Introduction to Accounting

BAF3M

What is Accounting?Class Discussion

Are there any common misconceptions?

What ISN’T Accounting?

What is Accounting?A system that records the day to day financial

activities of a business

Summarizes information with Financial Statements

Provides information for decision making

Why do we have Accounting?

The purpose:To provide financial information for decision

making

Accounting vs. Bookkeeping

BOOKKEEPING

A method of recording day-to-day transactions for a

business in a specific format (the data, i.e. journal

entries, recording sales and expenses)

ACCOUNTING

The process of recording, analyzing, and interpreting

the economic activities of a business (turning data

into useful information, i.e. financial statements)

What do Accountants do, anyways?

Gather financial data

Prepare and collect records

Summarize and classify financial information

Prepare reports to help others make decisions

Establish controls to promote accuracy and honesty

Why is Accounting Important?

Accountability, Transparency People who handle cash in the company are responsible

for it; the business’ financial activities are not secretive, but open to public knowledge (for public corporations)

Budgeting This allows businesses to estimate its future sales and

expenses

Taxation Records must be kept in order to pay taxes

Why is Accounting Important?

Financial Statements

These are reports that summarize the financial

performance of a business

These reports indicate the business’ economic health

Annual Reports

Financial statements are presented to shareholders and

potential investors in the form of annual reports

An Information SystemWhat financial questions might you have about

your business?Is the business earning profit?Are selling prices too high/low?How much does ABC company owe me?What is the value of my inventory?How much did John Smith earn last year?Do we have enough money to pay our

bills?

An Information System

Who else may want financial information about

the business?

Government

Bankers

Lenders

Potential Investor

Do you ever want to own a business?

Accounting is the BACKBONE of BUSINESSWithout it, all the other functions of business fall

apartProvides accurate sales dataAffects marketing decisionsNeeded for keeping track of cashHow else would an owner know if they are making

money (PROFIT)?

Owning a BusinessIf you decide to operate your own business, you will

find yourself facing such accounting tasks as:

Banking

Payroll

Keeping track of amounts owed by and owed to

customers

Keeping track of amounts owed to the government

Producing an income statement for income tax

purposes

Let’s look at some important Accounting Terms

GAAP’s

Assets

Liabilities

Owner’s Equity (Personal Equity)

Fundamental Accounting Equation

GAAP’sGenerally Accepted Accounting Principles

These are the rules for AccountingThey are important because all Accountants must

follow them!

AssetsItems of value owned by a business or person

What are some examples of personal assets?

House

Car

Cash

RRSP’s

LiabilitiesThe debts of a business or person; what you

owe to others

What are some examples of personal liabilities?

Mortgage

$$ Owed to Parents

Credit cards

Bank Loan

School debt

Owner’s EquityThe net worth of a business (Owner’s Equity)

or person (Personal Equity)

It is the difference between the total assets and total liabilities of a business

Fundamental Accounting Equation

Assets = Liabilities + Owner’s Equity

OR

Assets – Liabilities = Owner’s Equity

A = L + OE OR A – L = OE

Think about it: Everything you own – Everything you owe = Your Net

Worth

Also called “The Balance Sheet Equation”

ActivityWhat’s your net worth?

Make a list of all of your assets and all of your liabilities

Calculate your total assets and your total liabilities by giving an approximate $ value to each one

Now calculate your net worth (personal equity) (remember the fundamental accounting equation)

Once completed, estimate your net worth 10 years from now. Repeat the steps above.THINK: Will I have a car? A house? What kind of car

– how much would it be worth? Will I have any student loans? Car loans? Approximately how much $$ would I have in the bank?

BE REALISTIC or… Have some fun with it!