Accounting Functions of a Business

Basic Accounting Concepts ■ Businesses engage in activities that concentrate on financial worth, such as money, spending, expenses, mergers, and costs ■ Accountants make meaningful and effective decisions based on up to date and accurate records of a company.

■Accounting o The process of recording, analyzing, and interpreting the financial or economic activities of a business.

■Two types of accounting: 1) Financial - process of recording and analyzing info, about the finances of an organization; used by many (gov., shareholders, customers, suppliers, etc.) to make decisions about the company. 2) Management - accounting practices used in a co. to make Internal decisions about the company

■ Financial activities in business are recorded as transactions: recording something of value for something else of value(i.e company pays employee $9 for an hour of work) ■ Bookkeeping is the recording of all transactions for a business in a specific format.

■ The principle that each transaction involves two changes is known as double-entry bookkeeping: one increase results in one decrease, two increases results in two decreases, and so on (i.e. if company pays $10 for labour, it decreases its cash balance while increasing its expenses)

■ Generally Accepted Accounting Principles (GAAPs) - guidelines developed by professional accountants for the way accounting records and financial statements are prepared. Financial records are presented in a standard form.

Financial Statements ■ Formal documents that use a standard format to provide the key information about a company's financial position. ■ They provide accurate information on a regular basis; may be each week, month or quarter or fiscal year. ■ All business organizations are required by law to produce financial statements to verify income for income tax purposes.

Accurate Financial Statements 1. help a company to remain profitable 2. help a company recover 3. identify and deal with problems 4. provide comparisons from fiscal year to fiscal year Fiscal Year: a period of 12 consecutive months, it does not always run from Jan-Dec

Accounting and Individuals ■ Individuals need to keep accurate financial records and to do this they need to know key information ■ Assets are things of value that a business or person owns. ■ Liabilities are debts or amounts of money that are owed to others by an individual or a business. ■ A person’s assets, after all liabilities are deducted, is known as personal equity or net worth.

Assets - Liabilities = Net Worth

Accounting and Businesses ■ Like individuals, businesses have assets and liabilities. ■ A businesses’ assets and liabilities are used to calculate the net worth—the owner’s equity

Balance Sheet ■ A statement of net worth on a certain date—the difference between what you own (assets) and what you owe (liabilities), sometimes called personal or owner’s equity. ■ A snapshot of the financial history of a business at a particular moment in time.

Balance Sheet

Owner’s equity is the owner’s investment in the business or the financial portion of the business that belongs to the owners or shareholders. Assets – Liabilities = Owner’s Equity (or net worth) ■ Business is growing if Owner’s Equity increases ■ Owner draws salary from Owner’s Equity

Balance Sheet Equations The balance sheet equation can be expressed in two ways: 1. To determine owner’s equity: Assets – Liabilities = Owner’s Equity 2. To determine total assets: Assets = Liabilities + Owner’s Equity *These are called the fundamental accounting equation: the two sides must balance

Keys Terms: Balance Sheet ■ Accounts Receivable: An asset—money owed to a business by customers ■ Accounts Payable: A liability—debts the business owes to another business ■ Mortgage Payable: A liability—a mortgage on a building

Example: Mark’s Repair Shop Here are the assets of Mark’s Repair Shop. cash in the business and in a bank account ($6500) accounts receivable ($8100) invoicing supplies ($500) parts inventory ($4000) business equipment (truck) ($25 500) building and land ($ ) Total Assets = $

Mark’s Repair Shop Here are Mark’s debts or liabilities. ■ accounts payable ($7350) ■ bank loan for truck ($11 050) ■ mortgage payable (on building) ($ ) Total Liabilities = $

Mark’s Repair Shop Equity calculation for Mark’s owner’s equity can be calculated as follows: Assets – Liabilities = Owner’s Equity $ $ = $91 200

Preparing Financial Statements Balance Sheets: ■ The balance sheet shows the financial position on any given day of the business, and provides information about its assets, liabilities, and equity. ■ Who might see a balance sheet? Creditors, investors, owners, government

Balance Sheet Equation Method ■ The balance sheet gets its name because the left side of the equation (assets) always equals the right side (liabilities plus owner’s equity). ■ Assets are owned by one of two groups owner(s) of the business (owner’s equity) individuals or businesses owed money (liabilities)

Five Steps to Creating a Balance Sheet 1.Fill out the Statement Heading – Who? What? When? 2.List the Assets – list assets according to liquidity (how easy to convert asset into cash) 3.List the liabilities – list liabilities in order by maturity date (the date by which they must be repaid) 4.Calculate Owner’s Equity – Use the balance sheet equation (Assets - Liabilities = Owner’s Equity) 5.Put it all Together – Using all the information from steps 1-4 create the sheet

Mark’s Repair Shop Balance Sheet September 30, 20__ Assets Liabilities Cash $6 500 Accounts Payable $ Accounts Receivable Bank Loan Supplies 500 Mortgage Payable Parts Inventory Total Liabilities Equipment Building and Land Owner’s Equity Mark Bianchet, Equity Total Liabilities and Total Assets $ Owner’s Equity $ Step 1 Statement Headings Step 2 List Assets Step 3 List Liabilities Step 4 Calculate Owner’s Equity Step 5 Put It All Together

IMPORTANT!!!! ■ Never use abbreviations ■ Never have corrections or changes appear on final version ■ Always take care to line up figures and dollar signs ■ Always underline totaling a column and double underline a final total ■ Remember this is a formal document

Balance Sheet Report Form Method ■ Computer programs easily complete the balance sheet using an up-and-down column format rather than a side-by- side format.