ACCOUNTING

What is Accounting?
Accounting is a system of dealing
with financial information that
provides information for decision-
making
ACCOUNTING VS.
BOOKKEEPING
ACCOUNTING
The process of recording, analyzing, and
interpreting the economic activities of a business
BOOKKEEPING
A method of recording all transactions for a
business in a specific format
WHY IS ACCOUNTING
IMPORTANT
ACCOUNTABILITY
People who handle cash in the company are responsible for it

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’s economic health

ANNUAL REPORTS
Financial
AN INFORMATION SYSTEM
What is financial questions might you have about your business?

 Is the business earning profit?

Are selling prices to high/low?
How much does ABC company owe me?
What is the value of my inventory?
How much did my company 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
Potential investor
A lawyer
 stake holders
OWNING A BUSINESS
If 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
CATEGORIES OF ACCOUNTING
WORK
Routine daily activities Periodic accounting activities
(these activities occur at
regular intervals)
Processing bills
Preparing Cheques o Pay cheques (bi-weekly)
Daily banking o Bank accounts (balanced
monthly)
Recording transactions o Financial reports (monthly,
quarterly, yearly)
Papers o Income tax returns (yearly)
CATEGORIES OF ACCOUNTING
WORK
MISCELLANEOUS ACTIVITIES
 Employee resignation
An advertisement is prepared
New capital equipment is purchased
A new loan
A new employee is hired
THE FUNDAMENTAL ACCOUNTING
EQUATION
The Fundamental accounting equation states that:

ASSETS – LIABILITIES = OWNER’S EQUITY

OR

ASSETS = LIABILITIES + OWNER’S EQUITY

ASSETS
An asset is anything that the business owns that has value

What are some examples of personal assets?

House
Car
Cash
Plot
LIABILITIES
A liability is anything that the business owes; any debts of the business

What are some examples of personal liabilities?

Credit line
Mortgage
Owed to parents
Credit cards
OWNER’S EQUITY
Owner’s Equity is also referred to as capital or net worth

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

business
PERSONAL NET WORTH
Here is the list of my assets:
House
Car
Furniture
Cash in bank
Savings
Pension
PERSONAL NET WORTH
Here is the list of my liabilities:

Mortgage

Credit card ( paid of every month, but still a potential liability)

Line of credit
PERSONAL NET WORTH
What do I need to do to calculate my net worth?

Take my total assets and subtract them form my total liabilities

THE BALANCE SHEET
A “FREEZE FRAME’ or snapshot of what the business owns, owes
and the owners invested interest.

A financial picture of the business at a point in time.

The balance sheet does not indicate whether a business has made a
profit , only whether it is financially strong.
FEATURES OF THE BALANCE
SHEET
The balance sheet looks like the Fundamental Accounting equation

A = L + OE

Assets are on the left side and the liabilities and owner’s equity are
on the right side
FEATURES OF THE BALANCE
SHEET
A three Line Heading is used

WHO? – The name of the individual, business or other organization

WHAT? –The name of the financial statement ( in this case the

balance sheet)

WHEN? –The date on which the financial position is determined

CASH AND LIQUIDITY
Cash is arguably the most valuable of a business

WHY? –It can easily be exchanged for other assets

LIQUIDITY –How easily an asset can be exchanged for any other asset
or converted to cash.
ASSETS
Ownership ( title- legal right to use) is separate from financing
( source of funds used to purchase asset).
With ASSETS, an owner can:
Use
Sell
Give away
Leave to heirs
Whether bought for cash or on credit, the owner still has ‘’ title” to
his/her property
CATEGORIZING ASSETS
CURRENT ASSETS –Things a business owns that disappear quickly,
usually in less than one year.

LONG-TERM ASSETS (Capital assets or fixed assets) –Assets that a

business keeps for a long time.
ASSETS
In order of liquidity, assets include:
Cash , bank balances,

Accounts receivable (listed in alphabetical order)

Inventory and supplies, and

Furniture, equipment, fixtures, vehicle, property and buildings ( listed in the

order in which they will be used up)
ACCOUNTS RECEIVABLE
Customers of the business will often buy goods or services with the
understanding that they will be paid for in the future

These debts owed represent a dollar value to the business, so the

business has a right to include them among the assets on the
balance sheet

Each of these customers that owes money to the business is one of

its debtors
CURRENT ASSETS
CURRENT ASSETS

CASH $ 50,000
ACCOUNTS RCEIVABLE $ 30,000
INVENTRY $ 120,000
SUPPLIES $ 15,000

TOTAL CURRENT ASSETS $ 215,000

FIXED ASSETS
FIXED ASSETS
 LAND $ 200,000
BUILDING $ 1,100,000
EQUIPMENT $ 950,000
FURNITURE $ 225,000
VEHICLES $ 215,000

TOTAL FIXED ASSETS $ 2,690,000

LIABILITIES
Liabilities are the debts of a business.
Businesses acquire debt in two main ways:

1) ACCOUNTS PAYABLE –Purchasing inventory and supplies on credit.

2) LOANS PAYABLE (NOTES PAYABLE) –Acquired by borrowing money

from investors, bank, etc.
CATEGORIZING LIABILITIES
Liabilities are listed in order of priority, or how quickly they need to
be paid off.

CURRENT LIABILITIES –Debts such as invoices for merchandise

inventory, that are paid off quickly.

