Accounting basics

Basics of Accounting
(The Language of Finance)
Devotional
Introduction Video
Discussion of Fundamentals
Basic Accounting Problem
Grade on Neatness – Bring Back Problem on
Wednesday
Note: Use a Pencil & Take Good Notes


Business & Accounting
Accounting is the universal language of Business and
Finance.
More CEO’s from fortune 500 companies have come up
through the ranks of accounting than from any other area
in business. Currently: 54%
Small businesses and usually fail because of poor
accounting understanding.
Marriages usually fail because of poor financial
management (80% of divorces are $$$$ related.)
If you want to get ahead in business & marriage
determine that you are going to understand accounting
basics.


What do Accountants Account For?
Everything of value!


Terms

Assets: Tangible and Non-tangible resources
of a business that have future value. Usually
sub-classified as follows:


Quick Assets (Liquid Assets)
Cash – Petty Cash – Receivables - Securities



Current Assets (Turn into cash/use annually)
All the above + Inventories, Supplies



Fixed Assets (Depreciated over several yrs.)
Buildings, Equipment, Natural Resources




Land (Fixed, but never depreciated)
Intangible Assets: Patents, Trademarks, Copyrights


What are your Assets?
Bank Account & Money in your pocket
Car
Clothes
Books

Stocks/Bonds/CD’s
Prepaid rent
Computers & Electronic Equip.
Knowledge????
Abilities????


Accounting Term: Liabilities
Other people’s claims against your assets!



What you owe!! Debts!
Classified as:
Current Liabilities (one year debt)


Credit Card Debt, Accounts Payable

Long Term Liabilities


Car, Mortgage, Note Payable

Unearned revenues
Bonds (usually super long term)


What are your liabilities?
School Loan

Car Loan
Credit Card Balance
J.C. Penny Account
BYU-Idaho Amount Due


Capital or Owners Equity
The portion of your assets that you can legally claim.
(Net Assets) What you really own legally.
Assets – (minus) Liabilities = Owners Equity (or Capital)
Example (purchased a building for $500,000 with a 10%
down payment ($50,000)




Cost of a building (sales price = Asset amount) $500,000
Less: What you still owe on the building (Liability) $450,000
Equals: Your equity in the building (Capital) or your net worth
in the building. $50,000

Formula universally used in all financial and personal
financial institutions:




Assets = Liability + Owners Equity (Balance Sheet
Equation)
(Resources you have) =(What you owe on them) + (the principle

you have paid on them.)


Owners Equity Account Titles
Single Proprietorship:


Capital

Corporation:




Common Stock (what owners paid in)
Preferred Stock (what owners paid in)
Retained Earnings (profits that the business
keeps in the business)


What is your net worth???
What you have minus what you owe.
What format do we use in business and in
personal finance to show our net worth?


A Balance Sheet Financial Statement
List of Assets (classified by type in accounts)
Compared or balanced with:


List of Liabilities and Owners Equity (classified by type
and in accounts)

Text Book Example Page 660


Example (Simplified)
John Doe’s Business or Personal Records
Balance Sheet
September 10, 2003
Assets:

Current:
Cash at Home
Cash Deposits in Bank

Fixed:
Wardrobe
Equipment
Car


$100
500
2000
1000
5000

Total Assets:

Liabilities:

Current:
Credit Card Payable

Long Term:
Note Payable (on Car)

Total Liabilities
Capital, John Doe:
Total Liabilities & Owners Equity:

$8,600
$500
$2000
$2,500
6,100
$8,600


Other Terms
Temporary Accounts are used in addition to
balance sheet accounts to record changes in
owners equity each reporting period.






Expenses – Decrease in owners equity during the
period by using up an asset or a portion of an asset.
(or creating additional liabilities)
Revenue – Increase in owners equity during the
period by performing a service or selling an asset.
Drawing or Dividends – Decrease in owners equity
due to personal withdrawals by the owner(s).


Income Statement Report
Used to determine the net income or net
loss of an individual or business for a
defined period of time.






Used for marking progress by comparing
months and years
Used by financial institutions for determining
the progress and status of a company or
individuals financial health.
Used by the IRS for determining taxes


Income Statement – What does it
contain?

Matches Expenses with Revenues for a specific
period of time. (Only the temporary type of
accounts are on the income statement.) No
Assets/Liabilities
Income Statement accounts are closed out at
the end of the reporting period and started over
again the next period….so comparisons can be
made.
Personal Income Statement sometimes called a
Cash Flow Statement example on page 661


Income Statement – Example
Name of Individual or business
Income Statement
For period of time (Month of Sept. 2003)
Revenue:
Income from Job
$500
Income from Pell Grant
2000
Total Revenue:
Expenses:
Clothes Expense
$300
Rent Expense
200
Food Expense
50
Tuition Expense

1200
Misc. Expense
250
Total Expenses:
Net Income for September:

$2500

$2000
$ 500


Pop Quiz – Use a Pencil Today

1. Which financial report is a “snapshot” of the of the
financial status of a business or a family…..and is given
a specific date?
2. Which financial report is a “moving picture” of the
business/enterprise for a period of time?
3. What does a balance sheet balance?
4. What are the two kinds of accounts found on an
Income Statement?
5. On what financial report(s) is the “cash” account
found?
6. What are the three subtitles of a income statement.
(name them in the order they are given on the report)
7. If the bank wanted to know your “Net Worth” what
report would they ask for?
8. Capital in a corporation is entitled ?
9. Two ways to increase the capital account are?

