1. INTRODUCTION TO ACCOUNTING

2. Definition of Accounting
Accounting is a system of dealing with financial information that provides information for decision-making

3. Accounting vs. Bookkeeping
The process of recording, analyzing, and interpreting the economic activities of a business
BOOKKEEPING
A method of recording all transactions for a business in a specific format

4. Why is Accounting Important
Accountability
People who handle cash in the company are responsible for it
Budgeting
This allows businesses to estimate its future sales and expenses
Taxation
Records must be kept in order to pay taxes

5. Why is Accounting Important
Financial Statements
These are reports that summarize the financial performance of a business
These reports indicate the business’s economic health
Annual Reports
Financial statements are presented to shareholders and potential investors in the form of annual reports

6. An Information System
What financial questions might you have about your business?
Is the business earning profit?
Are selling prices to high/low?
How much does ABC company owe me?
What is the value of my inventory?
How much did John Smith earn last year?
Do we have enough money to pay our bills?

7. An Information System
Who else may want financial information about the business?
Government
Bankers
Lenders
Potential Investor
A Lawyer

8. OWNING A BUSINESS
If you decide to operate your own business you will find yourself facing such accounting tasks as:
Banking
Payroll
Keeping track of amounts owed by and owed to customers
Keeping track of amounts owed to the government
Producing an income statement for income tax purposes

9. Categories of Accounting Work
Routine Daily Activities
Processing Bills
Preparing Cheques
Daily Banking
Recording Transactions
Preparing Business Papers
Periodic Accounting Activities (these activities occur at regular intervals)
Paycheques(bi-weekly)
Bank accounts (balanced monthly)
Financial reports (monthly, quarterly, yearly)
Income tax returns (yearly)

10. Categories of Accounting Work
Miscellaneous Activities
Employee resignation
An advertisement is prepared
New capital equipment is purchased
A new loan
A new employee is hired

11. The Fundamental Accounting Equation
The fundamental accounting equation states that:
ASSETS – LIABILITIES = OWNER’S EQUITY OR
ASSETS = LIABILITIES + OWNER’S EQUITY

12. ASSETS An asset is anything that the business owns that has value
What are some examples of personal assets?
House
Car
Cash
RRSP’s

13. LIABILITIES
A liability is anything that the business owes; any debts of the business
What are some examples of personal liabilities?
Credit Line
Mortgage
Owed to Parents
Credit cards

14. OWNER’S EQUITY
Owner’s Equity is also referred to as capital or net worth
It is the difference between the total assets and total liabilities of a business

15. PERSONAL NET WORTH Here is a list of my assets: House Car Furniture
Cash in Bank
Savings
RRSP’s
Teachers Pension

16. PERSONAL NET WORTH Here is a list of my liabilities: Mortgage
Credit card ( paid of every month, but still a potential liability)
Line of credit

17. PERSONAL NET WORTH What do I need to do to calculate my net worth?
Take my total assets and subtract them from my total liabilities

18. PERSONAL NET WORTH
We can see how this looks by examining a Balance Sheet containing my personal assets, liabilities, and net worth
Mrs. Drummond
Balance Sheet
May 20, 2012
Assets
Liabilities
Cash in Bank
$ 2,000.00
Credit Card
$ 1,500.00
Savings
Car Loan
$ 25,000.00
RRSP's
$ 5,000.00
Credit Line
$ 10,000.00
Teachers Pension
Mortgage
$ 170,000.00
Household Items
$ 20,000.00
Car
$ 30,000.00
Total Liabilities
$ 206,000.00
House
$ 400,000.00
Net Worth
Mrs. Drummond’s Equity
$ 258,000.00
Total Assets
$ 464,000.00
Total Liabilities and Equity

19. YOUR NET WORTH
Make a list of all of your assets and all of your liabilities
Calculate your total assets and your total liabilities
Now calculate your net worth (remember the fundamental accounting equation)
Make a new net worth statement for yourself for 10 years from now!

20. The Balance Sheet

21. BALANCE SHEET = a statement of financial position
Liabilities
(debts you owe) +
Owners Equity
(the owner’s share of the assets)
Assets (Things owned) =

22. THE ACCOUNTING EQUATION
ASSETS = LIABILITIES + OWNERS EQUITY
A=L+OE

23. BALANCE SHEET
A “freeze frame” or snapshot of what the business owns, owes and the owners invested interest.
A financial picture of the business at a point in time.
The balance sheet does not indicate whether a business has made a profit, only whether it is financially strong.

