Basic Accounting Concepts

1. 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.

2. Basic Accounting Concepts 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-entrybookkeeping: one increase results in one decrease, two increases results in two decreases, and so on.

3. Basic Accounting Concepts Assets • things of value that a business or person owns. Liabilities • 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.

4. Basic Accounting Concepts 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

5. 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 ($175 000) Total Assets = $219 600

6. 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) ($110 000) Total Liabilities = $128 400 Equity calculation for Mark’s net worth can be calculated as follows: Assets – Liabilities = Owner’s Equity $219 600 - $128 4000 = $91 200

7. Preparing Financial Statements 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)

8. Preparing Financial Statements Step 1 Statement Headings Step 2 List Assets Step 3 List Liabilities Mark’s Repair Shop Balance Sheet September 30, 20__ Assets Liabilities Cash $6 500 Accounts Payable 7 350 Accounts Receivable 8 100 Bank Loan 11 050 Supplies 500 Mortgage Payable 110 000 Parts Inventory 4 000 Total Liabilities $ 128 400 Equipment 25 500 Building and Land 175 000Owner’s Equity Mark Bianchet, Equity $ 91 200 Total Liabilities and Total Assets $ 219 600Owner’s Equity 219 600 Step 4 Calculate Owner’s Equity Step 5 Put It All Together

9. 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.

10. Preparing Financial Statements Income Statements for Service Businesses Mark’s Repair Shop Balance Sheet For the month ending September 30, 20__ Revenue Repairs Revenue $ 9 900 Total Revenue $ 9 900 Expenses Salaries $ 2 600 Rent 2 000 Advertising 850 Supplies 185 Utilities 235 Insurance 150 Delivery Expense 770 Total Expenses $ 6 790 Net Income $ 3 110 Step 1 Statement Headings Step 2 Organize Revenue Section Step 3 Organize Expenses Section Step 4 Calculate Net Income/Loss

11. 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 besold) 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

12. Preparing Financial Statements Beginning Inventory, Jan.1, 20__ $50 000 Inventory Purchased +75 000 Costs of All Goods for Sale 125 000 Ending Inventory, Dec. 20__ - 40 000 Costs of Goods Sold 85 000 Sales Revenue $150 000 Cost of Goods profit - 85 000 Gross Profit 65 000 Gross Profit $65 000 Expenses - 25 000 Net Profit $40 000 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. Operating expenses are deducted from the gross profit to determine the net profit.

13. 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__ $ 75 000 Add: Net Income $ 40 000 C. Donahue, Capital, Dec. 31, 20__ $ 115 000 Projected Cash Flow Statement Mark’s Repair Shop October 31, 20__ Transaction In (+) Out (-) Investment Income +$ 500.00 Accounts Receivables +750.00 Equipment to be Sold +1 250.00 Payroll Not Yet Paid -$ 460.00 Loan Repayment -930.00 Insurance Due -200.00 Projected Cash Flow 910.00 Basic Accounting Concepts “Capital” is added to identify the owner’s account