Introduction to Accounting

What is Accounting?

The process of recording, analyzing and interpreting the economic activities of a business

Any business activity that involves money is recorded as a transaction Exchanging something of value for

something else that has value Bookkeeping

The recording of all business transactions

Accounting and You

Individuals must keep accurate accounting records too

You should record your cheques, debit card transactions to ensure you don’t overdraw your bank account

Pre-authorized Payment Giving permission for someone else to

take money from your account on a regular basis, e.g. utilities

Asset

Something that is owned and has value e.g. bicycle, cell phone, computer

Even if you still owe money on the asset, you still own it

Liability

Debts or amounts that are owed to others

Common for large purchases such as cars, houses where the entire amount can’t be paid in cash

Personal Equity or Net Worth

The amount you would have left after all your debts (or liabilities) are paid

Net Worth = Assets - Liabilities

Accounting and Business

Businesses also have assets and liabilities that can be used to calculate net worth

Owner’s equity The net worth of a business= Assets - Liabilities

Fundamental Accounting Equation

Owner’s Equity = Assets – Liabilities Can also be rearranged to highlight

assets or liabilities

Assets = Owner’s Equity + Liabilitiesor

Liabilities = Assets – Owner’s Equity

Company Profit

Helpful to calculate how much money the business made

Terminology

Net Income The difference between revenue and

expenses

Revenue The money a business receives for the

products or services it sells

Expenses Expenditures that help a business earn

revenue e.g. utilities, telephone

Profit and Loss

Profit When a business’s revenues are

greater than its expenses

Loss When a business’s expenses are

greater than its revenues

Using Financial Information

Preparing reports regularly helps business owners and managers keep track of the financial health of the business

Can also communicate information about a business to outsiders that have an interest in the business such as bankers, the government

Usually compare current year with previous year to identify changes

Using Financial Info continued…

Analyzing helps to determine what needs to be changed and/or improved and what strategies are working

Useful to analyze current and prior year’s: Net income (profit) Revenue and expenses Owner’s equity (net worth of company)

Who is Interested in Financial Information?

Creditors Banks, credit unions

Owners of the Business Investors (current and potential) Government