1. Chapter 9: Accounting Basic Accounting Concepts
Businesses engage in activities that concentrate on financial worth, such as money, spending, expenses, mergers, and costs.
What Accountants Do
Accountants make meaningful and effective decisions based on up to date and accurate records of a company.
Accounting is the process of recording, analyzing, and interpreting the financial or economic activities of a business. Financial activities in business are recorded as transactions: recording something of value for something else of value. Bookkeeping is the recording of all transactions for a business in a specific format.
Double-Entry Bookkeeping
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.
WHAT ACCOUNTANTS DO
Businesses can conduct hundreds—even thousands of transactions daily.
Transactions include paying staff; paying bills, such as heat and electricity; and buying and storing inventory.
Most businesses use accounting software packages, such as QuickBooks and Simply Accounting, to record and track financial information.
Double-entry Bookkeeping
A transaction could result in one increase offset by one decrease, two increases, or two decreases.
An example would be if a business pays $80 for labour, it decreases cash while increasing expenses.

2. Chapter 9: Accounting Basic Accounting Concepts
Accounting and Individuals
Individuals need to keep accurate financial records. People often allow organizations to take preauthorized payments resulting in money taken automatically and on a regular basis from their bank accounts.
Assets
Assets are things of value that a business or person owns.
Liabilities
Liabilities are debts or amounts of money that are owed to others by an individual or a business.
Personal Equity or Net Worth
A person’s assets, after all liabilities are deducted, is known as personal equity or net worth.
ACCOUNTING AND INDIVIDUALS
Personal records or transactions can be recorded in a cheque register or on a computer program.
An example of a preauthorized payment would be a utility bill deducted on a monthly basis from a chequing account.
Always keeping accurate records ensures that individuals do not find themselves with insufficient funds.
Assets
When you take ownership of something, even if you owe money on it, it becomes yours and it is an asset.
Liabilities
Individuals and businesses may borrow money from financial or credit companies.
Personal Equity or Net Worth
See equation below Owner’s Equity on the next slide.

3. Chapter 9: Accounting Basic Accounting Concepts
Accounting and Businesses
A businesses’ assets and liabilities are used to calculate the net worth—the owner’s equity.
Owner’s Equity
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
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
ACCOUNTING AND BUSINESSES
A balance sheet is a financial statement that shows the financial position of a business on a specific date.
If the information on the balance sheet is correct, the left and right side will be equal.

4. Chapter 9: Accounting Basic Accounting Concepts
Cost Principle and Depreciation
The accounting practice of always recording an asset at the actual amount it costs the business is known as the cost principle. Even when an asset depreciates or loses value over time the asset value on the books remains the same.
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
Accounts receivable is the money owed to the business.

5. Chapter 9: Accounting Basic Accounting Concepts
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 = $
Equity calculation for Mark’s net worth can be calculated as follows:
Assets – Liabilities = Owner’s Equity
$ $ = $91 200
ACCOUNTING AND INDIVIDUALS
Accounts payable is the money that a business owes.
Mortgage payable is the debt owed on a building.

6. Chapter 9: Accounting Preparing Financial Statements
The balance sheet, the income statement, and the statement of cash flow helps owners and managers keep track of the financial health of the business. The financial statements provide outsiders with accurate information about the business.
Preparing a Balance Sheet
The balance sheet shows the financial position on any given day of the business, and provides information about its assets, liabilities, and equity.
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)
PREPARING FINANCAIL STATEMENTS
Outsiders interested in the business could be lenders, government employees, and other business people.
See Figure 9.1, “Types of Financial Statements”, on page 281.
Preparing a Balance Sheet
On any given day the balance sheet should be different, that is why it is like a snapshot.
Balance Sheet Equation Method
If the business did not have any debts the balance sheet equation would be: Assets = Owner’s Equity.

