1. Introduction to Accounting BAF3M

2. What is Accounting? Class Discussion Are there any common misconceptions? What ISN’T Accounting?

3. What is Accounting? A system that records the day to day financial activities of a business Summarizes information with Financial Statements Provides information for decision making

4. Why do we have Accounting? The purpose: To provide financial information for decision making

5. Accounting vs. Bookkeeping BOOKKEEPING A method of recording day-to-day transactions for a business in a specific format (the data, i.e. journal entries, recording sales and expenses) ACCOUNTING The process of recording, analyzing, and interpreting the economic activities of a business (turning data into useful information, i.e. financial statements)

6. What do Accountants do, anyways? Gather financial data Prepare and collect records Summarize and classify financial information Prepare reports to help others make decisions Establish controls to promote accuracy and honesty

7. Why is Accounting Important? Accountability, Transparency People who handle cash in the company are responsible for it; the business’ financial activities are not secretive, but open to public knowledge (for public corporations) Budgeting This allows businesses to estimate its future sales and expenses Taxation Records must be kept in order to pay taxes

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

9. An Information System What financial questions might you have about your business? Is the business earning profit? Are selling prices too 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?

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

11. Do you ever want to own a business? Accounting is the BACKBONE of BUSINESS Without it, all the other functions of business fall apart Provides accurate sales data Affects marketing decisions Needed for keeping track of cash How else would an owner know if they are making money (PROFIT)?

12. 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

13. Let’s look at some important Accounting Terms GAAP’s Assets Liabilities Owner’s Equity (Personal Equity) Fundamental Accounting Equation

14. GAAP’s Generally Accepted Accounting Principles These are the rules for Accounting They are important because all Accountants must follow them!

15. Assets Items of value owned by a business or person What are some examples of personal assets? House Car Cash RRSP’s

16. Liabilities The debts of a business or person; what you owe to others What are some examples of personal liabilities? Mortgage $$ Owed to Parents Credit cards Bank Loan School debt

17. Owner’s Equity The net worth of a business (Owner’s Equity) or person (Personal Equity) It is the difference between the total assets and total liabilities of a business

18. Fundamental Accounting Equation Assets = Liabilities + Owner’s Equity OR Assets – Liabilities = Owner’s Equity A = L + OE OR A – L = OE Think about it: Everything you own – Everything you owe = Your Net Worth Also called “The Balance Sheet Equation”

19. Activity What’s your net worth? Make a list of all of your assets and all of your liabilities Calculate your total assets and your total liabilities by giving an approximate $ value to each one Now calculate your net worth (personal equity) (remember the fundamental accounting equation) Once completed, estimate your net worth 10 years from now. Repeat the steps above. THINK: Will I have a car? A house? What kind of car – how much would it be worth? Will I have any student loans? Car loans? Approximately how much $$ would I have in the bank? BE REALISTIC or… Have some fun with it!

20. Our 1 st GAAP Business Entity Principle Each business is considered a separate entity, and the financial data for the business should be kept separate from the owner’s personal financial data.

21. Balance Sheet A financial statement that shows the financial position of the business at a certain date It lists assets, liabilities, and owner’s equity A “freeze frame” or snapshot of what the business owns, owes and the owner’s invested interest. The balance sheet does not indicate whether a business has made a profit, only whether it is financially strong.

22. Balance Sheet Assets (Things owned) = Liabilities (debts you owe) + Owners Equity (the owner’s share of the assets)

23. Balance Sheet - Example Mr. Smith Balance Sheet September 5, 2013 AssetsLiabilities Cash $2,000.00Credit Card $2,000.00 House300,000.00Car Loan 500.00 Car5,000.00Bank Loan 20,000.00 Household Items 5,000.00Mortgage 200,000.00 Total Liabilities $222,500.00 Owner's Equity Mr. Smith, Capital $89,500 Total Assets $312,000.00Total Liabilities and Equity $312,000.00

24. Step 1 – Statement Heading 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

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

26. Step 2 – List Assets Assets are listed on the left side of the page The total of Assets must be on the same line as the total for Liabilities and Owner’s Equity 2 types of Assets: Short Term Assets: appear in order of liquidity (how fast they can be converted to cash) For example: Cash, Accounts Receivable, Office Supplies Long Term Assets: appear in order of their useful life to the business. Longest life comes first. For example: Land, Buildings, Equipment

27. Step 3 – List Liabilities The liabilities are listed and totalled on the right side of the page Liabilities are listed according to maturity date, that is, the date they are due to be paid. i.e. Those that must be paid first are listed first For example: Accounts Payable, Bank Loan, Mortgage

28. Step 4 – Show Owner’s Equity Owner’s Equity is listed on the right side of the page, after the Liabilities section Shows the Owner’s Capital, another word for equity

29. Mr. Smith Balance Sheet September 5, 2013 AssetsLiabilities Cash $2,000.00Credit Card $2,000.00 House300,000.00Car Loan 500.00 Car5,000.00Bank Loan 20,000.00 Household Items 5,000.00Mortgage 200,000.00 Total Liabilities $222,500.00 Owner's Equity Mr. Smith, Capital $89,500 Total Assets $312,000.00Total Liabilities and Equity $312,000.00

30. Accounts Receivable An Asset (short term) It is the total amount due from debtors (people or businesses that owe a business money) From purchasing goods or services from the business on credit Often due within 30 or 60 days The “seller” will have an Accounts Receivable

31. Accounts Payable A Liability (short term) It is the total amount owed to creditors (people or businesses that we owe money to) For the purchase of goods or services on credit Often due within 30 or 60 days The “buyer” will have an Accounts Payable

32. Our 2 nd GAAP The Cost Principle Assets are shown on the balance sheet at the cost of their acquisition The value of assets is never increased, even though the owner might think that the value of an asset has risen

33. Class Work / Homework Read over pg. 6-10 pg. 13 Exercises 2 – 4, 5(b)

34. Day 2 Balance Sheet Take up pg. 13 Ex 5(b) pg. 14 Ex 6 + 7 in class Take up Ex 6 + 7