24. Features of the Balance Sheet
The Balance Sheet looks like the Fundamental Accounting Equation
A = L + OE
Assets are on the left side and the liabilities and owner’s equity are on the right side

25. Features of the Balance Sheet
A Three Line Heading is Used
WHO? – The name of the individual, business or other organization
WHAT? – The name of the financial statement (in this case the balance sheet)
WHEN? – The date on which the financial position is determined

26. WHO? – The name of the individual, business or other organization
What?
WHO? – The name of the individual, business or other organization
When?

27. CASH AND LIQUIDITY Liquidity – how easily an
Cash is arguably the MOST valuable asset of a business.
WHY??
It can easily be exchanged for other assets
Liquidity – how easily an
asset can be exchanged for
any other asset or converted
to cash.

28. ASSETS
Ownership (title- legal right to use) is separate from financing (source of funds used to purchase asset).
With ASSETS, an owner can:
Use
Sell
Give away
Leave to heirs
Whether bought for cash or on credit, the owner still has “title” to his/her property

29. CATEGORIZING ASSETS
Current Assets – things a business owns that disappear quickly, usually in less than one year.
 Long-term Assets (Capital Assets or Fixed Assets) – assets that a business keeps for a long time.

30. ASSETS In order of liquidity, assets include: cash, bank balances,
accounts receivable (listed in alphabetical order),
inventory and supplies, and
furniture, equipment, fixtures, vehicles, property and buildings (listed in the order in which they will be used up).

31. ACCOUNTS RECEIVABLE
Customers of the business will often buy goods or services with the understanding that they will be paid for in the future
These debts owed represent a dollar value to the business, so the business has a right to include them among the assets on the balance sheet
Each of these customers that owes money to the business is one of its debtors

32. CURRENT ASSETS Current Assets Cash $ 50,000
Accounts Receivable $ 30,000
Inventory $120,000
Supplies $ 15,000
Total Current Assets $215,000
ORDER Of
LIQUIDITY
CLOSEST TO
CASH
FARTHEST FROM
CASH

33. FIXED ASSETS Fixed Assets Land $ 200,000 Building $ 1,100,000
IN ORDER OF REVERSE DEPRECIATION
Fixed Assets
Land $ ,000
Building $ ,100,000
Equipment $ ,000
Furniture $ ,000
Vehicles $ ,000
Total Fixed Assets $ ,690,000
ONE THAT WILL BE AROUND THE LONGEST
ONE THAT WILL BE AROUND THE LEAST AMOUNT OF TIME

34. LIABILITIES
Liabilities are the debts of a business. Businesses acquire debt in two main ways:
1) Accounts Payable – purchasing inventory and supplies on credit.
2) Loans Payable (Notes Payable) – acquired by borrowing money from investors, banks, etc.

35. CATEGORIZING LIABILITIES
Liabilities are listed in order of priority, or how quickly they need to be paid off.
Current Liabilities – debts such as invoices for merchandise inventory, that are paid off quickly.
Long-term Liabilities – debts such as a mortgage loan, that may not be repaid for decades.

36. ACCOUNTS PAYABLE
A business often purchases goods and services from its suppliers with the understanding that payment will be made later
These debts to suppliers represent a dollar obligation of the business, the business must include them among its liabilities
Each of the suppliers owed money by the business is one of its creditors

37. CURRENT LIABILITIES Current Liabilities Wages Payable $ 10,000
ORDER Of
MATURITY*
Current Liabilities
Wages Payable $ 10,000
Accounts Payable $ 80,000
Other Liabilities $ 50,000
Current Portion - Mortgage $ 15,000
Total Current Liabilities $ ,000
* Maturity – When a debt is “mature” it’s payment is due
FIRST
TO BE
PAID
LAST
TO BE
PAID

38. LONG TERM LIABILITIES Long Term Liabilities Vehicle Loans $ 150,000
Equipment Loan $ 900,000
Mortgage $ 850,000
Total Long Term Liabilities $1,900,000
ORDER OF
MATURITY*
SHORTEST TERM
LONGEST TERM

39. OWNER’S EQUITY Owner’s Equity Owner’s Capital $ 750,000
ORDER SHOWN
Owner’s Equity
Owner’s Capital $ 750,000
Plus: Net Income $ 150,000
$ 900,000
Less: Drawings ($ 50,000)
Total Owner’s Equity $ 850,000
CAPITAL +/(-)
INCOME/ (LOSS)
THEN SUBTOTAL
SUBTRACT
DRAWINGS
AND THEN TOTAL

42. MEASURING SUCCESS WITH A BALANCE SHEET
Working Capital = Current Assets – Current Liabilities
Working capital indicates a business’s ability to pay its short-term debts.
Working Capital has to be positive
Current Ratio = Total Current Assets / Total Current Liabilities
Current Ratio shows how many dollars of liquid assets (cash or near cash) a business has for every dollar of short-term debt.
Current ratio has to be over 1.2

43. MEASURING SUCCESS WITH A BALANCE SHEET
Total Debt to Total Asset Ratio = Short Term Debt + Long Term Debt/Total Assets
A metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. Calculated by adding short-term and long-term debt and then dividing by the company's total assets.