7. Chapter 9: Accounting Preparing Financial Statements
Step 1
Statement Headings
Mark’s Repair Shop
Balance Sheet
September 30, 20__
Assets Liabilities
Cash $ Accounts Payable
Accounts
Receivable Bank Loan
Supplies 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 2
List Assets
Step 3
List Liabilities
(steps for preparing a valance sheet for Mark’s Repair Shop)
Step 1: Fill in the Statement Heading: three-line header, centred, with who, what and when
Step 2: List the Assets: Assets should be listed in order of liquidity, the ability to convert an asset or investment into cash quickly and easily.
Step 3: List the Liabilities: Liabilities are listed in order of maturity date, the date by which they must be repaid. The individuals and business under liabilities are often called creditors (a person or business that is owed money; one who lends money or sells on credit.
Step 4: Calculate Owner’s Equity: Use the balance sheet equation Assets – Liabilities = Owner’s Equity to calculate the Mark’s equity in the business.
$ $ = $91 200
Step 5: Put It All Together: Using Steps 1 through 4, the balance sheet for Mark’s Repair Shop will be as shown.
Step 4
Calculate Owner’s Equity
Step 5
Put It All Together

8. Chapter 9: Accounting Preparing Financial Statements
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.
Preparing an Income Statement
The income statement is a financial statement that shows a business’s profit (or loss) over a stated period of time.
The money, or the promise of money, received from the sale of goods or services is called revenue.
Expenses are expenditures that help a business generate revenue.
Balance Sheet Report Form Method
See Figure 9.2, “Who Might Need to Review a Balance Sheet?”, on page 285.
PREPARTING AN INCOME STATEMENT
An income statement is like a movie that shows what happened over a period of time (week, month, quarter, or year).
Examples of expenses include salaries, advertising, maintenance, and utilities.

9. Chapter 9: Accounting Preparing Financial Statements
Income Statements for Service Businesses
Step 1
Statement Headings
Mark’s Repair Shop
Balance Sheet
For the month ending September 30, 20__
Revenue
Repairs Revenue $
Total Revenue $
Expenses
Salaries $
Rent
Advertising
Supplies
Utilities
Insurance
Delivery Expense
Total Expenses $
Net Income $
Step 2
Organize Revenue Section
Step 3
Organize Expenses Section
INCOME STATEMENT FOR SERVICE BUSINESSES
(steps for preparing an income statement for mark’s Repair Shop for the month of September)
Step 1: Fill in the Statement Heading: It answers the questions Who? What? And When?
Step 2: Organize the Revenue Section: All sources of revenue should be listed.
Step 3: Organize the Expenses Section: Larger expenses tend to go first, with all of September’s expenses listed.
Step 4: Calculate Net Income or Net Loss: Using the information from Steps 2 and 3 and the equation for calculating profit (Total Revenue – Total Expenses) $ $6 790 = $3 110
When expenses are shown on the income statement they should be matched with the revenue they generate.
The matching principle states that accurate profit reporting can be done only if all the costs of dong business in a particular period are matched with the revenue generated during that period.
Not following the matching principle might distort figures that business decisions are based on.
See Table 9.1, “Matching Principle Example”, on page 289.
Step 4
Calculate Net Income/Loss

10. Chapter 9: Accounting Preparing Financial Statements
Income Statements for Retail Businesses
Balance sheets for retail businesses are similar to those of service businesses. However, retail businesses need to take the cost of inventory (goods on hand to be sold) into account.
Income Statement Equations
Income statement equation for a service business.
Revenue – Expenses = Net Income
Income statement equation for a retail business.
Revenue – Cost of Goods Sold = Gross Profit Gross Profit – Expenses = Net Income
Income Statement for Retail Businesses
Inventory is the goods and materials kept on hand by a business.
Income Statement Equations
Gross profit, or gross margin, is the money left over after deducting the cost of goods sold from the revenue, but before deduction the business expenses that helped generate the revenue.
The cost of goods sold is calculated by starting with the opening inventory figure (goods and services purchased in previous months but not yet used), adding the new purchases made during the period, and subtracting the inventory remaining at the end of the time period.

