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Introduction to accounting

Introduction to accounting. Miss Savige. Overview. Any thing in RED write down in your books please . Learning Intentions. General understanding of accounting and the language of business Knowledge and understanding of the five types of account classification. Asset Liability Income

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Introduction to accounting

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  1. Introduction to accounting Miss Savige

  2. Overview • Any thing in RED write down in your books please

  3. Learning Intentions • General understanding of accounting and the language of business • Knowledge and understanding of the five types of account classification. • Asset • Liability • Income • Expenses • Equity

  4. Accounting Concepts • What do you think accounting is? • Bank statements • Profit • Tax • Business • Financial statements • Management • Partnership • The process or work of keeping financial accounts

  5. Common phrases • The language of business. • A means to communicate financial information. • A way to convey information about a business to users.

  6. Other Definitions • The production of information about an enterprise and the transmission of that information from people who have it to those who need It. – (Intermediate Accounting, 2nd edition) • The information system that measures business activity, process the data into reports and communicates the results to decision makers. – (accounting 6th edition)

  7. Who uses accounting? • Individuals • Businesses (managers, owners) • Investors • Creditors • Governments • Tax authorities • Non-profit organisations • Others….

  8. How they use accounting • Individuals • manage bank accounts • Evaluate jobs • Decide whether they can afford something (e.g. a car • Businesses • Set goals • Budgeting • Investors • Whether to invest or not • How much they will get in return if they invest • Creditors (e.g. Banks) • If a company can make the loan repayments • Report on predicted income

  9. How they use accounting • Governments • For making decisions regarding welfare • Tax authorities • Tax is calculated using accounting information • How much business have purchased and sold • Non-profit organisations • The same way business do • Others. (employees, unions, etc.) • Estimate wages • Decipher business profit • Influence potential decisions

  10. reflection • write down two examples of who uses accounting • write an example of how you used accounting within this month • People who use accounting to manage bank accounts are ________? • Budgeting for products is used by ________ ? Why?

  11. Account classification • Accounting is based on 5 basic account types • Asset • Liability • Owners Equity • Income/revenue • Expenses

  12. What is an Asset? • An asset is a resource that a business/ person/ government owns and is expected to benefit them in the future. • something that is of a benefit • Examples?

  13. What is an asset • Cash at bank • Accounts receivable (paid by credit) • Bills receivable (paid by certain date) • Inventories (stock) • Prepaid expenses • Land • buildings

  14. Different types of assets • Current assets • Assets that can be converted into cash or sold within the next 12 months • Land • Property • Non-current assets • Assets that are not current assets. • Equipment that is needed for the company to run

  15. What is a liability • Economic obligations (debts) payable to an individual or an organisation outside the business • A responsibility or an obligation of arising from past transactions or events. • Examples?

  16. What is a Liability • Accounts payable (opposite of accounts receivable) • Bills payable (opposite of bills receivable) • Accrued liabilities (sometimes called accrued expense) • Interest, salary

  17. Learning intention • Demonstrate knowledge and understanding of assets, liabilities, owners equity and the accounting equation. Reminder • Any thing in RED write down in your books please

  18. Liability asset Accounts payable • Something that the company has paid for by credit and not cash Bills payable • Unpaid bills Accounts receivable • A sale that was paid for by credit and the company is yet to receive the payment e.g. cash Bills receivable • An invoice has been sent out and a company is waiting for the payment

  19. Accrued liability • Accrued – to accumulate - (benefit or sum of money) - received by someone in regular or increasing amounts • Accrued Liability is an expense that has been acquired but not yet paid in cash. (has not been paid therefore it is owed) • Wages – an employee has done the work but you haven't paid them yet. • Interest – the interest is continually rising but the company does not pay it until the end of the month

  20. What is owners equity • What the business is worth • Owners equity is the difference between the assets and the liabilities of a business and equals the amount of the owners investment in the business • What an owner invests in the company • Owners equity = Assets – Liabilities • Examples?

  21. What is owners equity • Capital – What an owner invest in a company (money, land, buildings) • Drawings – what an owner removes from the company • Revenues (income) • Expenses Covered further down

  22. Which is which? • Classify each of the following as assets, liabilities or Owners equity • Accounts payable • Loan from bank • Owners interest in the business • Furniture • Money owed by Jack • Cash at bank • Stock / inventory • Rent – that you have to pay • Salaries

  23. Equations • Assets = Liabilities + owners equity • A = L + OE • The accounting equation • Owners equity = Assets – Liabilities • OE = A – L • Liabilities = Assets - Owners equity • L = A - OE

  24. Owners Equity = Assets - Liabilities • OE = A - L • John Smith the owner of the tuckshop wants to know his investment in the business. Use the above equation to work out the total value. • Cash at bank $ 500 • Loan from PNC comity $ 200 • Accounts payable $ 50 • Accounts Receivable $ 70 • Value of stock $ 80 • Value of fridge $ 200

  25. Assets • Cash at bank $ 500 • Accounts Receivable +$ 70 • Value of stock +$ 80 • Value of fridge +$ 200 =$ 850 • Loan from PNC comity $ 200 • Accounts payable +$ 50 =$ 250 Answer $ 600

  26. Assets = Liabilities +owners equity • A = L + OE • John Smith the owner of the tuckshop wants to know the value of the assets. Use the accounting equation to work out the total value. • Amount owed to jack $100 • Cost of bread $ 20 • Loan from PNC $300 • Amount owing by Ms Schmidt $ 10 • New fridge monthly repayment $ 50 • John smiths Investment $ 500

  27. Learning intention • Demonstrate knowledge and understanding of income/revenue and expenses as well as how assets, liabilities and owners equity, work in the accounting equation. Reminder • Any thing in RED write down in your books please

