Accounting 11

Why study Accounting?

• http://www.youtube.com/watch?v=4kIWqDK4j5Q

Top 10 Reasons why …

• http://www.youtube.com/watch?v=zUD2MFYJf38

Unit 1: Financial Position

The Purpose of Accounting

• to provide financial information for decision making.

Every accounting system must:

• Record the day-to-day financial activities of the business

• Summarize and report information in financial statements for analysis and decision making.

Unit 1: Financial Position

Total value of Items owned

Total owed to Creditors

Personal Net worth

- =

Creditors – are people or businesses that extended credit when goods and services were purchased or who loaned money used to purchase possessions.

Personal Net Worth – is the difference between the cost of items owned and the debts owed.

Purpose: helps determine whether you should grant a loan or not

Calculating Financial PositionItems owned by Lara Chari Debts owed to creditors by Lara Chari

CashGovernment BondsClothingFurnitureEquipmentAutomobile

$ 4 0005 0003 000

15 00010 00020 000

$57 000

Credit Card DebtBank Loan

$ 2 00010 000

$12 000

Total value of Items owned

Total owed to Creditors

Personal Net worth

- =

$57 000 $12 000 $45 000- =

Accounting Terminology

• Assets: are items of value owned by a business or person

• Liabilities: are the debts of a business or a person.

• Personal equity: is a person’s net worth.(a positive net worth is good…the greater the value, the more likely you will get a loan)

Assets• items of value owned by a person or business • Something a person or business owns.

Categories:

1. Cash - currency, cheques, money orders, bank deposits.2. Accounts Receivable - total amount due from customers.3. Government Bonds4. Furniture5. Office Equipment6. Automobiles - cars, trucks7. Land8. Buildings

How does a business acquire these assets?

1. Borrowing

2. Investment by the owner(s)

Creditor - a person/business to whom money or goods is owed.

Debtor - a person/business who owes money or goods.

Borrowing = Debt = Liabilities• Liabilities - the debts of a business or person.

- something a business or person owes.

• Categories:

1. Loans2. Accounts Payable - amounts owing to creditors for

purchases of goods and services.3. Mortgage - a long-term debt where the building or

land is used as collateral for the debt.

Investment by the owner(s) =

Owner’s Equity

• Owner’s Equity - claim of the owner against the asset of the business.

• Personal Equity (Net Worth) - the difference between the cost of items owned and debts owed.

Questions 1-4 Page (12-13)

• Apply your knowledge

Balance Sheet Equation- The financial position of a person or a business can be stated in the form of a balance sheet equation: (basis for much of the accounting theory you will learn)

Assets Liabilities Owner’s Equity= +

A L OE= +

Example:

$57 000 $12 000 $45 000= +

$57 000 $57 000=

Balance Sheet – Template in Workbook

See Figure 1.1 – Page 4 – Personal balance sheet

Balance Sheet - Excel Template

Business Entity Principle

• Requires that each business be considered a separate entity, and that the financial data for the business be kept separate from the owner’s personal financial data.

Company Balance Sheet

• is a formal report or statement that shows the financial position of the business at a certain date.

• Left side must equal the Right side

• See Figure 1.2

A L OE= +

More Accounting Terminology

• Accounts Receivable: refers to the total amount due from debtors. (customers)

• Accounts payable: refers to the total amount owed to creditors for the purchase of goods and services by the business

• Mortgage Payable: time to repay is longer (typically larger in amount)

“ASSET”

“Liability”

“Liability”

Balance Sheet Preparation

• Step 1: Prepare Statement Heading– Who, What, When?

• Step 2: List Assets

• Step 3: List Liabilities

• Step 4: Show Owner’s Equity

- See Diagrams on Pages 7-8.

Facts to Remember

1) Totals of the left and right side must be written on the same line.

2) No abbreviations.

3) No corrections.

4) Dollar sign should be aligned and placed:- beside the first figure in each column- beside the final total on both sides of the

statement.

Order of Items on Balance Sheet

• Assets (two types)

• Liabilities– are listed according to the date they are due to be

paid, that it, their maturity date.– From shortest to longest term.

• Ex: Accounts Payable (30 days), Bank Loan (1-5 years), Mortgage Payable (within 25 years)

1) Last a short time

- listed in order of their liquidity

2) Last a long time

- listed in order of their useful life to the business, with the longest lasting listed first.

See Examples Page 10

Cost Principle

• when an asset is obtained, its value is recorded at the actual cost to the business.

(does not rise…even if it is thought that the value of the asset has increased)

Accounting Information is Used to Make Decisions:

Accounting Information

Creditors

Government

InvestorsManagement

Owners

Common Recording Practices

• 1) Ruled Accounting Paper – dollar signs, commas, spaces, and decimals are not used.

• 2) Single Line – Addition or Subtraction.• 3) Double Line – Final Totals• 4) Opposite of #1• 5) No Abbreviations. (unless in official name)• 6) Accounting records must be neat & legible!

GAAP – Generally Accepted Accounting Principles

1) The Purpose of Accounting2) The Business Entity Concept3) The Cost Principle4) Liquidity Order5) Maturity Date Rule

(standard accounting rules and guidelines)

(details given for each one on page 20 in your textbook)

Apply your knowledge!

• Page 13-14 (#5-8)