What is Accounting?

1. What is Accounting? Accounting is the Recording; classifying, summarizing and interpreting of financial events and transactions to provide management and other interested parties with the information they need to make good decisions”.

2. The Internal Role of Accounting Executive Management - Financial statements, budgets, and performance reports Finance - Cash flow information Human Resources - Payroll information Research & Development – cost reports Production – production reports, internal controls Marketing – sales reports, cost reports

3. External Role of Accounting • Accounting >>>Financial statements >> • Executive Management> • Financial reports > External decision makers

4. Internal & External considerations • What organizations does the organization own? • What debts does it owe? • How much income is it earning? • Are the expenses appropriate for the amount of sales? • Are customers accounts being collected properly?

5. Other decision-makers • Other decision makers include people who loan money to the organization. These lenders, called creditors need information to decide whether the company has enough financial strength and profits to pay it’s debts. • Has the organization promptly paid it’s debts in the past? • Dies it have the ability to pay it’s current debts? • Does it have good prospects for future earnings?

6. Areas of Accounting • 5 key areas of accounting: • Managerial accounting • Financial accounting • Compliance (Auditing) • Tax accounting • Governmental and not-for profit accounting

7. Managerial Accounting • The role of a managerial accountant is to provide information to managers in an organization to aid them in making decisions; • Part of their role involves measuring and repairing costs of production, marketing, and other functions; • Prepare budgets, design cost-effective strategies for the business

8. Financial Accounting • All of the information and analyses prepared are for people OUTSIDE the organization; • This includes creditor and lenders, employee unions, customers, suppliers, government agencies and the general public • Much of this information is included in the company’s annual report – a yearly report on the financial “health” of the business, and also the activities and projects of the business.

9. Compliance (Auditing) • Reviewing and evaluating the records used to prepare the company’s financial statements • There are both PRIVATE accountants in the organization that conduct internal audits to ensure that the business is following proper accounting procedures and financial reporting; • PUBLIC accountants will conduct an INDEPENDENT AUDITS of the records and statements of a business; this is required by law for all public corporations in Canada

10. Compliance • Part of the role of an accountant is to ensure that the information prepared is accurate. • Accountants following the GAAP principles • Generally Accepted Accounting Principles (GAAP) were developed to ensure consistency and compliance across all accounting designations, such as the • CA, CGA, and CMA

11. Ethics in Accounting • Due to the many accounting scandals in recent history, all accounting designations have developed their own Code of Ethics • The GAAP are guidelines that help accountants make ethical and consistent decisions in the preparation of accounting statements. • The Sarbanes-Oxley Act (U.S.) – many provisions, including new government reporting standards for publicly-traded companies.

12. Accounting Principles • 1. Business Entity Concept – • Every business is treated as a separate entity, separate and distinct from it’s owner or owners and from every other business. • This will avoid over the financial position and profitability of the business • Example: the personally owned car of a business owner

13. 2. Cost Principle – All goods and services purchased are recorded at cost and appear on the statements at cost • Example – if a business owner purchases land at $50,000 for his business, the purchase should be recorded at $50,000 regardless of the appraised value or if land prices increase or decrease over time.

14. 3. Objectivity Principle – this ensures that the information is based on objective data. • In the previous example, it does not matter what the perceived value is of the land, the cost is determined by the buyers and sellers.

15. The Accounting cycle • A six-step process that results in the preparation and analysis of the major financial statements (balance sheet, income statement, and cash flow statement.) • 1. Analyze documents – • Sales slips, • Travel records, • Bank statements, etc.

16. Accounting cycle • 2. Determine your Assets, Liabilities & Owner’s Equity • Assets – cash, equipment, land, office supplies, merchandise, and amount owed to the business by it’s customers (accounts receivable); • Current Assets: can easily be converted to cash, i.e. cash, accounts receivables, inventory; • Fixed (Capital) Assets: not easily converted to cash, i.e. property, plan and equipment • Intangible Assets: long-term assets which no real physical value, i.e. goodwill, etc. • Liabilities – are the company debts (accounts payable) salaries & wages, taxes payable, interest payable, etc. • Owner’s equity or Shareholder’s Equity

17. Shareholders vs. Owners Equity • Liabilities – are the company debts (accounts payable) salaries & wages, taxes payable, interest payable, etc. • Shareholders equity – if a business is organized like a corporation, the owners of the business are called shareholders or stockholders • Owners equity – if the business is owned by one person, and not a corporation is called Owners Equity.

18. Accounting Equation • Assets = Liabilities + Owner’s Equity • When you are analyzing the documents (the transactions) you record these into a journal. • this involves creating t-accounts, and the practice of DOUBLE-ENTRY bookkeeping is applied. • This refers to writing every transaction in two places, referred to a debit and a credit

19. Analyzing transactions • It is easier to develop t-accounts to record these transactions • Each transaction must have two entries or a debit – which means to enter an amount on the left side of an account; • Credit – which means to enter an amount on the right side of an account;

20. Double-Entry Accounting • Assets = Liab.’s + Owner’s Equity • Dr=increases Dr = for decreases • Cr=decreases Cr = for increases

21. Analysing Transactions • 1. On April 1, 2009 Larry Owen decides to invest $5,000 in a new law practice: • CashLarry Owen, Capital • Dr $5,000 Cr $5,000

22. Analysing Transactions:using t-accounts • 2. On April 2, Larry Owen purchases office equipment for cash, $3,700. • CashOffice Equipment • DR $5,000 • CR $3,700 DR $3,700 • *after all transactions have been entered, then the account balance

23. Analyzing Transactions • 3. On April 3rd, paid the office rent for three months in advance, $900.00. • CashPrepaid Rent • Dr $5,000 Dr $900 • Cr $3,700 • Cr $ 900