Intro To Accounting


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Intro To Accounting

  1. 1. Accounting
  2. 2. The Role of Accounting <ul><li>Accounting is the process of recording, analyzing, and interpreting the economic activities of a business. </li></ul><ul><li>Accounting functions are performed for the purpose of: </li></ul><ul><ul><li>Accountability of employees </li></ul></ul><ul><ul><li>Budgeting </li></ul></ul><ul><ul><li>Taxation </li></ul></ul><ul><ul><li>Financial Statements and Annual Reports </li></ul></ul>
  3. 3. Accounting Records <ul><li>Accounting records are kept according to certain rules. Because of this: </li></ul><ul><ul><li>Someone not involved with the company can understand key aspects of its activities or performance by looking at the accounting records and reports </li></ul></ul><ul><ul><li>A person can use the financial records and reports to compare different businesses </li></ul></ul><ul><ul><li>This is why accounting is often referred to as “the language of business” </li></ul></ul>
  4. 4.  Types of Accounting <ul><li>There are two types of accounting: </li></ul><ul><ul><li>Financial accounting – process of recording and analyzing information about the financial position of a company </li></ul></ul><ul><ul><li>Managerial Accounting – used within a company to help make decisions </li></ul></ul><ul><li>Financial Statements are formal documents that provide key information about a company’s financial position  Balance Sheet and the Income Statement </li></ul>
  5. 5. Accounting Transactions <ul><li>A transaction occurs when something that has value is exchanged for something else that has value. A minimum of two accounts are affected. </li></ul><ul><li>Eg. Pay an employee $100 for 10 hours of work </li></ul><ul><li>Cash  Wages Expense  </li></ul><ul><li>Eg. Purchase a computer for the business for $2100 </li></ul><ul><li>Computer  Cash  </li></ul><ul><li>Eg. The business borrows $1000 from the bank </li></ul><ul><li>Cash  Bank Loan  </li></ul>
  6. 6. The Balance Sheet <ul><li>The Balance Sheet measures the financial health of a business at a specific point in time. </li></ul><ul><li>To make a balance sheet you must ask yourself: </li></ul><ul><li>1. What are the things the business owns? (assets) </li></ul><ul><li>2. What are the debts (liabilities) </li></ul><ul><li>3. What is the difference? (equity) </li></ul>
  7. 7. Assets <ul><li>Items of value that the business owns </li></ul><ul><li>Cash: The bank balance </li></ul><ul><li>Accounts Receivable: Money owed to the business </li></ul><ul><li>Inventory: Goods on hand for re-sale </li></ul><ul><li>Supplies: Pens, paper, pencils, etc. </li></ul><ul><li>Building </li></ul><ul><li>Land </li></ul>
  8. 8. Asset Classification <ul><li>Current Assets are items that the business owns that will be used up or disappear within one year. </li></ul><ul><li>Eg. Cash, Accounts Receivable, Inventory, Supplies </li></ul><ul><li>Long-term (Capital) Assets are items that the business owns that will last for longer than one year. </li></ul><ul><li>Eg. Automobiles, Building, Land </li></ul>
  9. 9. Liabilities <ul><li>Liabilities are the debts of the business </li></ul><ul><li>Bank Loan: money the business owes to the bank </li></ul><ul><li>Accounts Payable: money the business owes for previous purchases </li></ul><ul><li>Mortgage: money the business owes for the purchase of the building </li></ul>
  10. 10. Liability Classifications <ul><li>Current Liabilities </li></ul><ul><ul><li>Debts that will be paid off within one year </li></ul></ul><ul><ul><li>Eg. Bank Loan (current portion), Accounts Payable </li></ul></ul><ul><li>Long-term Liabilities </li></ul><ul><ul><li>Debts that will take longer than one year to pay off </li></ul></ul><ul><ul><li>Eg. Bank Loan (remaining), Mortgage </li></ul></ul>
  11. 11. Owner’s Equity <ul><li>Owner’s Equity is the owner’s portion of the business </li></ul><ul><li>A residual amount calculated from assets and liabilities </li></ul><ul><li>Formula: </li></ul><ul><ul><li>Assets – Liabilities = Owner’s Equity </li></ul></ul>The Accounting Equation: Assets = Liabilities + Owner’s Equity
  12. 12. Formatting <ul><li>The set-up of the balance sheet is always Assets = Liabilities + Owner’s Equity </li></ul><ul><li>There is a three line heading (who, what & when) </li></ul><ul><li>Assets are listed in order of liquidity (ease at which things are converted into cash) </li></ul><ul><li>Liabilities are listed in order in which they are paid. </li></ul>
  13. 13. Balance Sheet Example
  14. 14. Balance Sheet Solution                                                                                               0 0 2 $383 Total Liabilities and Owenrs Equity   0 0 2 $383 Total Assets   0 0 0 325 S. Simpson, Capital   0 0 5 $367 Total Capital Assets           Owner's Equity   0 0 0 300 Land   0 0 2 $58 Total Liabilities   0 0 0 50 Building   0 0 0 40 Mortgage   0 0 5 17 Audio Equipment and Speakers           Long Term Liabilities           Capital Assets   0 0 2 $ 18 Total Current Liabilities   0 0 7 $ 15 Total Current Assets   0 0 0 15 Bank Loan   0 0 7   Accounts Receivable   0 0 2 $ 3 Accounts Payable   0 0 0 $ 15 Cash           Current Liabilities           Current Assets           Liabilities           Assets                         As of April 15th, 2008 Balance Sheet Simon's Recording Studio
