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?