1. Unit 3, Lesson 9 Accounting Basics
AOF Entrepreneurship
Unit 3, Lesson 9
Accounting Basics
Copyright © 2009–2012 National Academy Foundation. All rights reserved.
Copyright © 2009–2011 National Academy Foundation. All rights reserved.

2. Accounting is important in today’s world
Accounting is an integral part of running a business.
Accounting helps entrepreneurs make decisions about every facet of a business.
Accounting can show operational strengths and weaknesses, thus allowing entrepreneurs to make changes that make the company more profitable.
Copyright © 2009–2011 National Academy Foundation. All rights reserved.

3. The accounting cycle is a series of steps
Collect and analyze source documents
List each transaction chronologically in the general journal
Post to the general ledger
Prepare a trial balance
Prepare financial statements
Make post-closing journal entries
Create a post-closing trial balance
Copyright © 2009–2011 National Academy Foundation. All rights reserved.

4. The general journal lists transactions by date
A general journal contains a chronological listing of a business’s financial transactions.
Journalizing is the process of recording financial transactions into a journal.
Before entering a transaction into the journal, you must decide which accounts will be affected.
Why would you want to organize financial transactions in the order in which they occurred?
Copyright © 2009–2011 National Academy Foundation. All rights reserved.

5. The general ledger lists transactions by account
A general ledger keeps specific account information together and tracks individual account balances.
The information from the journal is transferred to the respective account in the general ledger in chronological order.
Why would it be helpful to track the financial information from specific accounts?
Copyright © 2009–2011 National Academy Foundation. All rights reserved.

6. A trial balance helps you make sure you’ve entered everything correctly in the general ledger
A trial balance lists account names and their balances on a specific date.
It proves the general ledger is in balance.
You can detect errors by preparing a trial balance.
The sum of all debits must equal the sum of all credits.
What are some types of errors that can be made during the accounting cycle?
Copyright © 2009–2011 National Academy Foundation. All rights reserved.

7. The income statement shows revenues and expenses for a specific time period
By listing aggregated revenues and expenses, you can identify anything unexpected or out of balance.
By subtracting expenses from revenues, you can see how much you made (or lost) during the time period you’re reporting.
Information from the income statement is used in other financial statements.
Copyright © 2009–2011 National Academy Foundation. All rights reserved.

8. The statement of changes in owner’s equity (SCOE) shows the company’s worth at the end of the accounting period
The SCOE is usually prepared after the income statement and before the balance sheet.
The SCOE reports the change in capital from the beginning to the end of a time period.
Capital can be increased or decreased during each accounting cycle.
Domingo’s Dance Studio
Statement of Changes in Owner’s Equity
For the Month Ended February 28, 2009
Beginning Capital Balance, February 1, 2009
0.00
Add: Investments by Owner
  2,000.00
Subtotal
2,000.00
Less: Withdrawals by Owner
1,000.00
Net Loss
Total Decrease in Capital
1,270.00
Ending Capital, February 28, 2009
730.00
What are the benefits of reinvesting a company’s net income back into the company?
Copyright © 2009–2011 National Academy Foundation. All rights reserved.

9. The balance sheet reports a company’s assets, liabilities, and shareholder equity
Copyright © 2009–2011 National Academy Foundation. All rights reserved.

10. Performance reports help control expenses and plan for the future
Cooper's Kites
Performance Report
For Year Ended December 31, 2013
Increase/(Decrease)
Projected
Actual
Amount
Percentage
Operating Revenue
Net Sales
$50,000
$62,847
$12,847
25.69%
Cost of Merchandise Sold
25,500
32,062
6,562
25.73%
Gross Profit on Operations
24,500
30,785
6,285
25.65%
Operating Expenses
Selling Expenses
Advertising Expense
1,325
1,880
555
41.89%
Supplies Expense--Sales
576
748
172
29.86%
Total Selling Expenses
1,901
2,628
727
38.24%
Administrative Expenses
Depr. Expense--Office Equipment
714
0.00%
Depr. Expense--Computer System
1,000
Insurance Expense
1,720
Payroll Taxes Expense
2,850
2,660
-190
-6.67%
Rent Expense
1,200
Salary Expense--Administrative
9,500
Supplies Expense--Administrative
435
565
130
29.89%
Uncollectible Accounts Expense
112
159 47
41.96%
Utilities Expense
869
927 58
6.67%
Total Administrative Expenses
18,400
18,445 45
0.24%
Total Operating Expenses
20,301
21,073
772
3.80%
Income from Operations
4,199
9,712
5,513
131.29%
Other Revenue and Expenses
Interest Revenue 26 38 12
46.15%
Net Income before Federal Income Tax
4,225
9,750
5,525
130.77%
Federal Income Tax Expense
634
1,463
829
130.76%
Net Income after Federal Income Tax
3,591
8,287
4,696
Units of Item Sold
1000
1248
248
24.80%
Performance reports serve to:
Analyze differences between projected and actual sales, costs, and expenses
Identify significant and/or unfavorable differences needing corrective actions
Copyright © 2009–2011 National Academy Foundation. All rights reserved.