Introduction to accounting

 Any thing in RED write down in your books please

 General understanding of accounting and the
language of business
 Knowledge and understanding of the five types of
account classification.
 Asset
 Liability
 Income
 Expenses
 Equity

 What do you think accounting is?
 Bank statements
 Profit
 Tax
 Business
 Financial statements
 Management
 Partnership
 The process or work of keeping financial
accounts

 The language of business.
 A means to communicate financial
information.
 A way to convey information about a business
to users.

 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)

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

 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

 Governments
 For making decisions regarding welfare
 Tax authorities
 Tax is calculated using accounting information
 How much business have purchased and sold
 The same way business do
 Others. (employees, unions, etc.)
 Estimate wages
 Decipher business profit
 Influence potential decisions

 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?

 Accounting is based on 5 basic account types
 Asset
 Liability
 Owners Equity
 Income/revenue
 Expenses

 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?

 Cash at bank
 Accounts receivable (paid by credit)
 Bills receivable (paid by certain date)
 Inventories (stock)
 Prepaid expenses
 Land
 buildings

 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

 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?

 Accounts payable (opposite of accounts
receivable)
 Bills payable (opposite of bills receivable)
 Accrued liabilities (sometimes called accrued
expense)
 Interest, salary

 Demonstrate knowledge and understanding of
assets, liabilities, owners equity and the
accounting equation.
Reminder

Accounts 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 – 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 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?

 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

 Classify each of the following as assets,
liabilities or Owners equity
 Accounts payable
 Loan from bank
 Owners interest in the business
 Furniture
 Money owed by Jack
 Cash at bank
 Stock / inventory
 Rent – that you have to pay
 Salaries

 Assets = Liabilities + owners equity
 A = L + OE
 The accounting equation
 Owners equity = Assets – Liabilities
 OE = A – L
 Liabilities = Assets - Owners equity
 L = A - OE

 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 $ 500
 Loan from PNC comity $ 200
 Accounts payable $ 50
 Accounts Receivable $ 70
 Value of stock $ 80
 Value of fridge $ 200

 Assets
 Cash at bank $ 500
 Accounts Receivable +$ 70
 Value of stock +$ 80
 Value of fridge +$ 200
=$ 850
 Loan from PNC comity $ 200
 Accounts payable +$ 50
=$ 250
Answer $ 600

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

income/revenue and expenses as well as how
assets, liabilities and owners equity, work in the
Reminder

 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

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

 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?

 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

 Office rent
 Salaries for
employees
 Advertising
 Water, electricity gas
 insurance
 Supplies (used)
 Cash expenses
Depreciation
ONLY BECOME
EXPENSES WHEN
PAID

 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.

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.

 If John Smith has the following assets and
liabilities what is the owners equity
 Cash at Bank $ 1,000
 Loan from bank $ 4,000
 Accounts receivable $ 8,000
 Inventories $ 2,000
 Furniture $ 3,500

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

 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
 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 ?
E
L
R/I
A
OEConsider using excel

assets
 New Equipment $ 3,000
Accounts payable ?
Prepaid rent ?
Company Car ?
Paid for food ?
Tax owing ?
Drawings ?
Cash at bank ?
Capital ?
Interest earned ?
E
L
R/I
A
OE
L

 Assets = $ .
?
?
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?
?
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?
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?

 Assets = $27,000 .
L
A
A
A
E
R/I
OE
E
L
OE
A
E
OE
R/I

 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 benefit
 Expenses 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

revenue and expenses as well as how assets,
liabilities and owners equity, work in the
who uses accounting
Reminder

 Individuals
 Businesses
 Investors
 Creditors
 Governments
 Tax authorities
 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

Assets owners equity liabilities

 Show three ways the accounting equation
can be expressed (write them down)
A = L + OE
OE = A – L
L = A - OE

1. Write out the appropriate equation
2. Decipher which classification it is asking for
3. List values under the equation
4. Work out totals
5. Work out missing value

 If John Smith has the following assets and
liabilities what is the owners equity
 Cash at Bank $ 2,000
 Bank Loan $ 3,500
 Accounts receivable $ 7,100
 Inventories $ 3,000
 Furniture $ 1,700
 Land $ 8,000
 Interest Payable $ 200

Owners Equity = Assets - Liabilities
Cash at Bank Bank Loan
$ 2,000 $ 3,500
Accounts receivable Accounts payable
$ 600 $ 7,100
Inventories Interest Payable
$ 3,000 $ 200
Furniture
$ 1,700
Land
$ 8,000
Totals $15, 300 - $10,800
= $ 4500

assets
 New Equipment value $ 4,500
Company Car ?
Accounts payable ?
Cash at bank ?
Interest earned ?
Tax owing ?
Drawings ?
Prepaid rent ?
Paid for food ?
Capital ?
E
L
R/I
A
OE
L

 Assets = $ .
Company Car ?
Accounts payable ?
Cash at bank ?
Interest earned ?
Tax owing ?
Drawings ?
Prepaid rent ?
Paid for food ?
Capital ?

 Assets = $ 32,500 .
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

 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!

 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

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

 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 card – spending your own money
 Credit card – spending someone else's money
e.g. Spending the banks money

 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.

 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.

 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?

Debit
Assets expenses
Credit
liabilities 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

Introduction to accounting

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