chapter 8 bbi1o1. opening activity what do you own? what do you owe? what i own – what i owe =...
TRANSCRIPT
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WHAT IS ACCOUNTING?
Chapter 8
BBI1O1
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Opening Activity
What do you OWN?
What do you OWE?
What I OWN – What I OWE = Personal Net Worth
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Financial Position of an Individual or Company
Cash equipment Furniture Automobile Building
Credit card debt Suppliers Bank loan Mortgage
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Accounting
Process of recording, analyzing, and interpreting the economic activities of a business
A record of all the MONEY coming IN and OUT
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Examples of Money Flow
Payment received by customers (debtors) Pays for services Pays for merchandise (goods)
Payments made by business to other businesses (creditors)
TRANSACTIONS business activity involving money
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Accounting
Accounting records follow strict rules called Generally Accepted Accounting Principles (GAAP)
Using GAAP presents financial information in a standard format in order to compare financial information
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The Importance of Accounting
Accountability (employees accountable; receipts, invoices, etc.)
Budgeting (forecasting) Taxation (paying taxes on profit/earnings; capital
gains)
Prepare financial statements Reports summarize business’ economic
health to interested parties (stakeholders) Prepare annual reports
Summary of years activity about company achieved goals, new product launches, sales, expansions, etc.
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Two Types of Accounting:
Financial accounting Recording company’s financial position Financial position: financial status of a
business with its owners and creditors Management accounting
Used within a company to make decisions
Ex. How much to charge for products?or Should the business expand?
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Accounting Equation Example
A company has the following:
Assets:
• Cash $50,000• Building $100,000• Land $400,000• Supplies $10,000• Inventory $200,000
Liabilities:
• Accounts Payable $75,000• Bank Loan $350,000• Mortgage $150,000
What is the company’s Owner’s Equity?
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Accounting Equation Example
Remember the Accounting Equation formula:
A = L + O.E.
Assets: $50,000 + $100,000 + $400,000 + $10,000 + $200,000
=Liabilities: $75,000 + $350,000 + $150,000+Owner’s Equity
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Accounting Equation Example
A = L + O.E.
Assets: $760,000 = Liabilities: $575,000 + Owner’s Equity
$760,000 = $575,000 + O.E.
$760,000 - $575,000 = O.E.
$185,000 = O.E.
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Accounting Equation Example
Therefore, the company has $185,000 in Owner’s Equity.
This number represents the value of assets that the owner has a claim to.