AOF
Entrepreneurship
Unit 3, Lesson 9
Accounting Basics
Copyright © 2009–2012 National Academy Foundation. All rights reserved.
Accounting is important in today’s world
• Accounting is an integral part of
running a business.
• Accounting helps entrepreneurs
make decisions about every
facet of a business.
• Accounting can show
operational strengths and
weaknesses, thus allowing
entrepreneurs to make changes
that make the company more
profitable.
The accounting cycle is a series of steps
1. Collect and analyze source documents
2. List each transaction chronologically in the general
journal
3. Post to the general ledger
4. Prepare a trial balance
5. Prepare financial statements
6. Make post-closing journal entries
7. Create a post-closing trial balance
The general journal lists transactions by date
• A general journal contains
a chronological listing of a
business’s financial
transactions.
• Journalizing is the process
of recording financial
transactions into a
journal.
• Before entering a
transaction into the
journal, you must decide
which accounts will be
affected.
Why would you want to
organize financial
transactions in the order
in which they occurred?
The general ledger lists transactions by account
• A general ledger keeps specific
account information together
and tracks individual account
balances.
• The information from the
journal is transferred to the
respective account in the
general ledger in chronological
order.
Why would it be helpful
to track the financial
information from specific
accounts?
A trial balance helps you make sure you’ve entered
everything correctly in the general ledger
• A trial balance lists account
names and their balances on a
specific date.
• It proves the general ledger is in
balance.
• You can detect errors by
preparing a trial balance.
• The sum of all debits must equal
the sum of all credits.
What are some types of errors that can be made
during the accounting cycle?
The income statement shows revenues and expenses for a
specific time period
• By listing aggregated
revenues and expenses, you
can identify anything
unexpected or out of
balance.
• By subtracting expenses
from revenues, you can see
how much you made (or
lost) during the time period
you’re reporting.
• Information from the income
statement is used in other
financial statements.
The statement of changes in owner’s equity (SCOE) shows
the company’s worth at the end of the accounting period
• The SCOE is usually
prepared after the
income statement and
before the balance
sheet.
• The SCOE reports the
change in capital from
the beginning to the end
of a time period.
• Capital can be increased
or decreased during
each accounting cycle.
Domingo’s Dance Studio
Statement of Changes in Owner’s Equity
For the Month Ended February 28, 2009
Beginning Capital Balance, February 1, 2009
Add: Investments by Owner
Subtotal
Less: Withdrawals by Owner
Net Loss
Total Decrease in Capital
Ending Capital, February 28, 2009
0.00
2,000.00
2,000.00
1,000.00
-270.00
1,270.00
730.00
What are the benefits of
reinvesting a company’s
net income back into the
company?
The balance sheet reports a company’s assets, liabilities, and
shareholder equity
Performance reports help control expenses and plan for the
future
Performance reports
serve to:
• Analyze differences
between projected
and actual sales,
costs, and
expenses
• Identify significant
and/or unfavorable
differences needing
corrective actions
Cooper's Kites
Performance Report
For Year Ended December 31, 2013
Projected
Actual
Increase/(Decrease)
Amount
Percentage
Operating Revenue
Net Sales
Cost of Merchandise Sold
Gross Profit on Operations
Operating Expenses
Selling Expenses
Advertising Expense
Supplies Expense--Sales
Total Selling Expenses
Administrative Expenses
Depr. Expense--Office Equipment
Depr. Expense--Computer System
Insurance Expense
Payroll Taxes Expense
Rent Expense
Salary Expense--Administrative
Supplies Expense--Administrative
Uncollectible Accounts Expense
Utilities Expense
Total Administrative Expenses
Total Operating Expenses
Income from Operations
Other Revenue and Expenses
Interest Revenue
Net Income before Federal Income Tax
Federal Income Tax Expense
Net Income after Federal Income Tax
Units of Item Sold
$50,000
25,500
$62,847
32,062
$12,847
6,562
25.69%
25.73%
24,500
30,785
6,285
25.65%
1,325
576
1,901
1,880
748
2,628
555
172
727
41.89%
29.86%
38.24%
714
1,000
1,720
2,850
1,200
9,500
435
112
869
18,400
20,301
714
1,000
1,720
2,660
1,200
9,500
565
159
927
18,445
21,073
0
0
0
-190
0
0
130
47
58
45
772
0.00%
0.00%
0.00%
-6.67%
0.00%
0.00%
29.89%
41.96%
6.67%
0.24%
3.80%
4,199
9,712
5,513
131.29%
26
4,225
634
38
9,750
1,463
12
5,525
829
46.15%
130.77%
130.76%
3,591
1000
8,287
1248
4,696
248
130.77%
24.80%