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Basic Accounting Concepts

Businesses engage in activities that concentrate on financial worth, such as money, spending, expenses, mergers, and costs.

What Accountants DoAccountants make meaningful and effective decisions based on up to date and accurate records of a company.

Accounting is the process of recording, analyzing, and interpreting the financial or economic activities of a business.

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Basic Accounting Concepts

Financial activities in business are recorded as transactions: recording something of value for something else of value.

Bookkeeping is the recording of all transactions for a business in a specific format.

Double-Entry BookkeepingThe principle that each transaction involves two

changes is known as double-entry bookkeeping: one increase results in one decrease, two increases results in two decreases, and so on.

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Basic Accounting Concepts

Assets•things of value that a business or person owns.

Liabilities•debts or amounts of money that are owed to others by an individual or a business.

Personal Equity or Net WorthA person’s assets, after all liabilities are deducted, is known as personal equity or net worth.

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Basic Accounting Concepts

Owner’s EquityOwner’s equity is the owner’s investment in the business or the financial portion of the business that belongs to the owners or shareholders.

Assets – Liabilities = Owner’s Equity

Balance Sheet EquationsThe balance sheet equation can be expressed in two ways:1. To determine owner’s equity: Assets – Liabilities = Owner’s Equity2. To determine total assets: Assets = Liabilities + Owner’s Equity

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Basic Accounting Concepts

Cost Principle and DepreciationThe accounting practice of always recording an asset at the actual amount it costs the business is known as the cost principle. Even when an asset depreciates or loses value over time the asset value on the books remains the same.

Mark’s Repair ShopHere are the assets of Mark’s Repair Shop.• cash in the business and in a bank account ($6500)• accounts receivable ($8100)• invoicing supplies ($500)• parts inventory ($4000)• business equipment (truck) ($25 500)• building and land ($175 000)

Total Assets = $219 600

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Basic Accounting Concepts

Mark’s Repair ShopHere are Mark’s debts or liabilities. • accounts payable ($7350)• bank loan for truck ($11 050)• mortgage payable (on building) ($110 000)

Total Liabilities = $128 400

Equity calculation for Mark’s net worth can be calculated as follows:

Assets – Liabilities = Owner’s Equity

$219 600 - $128 4000 = $91 200

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Preparing Financial Statements

Preparing a Balance SheetThe balance sheet shows the financial position on any given day of the business, and provides information about its assets, liabilities, and equity.

Balance Sheet Equation MethodThe balance sheet gets its name because the left side of the equation (assets) always equals the right side (liabilities plus owner’s equity).Assets are owned by one of two groups

1. owner(s) of the business (owner’s equity)2. individuals or businesses owed money

(liabilities)

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Preparing Financial StatementsMark’s Repair Shop

Balance SheetSeptember 30, 20__

Assets LiabilitiesCash $6 500 Accounts Payable 7 350AccountsReceivable 8 100 Bank Loan 11 050Supplies 500 Mortgage Payable 110 000Parts Inventory 4 000 Total Liabilities $ 128 400Equipment 25 500Building and Land 175 000 Owner’s Equity

Mark Bianchet, Equity $ 91 200 Total Liabilities and

Total Assets $ 219 600 Owner’s Equity 219 600

Step 1Statement Headings Step 2

List Assets Step 3List Liabilities

Step 4Calculate Owner’s Equity

Step 5Put It All Together

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Preparing Financial Statements

Balance Sheet Report Form MethodComputer programs easily complete the balance sheet using an up-and-down column format rather than a side-by-side format.

Preparing an Income StatementThe income statement is a financial statement that shows a business’s profit (or loss) over a stated period of time.

The money, or the promise of money, received from the sale of goods or services is called revenue.

Expenses are expenditures that help a business generate revenue.

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Preparing Financial StatementsIncome Statements for Service Businesses

Mark’s Repair ShopBalance Sheet

For the month ending September 30, 20__RevenueRepairs Revenue $ 9 900Total Revenue $ 9 900ExpensesSalaries $ 2 600Rent 2 000 Advertising 850Supplies 185Utilities 235Insurance 150Delivery Expense 770Total Expenses $ 6 790Net Income $ 3 110

Step 1Statement Headings

Step 2Organize Revenue Section

Step 3 Organize Expenses Section

Step 4Calculate Net Income/Loss

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Preparing Financial Statements

Income Statements for Retail Businesses

Balance sheets for retail businesses are similar to those of service businesses. However, retail businesses need to take the cost of inventory (goods on hand to be sold) into account.

Income Statement Equations

Income statement equation for a service business.

Revenue – Expenses = Net Income

Income statement equation for a retail business.

Revenue – Cost of Goods Sold = Gross Profit Gross Profit – Expenses = Net Income

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Preparing Financial Statements

Income Statements and Inventory

Tracking of inventory is critical. It saves the retail business money and increases customer satisfaction. When a physical count of inventory is taken, it is compared to the on-going count that is usually maintained by computer systems.

Operating expenses are deductedfrom the gross profit to determinethe net profit.

Beginning Inventory, Jan.1, 20__ $50 000

Inventory Purchased +75 000

Costs of All Goods for Sale 125 000

Ending Inventory, Dec. 20__ - 40 000

Costs of Goods Sold 85 000

Sales Revenue $150 000

Cost of Goods profit - 85 000

Gross Profit 65 000

Gross Profit $65 000

Expenses - 25 000

Net Profit $40 000

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Basic Accounting Concepts

Owner’s Equity AccountThe net profit is calculated first then transferred to the balance sheet as part of owner’s equity. Creditors and owners have claims on the assets of the business.

Preparing a Statement of Cash FlowCash flow is the movement of cash-in and cash-out of a business. The statement of cash flow is a summary of the cash-in and cash-out transactions of a business that helps to predict the amount of cash it needs to meet obligations.

Owner’s EquityC. Donahue, Capital, Jan. 1, 20__ $ 75

000Add: Net Income $ 40 000C. Donahue, Capital, Dec. 31, 20__ $ 115 000

Projected Cash Flow Statement Mark’s Repair Shop

October 31, 20__Transaction In (+) Out (-)Investment Income +$ 500.00Accounts Receivables +750.00Equipment to be Sold +1 250.00Payroll Not Yet Paid -$

460.00 Loan Repayment -930.00Insurance Due -200.00Projected Cash Flow 910.00

“Capital” is added to identify the owner’s account