10. Two ways to decrease the capital account are?


How do individuals or businesses keep track for all
their assets, liabilities, capital, expenses,
revenues. Etc.?

The “Accounting Process” or otherwise
known as the Accounting Cycle. (also
called the “Audit Trail” of business.
Based on universally accepted accounting
principles. (Generally accepted
accounting principles)
Double Entry Bookkeeping
Accrual Accounting vs. Cash Accounting
Bookkeeping part of accounting.


Accounting Cycle – Start with
financial transactions (you will
need to know these steps!)

Verbs & Nouns for each step
#1 Analyze Source Documents



Check, receipts, invoices, deposit slips, etc.
Decide what accounts they represent

#2 Enter (journalize) data in the journal.




Chronological record of transactions
Book of original entry – checks and balances
Two or more accounts entered at cost

Make a Journal – Required


Accounting Cycle
#3 Post from the journal to the individual
ledger accounts. (to keep a running balance of
each account)


Ledger divided up into these different accounts:
Assets (100 accounts)
Liabilities (200 accounts)
Capital/Owners Equity (300 accounts)
Revenues (400 accounts)
Cost of Goods Sold (Expense) – (500 accounts)
General Expenses (600 accounts)

Make some ledger accounts - required


Accounting Cycle #4

Adjust the necessary accounts to bring
them up to date.






Requires internal transactions
Requires journal entries & posting as well
Example: Maybe some of your Supplies
valued at $500 when you bought them have
been used…you need to bring their value up
to date and expense what has been used.
Example: Depreciation of Equipment


Accounting Cycle #5
#5 At the end of the period or at any time
(with computers) balance all of the
accounts in a trial balance. (Checks and
balance step to see if all of your journal
entries and posting was correct.)




The trail balance is a list of all of your
accounts with balances.
The total of the debit balances must equal the

total of the credit balances.

Make a Trial Balance - Required


Accounting Cycle #6 & 7 & 8
#6 Prepare the Financial Statements




Income Statement
Statement of Changes in Owners Equity
Balance Sheet

Make Financial Statements - Required
#7 Close out all the temporary accounts to
zero, so that you can start a new period/cycle.


Requires journal entries and postin gs

#8. Analyze your financial findings.


The Balance Sheet and Debits and Credits
Balance Sheet Equation


A = L + OE

Use of another checks & balance method





Debits and Credits are terms used to increase or
decrease various accounts and show balances.
All Accounts have either a debit or credit balance.
Assets/Expenses/Withdrawals have debit balances
Increased by debiting and decreased by crediting



Liabilities, Capital, and Revenues have credit
balances.
Increased by crediting, and decreased by debiting


Assets
Cash
Debit
+
100
75

Credit
50

=

Liabilities
A/P
Debit
-

+

Credit
+

O.E.
Capital
Debit
+

Credit
100

-Drawing -Expense +Revenue




Dr
+

Cr
-

Dr
+
50

Cr
-

Dr
-

Cr
+
75

Each Transaction in finance has a debit and a credit. The debit amount must
always equal the credit amount. (Checks & Balances)
Example: Invested 100 Cash in my business.
Example: Paid $50 for Advertising Expense.
Example: Earned $75 for performing services
At the end of the day: (Assets = 125) = (Liabilities = 0) + (OE = 125) and
debits = 225 and credits = 225 (Double balance, double witness)


Quiz Preview – Review with Partner
1-2. Give the accounting equation and define each element in the equation.
_____________________________ = _________________________ + ______________________
Define:_________________________

_______________________

______________________

3. Accounting is called the _____________________________________ of business.
4-7. Name these two statements (The Trial Balance is not a Statement) used in accounting which are used
by managers to make financial decisions (the ones completed in your accounting project) What type of
accounts are on each statement?
First Statement Prepared_____________________________________________________________
Types of accounts found on this
statement._______________________________________________
Last Statement Prepared___________________________________________________________
Two accounts found on this statement?
__________________________________________________
8-12. Give the verbs and nouns of the Six first steps in the accounting cycle: (fill in the blanks)
Verb
Noun
1.)
_________________________________
_________________________________
2.)
_________________________________
_________________________________
3.)
_________________________________
_________________________________
4.)
____Adjust _______________________
____Internal Accounts_______________
5.)
_________________________________

_________________________________
6.)
_________________________________
_________________________________