
Accountants are responsible for answering questions
surrounding the financial side of business

Accountants make sure records of a business are up to
date and accurate

Information accountants keep will be used to make
meaningful and effective business decisions in a
timely manner

Profits or loss will determine what decisions
businesses make

Accounting is the process of recording,
analyzing, and interpreting the economic
activities of a business

Any business activity that involves money is a
transaction
A transaction occurs when something of value is
exchanged for something else of value
 Examples:

 A business pays an employee $80 in exchange for 8 hours
of work
 A customer buys a toner for a computer printer in
exchange for $150
 A clothing manufacturer sells 100 sweaters to a retail
outlet in exchange for $5000

The monetary part of these exchanges can be paid by
cash, cheque, or on credit

Businesses can conduct thousands of
transactions a day
 Example: Think about the number of sales a grocery
store makes on a Saturday

In addition to sales business conduct many other
types of monetary exchanges on a regular basis
 Examples: Paying staff, paying bills such as heat and
electricity, purchasing equipment needed to operate
the business, paying taxes, and buying and selling
store inventory

Bookkeeping is recording of all the
transactions a business makes

Today, most accounting is done electronically

Computer programs such as QuickBooks and
Simply Accounting two popular accounting
computer programs
Most businesses use a double entry bookkeeping system
 Double entry bookkeeping is based on the principle that
each transaction involves two changes
 A transaction could result in one increase offset by one
decrease, two increases, or two decreases
 Examples:

 When a business pays $80 for labour it decreases its cash $80
while increases its expenses $80 (increase, decrease)
 When a business borrows $10,000 from the bank it increases its
cash $10,000 and increases the amount owing to the bank
$10,000 (increase, increase)
 If a business pays $500 towards its mortgage it decreases its
cash $500 and decreases the amount owing on the mortgage
$500 (decrease, decrease)




People as well as businesses must keep accurate financial records
Many people record personal transactions using a cheque book or a
computer program
Many personal transactions today are made with a debit card, credit
card, or through a preauthorized payment
A preauthorized payment occurs when you have given prior permission
for someone else to automatically take money from your bank account,
usually on a regular basis
 Example: Your power bill could be preauthorized and therefore the amount
owing be deducted by the power company from your chequing account


Increasing the value of an account is done through a deposit which many
are done electronically today
Individuals must keep good records of deposits and withdrawals to make
sure you do not write cheques on an account that does not have
insufficient funds to cover the cheque

Individuals will also determine their net worth

Net worth is the value of everything you own
after everything you owe, known as debts,
are paid

Own – Owe = Net Worth

An asset is something of value that is owned by
a person or business

An asset is a resource controlled by an individual
as a result of past events and from which future
economic benefits are expected to flow

If you own a bicycle it is considered an asset,
even if it was given to you

Even if you owe money on a bicycle you
purchased it is still considered an asset

Examples of business assets:
 Cash the business has in the bank
 Money owed to a business by customers – known as




accounts receivable
Supplies on hand needed to operate the business such
as pens and paper
Equipment, such as a computer, and vehicles needed
to operate the business
Buildings and Land
Merchandise inventory




Sometimes you have to borrow money to
acquire assets
When you purchase assets of higher value,
such as a car, you may have to borrow money
from the bank to do so
The result of borrowing money on credit is
known as debt
Liabilities are debts or amounts that are
owed to others

If you purchased a stereo for $150, giving $50 as
a down payment, you have a debt, or liability, of
$100

Remember though, the stereo is still your asset
valued at $150, even though you have not fully
paid for it yet

As the stereo gets old, it will lose some of its
value, but that does not mean it is not useful to
you

Liabilities of a business can include:
 Debts owed to another business – known as
Accounts Payable
 Money borrowed from the bank
 Mortgage on the building you business operates
in – known as Mortgage Payable

If you can put a dollar figure on what you own
and if you know how much money you owe
you can calculate your personal equity

Personal equity or net worth is what you
would have left if you paid all your debts

You can calculate a person’s or business’ net
worth using this formula

Assets – Liabilities = Net Worth

Sonia calculated her total assets at $1400 and
her debts at $300
 $1400 - $300 = $1100

Sonia’s net worth is $1100

Like people, businesses also have assets and
liabilities

Accounts use this information to calculate the
net worth of the business – the owner’s
equity

There are many types of business ownerships
with either one owner (sole proprietorships)
or potentially several owners (partnerships,
corporations, cooperatives, and franchises)

Owner’s equity is the net worth of the
business

Owner’s equity is calculated the same way as
it is for an individual
 Assets – Liabilities = Owner’s Equity

Because shareholders own corporations,
owners equity is referred to as shareholder’s
equity

Accountants using these terms form what is
known as the balance sheet equation

This equation can be expressed in two ways
depending on what part of the equation is
unknown

To determine the owner’s equity use:
 Assets – Liabilities = Owner’s Equity

To determine the total assets use:
 Assets = Liabilities + Owner’s Equity

A balance sheet is one of the financial
statements used in business and is used by
accountants to show the financial position of
that business on a particular date

Assets = Liabilities + Owner’s Equity is the
formula used to set up a balance sheet

If the information on the balance sheet is correct
the left side and the right side will balance, that
is, be equal in value

Mark’s Repair Shop has the following assets and
liabilities:
Assets
Value
Liabilities
Value
Cash
$6500
Accounts Payable
$7350
Accounts Receivable
$8100
Bank Loan
$11,050
Supplies
$500
Mortgage Payable
$110,000
Parts Inventory
$4000
Equipment and Truck
$25,500
Building and Land
$175,000
Total Assets
$219,000
Total Liabilities
$128,400
Assets – Liabilities = Owner’s Equity
$219,000 - $128,400 = $91,200

Assets will increase and decrease in value over time
but balance sheets are not set up for this

The cost principle is where the value of assets are
always recorded as the actual amount they originally
cost the business regardless if the owner believes the
assets have increased or decreased in value

An asset can be sold for more than the value it was
purchased for

Depreciation is where an asset loses value over time,
but the original value will remain “in the books”