Accounting and Managing Information

©2004 Actimax Learning Inc.2 Key Concepts Purpose of Accounting Accounting Methods Accounting Cycle Transactions Financial Statements Closing the Books

©2004 Actimax Learning Inc.3 Think about… How do you keep track of your money? How do you know if your records are accurate? How do you know if your enterprises or activities are profitable? How much you are worth financially?

©2004 Actimax Learning Inc.4 Keeping Track of Information Is important for businesses to determine performance and be accountable Bookkeeping is recording or posting the transactions of a business Accounting is the entire process of identifying, recording, and communicating financial information of a business

©2004 Actimax Learning Inc.5 Purposes of Accounting Summarize economic activity of a business Internally (managers, employees) Externally (investors, regulators, IRS)

©2004 Actimax Learning Inc.6 Accounting Methods Cash Method Revenue is recorded when received Expense is recorded when paid Reap version of The Farming Game Accrual Revenue and expense are recorded in the year that the activity occurred More accurate representation

©2004 Actimax Learning Inc.7 Single-Entry vs. Double-Entry Single-Entry System Accounting profession does not acknowledge; not good practice “Shoebox” method – put all receipts in one box and all bills in another box Double-Entry System Debit and credit sides of the transaction must be equal

©2004 Actimax Learning Inc.8 Accounting Cycle Basic Accounting Equation Assets = Liabilities + Owner’s Equity Assets Property owned by a business Cash, accounts receivable, equipment, supplies Liabilities Claims against business assets Accounts payable, notes payable, salaries payable, interests payable Owner’s Equity Remaining assets that go to owners after all liabilities are paid, if the business liquidates

©2004 Actimax Learning Inc.9 Accounting Cycle General Journal (or T-Accounts) Trial Balance General Ledger Financial Statements

©2004 Actimax Learning Inc.10 Accounts Assets, liabilities, and owner’s equity can be broken down into accounts Accounts contained detailed information about A, L, OE Each account has two sides (T-accounts) Debit = Left side Credit = Right side Each account has a debit or credit balance Increase left side = Debit entry Increase right side = Credit entry

©2004 Actimax Learning Inc.11 Illustration of Accounting Cycle Sample year is illustrated in Part 2 See sample year of General Journal & T-Accounts General Ledger Trial Balance

©2004 Actimax Learning Inc.12 General Journal Historical record of transactions Chronological order GENERAL JOURNAL DateAccount & DescriptionDebitCreditRef# 1/1Asset Equity Inherited 10 Acres of Hay 20,000 1

©2004 Actimax Learning Inc.13 Posting from General Journal to Specific Accounts T-Accounts are done for illustrations or educational purposes More graphic Most business post to General Ledger More textual Order of accounts are the same as the Balance Sheet

©2004 Actimax Learning Inc.14 General Journal to T-Accounts Done for educational purposes AssetOwner’s Equity #DebitCredit##DebitCredit# 1/120, /1

©2004 Actimax Learning Inc.15 General Ledger No description of transactions (references transactions in General Journal) Tracks rolling balances of each account GENERAL LEDGER Asset Ref#DateDebitCreditBalance 11/120,000 Owner’s Equity Ref#DateDebitCreditBalance 11/120,000

©2004 Actimax Learning Inc.16 Running a Trial Balance Completed at the end of a reporting period Done to see if debits and credits equal each other Helps identify possible errors from journalizing or posting Adjusting entries can be made before preparing financial sheets (not done in The Farming Game)

©2004 Actimax Learning Inc.17 Trial Balance TRIAL BALANCE AccountDebitCredit Asset50,000 Owner’s Equity40,000 Notes Payable8,000 Income16,300 Expense6,000 Cash8,300 TOTAL58,300

©2004 Actimax Learning Inc.18 Reap’s Accounting Cycle Transaction Register replaces General Journal & T-Accounts General Ledger Trial Balance Transaction RegisterFinancial Statements

©2004 Actimax Learning Inc.19 Preparing the Financial Statements Final trial balance provides the figures for financial statements Balance Sheet Income Statement Statement of Owner’s Equity

©2004 Actimax Learning Inc.20 Closing the Books Temporary or nominal accounts are closed when preparing the financial statements All accounts related to revenues and expenses Closing temporary accounts resets them to zero and they start afresh for the next accounting period Permanent or real accounts keep a running total for the following year All accounts related to the balance sheet Ending balances become the opening balances for the next accounting period

©2004 Actimax Learning Inc.21 Review Questions Why do businesses perform accounting? What is the cash method? What is the accrual method? What is single entry accounting? What is double entry accounting?

©2004 Actimax Learning Inc.22 Review Questions What is the basic accounting formula? What is the comprehensive accounting cycle? How does Reap adapt this cycle to a simpler system? What are T-accounts? How are transactions entered in a general journal?

©2004 Actimax Learning Inc.23 Review Questions What is a general ledger? What is a trial balance? What is reflected on an income statement? What is an owner’s equity statement? What is reflected on the balance sheet? What period of time does it cover?

©2004 Actimax Learning Inc.24 Review Questions What does ‘closing the books’ mean? What are 2 examples of nominal or temporary accounts? What are 3 examples of accounts with credit balances?

©2004 Actimax Learning Inc.25 Review Questions What factors can be used when making finance decisions? Define credit and borrowing capacity; leverage and profitability; leverage and risk; and repayment capacity. How does marketing affect a business?

©2004 Actimax Learning Inc.26 Are you ready to track and manage information?