» Accounting is a system of dealing with financial information that provides information for decision-making

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

» 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

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

What 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 John Smith earn last year?
˃ Do we have enough money to pay our bills?

Who else may want financial information about the business?
˃ Government
˃ Bankers
˃ Lenders
˃ Potential Investor
˃ A Lawyer

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

Routine Daily Activities o Processing Bills o Preparing Cheques o Daily Banking o Recording Transactions o Preparing Business
Papers
Periodic Accounting
Activities (these activities occur at regular intervals)

Paycheques(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 states that:

» An asset is anything that the business owns that has value
» What are some examples of personal assets?
˃ House
˃ Car
˃ Cash
˃ RRSP’s

» 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 is also referred to as capital or net worth
» It is the difference between the total assets and total liabilities of a business

Here is a list of my assets:
˃ House
˃ Car
˃ Furniture
˃ Cash in Bank
˃ Savings
˃ RRSP’s
˃ Teachers Pension

Here is a list of my liabilities:
˃ Mortgage
˃ Credit card ( paid of every month, but still a potential liability)
˃ Line of credit

» What do I need to do to calculate my net worth?
» Take my total assets and subtract them from my total liabilities

» We can see how this looks by examining a Balance Sheet containing my personal assets, liabilities, and net worth
Assets
Cash in Bank
Savings
RRSP's
Teachers Pension
Household Items
Car
House
Total Assets
Mrs. Drummond
Balance Sheet
May 20, 2012
$ 2,000.00
$ 2,000.00
$ 5,000.00
$ 5,000.00
Liabilities
Credit Card
Car Loan
Credit Line
Mortgage
$ 1,500.00
$ 25,000.00
$ 10,000.00
$ 170,000.00
$ 20,000.00
$ 30,000.00
$ 400,000.00
Total Liabilities $ 206,000.00
Net Worth
Mrs. Drummond’s Equity $ 258,000.00
$ 464,000.00 Total Liabilities and Equity $ 464,000.00

» Make a list of all of your assets and all of your liabilities
» Calculate your total assets and your total liabilities
» Now calculate your net worth (remember the fundamental accounting equation)
» Make a new net worth statement for yourself for 10 years from now!

(Things owned)
(debts you owe)
(the owner’s share of the assets)

» ASSETS = LIABILITIES + OWNERS EQUITY

» 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.

» 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

» 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

What?
Assets
Cash
Accounts Receivable
B. Cava
K. Lincoln
Equipment
Trucks
Total Assets
WHO? – The name of the individual, business or other organization
Metropolitan Movers
Balance Sheet
August 31, 2005
Liabilities
1 1 5 0 00 Accounts Payable
Central Supply
2 0 0 0 00 Loan Payable
1 4 0 0 00 Mercury Finance
13 5 7 5 00 Total Liabilities
42 5 0 0 00
Owners' Equity
J. Hofner, Capital
60 6 2 5 00 Total Liabilities and Equity
When?
1 3 5 0 00
25 1 7 0 00
26 5 2 0 00
34 1 0 5 00
60 6 2 5 00

» Cash is arguably the MOST valuable asset of a business.
» WHY??
˃ It can easily be exchanged for other 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

» 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.
»

» In order of liquidity, assets include:
˃ cash, bank balances,
˃ accounts receivable (listed in alphabetical order),
˃ inventory and supplies, and
˃ furniture, equipment, fixtures, vehicles, property and buildings (listed in the order in which they will be used up).

» 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

ORDER
Of
LIQUIDITY
CLOSEST
TO
CASH
FARTHEST
FROM
CASH
• Current Assets
» Cash
» Accounts Receivable
» Inventory
» Supplies
» Total Current Assets
$ 50,000
$ 30,000
$120,000
$ 15,000
$215,000

IN ORDER OF
REVERSE
DEPRECIATION
ONE THAT
WILL BE
AROUND THE
LONGEST
ONE THAT
WILL BE
AROUND THE
LEAST
AMOUNT OF
TIME
• Fixed Assets
» Land
» Building
» Equipment
$ 200,000
$ 1,100,000
$ 950,000
» Furniture
» Vehicles
$
$
225,000
215,000
» Total Fixed Assets $ 2,690,000

» 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.

» 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.

