WHAT IS ACCOUNTING?

Chapter 8

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Opening Activity

What do you OWN?

What do you OWE?

What I OWN – What I OWE = Personal Net Worth

Financial Position of an Individual or Company

Cash equipment Furniture Automobile Building

Credit card debt Suppliers Bank loan Mortgage

Accounting

Process of recording, analyzing, and interpreting the economic activities of a business

A record of all the MONEY coming IN and OUT

Examples of Money Flow

Payment received by customers (debtors) Pays for services Pays for merchandise (goods)

Payments made by business to other businesses (creditors)

TRANSACTIONS business activity involving money

Accounting

Accounting records follow strict rules called Generally Accepted Accounting Principles (GAAP)

Using GAAP presents financial information in a standard format in order to compare financial information

The Importance of Accounting

Accountability (employees accountable; receipts, invoices, etc.)

Budgeting (forecasting) Taxation (paying taxes on profit/earnings; capital

gains)

Prepare financial statements Reports summarize business’ economic

health to interested parties (stakeholders) Prepare annual reports

Summary of years activity about company achieved goals, new product launches, sales, expansions, etc.

Two Types of Accounting:

Financial accounting Recording company’s financial position Financial position: financial status of a

business with its owners and creditors Management accounting

Used within a company to make decisions

Ex. How much to charge for products?or Should the business expand?

Accounting Equation Example

A company has the following:

Assets:

• Cash $50,000• Building $100,000• Land $400,000• Supplies $10,000• Inventory $200,000

Liabilities:

• Accounts Payable $75,000• Bank Loan $350,000• Mortgage $150,000

What is the company’s Owner’s Equity?

Accounting Equation Example

Remember the Accounting Equation formula:

A = L + O.E.

Assets: $50,000 + $100,000 + $400,000 + $10,000 + $200,000

=Liabilities: $75,000 + $350,000 + $150,000+Owner’s Equity

Accounting Equation Example

A = L + O.E.

Assets: $760,000 = Liabilities: $575,000 + Owner’s Equity

$760,000 = $575,000 + O.E.

$760,000 - $575,000 = O.E.

$185,000 = O.E.

Accounting Equation Example

Therefore, the company has $185,000 in Owner’s Equity.

This number represents the value of assets that the owner has a claim to.