INTRODUCTION TO ACCOUNTING

1. INTRODUCTION TO ACCOUNTING UNIT 1: Accounting Principles TouchText • What IS a business • Accounting Principles Problems and Exercises Next

2. Accounting “is for NERDS!”: So Which One Is The Accountant? Dictionary Take Notes Back Next

3. Business as “Money Machine” To understand what accounting is, first think of a business as a “money machine”. (For now, it doesn’t matter what the business actually does!) Business Dictionary Investors/Owners Customers & Suppliers Banks Purchases & Expenses (*Actually, accounting is used by many non-business “entities”, including governments, non- government organizations, individuals, and so on. But they are not addressed in this course.) Back Next

4. What Is Accounting? Accounting is the process of collecting, organizing, reporting and analyzing the financial position and performance of a (business) entity. Dictionary Entity Accounting Activities Business Financial Position • Collect • Organize • Report • Analyze (One point in time) Financial Performance (A period of time) Back Next

5. Financial Position As a “money machine”, a business’s financial position refers to what the business owns and what it owes to others, as well as its owners’ net worth in the business at a specific point in time. Dictionary Financial Position Business Financial = related to money ($) Owns = Belongs to the business. Owes = The business must pay back. Net Worth ($) = Owns ($) – Owes ($) Banks Assets Investors/Owners * Much of what a business owns are physical things (“assets”), not money. But accounting requires recording the money value of all assets, including physical things. Back Next

6. Financial Performance As a “money machine”, a business’s financial performance refers to what the business earned, as against what the business paid out in costsand expenses, overa period of time– the difference being profit. Dictionary Revenues from Sales Costs & Expenses Financial Performance Financial = related to money ($) Earned = Revenue received from sales to customers, plus others. Costs = What the business paid for the things it sold to its customers. Expenses = What the business paid to carry on operating Profit ($) = Revenues ($) – Costs ($) – Expenses ($) *Profit same as “Net Income”. Back Next

7. What is NOT a Business Entity “Living in the now” • Informal Economies and Businesses • Cash Transactions Only • No Documents, Records or Receipts • No (Profit-based) Taxes • Owner Same as Business “ I am going home with more money than I started. So business is doing good enough!” Dictionary Proprietorship In some places, this informal approach to running a small business is common. But this is not the right business model to envision when learning about accounting. Business = Owner No Role for Accounting Back Next

8. What IS a Business Entity In accounting, every business is an “entity” distinct and different from its owner(s). Dictionary ≠ Business Owner • As an entity separate from its owner, a business… • Can itself own and owe things. • Can engage in contracts. • Keeps its own documents, records and receipts. • Can engage in both cash and credit (non-cash) transactions. • Is assumed to live forever (as an “going concern”) • Pays taxes. • If it is a corporation, can go bankrupt without any owner liabilities (so-called “limited liability”). • Cannot be “rich” (only its owners can!). Back Next

9. So Who Wants to Know? (Internal) Many different individuals and entities have an interest in knowing the financial position and performance of a business, but for different reasons. Some of this interest is internal. Dictionary Managers: Are we doing a good job? How can we do better? Business Workers: Are we being paid enough? Back Next

10. So Who Wants to Know? (External) Many different individuals and entities have an interest in knowing the financial position and performance of a business, but for different reasons. Some of this interest is external. Dictionary Owners Business Government Potential Investors Suppliers Why would these entities want to know? Banks Competitors Back Next

11. Who Wants to Know (External)? Why? Why do they want to know? Government: Are the paying their taxes? Suppliers: Are the making too much profit from me? Competitors: How are we doing compared to them? Banks: Should we loan them money? Can they pay it back? Potential Investors? Should I buy stock in this business? Owners: How are we doing? What about our management? Dictionary Back

12. Need for Rules Because a lot of different entities are using accounting information for a lot of different reasons, there has to be a common accounting “language” – or set of rules – that accountants should use. Dictionary Is this a cost or an expense? This machine is getting old. What do I do? We sold something but haven’t been paid? What is this? Our land has increased in value. Is this profit? Accounting rules need to be created to answer these questions, so that information coming from different accountants, or different businesses, can be understood and compared. Back Next

13. Who Makes the Rules Accounting rules and regulations are typically created and agreed by accounting standards bodies, rather than by laws of governments. Dictionary USA’s GAAP Vs. IFRS International & Regional International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS) Country Specific e.g. Thailand’s Federation of Accounting Professions (FAP) Can/Will ASEAN countries converge to IFSR? Back Next

14. Who Needs to Know the Rules? Do NOT need to know all the accounting regulations: Beginning Accounting Students (this course!) DO need to know accounting regulations: Advanced Accounting Students Practicing Accountants Dictionary In this class, we learn about universally agreed accounting definitions, principles and practices, so that we can create and understand financial statements. (* We’ve already learned that a business must be treated as a separate entity and as an going concern!) Back Next

15. Principles of Accounting: Business Life Going Concern: Businesses are assumed to go on forever. Periodicity: The life of a business is split up into accounting periods that have a specific beginning and ending; usually one year from 1 January to 31 December. Dictionary Periodicity Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 ….. Going Concern……. Forever ∞ Time * At the end of each accounting period, some accounts are “zeroed out” and start over. Other accounts continue on. Back Next

16. Principles of Accounting: The Accounting Cycle At the end of each accounting period …… Adjusting Entries (non-cash) to bring the accounts up to date. Closing Entries (non) cash to zero-out and move all revenue and expense accounts to the balance sheet. In real time, as they occur, 1. Record all accounting Transactions. Dictionary Going Concern……. Forever ∞ Back Next

17. Principles of Accounting: Quantitative, Measureable and Monetary Accounting entries must be ... Quantitative: defined with numbers Measurable: how much/many is objectively known Monetary: recorded in (home currency) money amounts Dictionary Back Next

18. Principles of Accounting: When to Recognize Revenues and Costs Recognition Rule: In accounting, purchases and sales occur exactly when legal title to the item(s) changes owner. Revenue from Sale Dictionary Customer Orders Item Customer Receives Item Customer Sends $$$ Time >> Time >> Business Buys Item Business Sends Item Business Receives $$$ Cost of Sale Matching Rule: Costs incurred to make/buy the item are matched to the time at which it is sold (using the Recognition Rule). Time-based expenses are matched to the time at which the expenses are incurred. (*The recognition and matching rules become important when the transaction occurs over two different accounting periods.) Back Next

19. Principles of Accounting: Historic Cost Monetary amounts need to be recorded at historic cost, and insignificant adjustments are unnecessary. Dictionary Historic Cost: Things of value purchased and owned by the business (“Assets”) are recorded at the prices originally paid for them. Materiality: Sometimes the work involved to strictly and correctly apply accounting rules isn’t worth the small amount of money involved. When the amount of money involved doesn’t significantly (“materially”) affect the results, the rules need not be strictly enforced. Back Next

20. What is an Account? An Account is simply a category in which like accounting items are placed. Dictionary Entity Cash Sales Bank Loans • Collect • Organize • Report • Analyze Supplies Taxes Land Back Next

21. Account Types Every account is one of five (5) types. Revenues Income from sales, etc. Dictionary Liabilities Debts the business owes Assets Things of value that the business owns Expenses Costs of running the business Owners’ Equity Owners’ net investment in the business Take Notes Back Next

22. End of Unit 1 Questions and Problems Dictionary Take Notes Back End