Non Current assets are sold within 12 months. T F I owe John Smith money, that is an asset T F Accounts payable is the opposite of accounts receivable T F Owners equity = Assets + Liabilities T F Liabilities = Assets - Owners equity T F Total assets must always equal total liabilities plus T F

owners equity

LEARNING INTENTION

Knowledge and understanding of debit and credit and how they affect different accounts.

DEBIT AND CREDIT Debit” and “Credit” are just accounting-

terms for “increase” and “decrease”. Both debit and credit can cause an

increase or a decrease Debit is always on the left credit is

always on the right whether its in a bank statement, ledger or balance sheet.

A ledger is A book or other collection of financial accounts of a particular type

DEBIT AND CREDIT Debit card – spending your own money Credit card – spending someone else's

money e.g. Spending the banks money

DEBIT

Debits either increase a debit account or decrease a credit account.

Assets and Expenses are increased by debit

Liabilities, owners equity and revenue are decreased by a debit

For example, a debit entry in a ledger may record an increase in an asset, an expense, or a decrease in a liability.

CREDIT Credits either increase a credit account

or decrease a debit account. Liabilities, owners equity and revenue

are increased by a credit Assets and Expenses are decreased by

credit For example, a credit entry may record

an decrease in an asset, an increase in a liability, or a revenue or profit.

WAYS OF REMEMBERING DEAD – Debits increase Expenses,

Assets and Dividend Dividends are a sum of money paid regularly by

a company to its shareholders out of its profits Dividends are considered an expense as a

company has to pay money to its shareholders

CORAL – Credits increase Owners equity, Revenue And Liabilities

Equity isn't an expense dividends how to explain?

WAYS OF REMEMBERING

DebitAssets expenses

Creditliabilities revenue Owners

equity

To increase an Asset or Expense: Debit To increase a Liability, Revenue, or Owners’

Equity: Credit To decrease an Asset or Expense: Credit To decrease a Liability, Revenue, or Owners’

Equity: Debit