  28. Understanding the accounting equation • Total assets must always equal total liabilities plus owners equity • If the owner puts $20,000 in a business where does that money go (what account does it go into)? • If the business buys furniture on credit what type of account is being used? (WRITE DOWN WHAT YOU THINK THE ANSWERS ARE)

  29. The money goes into cash at bank • Equal reaction on the other side • Created a liability but also gained an asset • Created liability through buying something on credit • Gained an asset through obtaining furniture

  30. A = L + OE • John Smith the owner of the tuckshop wants to know the value of the assets. Use the accounting equation to work out the missing asset value. • Amount owed to jack $100 • Cost of bread $ 20 • Loan from PNC $300 • Amount owing by Ms Schmidt $ 10 • New fridge monthly repayment $ 50 • John smiths Investment $ 500

  31. What is income/revenue • The total amount of all revenues and other gains received in an accounting period. • Can enhance an asset can decrease a liability • (does not include money put in by the owner) • Increase the economic benefit • Examples?

  32. Learning intention • Demonstrate knowledge and understanding of income/revenue and expenses as well as how assets, liabilities and owners equity, work in the accounting equation. Reminder • Any thing in RED write down in your books please

  33. What are expenses • The result of decreasing asset or increasing liabilities is called an expense. An expense occurs from the cost of delivering services to clients. • Decreases economic benefit • Does not include distributions of equity participants

  34. Types of expenses • Office rent • Salaries for employees • Advertising • Water, electricity gas • insurance • Supplies (used) • Cash expenses • Depreciation } ONLY BECOME EXPENSES WHEN PAID

  35. what IS depreciation • The devaluing of something • E.g. Apple Iphone 3 cheaper now because over time more advance products have came out • E.g. Wear an tear, a brand new car as soon as it is use is worth less than it was originally • The result of decreasing an asset or increasing liabilities is called an expense. An expense occurs from the cost of delivering services to clients.

  36. Summary The Basic Accounting Elements: Asset • Something a business owns or controls that is of benefit. Liability • Obligation to settle debts in the future Owners’ Equity • Owners’ interest in the company Revenue/Income • Operations of the company that increase assets and economic resources Expense • Decrease in economic resources and assets.

  37. Activity together • If John Smith has the following assets and liabilities what is the owners equity • Cash at Bank $ 1,000 • Loan from bank $ 4,000 • Accounts payable $ 500 • Accounts receivable $ 8,000 • Inventories $ 2,000 • Furniture $ 3,500

  38. Answer Assets - Liabilities = Owners equity Cash at bank Loan from bank $1,000 $4,000 Accounts receivable Accounts payable $8,000 $ 500 Inventories $2,000 Furniture $3,500 Total $14,500-$4,500 = $10,000

  39. Activity 1 (left side do) Activity 2 (right side do) Consider using excel • John Smith gives you the following list of items. Use the accounting equation to determine the total value of assets • Money owing to Tim $ 1,000 • Value of stock $ 8,000 • Loan from bank $ 1,000 • Amount owing from Jack $ 1,000 • New Equipment $ 3,000 • Vehicle's value $15,000 • John Smiths investment $25,000

  40. Now do the other activity Activity 1 (right side do) Activity 2 (leftside do) • John Smith gives you the following list of items. Use the accounting equation to determine the total value of assets • Money owing to Tim $ 1,000 • Value of stock $ 8,000 • Loan from bank $ 1,000 • Amount owing from Jack $ 1,000 • New Equipment $ 3,000 • Vehicle's value $15,000 • John Smiths investment $25,000 L

  41. Activity 1 answer • Assets = $ . Activity 2 answer

  42. Activity 1 answer • Assets = $27,000 . Activity 2 answer

  43. L Game Time • Fill in the blank • Capital is what an owner . . in a company. • Drawings is what an owner . . from the company • Accounting is . . (please circle) • Income/revenue Increases the T F • economic benefit • Expenses Increases the economic benefit T F • Owners equity is the difference between the . . and the . . of a business and equals the amount of the . . Investment in the business

  44. Two examples of an Asset. 1 . 2 . • Two examples of a Liability. 1 . 2 . • Two examples of Owners equity. 1 . 2 . • Two examples of an Expense 1 . 2 . • Two examples of Income/revenue 1 . 2 . • What is the Accounting equation? . . • Fill in the Blank. An asset is something a business . . or controls that is of . . (please circle) • Is budgeting in accounting? T F • Accounts are the only people who use accounting T F • Non Current assets are sold within 12 months. T F • I owe John Smith money, that is an asset T F • Accounts payable is the opposite of accounts receivable T F • Owners equity = Assets + Liabilities T F • Liabilities = Assets - Owners equity T F • Total assets must always equal total liabilities plus T F owners equity

  45. Learning intention • Demonstrate knowledge and understanding of revenue and expenses as well as how assets, liabilities and owners equity, work in the accounting equation. • Demonstrate knowledge and understanding of who uses accounting Reminder • Any thing in RED write down in your books please

  46. Who uses accounting • Individuals • Businesses • Investors • Creditors • Governments • Tax authorities • Non-profit organisations • Others. (employees, unions, etc.) • manage bank accounts • Evaluate jobs • Decide whether they can afford something (e.g. a car) • Set goals • Budgeting • Whether to invest or not • How much they will get in return if they invest • If a company can make the loan repayments • Report on predicted income • For making decisions regarding welfare • Tax is calculated using accounting information • How much business have purchased and sold • The same way business do • Estimate wages • Decipher business profit • Influences for potential decisions

  47. Game time Assets owners equity liabilities

  48. Activity • Show three ways the accounting equation can be expressed (write them down) • A = L + OE • OE = A – L • L = A - OE

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