INTRODUCTION TO ACCOUNTING

Definition of Accounting - Accounting is a system of dealing with financial

information that provides information for decision-making

Accounting vs. Bookkeeping

ACCOUNTING BOOKKEEPING
The process of A method of
recording, analyzing, recording all
and interpreting the transactions for a
economic activities of business in a specific
a business 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


o These are reports that summarize the financial performance of a business
o These reports indicate the business’s economic health
o Annual Reports
o Financial statements are presented to shareholders and potential
investors in the form of annual reports

An Information System, answers the questions:

 1. What financial questions might you have about your business?
2. Is the business earning profit?
3. Are selling prices to high/low?
4. How much does ABC company owe me?
5. What is the value of my inventory?
6. How much did we earn last year?
7. Do we have enough money to pay our bills?
8. Who else may want financial information about the business?
o Government
o Bankers
o Lenders
o Potential Investor

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

 Processing Bills
 Preparing Cheques
 Daily Banking
 Recording Transactions
 Preparing Business Papers Periodic Accounting Activities (these activities
occur at regular intervals)
 Pay cheques (bi-weekly)
 Bank accounts (balanced monthly)
 Financial reports (monthly, quarterly, yearly)
 Income tax returns (yearly)
 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 • RRSP’s

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

The Balance Sheet

BALANCE SHEET = a statement of financial position

 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.

Liabilities (debts you owe) + Owners Equity (the owner’s share of the assets) = Assets
(Things owned)

Features of the Balance Sheet

1. The Balance Sheet looks like the Fundamental Accounting Equation

2. Assets are on the left side and the liabilities and owner’s equity are on the right
side
3. A Three Line Heading is Used
4. WHO? – The name of the individual, business or other organization
5. WHAT? – The name of the financial statement (in this case the balance sheet)
 6. WHEN? – The date on which the financial position is determined

CASH AND LIQUIDITY

Cash is arguably the MOST valuable asset of a business.

• 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:


o Use
o Sell
o Give away
o Leave to heirs
o 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.

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

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,
banks, etc.

CATEGORIZING LIABILITIES

Liabilities are listed in order of priority, or how quickly they need to be paid off.


o Current Liabilities – debts such as invoices for merchandise inventory,
that are paid off quickly.
o 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 from 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

OWNER’S EQUITY - Ownership