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  • 1. Chapter 1An Introductionto BookkeepingPrepared byBrooke C. W. BarkerCopyright © 2010 by Nelson Education Limited
  • 2. Chapter 1: An Introduction to BookkeepingChapter ObjectivesAfter completing this chapter, you will be able to: define the three forms of business organization define the five categories of accounts: assets, liabilities,owner’s equity, revenues, and expenses classify accounts according to the five categories identify the generally accepted accounting principles1-2
  • 3. Chapter 1: An Introduction to BookkeepingWhat is bookkeeping? Keeping track of money-related activities for anindividual or a businessWhat kinds of money-related activities? Cash received Cash paid out Sales Purchases Others activities1-3
  • 4. Personal BookkeepingCheque bookBankbookWebsitePg 3
  • 5. Marvin ReeseCash in(deposits)Cash out(cheques)Pay 672.50672.50RentUtilitiesFoodCarMisc450.00140.00200.00195.00135.00
  • 6. Marvin can save 205 each month.Cash in(deposits)Cash out(cheques)Pay 672.50672.50RentUtilitiesFoodCarMisc450,00140,00200,00195,00135,001345.00 1140.00
  • 7. If he needed a loanThings he owns(cash, or their value incash!)Debts he owesCashCarFurnitureSavingsbond1135.001500.002000.002500.00CreditcardsTailorGarage450.00390.00270.007135.00 1110.00
  • 8. 1-8Chapter 1: An Introduction to Bookkeeping Personal BookkeepingCash receivedCash paid outThings ownedDebts owed Bookkeeping for BusinessCash receivedCash paid outSalesPurchasesThings ownedDebts owed
  • 9. Lance – Cash in, Cash outCash inRevenueCash outExpensesJ. TinnicliffeL. PorthB. SzuutsD. Essig32.0025.0027.0020.00GasBagsMisc.16.0014.505.00104 35.50
  • 10. Lance Reed– what his businessowes and ownsThings ownedAssetsDebts owedLiabilitiesLawnmowerTools250.0040.00Loan 120.00290.00 120.00
  • 11. Chapter 1: An Introduction to BookkeepingFinancial Statements: Balance SheetThe balance sheet shows what you own (assets) andthe debts you owe (liabilities). Equity is the differencebetween assets and liabilities.1-11
  • 12. Chapter 1: An Introduction to BookkeepingFinancial Statements: Income StatementThe income statement shows the revenue (income)earned and the operating costs incurred - expenses. Netincome is the difference between revenue andexpenses.Copyright © 2010 by Nelson Education Limited1-12
  • 13. Chapter 1: Three Forms of Business OrganizationEvery business is one of the three forms of business organization:ProprietorshipPartnershipCorporation1-13
  • 14. Chapter 1: Three Forms of Business OrganizationProprietorshipA business with only one owner.The owner is the manager, the ownermakes all the business decisions, andthe owner is responsible for all thedebts of the business.1-14
  • 15. Chapter 1: Three Forms of Business OrganizationPartnershipA business owned by two or morepersons (called partners).The partners share the managementand decision-making.Each partner is responsible for thedebts of the business.1-15
  • 16. Chapter 1: Three Forms of Business OrganizationCorporationA business that operates under agovernment charter.Owners are called shareholders orstockholders.1-16
  • 17. Resources to start a business….Lance decides to start a business…Google “ starting a small business inOntario”
  • 18. Keeping business records…. Business records Youre required by law to keep thorough, organizedbooks and records—and, in the case of income tax, youhave to hold onto them for at least six years after thetaxation year they relate to. This can be somewhat onerous, particularly if you hireemployees. If you have an accountant, he/she can either set up anddo your books for you, help find you a good bookkeeper(bookkeepers are generally less expensive thanaccountants) or recommend a good bookkeeping andaccounting software program so you can do it yourself.
