introduction to accounting. what is accounting? the system of recording and summarizing financial...

Introduction to Accounting

What is accounting?

the system of recording and summarizing financial transactions and analyzing, verifying, and reporting the results

http://www.merriam-webster.com/dictionary/accounting

Who uses accounting?

• Everyone! • Businesses use accounting information to run the

business.• Investors use it to make decisions about whether to buy

a company’s stocks.• Creditors use it to make decisions about whether to

loan money to a company.• IRS use it to determine how much taxes the company

must pay.• Customers use the information to determine which

company to purchase products or services from (you want a company that is going to be around in the future).

Key Terms

• Assets – things you own

• Liabilities – a debt or obligation (money owed)

• Owner’s Equity = Assets - Liabilities

• Income – a monetary gain (usually from the sale of products or services)

• Expenses – financial burdens; cost

What is credit & debit?

• Credit – entry on the right side of an account

Account Name

CreditDebit

• Debit – entry on the left side of an account

Example of Debit & CreditAsset Account

In this example, your parents gave you $150 cash and you spend

$100 on clothes.

Asset Account

Credit

Decreases

Debit

Increases

Type of Account

Example of Debit & CreditAsset Account

What is the balance of your cash account?

100150

Cash

In this example, your parents gave you $150 cash and you spend

$100 on clothes.

50

Asset Account

Credit

Decreases

Debit

Increases

Type of Account

Tips

• Asset accounts, which are debit accounts, include cash, accounts receivable (money owed by others for goods sold on credit), inventory, prepaid expenses, plants and equipment, office supplies, and investments.

• Liabilities, which are credit accounts, include accounts payable (money owed to other businesses or individuals), notes payable and long-term debt (money the company promises to pay on a future date), and unearned fees (money received in advance).

• Remember that debit means left side and credit means right side.• Remember that for every transaction, The Sum of Debits = The

Sum of Credits. The left side of the balance sheet must balance the right side: Assets = Liabilities + Owners' Equity.

• Owners' equity, a credit account, include capital invested by the original investors and retained earnings and surplus.

Financial Statements

• Balance Sheet - An official financial statement that includes the company’s assets and liabilities. It determines the value of the company by subtracting liabilities from assets.

• Income Statement - A financial statement of a company’s operation. Shows a company’s income, expenses, and income for a period of time. Shows the company’s profit or loss for a given period of time.

BCS III – Accounting UnitEssential Questions

• What are debits? credits?

• What are the basic account types?

• What is an Income Statement?

• What is a Balance Sheet?