LONG-TERM LIABILITIES –Debts such as a mortgage loan, that may

not be repaid for decades.
ACCOUNTS PAYABLE
A business often purchases goods and services form its suppliers
with the understanding that payment will be made later

These debts to suppliers represent a dollar obligation of the

business, the business must include them among its liabilities

Each of the suppliers owed money by the business is one of its

creditors
CURRENT LIABILITIES
CURRENT LIABILITIES
 WAGES PAYABLE $ 200,000
ACCOUNTS PAYABLE $ 1,100,000
OTHER LIABILITIES $ 950,000
CURRENT PORTION- MORTGAGE $ 225,000

TOTAL CURRENT LIABILITIES $ 2,475,000

LONG TERM LIABILITIES
LONG TERM LIABILITIES

VEHICLE LOANS $ 50,000

EQUIPMENT LOAN $ 30,000
MORTGAGE $ 120,000

TOTAL CURRENT ASSETS $ 200,000

OWNER’S EQUITY
OWNER’S EQUITY

 OWNER’S CAPITAL $ 750,000

PLUS: NET INCOME $ 150,000
GROSS $ 900,000
LESS: DRAWINGS $ (50,000)

TOTAL OWNERS’S EQUITY $ 850,000

BALANCE SHEET
MEASURING SUCCESS WITH A
BALANCE SHEET
WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES
Working capital indicates a business’s ability to pay its short-term debts
 Working capital has to be positive

CURRENT RATIO = TOTAL CURRENT ASSETS / TOTAL CURRENT LIABILITIES

 Current ratio shows how many dollars of liquid assets (cash or near cash) a
business has for every dollar of short-term debt.
Current ratio has to be over 1.2
THE INCOME STATEMENT
WHAT IS AN INCOME STATEMENT?
 REMEMBER: A balance sheet is a snapshot of a business on one
day in time
An INCOME STATEMENT shows what happens over a period of time
in a business, it could be one month, six month, or a year

An INCOME STATEMENT shows how much money a business made

or lost over a period of time
THE INCOME STATEMENT
As a business operates it makes money form daily activities

Through these daily activities the business also accumulates

expenses

What are some of the expenses of day to day operations for a

business?
THE INCOME STATEMENT
RECALL:

 What is the difference between a cost and an expense?

COST of an object or action) require the payment of (a specified sum of

money) before it can be acquired or done.

EXPENSE the cost incurred in or required for something.

ORDER OF ENTRIES ON AN
INCOME STATEMENT
Just like Balance sheet, the income statement has a three line
heading:
WHO? – The name of the individual, business or other organization

WHAT? –The name of the financial statement ( in this case an income

statement)

WHEN? –(Period of time on a certain date)

THE INCOME STATEMENT
The sources of revenue are listed next

These are listed n alphabetical order

Revenue
(Sales or income) is the money, or the promise of money,
received from the sales of goods and services
THE INCOME STATEMENT
Then COST OF GOODS SOLD is listed or calculated (if applicable)
COST OF GOODS SOLD is the cost of inventory that was sold to generate
business revenue for a specific period of time

COST OF GOODS SOLD is calculated using information form the balance sheet,
from invoices that detail the year’s purchases and form the physical inventory
count at the end of the fiscal year
PURCHASES shows the total amount of the goods bought by the business in a
year.
COST OF GOODS SOLD
COST OF GOOD SOLD (COGS)
=
BEGINNING INVENTORY + PURCHASES – ENDING INVENTORY
EXAMPLE:
INVENTORY, MAY 1ST , 2022 = $ 50,000
INVENTORY, MAY 31ST, 2022= $ 20,000
PURCHASES IN MAY 2022 = $ 30,000
COGS= $50,000 +$30,000- $20,000
THE INCOME STATEMENT
Then Gross profit is calculated (if applicable)

Gross Profit = Total Revenue – COGS

Gross profit shows how much money covers the cost of the product
and how much is left over to cover the business expenses.
THE INCOME STATEMENT
Expenses are listed next, in alphabetical order

OPERATING EXPENSES or OVERHEAD are the cost of operating the

business during the period the sale took place.

Expenses include things like salaries, advertising, maintenance, and

utilities and are used to help generate the revenue of a business.
THE INCOME STATEMENT
MATCHING PRINCIPLE –All the costs of doing business in a
particular time period are matched with the revenue
generated during the same period.

EXAMPLE:
+ If you run a hot dog stand, you would report the cost of the buns and sausages in the
same period that you sell the hot dog
THE INCOME STATEMENT
Lastly, a NET INCOME, or NET LOSS is calculated
This is calculated by subtracting expenses from the revenue

NET INCOME / NET LOSS = GROSS PROFT – EXPENSES

A NET INCOME occurs when the revenue is larger than the expenses, and a NET
LOSS occurs when expenses are greater than revenue
THE INCOME STATEMENT (NET PROFIT)
THE INCOME STATEMENT (NET
LOSS)
MEASURING SUCCESS
Management looks at income statement to measure profitability.

Rate of return on Net sales = (net profit / total revenue) x 100%

Rate of return on net sales indicates, as a percentage, the portion of

a business’ sales that are kept as profit.
MEASURING SUCCESS
Gross Profit percentage = ( Gross profit / total Revenue) x 100%

The gross profit percentage indicates how much of the revenue is left
after costs (COGS) have been covered.

Management can see how much of its potential profit pays for
product (cost of good sold) and how much is left to pay for expenses
(overhead).
GROSS PROFIT PERCENTAGE
If a business has a high gross profit percentage, it means the
business is earning a high margin on its sales.

Margin is the difference between the cost of the product

and the selling price of the product.
MEASURING SUCCESS
Profit margin = (net income / total revenue) x 100%
A ratio of profitability calculated as net income divided by revenue,
or net profits divided by sales. It measures how much out of every
dollar of sales a company actually keeps in earnings.
Profit margin is very useful when comparing companies in similar
industries. A higher profit margin indicates a more profitable
company that has better control over its costs compared to its
competitors. Profit margin is displayed as a percentage; a 20% profit
margin, for example, means the company has a net income of $0.20
for each dollar sales.
THANK YOU