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%