11. Chapter 9: Accounting Preparing Financial Statements
Income Statements and Inventory
Tracking of inventory is critical. It saves the retail business money and increases customer satisfaction. When a physical count of inventory is taken, it is compared to the on-going count that is usually maintained by computer systems.
Beginning Inventory, Jan.1, 20__ $50 000
Inventory Purchased
Costs of All Goods for Sale
Ending Inventory, Dec. 20__
Costs of Goods Sold
Sales Revenue $
Cost of Goods profit
Gross Profit
Gross Profit $65 000
Expenses
Net Profit $40 000
ACCOUNTING AND INDIVIDUALS
A fiscal year, or business year, is any 12-month operating period.
The fiscal year often, but not always, corresponds to the calendar year,; it could be January 1 to December 31, or April 1 to March 31.
At the beginning of the fiscal year (Jan. 1, 20__) the shoe store had $ in inventory.
The shoe store, through the year, buy $ worth of additional inventory.
Over the whole year the store has a total of $ in inventory to sell.
At the end of the twelve month period an actual physical count is done. There is $ in unsold inventory.
Subtract the $ (ending inventory) from the $ (cost of all goods available for sale) and the cost of goods sold in $
Remember the cost of goods sold is not the price the customer paid.
The store collected $ in sales revenue (from goods sold) during the year.
$ (cost of goods sold) is deducted from $ (sales revenue) and the gross profit is $ (this is the amount before deducting the business expenses that helped to generate the revenue).
Expenses ($25 000) are deducted from gross profit ($65 000) and it results in net profit ($40 000).
Net profit is the amount the storeowner can declare as income for income tax purposes.
Operating expenses are deducted
from the gross profit to determine
the net profit.

12. Chapter 9: Accounting Basic Accounting Concepts
“Capital” is added to identify the owner’s account
Owner’s Equity Account
The net profit is calculated first then transferred to the balance sheet as part of owner’s equity. Creditors and owners have claims on the assets of the business.
Preparing a Statement of Cash Flow
Cash flow is the movement of cash-in and cash-out of a business. The statement of cash flow is a summary of the cash-in and cash-out transactions of a business that helps to predict the amount of cash it needs to meet obligations.
Owner’s Equity
C. Donahue, Capital, Jan. 1, 20__ $
Add: Net Income $
C. Donahue, Capital, Dec. 31, 20__ $
Projected Cash Flow Statement
Mark’s Repair Shop
October 31, 20__
Transaction In (+) Out (-)
Investment Income +$
Accounts Receivables
Equipment to be Sold
Payroll Not Yet Paid $
Loan Repayment
Insurance Due
Projected Cash Flow
PREPARING A STATEMENT OF CASH FLOW
Sources of cash moving into a business could include sales, interest on investments, accounts receivable, the sale of capital equipment, new loans, and investments.
Sources of expenditures, cash moving out of the business could include rent, payroll, accounts payable, interest payable, and insurance.

13. Chapter 9: Accounting Basic Accounting Concepts
Ways to Increase Cash Flow
A business must consider several ways to meet its obligations if cash flow is inefficient. A business might seek extra investments, reduce inventory purchases, and increase efforts to collect accounts receivables.
Cash-flow Implications of Credit and Debit Cards
Business that allow customers to use a credit and/or debit card do not have wait for their money (accounts receivables); they receive their money (sales revenue) up front. Since these businesses take a long time to pay their own bills, they invest the customers’ cash to make more money.
Ways to Increase Cash Flow
Extra investment sources are increased money from owner(s), a short-term loan from a bank, or finding new partners or investors.
See Figure 9.3, “Eight Ways to Boost Your Cash Flow”, page 294.
Cash-flow Implications of Credit and Debit Cards
In some cases stores can make as much or more on their money-on-money investments as they do selling goods in the store.

14. Chapter 9: Accounting Basic Accounting Concepts
Interpreting Financial Statements
Financial statement information allows accountants to make recommendations to owners regarding future business decisions.
Accountants compare data over a set period of time, usually two or more years.
A Final Measure of Success
For a business to be successful, the return on the owner’s investment should be equal to or greater than the return for a savings account, bond, or mutual fund.
INTERPRETING FINANCIAL STATEMENTS
See Table 9.2, “Comparative Balance Sheet”, on page 297.
The comparison gives an indication of where the company was and where it is now.
The comparison balance sheet could demonstrate that the business needs to direct more effort to collecting accounts receivable.
The balance sheet can give information concerning inventory, show that there is too much debt, or if owner’s net worth has decreased.