44. Current Assets – Current Liabilities = (1150+2000+1400)-(1350)= 3200
Working Capital
Current Ratio
Current Assets/Current Liabilities =
( )/(1350)= 3.37

45. The Income Statement

46. WHAT IS AN INCOME STATEMENT?
Remember: a Balance Sheet is a snapshot of a business on one day in time
An Income Statement shows what happens over a period of time in a business, it could be one month, six months, or a year
An Income Statement shows how much money a business made or lost over a period of time

47. THE INCOME STATEMENT
As a business operates it makes money from daily activities
Through these daily activities the business also accumulates expenses
What are some of the expenses of day to day operations for a business?

48. THE INCOME STATEMENT RECALL:
What is the difference between a cost and an expense?
Cost 
Expense 

49. Order of Entries on an Income Statement
Just like the Balance Sheet, the Income Statement has a three line heading:
Who? (the name of the business/individual)
What? (in this case, an Income Statement)
When? (period of time ending on a certain date)

50. The Income Statement The sources of Revenue are listed next
These are listed in alphabetical order
Revenue (Sales or Income) is the money, or the promise of money, received from the sale of goods or services

51. The Income Statement
Then Cost of Goods Sold is listed or calculated (if applicable)
Cost of Goods Sold is the cost of inventory that was sold to generate business revenue for a specific period of time
Cost of Goods Sold is calculated using information from the balance sheet, from invoices that detail the year’s purchases, & from the physical inventory count at the end of the fiscal year 
Purchases show the total amount of the goods bought by the business in a year.

52. COST OF GOODS SOLD COST OF GOOD SOLD (COGS) =
BEGINNING INVENTORY + PURCHASES – ENDING INVENTORY
Example:
Inventory, May 1st, $50,000
Inventory, May 31st, $20,000
Purchases - $30,000
COGS = $50,000 + $30,000 – $20,000

53. The Income Statement Then Gross Profit is calculated (if applicable)
Gross Profit = Total Revenue – COGS
Gross Profit shows how much money covers the cost of the product and how much is left over to cover the business expenses.

54. The Income Statement Expenses are listed next, in alphabetical order
Operating expenses or overhead are the costs of operating the business during the period the sales took place.
Expenses include things like salaries, advertising, maintenance, and utilities, and are used to help generate the revenue of a business.

55. The Income Statement
Matching Principle – all the costs of doing business in a particular time period are matched with the revenue generated during the same period.
Example:
If you run a hot dog stand, you would report the cost of the buns & sausages in the same period that you sell the hot dog

56. The Income Statement Lastly, a net income, or net loss is calculated
This is calculated by subtracting the expenses from the revenue
Net Income/Net Loss = Gross Profit – Expenses
A net income occurs when the revenue is larger than the expenses, and a net loss occurs when expenses are greater than revenue

57. For the Year Ending December 31, 2011
Donahue's Shoe Store
Income Statement
For the Year Ending December 31, 2011
Revenue
Shoe Sales
$250,000
Total Revenue
Cost of Goods Sold
Beginning Inventory, Jan 1, 2011
$50,000
Inventory Purchased
$75,000
Cost of goods available for sale
$125,000
Ending Inventory, Dec. 31, 2011
$40,000
Total Cost of Goods Sold (COGS)
$85,000
Gross Profit
$165,000
Expenses
Advertising
$1,200
Rent
$12,000
Salaries
$60,000
Supplies
$350
Utilities
$15,000
Total Expenses
$88,550
Net Income
$76,450

58. Measuring Success
Management looks at income statements to measure profitability.
Rate of Return on Net Sales = (Net Profit / Total Revenue) x 100%
Rate of Return on net sales indicates, as a percentage, the portion of a business’ sales that are kept as profit.

59. Measuring Success
Gross Profit Percentage = (Gross Profit / Total Revenue) x 100%
The gross profit percentage indicates how much of the revenue is left after costs (COGS) have been covered.
Management can see how much of its potential profit pays for product (cost of goods sold) and how much is left to pay for expenses (overhead).

60. Gross Profit Percentage
If a business has a high gross profit percentage, it means the business is earning a high margin on its sales.
Margin is the difference between the cost of the product and the selling price of the product.

61. Measuring Success Profit Margin= (Net Income/ Total Revenue) x 100%
A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20\% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales. Also known as Net Profit Margin.