Accounting 11
Why study Accounting?
• http://www.youtube.com/watch?v=4kIWqD
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Top 10 Reasons why …
• http://www.youtube.com/watch?v=zUD2MF
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Unit 1: Financial Position
The Purpose of Accounting
• to provide financial information for decision
making.
Every accounting system must:
• Record the day-to-day financial activities of the
business
• Summarize and report information in financial
statements for analysis and decision making.
Unit 1: Financial Position
Purpose: helps determine whether you should grant a loan or not
Total value of
Items owned
- Total owed to = Personal Net
Creditors
worth
Creditors – are people or businesses that extended credit when goods and services were
purchased or who loaned money used to purchase possessions.
Personal Net Worth – is the difference between the cost of items owned and the debts
owed.
Calculating Financial Position
Items owned by Lara Chari
Cash
Government Bonds
Clothing
Furniture
Equipment
Automobile
Debts owed to creditors by Lara Chari
$ 4 000
5 000
3 000
15 000
10 000
20 000
$57 000
Credit Card Debt
Bank Loan
Total value of
Items owned
-
Total owed
to
Creditors
$57 000
-
$12 000
=
=
$ 2 000
10 000
$12 000
Personal
Net worth
$45 000
Accounting Terminology
• Assets: are items of value owned by a
business or person
• Liabilities: are the debts of a business or a
person.
• Personal equity: is a person’s net worth.
(a positive net worth is good…the greater the
value, the more likely you will get a loan)
Assets
•
•
items of value owned by a person or business
Something a person or business owns.
Categories:
1.
2.
3.
4.
5.
6.
7.
8.
Cash - currency, cheques, money orders, bank deposits.
Accounts Receivable - total amount due from customers.
Government Bonds
Furniture
Office Equipment
Automobiles - cars, trucks
Land
Buildings
How does a business acquire these
assets?
1. Borrowing
Creditor - a
person/business to
whom money or
goods is owed.
2. Investment by the owner(s)
Debtor - a
person/business who
owes money or goods.
Borrowing = Debt = Liabilities
•
Liabilities - the debts of a business or person.
- something a business or person owes.
•
Categories:
1. Loans
2. Accounts Payable - amounts owing to creditors for
purchases of goods and services.
3. Mortgage - a long-term debt where the building or
land is used as collateral for the debt.
Investment by the owner(s) =
Owner’s Equity
• Owner’s Equity - claim of the owner against
the asset of the business.
• Personal Equity (Net Worth) - the difference
between the cost of items owned and debts
owed.
Questions 1-4 Page (12-13)
• Apply your knowledge
Balance Sheet Equation
- The financial position of a person or a business can be stated in the form of a
balance sheet equation: (basis for much of the accounting theory you will learn)
Assets
=
Liabilities
+
Owner’s Equity
A
=
L
+
OE
$57 000
=
$12 000
+
$45 000
$57 000
=
$57 000
Example:
Balance Sheet – Template in Workbook
See Figure 1.1 – Page 4 – Personal balance sheet
Balance Sheet - Excel Template
Business Entity Principle
• Requires that each business be considered a
separate entity, and that the financial data for
the business be kept separate from the
owner’s personal financial data.
Company Balance Sheet
• is a formal report or statement that shows the
financial position of the business at a certain
date.
A
=
L
+
• Left side must equal the Right side
• See Figure 1.2
OE
More Accounting Terminology
• Accounts Receivable: refers to the total amount due
from debtors. (customers)
“ASSET”
• Accounts payable: refers to the total amount owed
to creditors for the purchase of
“Liability
goods and services by the business
”
• Mortgage Payable: time to repay is longer (typically
larger in amount)
“Liability
”
Balance Sheet Preparation
• Step 1: Prepare Statement Heading
– Who, What, When?
• Step 2: List Assets
• Step 3: List Liabilities
• Step 4: Show Owner’s Equity
- See Diagrams on Pages 7-8.
Facts to Remember
1) Totals of the left and right side must be written
on the same line.
2) No abbreviations.
3) No corrections.
4) Dollar sign should be aligned and placed:
- beside the first figure in each column
- beside the final total on both sides of the
statement.
See Examples Page 10
Order of Items on Balance Sheet
• Assets (two types)
1) Last a short time
2) Last a long time
- listed in order of their liquidity
- listed in order of their useful life
to the business, with the longest
lasting listed first.
• Liabilities
– are listed according to the date they are due to be
paid, that it, their maturity date.
– From shortest to longest term.
• Ex: Accounts Payable (30 days), Bank Loan (1-5 years),
Mortgage Payable (within 25 years)
Cost Principle
• when an asset is obtained, its value is
recorded at the actual cost to the business.
(does not rise…even if it is thought that the
value of the asset has increased)
Accounting Information is Used to
Make Decisions:
Creditors
Government
Owners
Accounting
Information
Management
Investors
Common Recording Practices
• 1) Ruled Accounting Paper – dollar signs,
commas, spaces, and decimals are not used.
• 2) Single Line – Addition or Subtraction.
• 3) Double Line – Final Totals
• 4) Opposite of #1
• 5) No Abbreviations. (unless in official name)
• 6) Accounting records must be neat & legible!
GAAP – Generally Accepted
Accounting Principles
(standard accounting rules and guidelines)
1)
2)
3)
4)
5)
The Purpose of Accounting
The Business Entity Concept
The Cost Principle
Liquidity Order
Maturity Date Rule
(details given for each one on page 20 in your textbook)
Apply your knowledge!
• Page 13-14 (#5-8)