BAF3M Accounting Unit 1: Intro to Accounting Ch1: Accounting and Business Ch2: The Balance Sheet Ch3: Analyzing Changes in Financial Position

First Some Common Abbreviations used throughout this course …..

B/S – Balance Sheet A – Assets L – Liabilities OE – Owner’s Equity A/R – Accounts Receivable A/P – Accounts Payable TB – Trial Balance I/S – Income Statement

Biz/Bus – Business Org’n – Organization Rec’d – Received Eq’n – Equation Stmt – Statement Mgmt - Management

1.1 What is Accounting “Accounting” – is a system of dealing with financial information that provides information for decision making “Business” – an organization that seeks to meet the needs and wants of consumers

1.1 What is Accounting 5 Activities in Accounting: 1. gathering financial information 2. preparing and collecting permanent records 3. rearranging, summarizing and classifying financial information 4. preparing information reports and summaries 5. establishing controls to promote accuracy

1.2 Why Study Accounting? Accounting can be useful to you: On the job In daily life – personal finance (budgeting, taxes) Owning your own business (entrepreneurship) As a profession (CPA) Complexity of business

1.3 Characteristics of Business A business involves the manufacture and/or sale of goods or services in order to earn a profit. They generally fit into one of four categories: Service Business Merchandising Business Manufacturing or Producing Business Non-Profit Organization Use p.4-5 to help you describe each

1.3 Characteristics of Business Type of Business Definition Example SERVICE MERCHANDISING MANUFACTURING NON-PROFIT

1.3 Characteristics of Business Type of Business Definition Example SERVICE Sell a service to the public, not a finished product Hair Salon, Landscaping Business, Real Estate MERCHANDISING Buys a product and resells it at a higher price (Buy from the manufacturer, sell to the final consumer) Clothing Store, Grocery Store, Computer Store MANUFACTURING Buy raw materials and convert them into a ‘new’ product – sell the new product to earn a profit. Shoe Mfr, Cars – Ford, Chrysler etc. NON-PROFIT Undertake activities to meet a social need, not seeking to make a profit. Cdn Cancer Society, Feed The Children, Make-A-Wish Fndn.

1.3 Characteristics of Business Forms of Business Ownership 3 basic types Sole Proprietorship Partnership Corporation (or “Limited” company) We will be working mostly with sole proprietorships, until about Chapter 13.

1.3 Characteristics of Business Form of Business Ownership Definition Example Sole Proprietorship Partnership Corporation

1.3 Characteristics of Business Form of Business Ownership Definition Example Sole Proprietorship A business owned by one person Joe’s Plumbing Partnership A business owned by 2 OR MORE people Joe & Flo’s Plumbing Corporation A special form of ownership where the business is considered a separate legal entity from its owners. Mario Bros. Plumbing Inc.

1.4 The Nature of Accounting

1.6 Roles of Accounting The Accounting Clerk (aka “Bookkeeper”) Work is clerical in nature, deals mostly with routine matters The Accountant Broader scope of duties, requires more education and experience, usually responsible for an entire accounting system See p.8 for more job details for each

End of Chapter Section NOTE: Each chapter section has two sets of activities at its conclusion: “questions” and “exercises” – also there is a section at the chapter’s end with “chapter review” questions and exercises Chapter 1 is so short that it only has the “chapter review” questions… So to review Ch 1’s content, we’ll try Ch1 Review Q’s: #2, 3, 4, 17 Ch1 Review Ex’s: #1, 3

Chapter 2 – The Balance Sheet BAF3M Accounting Chapter 2 – The Balance Sheet

2.1 Financial Position Basic concept to the whole accounting system To determine your financial position 1 – list dollar values of things you own 2 – list dollar values of things you owe 3 – calculate the difference

2.1 Financial Position Proper Terminology 1 –things you own ASSETS 2 –things you owe LIABILITIES 3 –the difference OWNER’S EQUITY* * other names for OE include “NET WORTH”, “CAPITAL”, or just “EQUITY”

2.1 Financial Position Fundamental Accounting Equation Pg.19 – this relationship is the key to the entire accounting system Assets = Liabilities + Owner’s Equity A = L + OE

2.2 The Balance Sheet Formal document which shows financial position of a person, business or other organization Examples p. 21 Fig 2.1 ‘personal’ AND Fig 2.2 ‘small business’

2.2 The Balance Sheet Set up the form of the fundamental accounting equation: A = L + OE Assets always on LEFT Liabilities and Owner’s Equity on RIGHT Heading is WHO? WHAT? WHEN?

