Introduction to
Accounting
BAF3M
What is Accounting?
 Class Discussion
 Are there any common misconceptions?
 What ISN’T Accounting?
What is Accounting?
 A system that records the day to day financial activities
of a business
 Summarizes information with Financial Statements
 Provides information for decision making
Why do we have Accounting?
 The purpose:
 To provide financial information for decision making
Accounting vs. Bookkeeping
BOOKKEEPING
 A method of recording day-to-day transactions for a
business in a specific format (the data, i.e. journal entries,
recording sales and expenses)
ACCOUNTING
 The process of recording, analyzing, and interpreting the
economic activities of a business (turning data into useful
information, i.e. financial statements)
What do Accountants do,
anyways?
 Gather financial data
 Prepare and collect records
 Summarize and classify financial information
 Prepare reports to help others make decisions
 Establish controls to promote accuracy and honesty
Why is Accounting Important?
 Accountability, Transparency
 People who handle cash in the company are responsible for it;
the business’ financial activities are not secretive, but open to
public knowledge (for public corporations)
 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
 These are reports that summarize the financial
performance of a business
 These reports indicate the business’ economic health
 Annual Reports
 Financial statements are presented to shareholders and
potential investors in the form of annual reports
An Information System
What financial questions might you have about your
business?
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

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Is the business earning profit?
Are selling prices too 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?
An Information System
Who else may want financial information about the
business?
 Government
 Bankers
 Lenders
 Potential Investor
Do you ever want to own a
business?
 Accounting is the BACKBONE of BUSINESS
 Without it, all the other functions of business fall apart


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Provides accurate sales data
Affects marketing decisions
Needed for keeping track of cash
How else would an owner know if they are making money
(PROFIT)?
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
Let’s look at some important
Accounting Terms
 GAAP’s
 Assets
 Liabilities
 Owner’s Equity (Personal Equity)
 Fundamental Accounting Equation
GAAP’s
 Generally Accepted Accounting Principles
 These are the rules for Accounting
 They are important because all Accountants must follow
them!
Assets
 Items of value owned by a business or person
 What are some examples of personal assets?
 House
 Car
 Cash
 RRSP’s
Liabilities
 The debts of a business or person; what you owe to
others
 What are some examples of personal liabilities?
 Mortgage
 $$ Owed to Parents
 Credit cards
 Bank Loan
 School debt
Owner’s Equity
 The net worth of a business (Owner’s Equity) or
person (Personal Equity)
 It is the difference between the total assets and total
liabilities of a business
Fundamental Accounting
Equation
 Assets = Liabilities + Owner’s Equity
OR
Assets – Liabilities = Owner’s Equity
 A = L + OE
OR
A – L = OE
 Think about it:
 Everything you own – Everything you owe = Your Net Worth
 Also called “The Balance Sheet Equation”
Activity
What’s your net worth?
 Make a list of all of your assets and all of your liabilities
 Calculate your total assets and your total liabilities by
giving an approximate $ value to each one
 Now calculate your net worth (personal equity)
(remember the fundamental accounting equation)
 Once completed, estimate your net worth 10 years from
now. Repeat the steps above.
 THINK: Will I have a car? A house? What kind of car –
how much would it be worth? Will I have any student
loans? Car loans? Approximately how much $$ would I
have in the bank?
 BE REALISTIC or… Have some fun with it!
Our 1st GAAP
 Business Entity Principle
 Each business is considered a separate entity, and the
financial data for the business should be kept separate
from the owner’s personal financial data.
Balance Sheet
 A financial statement that shows the financial
position of the business at a certain date
 It lists assets, liabilities, and owner’s equity
 A “freeze frame” or snapshot of what the business
owns, owes and the owner’s invested interest.
 The balance sheet does not indicate whether a
business has made a profit, only whether it is
financially strong.
Balance Sheet
Assets (Things owned) =
Liabilities
(debts you owe)
+
Owners Equity
(the owner’s share of the assets)
Balance Sheet - Example
Mr. Smith
Balance Sheet
September 5, 2013
Assets
Cash
House
Liabilities
$2,000.00
300,000.00
Credit Card
Car Loan
Car
5,000.00
Bank Loan
Household Items
5,000.00
Mortgage
Total Liabilities
$2,000.00
500.00
20,000.00
200,000.00
$222,500.00
Owner's Equity
Mr. Smith, Capital
Total Assets
$312,000.00
Total Liabilities and Equity
$89,500
$312,000.00
Step 1 – Statement Heading
 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?
WHO? – The name of the
individual, business or
other organization
Metropolitan Movers
Balance Sheet
August 31, 2005
When?
Assets
Cash
Accounts Receivable
B. Cava
K. Lincoln
Equipment
Trucks
2
1
13
42
Total Assets
Owners' Equity
J. Hofner, Capital
60 6 2 5 00 Total Liabilities and Equity
1 1 5 0 00
0
4
5
5
0
0
7
0
0
0
5
0
00
00
00
00
Liabilities
Accounts Payable
Central Supply
Loan Payable
Mercury Finance
Total Liabilities
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
Step 2 – List Assets
 Assets are listed on the left side of the page
 The total of Assets must be on the same line as the
total for Liabilities and Owner’s Equity
 2 types of Assets:
 Short Term Assets: appear in order of liquidity (how fast
they can be converted to cash)
 For example: Cash, Accounts Receivable, Office
Supplies
 Long Term Assets: appear in order of their useful life to
the business. Longest life comes first.
 For example: Land, Buildings, Equipment
Step 3 – List Liabilities
 The liabilities are listed and totalled on the right side of
the page
 Liabilities are listed according to maturity date, that is,
the date they are due to be paid.
 i.e. Those that must be paid first are listed first
 For example: Accounts Payable, Bank Loan, Mortgage
Step 4 – Show Owner’s
Equity
 Owner’s Equity is listed on the right side of the page,
after the Liabilities section
 Shows the Owner’s Capital, another word for equity
Mr. Smith
Balance Sheet
September 5, 2013
Assets
Cash
House
Liabilities
$2,000.00
300,000.00
Credit Card
Car Loan
Car
5,000.00
Bank Loan
Household Items
5,000.00
Mortgage
Total Liabilities
$2,000.00
500.00
20,000.00
200,000.00
$222,500.00
Owner's Equity
Mr. Smith, Capital
Total Assets
$312,000.00
Total Liabilities and Equity
$89,500
$312,000.00
Accounts Receivable
 An Asset (short term)
 It is the total amount due from debtors (people or
businesses that owe a business money)
 From purchasing goods or services from the business
on credit
 Often due within 30 or 60 days
 The “seller” will have an Accounts Receivable
Accounts Payable
 A Liability (short term)
 It is the total amount owed to creditors (people or
businesses that we owe money to)
 For the purchase of goods or services on credit
 Often due within 30 or 60 days
 The “buyer” will have an Accounts Payable
Our 2nd GAAP
 The Cost Principle
 Assets are shown on the balance sheet at the cost of
their acquisition
 The value of assets is never increased, even though the
owner might think that the value of an asset has risen
Class Work / Homework
 Read over pg. 6-10
 pg. 13 Exercises 2 – 4, 5(b)
Day 2 Balance Sheet
 Take up pg. 13 Ex 5(b)
 pg. 14 Ex 6 + 7 in class
 Take up Ex 6 + 7