Accounting for Entrepreneurs

By: Ms. Rand Marar

What is Accounting?

"The process of identifying, measuring and communicating economic information to permit

informed judgments and decisions by users of the information.” - The American Accounting Association. -

Four Fields of Accounting

• Financial Accounting.• Management Accounting.• Auditing.• Tax Accounting.

Why do we need Accounting?

1. Financial health.2. Financial planning.3. Budgeting.4. Calculating tax liability.5. Financial reporting.6. Need for financing.

The Elements of Accounting

Items with money value that are owned by a business and items that generate future benefits and

repayments.Ex. Cash, Building, Office Supplies, Accounts

Receivables…etc.

Assets

The Elements of Accounting (Cont’d)

Liabilities are debts owed by the business and items that represent economic future sacrifices.

Ex. Loans, Accounts Payable…etc.

Liabilities

The Elements of Accounting (Cont’d)

Capital, proprietorship, or net worth

Owner’s Equity

The Accounting Equation!

= + This equation must always balance!

Assets LiabilitiesOwner’s Equity

The Accounting Cycle: Definitions

• Transaction: A transaction is any activity that changes the value of a firm’s assets, liabilities, or owner’s equity

• Account: is an individual record or form to record and summarize information for each asset, liability, or owner’s equity transaction.

• Double-entry accounting: means that there will be at least two (2) accounts affected by each transaction.

The Accounting Cycle Definitions:

• Journal: diary of information of day-to-day transactions.

• Ledger: individual accounts that help summarize activity and obtain balances of accounts.

• Trial Balance: a statement listing on a certain date that shows all accounts and their balances. This usually occurs at the end of the month, but it could be any time.

The Accounting Cycle

1. Analyze transactions. (Debit or Credit)2. Record in a journal.(Record)3. Post from the journal to the ledger.(Summarize)4. Prepare an unadjusted trial balance.5. Record adjusting entries.6. Prepare adjusted trial balance.7. Prepare Financial Statements.

Analyze Transactions

Involves taking a decision on whether a particular business event has an economic

effect on the assets, liabilities or equity of the business. It also involves ascertaining the

magnitude of the transaction.

Analyzing Transactions

• Assets and ExpensesAn increase is recorded as debit (left side)A decrease is recorded as credit (right side)

• Liabilities, Equities and RevenuesA decrease is recorded as debit (left side)An increase is recorded as credit (right side)

Practical Example• The owner brings cash from his personal account into the business

Analysis:Cash (an asset) is increased thus debit CashOwner capital (an equity) is increased thus credit Owners' Capital

• Office supplies are purchased on accountAnalysis:Office Supplies (an asset) is increased thus debit Office SuppliesAccounts Payable (a liability) is increased thus credit Accounts Payable

• Wages payable are paidAnalysis:Wages Payable (a liability) is decreased thus debit Wages PayableCash (an asset) is decreased thus credit Cash

• Revenue is earned but not yet receivedAnalysis:Accounts Receivable (an asset) is increased thus debit Accounts ReceivableRevenue (a revenue) is increased thus credit Revenue

Recording Transactions in Journal Entries (practical example)

Recording Transactions in Journal Entries (practical example)

Posting from Journal to Ledger

Posting from Journal to Ledger

Posting from Journal to Ledger

Prepare Unadjusted Trial Balance

Record Adjusting Entries

• Accruals:These include revenues not yet received nor recorded and expenses not yet paid nor recorded. For example, interest expense on loan accrued in the current period but not yet paid.

• Prepayments:These are revenues received in advance and recorded as liabilities, to be recorded as revenue and expenses paid in advance and recorded as assets, to be recorded as expense. For example, adjustments to unearned revenue, prepaid insurance, office supplies, prepaid rent, etc.

• Non-cash:These adjusting entries record non-cash items such as depreciation expense, allowance for doubtful debts etc.

Record Adjusting Entries

Prepare Adjusted Trial Balance

Financial Statements

1. Income Statement (contains only revenue and expenses and shows net gain or loss)

2. Statement of Retained Earnings(summarizes the changes during the accounting period)

3. Balance Sheet (lists a firm’s assets, liabilities, and owner’s equity).

Income Statement

Statement of Retained Earnings

Balance Sheet

Users and Their Information Needs

1. Investors 2. Employees 3. Lenders 4. Suppliers and other trade creditors 5. Customers6. Governments and their agencies7. Public

Advantages & Limitations ofFinancial Ratios

Advantages

1. It simplifies the financial statements.2. It helps in comparing companies of different size

with each other.3. It helps in trend analysis which involves comparing

a single company over a period.4. It highlights important information in simple form

quickly. A user can judge a company by just looking at few numbers instead of reading the whole financial statements.

Limitations1. Different companies operate in different industries

each having different environmental conditions such as regulation, market structure, etc.

2. Financial accounting information is affected by estimates and assumptions. Accounting standards allow different accounting policies, which impairs comparability and hence ratio analysis is less useful in such situations.

3. Ratio analysis explains relationships between past information while users are more concerned about current and future information.

Thank youAny Questions?

“I have mentioned before that financial intelligence is a synergy of accounting, investing, marketing and law. Combine those four technical skills and making money with money is easier." - Robert Kiyosaki -