2.2 The Balance Sheet Assets are listed in order of LIQUIDITY (closest to cash) Liabilities listed in order they are paid off Final totals get a double underline

2.2 The Balance Sheet Accounts Receivable & Accounts Payable A.k.a. : “A/R” and “A/P” A/R is when someone buys from you, but has not paid you yet, so its an ASSET A debtor is someone who owes you money A/P is when you bought something, but have not paid it yet, so it’s a LIABILITY A creditor is someone you owe money to

2.2 The Balance Sheet Preparing the Balance Sheet Overhead Example, follow along 6 steps outlined on p. 23-25

2.2 The Balance Sheet Basic Recordkeeping Practices Let’s keep these in mind as we proceed through this course Use of Columnar Paper Use of Ruled Lines Neatness (these will all become ‘second nature’ as you progress)

2.3 Claims Against the Assets Both creditors and owners have claims to the assets listed on the balance sheet Why? Because creditors have usually provided the funds to the business to purchase the assets Upon liquidation of assets, creditors are paid first Leftover amounts go to the owner (capital)

2.4 Accounting Standards p. 33 Accountants have specific standards, rules and guidelines they must follow in order to ensure that their work properly done Used to be GAAP – Canada now switched over to IFRS and ASPE IFRS  International Financial Reporting Standards ASPE  Accounting Standards for Private Entreprises

2.4 Accounting Standards ASPE – mostly for private companies IFRS – mostly for public companies Some basic accounting standards will be pointed out through the course, but a specific knowledge of all standards is not required in this course. More on these as we need them!

Chapter 3 –Analyzing Changes in Financial Position

3.1 Business Transactions Many events occur every day that change a business’s financial position Businesses buy assets, assume more liabilities and also collect revenues and pay expenses All of these things are called “Business Transactions”

3.1 Business Transactions Source Documents Name given to documents that verify the amount of a business transaction (ie receipt, invoice) Accounting entries are made based on source documents Source documents are filed for future reference Accounting Standards – Objectivity Principle 3.1 Ex’s #1, 2

3.2 Equation Analysis Sheet Next step is to see how various business transactions affect and change financial position Example on overhead pg 61-67, see the effect that 7 transactions have on the balance sheet for METROPOLITAN MOVERS

The Equation Analysis Sheet Write down the fundamental accounting equation and list the items in the assets, liabilities, and owner’s equity sections. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Record the initial balances from a balance sheet. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Record the initial balances from a balance sheet. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Record the initial balances from a balance sheet. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Record the initial balances from a balance sheet. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Record the initial balances from a balance sheet. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Begin recording the transactions. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 1: Metropolitan Movers pays $1200 cash to reduce the Bank Loan. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

Record changes to the appropriate accounts. The Equation Analysis Sheet Transaction 1: Metropolitan Movers pays $1200 cash to reduce the Bank Loan. Record changes to the appropriate accounts. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

Record changes to the appropriate accounts. The Equation Analysis Sheet Transaction 1: Metropolitan Movers pays $1200 cash to reduce the Bank Loan. Record changes to the appropriate accounts. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

Record changes to the appropriate accounts. The Equation Analysis Sheet Transaction 1: Metropolitan Movers pays $1200 cash to reduce the Bank Loan. Record changes to the appropriate accounts. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 1: Metropolitan Movers pays $1200 cash to reduce the Bank Loan. Record the new balances. Make sure the equation still balances. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 2: K The Equation Analysis Sheet Transaction 2: K. Lincoln, who owes Metropolitan Movers $2500, pays $1100 in partial payment of the debt. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

Record changes to the appropriate items. The Equation Analysis Sheet Transaction 2: K. Lincoln, who owes Metropolitan Movers $2500, pays $1100 in partial payment of the debt. Record changes to the appropriate items. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

Record changes to the appropriate items. The Equation Analysis Sheet Transaction 2: K. Lincoln, who owes Metropolitan Movers $2500, pays $1100 in partial payment of the debt. Record changes to the appropriate items. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