  15. 15. Income Statement <ul><li>The statement that reports a business’s income and expenses for a fiscal period </li></ul><ul><li>It is also known as a statement of financial performance </li></ul><ul><li>Income (revenue) is money earned by the business by selling a good or service </li></ul><ul><li>Expenses are incurred to help earn revenue  Advertising, Salaries, Rent etc. </li></ul><ul><li>Allows you to analyze trends </li></ul><ul><li>Net Income is transferred to the Balance Sheet as Owner’s Equity </li></ul>
  16. 16. Income Statement Components <ul><li>Revenue is what a business earns from the sale of goods or services. Also called income. </li></ul><ul><li>Cost of Goods Sold (COGS) is the cost of any goods the business sold from inventory </li></ul><ul><li>Gross Profit is money available after paying COGS </li></ul><ul><ul><li>Formula: Revenue - COGS </li></ul></ul>
  17. 17. Income Statement Components <ul><li> Operating Expenses are the costs of operating the business during the period the sales took place. </li></ul><ul><li>Costs need to be matched to the revenue generated during this same time period. This is called the matching principle. </li></ul><ul><li>Net Profit is the profit remaining after all expenses have been deducted </li></ul><ul><ul><li>Formula: Gross Profit – Operating Expenses </li></ul></ul>
  18. 18. Accounting for a Merchandising Business <ul><li>Calculate Cost of Goods Sold and Cost of Goods Available for Sale, assuming the following: </li></ul><ul><ul><li>Beginning Inventory $30,000; Purchases $50,500; Ending Inventory $25,000 </li></ul></ul><ul><ul><li>Beginning Inventory + Purchases = Cost of Goods Available for Sale </li></ul></ul><ul><ul><ul><li>30,000+ 50,500 = 80,500 </li></ul></ul></ul><ul><ul><li>Cost of Goods Available for Sale – Ending Inventory = Cost of Goods Sold </li></ul></ul><ul><ul><ul><li>80,500 – 25,000 = 55,500 </li></ul></ul></ul><ul><ul><li>Beginning Inventory $56,700; Purchases $35,670; Ending Inventory $10,500 </li></ul></ul><ul><ul><li>Available for sale = $92,370; $COGS = 81,870 </li></ul></ul>
  19. 19. Calculations <ul><li>Calculate Cost of Goods Sold and Gross Profit, assuming the following: </li></ul><ul><ul><li>Revenue $67,000; Beginning Inventory $24,600; Purchases $16,750; Ending Inventory $22,340 </li></ul></ul><ul><ul><li>Beginning Inventory $124,000; Purchases $32,450; Ending Inventory $113,000; Sales $245,000 </li></ul></ul><ul><li>Calculate Net Income or Net Loss assuming the following: </li></ul><ul><ul><li>Revenue $45,000; Gross Profit $23,000; Expenses $10,000 </li></ul></ul><ul><ul><li>Sales $25,400; Cost of Goods Sold $14,500; Expenses $5,000 </li></ul></ul><ul><ul><li>Revenue $167,000; Beginning Inventory $15,000; Purchases $5,000; Ending Inventory $12,340; Expenses $25,890 </li></ul></ul>
  20. 20. Example: Income Statement
  21. 21. Accounting Ratios: Working Capital <ul><li>Indicates the business’s ability to pay their short-term debts. </li></ul><ul><li>Working Capital = Current Assets – Current Liabilities </li></ul><ul><li>A positive working capital figure is strong indicator of the business’s ability to pay their short-term debts. </li></ul><ul><li>The higher the figure the better. </li></ul><ul><li>This figure is usually compared to previous years or other companies in the industry. </li></ul>
  22. 22. Accounting Ratios: Current Ratio <ul><li>Current Ratio = Total Current Assets </li></ul><ul><li> Total Current Liabilities </li></ul><ul><li>Indicates how many dollars of liquid assets (current) the business has for every dollar of short-term debt. </li></ul><ul><ul><li>> 2 : 1 = Excellent ability to pay off debts </li></ul></ul><ul><ul><li>1.5 : 1 = Strong ability to pay off debts </li></ul></ul><ul><ul><li>1 : 1 = Can pay off debts but still risky </li></ul></ul><ul><ul><li>< 1 : 1 = Unable to pay off debts </li></ul></ul>
  23. 23. Accounting Ratios: Return on Sales <ul><li>Rate of Return = Net Profit x 100% </li></ul><ul><li>On Net Sales Total Revenue </li></ul><ul><li>Indicates , as a percentage, the portion of a business’s sales that are kept as profit. </li></ul><ul><li>A higher rate of return on sales means a more profitable company. </li></ul><ul><li>The higher the better. </li></ul><ul><li>This figure is usually compared to previous years or other companies in the industry. </li></ul>
  24. 24. Accounting Ratios: Return on Owner’s Equity <ul><li>Rate of Return On Owners Equity </li></ul><ul><li> Net Profit x 100% </li></ul><ul><li> Average Owner’s Equity </li></ul><ul><li>Indicates, as a percentage, the return on the owner’s investment. </li></ul><ul><li>Should be higher than the return the owner would get if the money was placed in a saving account or invested in a bond or mutual fund. </li></ul><ul><li>Example </li></ul><ul><li>Return on Equity = 34,000 x 100% </li></ul><ul><li>(410,000 + 431,000) ÷ 2 </li></ul><ul><li> = 34,000 x 100% </li></ul><ul><li>420,500 </li></ul><ul><li> = 8.1% </li></ul>34,000 Net Profit 431,000 Owner’s Equity, Dec 31, 2005 410,000 Owner’s Equity, Jan 1, 2005