  • 19. Chapter 1: Five Classes of AccountsEvery business divides its accounts into five classes:AssetsLiabilitiesOwners Equity or CapitalRevenuesExpensesSee pg 9 in text1-20
  • 20. Chapter 1: Five Classes of AccountsAssets Things of value, owned by the business. Examples include cash, buildings, equipment,merchandise for sale.Liabilities Debts owing to others. Examples include bank loans and mortgages.Owners Equity The value of assets that remains after all debts havebeen paid off.1-21
  • 21. Chapter 1: Five Classes of AccountsRevenues Earnings from the sales of goods and/or services tocustomers. A business can have more than one kind of revenue.Expenses Costs of operating the business. Examples include rent, salaries, electricity, water,advertising, etc.Copyright © 2010 by Nelson Education Limited1-22
  • 22. Chapter 1: Five Classes of AccountsAssets vs ExpensesAssets Contribute to the current operating year and to thefollowing year (or years). Worth more than $500 (each business sets own amt)Expenses Contribute only to the current operating year.Copyright © 2010 by Nelson Education Limited1-23
  • 23. Chapter 1: GAAPAll accountants follow the same practices andprocedures (the same rules) in how they recordaccounting activities and report accountinginformation.As of 2011 Canada actually switched to InternationalFinancial Reporting Standards for accounting rules,but still colloquially called GAAP – GenerallyAccepted Accounting Standards (old term)They help to ensure that all accounting information isfair, real and reliable.Copyright © 2010 by Nelson Education Limited1-24
  • 24. Chapter 1: GAAPA brief description of the GAAP principles: Business Entity Concept Accounting for the business must be kept separate from theaffairs of the owner. Continuing-Concern Concept Assumes the business will continue operations withoutinterruption. Conservatism Principle Information must be fair and reasonable. Values must not be overstated or understated.Copyright © 2010 by Nelson Education Limited1-25
  • 25. Chapter 1: GAAP Objectivity Principle Transactions must be based on objective evidence. Each transaction must have a verifiable source document toprove when it happened, what it was for, and how much. Time-Period Concept Each transaction will relate to a specific financial period (aspecific month or a specific operating year). Recognition Principle Revenue is recognized when it has been earned, whether themoney has been received or not. Expenses are recognizedwhen they have been consumed, whether paid for or not.Copyright © 2010 by Nelson Education Limited1-26
  • 26. Chapter 1: GAAP Matching Principle Related to the Recognition Principle. Each expense must be recorded in the same financial period asthe revenue it helped to earn. Cost Principle Related to the Objectivity Principle. Purchases must be recorded at their cost price. Consistency Principle The same accounting principles must be used period afterperiod, year after year.Copyright © 2010 by Nelson Education Limited1-27
  • 27. Chapter 1: GAAP Materiality Principle GAAP principles must be followed unless the value of atransaction is considered insignificant (immaterial). Full-Disclosure Principle All information about a companys financial situation must beincluded in the financial statements.Copyright © 2010 by Nelson Education Limited1-28
  • 28. Do Pg 12 Exercise 1 and 2
  • 29. Pg 12 Exercise 1 - AnswersAccount Name Class1 Cash Asset2 Delivery Truck Asset3 Bank Loan Payable Liability4 Telephone Expense Expense5 Salaries & Wages Expense6 Sales Revenue7 Office Supplies Prepaid Asset8 Accounts Receivable Asset9 Service Sales Revenue10 Capital Equity
  • 30. Pg 12 – Exercise 1 Answers11 Tools & Equipment Asset12 Building Asset13 Mortgage Payable Liability14 Rental of Equipment ** Revenue or Expense15 Advertising Expense Expense16 Insurance Prepaid Asset17 Utilities Expense Expense18 Interest Earned Revenue19 Bank Asset20 Office Equipment Asset
  • 31. Pg 12 – Exercise 2 AnswersAccount Name Class1 Vans & Trucks Asset2 Accounts Payable Liability3 Sales of Service Revenue4 Cash Asset5 Mortgage Payable Liability6 Office Supplies Prepaid Asset7 Capital Equity8 Accounts Receivable Asset9 Bank Loan Payable Liability10 Computers & Printers Asset
  • 32. Pg 12 – Exercise 2 AnswersAccount Name Class11 Sales of Merchandise Revenue12 Shipping Supplies Prepaid Asset13 Office Building & Warehouse Asset14 Interest Expense Expense15 Opening Inventory Expense16 Closing Inventory Expense17 Office Supplies Expense Expense18 Parking Fees Earned Revenue19 Salaries & Wages Expense Expense20 Taxes Expense Expense
  • 33. Chapter 1: An Introduction to BookkeepingEnd of Chapter 11-34

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