Chapter 1 Unit 1-1 Accounting Concepts and Procedures By Bill Venables

ACCT_100 Bill Venables Types of business organizations Sole proprietorship (one owner) Partnership (more than one owner) Corporation (many owners) See table 1-1 at the top of page 3

ACCT_100 Bill Venables Sole proprietorship One owner Runs business Plus –You make the decisions –When business does well you receive all of the benefits Minus –You do everything –If business can’t pay its expenses, you must pay for them Ends upon death

ACCT_100 Bill Venables Partnership >= 2 owners Plus –Decision making is shared –Risk is shared Minus –Partners are responsible for debts of partnership –Partners might not get along Ends upon death or leaving

ACCT_100 Bill Venables Corporation Owned by shareholders Plus –Limited liability of shareholders Minus –Other shareholders can take the company in a way you don’t want it to go Never ends – just keeps on going

ACCT_100 Bill Venables Classifying businesses by activity Service Merchandising Manufacturing Question: How would you classify an OFFICE ADMIN firm as far as activity?

ACCT_100 Bill Venables What do accountants do? Analyze-what happened? Record-the transactions Classify-group stuff together Summarize-total things by date (usually) Report-create reports based on the previous information Interpret-make money/ lost money?

ACCT_100 Bill Venables Definitions Revenue = money earned for services rendered and/or goods sold Expense = costs incurred by your firm to generate revenue

ACCT_100 Bill Venables GAAP Generally Accepted Accounting Principles Just because they are generally accepted doesn’t mean that they are correct (maybe the principle should be changed!) Guidelines when running a business

ACCT_100 Bill Venables GAAP - Business Entity Principle Keep the company’s affairs separate from your personal affairs I use 2 bank accounts for deposits and withdrawals –The company has its own cheque book –I have my own personal cheque book

ACCT_100 Bill Venables GAAP – Historical Cost Principle Record transactions at their cost Value of an asset never changes on your books Eg, Company bought land for $40,000 –It is now worth $60,000 –When the land was purchased it was recorded at $40,000 –It never changes on your books

ACCT_100 Bill Venables GAAP – Realization/Recognition Principle Record revenue and expenses when the transaction takes place Eg. The company completes a project today (January 6 th ) and invoices you but payment will not have to be made until February 15 th –Record the sale using the date = January 6 th not February 15 th )

ACCT_100 Bill Venables GAAP – Going-Concern Assumption Businesses (companies) will continue even if the shareholders pass away (others will take their place) The company is in business to make money (going concern)

ACCT_100 Bill Venables GAAP – Matching Principle Match revenue and expenses Eg. The company sells me a car for $40,000. –Revenue = $40,000 Expenses –The company paid $30,000 for the car –The company paid the salesman $2,000 as a commission to sell the car –Total expenses = $32,000 Net Income = revenue-expenses = $8,000.00

ACCT_100 Bill Venables GAAP – Conservatism Be conservative when recording transactions –Underestimate revenue –Overestimate expenses –This will minimize the taxes that you have to pay because you pay tax on net income = revenue-expenses

ACCT_100 Bill Venables GAAP – Fiscal Year End Every company has a year end = a date when one period ends and another starts Eg. For individuals, our year starts January 1 and goes to December 31 st. –Our year end = December 31 st Companies can have a year end that is not December 31 st –Eg. July 1, June 30, 2005 We will try to keep it simple and use the calendar year.

ACCT_100 Bill Venables GAAP – Materiality Painstaking detail when creating reports is not necessary Transactions are recorded in dollars and cents Reports are usually rounded to dollars Eg. Your company’s net income last year = $567, Do we really need to care about the $.02 No!

ACCT_100 Bill Venables GAAP – Consistency Make assumptions Stick with your assumptions so that from one year to the next, they are consistent

ACCT_100 Bill Venables The accounting equation – p 7 Assets = Equities –Assets are what you own (even if they are not paid off) –Equities are financial claims to the assets Equation must always be in balance

ACCT_100 Bill Venables Equities – p 7 Can be further broken down as Liabilities + Owner’s Equity Assets = equities (liabilities + owners equity) –Owners equity (capital) = rights (claims) by the owner –Liabilities = rights of creditors (companies or individuals who lend the business money/sell the business things on credit, etc) They get paid before the owners

ACCT_100 Bill Venables Catherine Hall Law Practice P 8 Catherine opens her own practice She must keep her personal affairs separate from the business –She will have her own personal Bank account cheque book –She will have a business Bank account cheque book

ACCT_100 Bill Venables Your turn again – p 8 Assume you are Catherine You supply the following items to the business when you start it up: –$7,000 cash –$800 in office equipment (printer, computer, monitor, speakers….) What is your equity in the business?

ACCT_100 Bill Venables Your turn-p 8 Use template Unit 1-1.xls workbook –Unit 1-1 worksheet Transaction A Catherine invests $7,000 cash and $800 worth of office equipment into the business Use these accounts: cash, office equipment, liabilities, owners equity Show the equation (it must always be in balance)

ACCT_100 Bill Venables Shift in Assets It is the weekend so it is time to Parrrrttttaaaay You have $100 cash so the total value of your assets is $100 You buy a case of beer for $20 What is the total value of your assets now?

ACCT_100 Bill Venables Your turn again-p 9 Transaction B Buy $900 worth of office equipment for cash This is a shift in assets –using up one asset to buy another –Cash goes down and office equipment goes up but the total assets does not change.

ACCT_100 Bill Venables Definitions – Accounts Payable (a liability) Sometimes the business will purchase things with cash (cash or cheque) Sometimes the business will purchase now but promise to pay for it later on (Mastercard, Visa, American Express…). You buy using credit. Accounts payable – an account that tracks what you purchase on credit –Eg. You go to Future Shop and purchase some music CDs using your Mastercard When you buy with Mastercard, you owe Mastercard the money, not Futureshop This is a liability, a promise to pay a creditor

ACCT_100 Bill Venables Definition – Accounts Receivable When the business does work for someone (supplies a service or goods to a customer) either the customer: –pays cash (cash or cheque) right away –promises to pay you later on Account receivable – an account that tracks what your customers owe you Eg. I (customer) hire you to do some work for me and I promise to pay you later, then this is an Accounts Receivable from your point of view (you will receive payment in the future or a customer (me) is promising to pay you later)

ACCT_100 Bill Venables Your turn again - p 9 Transaction C Buy $400 of office equipment on account (Accounts Payable=you will pay for it later)

ACCT_100 Bill Venables End of Unit 1-1 – p 10 Self review quiz 1-1