Record changes to the appropriate items. The Equation Analysis Sheet Transaction 2: K. Lincoln, who owes Metropolitan Movers $2500, pays $1100 in partial payment of the debt. Record changes to the appropriate items. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 2: K The Equation Analysis Sheet Transaction 2: K. Lincoln, who owes Metropolitan Movers $2500, pays $1100 in partial payment of the debt. Record the new balances. Make sure the equation still balances. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 3: Equipment costing $1950 is purchased for cash. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

Record changes to the appropriate items. The Equation Analysis Sheet Transaction 3: Equipment costing $1950 is purchased for cash. Record changes to the appropriate items. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

Record changes to the appropriate items. The Equation Analysis Sheet Transaction 3: Equipment costing $1950 is purchased for cash. Record changes to the appropriate items. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

Record changes to the appropriate items. The Equation Analysis Sheet Transaction 3: Equipment costing $1950 is purchased for cash. Record changes to the appropriate items. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 3: Equipment costing $1950 is purchased for cash. Record the new balances. Make sure the equation still balances. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 4: A pick-up truck is purchased at a cost of $18 000. Metropolitan Movers pays $10 000 cash and arranges a loan from its bank to cover the balance of the purchase price. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 4: A pick-up truck is purchased at a cost of $18 000. Metropolitan Movers pays $10 000 cash and arranges a loan from its bank to cover the balance of the purchase price. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 4: A pick-up truck is purchased at a cost of $18 000. Metropolitan Movers pays $10 000 cash and arranges a loan from its bank to cover the balance of the purchase price. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 4: A pick-up truck is purchased at a cost of $18 000. Metropolitan Movers pays $10 000 cash and arranges a loan from its bank to cover the balance of the purchase price. Chapter 3 – The Equation Analysis Sheet | Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 4: A pick-up truck is purchased at a cost of $18 000. Metropolitan Movers pays $10 000 cash and arranges a loan from its bank to cover the balance of the purchase price. Chapter 3 – The Equation Analysis Sheet | Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 5: Metropolitan Movers completes a storage service for B. Cava at a price of $1500. A bill is sent to Cava to indicate the additional amount that is owed. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 5: Metropolitan Movers completes a storage service for B. Cava at a price of $1500. A bill is sent to Cava to indicate the additional amount that is owed. Chapter 3 – The Equation Analysis Sheet | Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 5: Metropolitan Movers completes a storage service for B. Cava at a price of $1500. A bill is sent to Cava to indicate the additional amount that is owed. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 5: Metropolitan Movers completes a storage service for B. Cava at a price of $1500. A bill is sent to Cava to indicate the additional amount that is owed. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 6: J The Equation Analysis Sheet Transaction 6: J. Hofner, the owner, withdraws $500 for personal use. Chapter 3 – The Equation Analysis Sheet | Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 6: J The Equation Analysis Sheet Transaction 6: J. Hofner, the owner, withdraws $500 for personal use. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 6: J The Equation Analysis Sheet Transaction 6: J. Hofner, the owner, withdraws $500 for personal use. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 6: J The Equation Analysis Sheet Transaction 6: J. Hofner, the owner, withdraws $500 for personal use. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 7: One of the trucks requires an engine adjustment costing $375. The repair is paid for in cash when the truck is picked up. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 7: One of the trucks requires an engine adjustment costing $375. The repair is paid for in cash when the truck is picked up. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 7: One of the trucks requires an engine adjustment costing $375. The repair is paid for in cash when the truck is picked up. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Transaction 7: One of the trucks requires an engine adjustment costing $375. The repair is paid for in cash when the truck is picked up. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Final balances from the equation analysis sheet can be used to create an updated balance sheet. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Final balances from the equation analysis sheet can be used to create an updated balance sheet. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

The Equation Analysis Sheet Final balances from the equation analysis sheet can be used to create an updated balance sheet. Chapter 3 – The Equation Analysis Sheet l Accounting 1, 7th Edition

3.3 Summary of Steps in Analyzing a Transaction Step by Step 1 – Identify all items (A and L) that must be changed and make all necessary changes 2 – see if OE has changed 3 – Make certain that at least 2 of the individual items have changed 4 – Make sure the equation is still in balance

3.3 Exercises Pg 69 #1, 2