» 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

ORDER
Of
MATURITY*
FIRST
TO BE
PAID
• Current Liabilities
» Wages Payable
» Total Current Liabilities
$ 10,000
» Accounts Payable
» Other Liabilities
$ 80,000
$ 50,000
» Current Portion - Mortgage $ 15,000
$ 155,000
LAST
TO BE
PAID
* Maturity – When a debt is “mature” it’s payment is due

ORDER OF
MATURITY*
SHORTEST
TERM
• Long Term Liabilities
» Vehicle Loans
» Equipment Loan
» Mortgage
» Total Long Term Liabilities
LONGEST
TERM
$ 150,000
$ 900,000
$ 850,000
$1,900,000

ORDER SHOWN
CAPITAL +/(-)
INCOME/ (LOSS)
THEN SUBTOTAL
SUBTRACT
DRAWINGS
AND THEN TOTAL
• Owner’s Equity
» Owner’s Capital
» Plus: Net Income
»
» Less: Drawings
» Total Owner’s Equity
$ 750,000
$ 150,000
$ 900,000
($ 50,000)
$ 850,000

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

Total Debt to Total Asset Ratio = Short Term Debt + Long Term
Debt/Total Assets
˃ A metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. Calculated by adding short-term and long-term debt and then dividing by the company's total assets.

Working Capital
Current Assets – Current Liabilities =
(1150+2000+1400)-(1350)= 3200
Current Ratio
Assets
Cash
Accounts Receivable
B. Cava
K. Lincoln
Equipment
Trucks
Total Assets
Balance Sheet
(1150+2000+1400)/(1350)= 3.37
Liabilities
1 1 5 0 00 Accounts Payable
Central Supply
2 0 0 0 00 Loan Payable
1 4 0 0 00 Mercury Finance
13 5 7 5 00 Total Liabilities
42 5 0 0 00
Owners' Equity
J. Hofner, Capital
60 6 2 5 00 Total Liabilities and Equity
1 3 5 0 00
25 1 7 0 00
26 5 2 0 00
34 1 0 5 00
60 6 2 5 00

» 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 months, or a year
» An Income Statement shows how much money a business made or lost over a period of time

» As a business operates it makes money from 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?

»
»

»


» Just like the Balance Sheet, the Income
Statement has a three line heading:
˃ Who? (the name of the business/individual)
˃ What? (in this case, an Income Statement)
˃ When? (period of time ending on a certain date)

» The sources of Revenue are listed next
˃ These are listed in alphabetical order
»
the promise of money, received from the sale of goods or services

» 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 from the balance sheet, from invoices that detail the year’s purchases, & from the physical inventory count at the end of the fiscal year
» Purchases show the total amount of the goods bought by the business in a year.

COST OF GOOD SOLD (COGS)
=
BEGINNING INVENTORY + PURCHASES – ENDING INVENTORY
Example:
Inventory, May 1 st , 2012 - $50,000
Inventory, May 31 st , 2012 - $20,000
Purchases - $30,000
COGS = $50,000 + $30,000 – $20,000

» Then Gross Profit is calculated (if applicable)
»
»
the cost of the product and how much is left over to cover the business expenses.

» Expenses are listed next, in alphabetical order
» Operating expenses or overhead are the costs of operating the business during the period the sales took place.
» Expenses include things like salaries, advertising, maintenance, and utilities, and are used to help generate the revenue of a business.

»
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 & sausages in the same period that you sell the hot dog

» Lastly, a net income, or net loss is calculated
˃ This is calculated by subtracting the expenses from the revenue
˃ Net Income/Net Loss = Gross Profit – Expenses
» A net income occurs when the revenue is larger than the expenses, and a net loss occurs when expenses are greater than revenue

Donahue's Shoe Store
Income Statement
For the Year Ending December 31, 2011
Revenue
Shoe Sales
Total Revenue
Cost of Goods Sold
Beginning Inventory, Jan 1, 2011
Inventory Purchased
Cost of goods available for sale
Ending Inventory, Dec. 31, 2011
Total Cost of Goods Sold (COGS)
Gross Profit
$250,000
$50,000
$75,000
$125,000
$40,000
Expenses
Advertising
Rent
Salaries
Supplies
Utilities
Total Expenses
Net Income
$1,200
$12,000
$60,000
$350
$15,000
$250,000
$85,000
$165,000
$88,550
$76,450

» Management looks at income statements 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.

» 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 goods sold) and how much is left to pay for expenses (overhead).

» 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.

» Profit Margin= (Net Income/ Total Revenue) x 100%
» A ratio of profitability calculated as net income divided by revenues, 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 of sales.
Also known as Net Profit Margin.