Accountants are responsible for answering questions surrounding the financial side of business

Accountants make sure records of a business are up to date and accurate

Information accountants keep will be used to make meaningful and effective business decisions in a timely manner

Profits or loss will determine what decisions businesses make

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

Any business activity that involves money is a transaction

A transaction occurs when something of value is exchanged for something else of value

Examples:A business pays an employee $80 in exchange

for 8 hours of workA customer buys a toner for a computer printer

in exchange for $150A clothing manufacturer sells 100 sweaters to a

retail outlet in exchange for $5000

The monetary part of these exchanges can be paid by cash, cheque, or on credit

Businesses can conduct thousands of transactions a day Example: Think about the number of sales a

grocery store makes on a Saturday In addition to sales business conduct

many other types of monetary exchanges on a regular basis Examples: Paying staff, paying bills such as

heat and electricity, purchasing equipment needed to operate the business, paying taxes, and buying and selling store inventory

Bookkeeping is recording of all the transactions a business makes

Today, most accounting is done electronically

Computer programs such as QuickBooks and Simply Accounting two popular accounting computer programs

Most businesses use a double entry bookkeeping system

Double entry bookkeeping is based on the principle that each transaction involves two changes

A transaction could result in one increase offset by one decrease, two increases, or two decreases

Examples: When a business pays $80 for labour it decreases its cash

$80 while increases its expenses $80 (increase, decrease) When a business borrows $10,000 from the bank it

increases its cash $10,000 and increases the amount owing to the bank $10,000 (increase, increase)

If a business pays $500 towards its mortgage it decreases its cash $500 and decreases the amount owing on the mortgage $500 (decrease, decrease)

People as well as businesses must keep accurate financial records

Many people record personal transactions using a cheque book or a computer program

Many personal transactions today are made with a debit card, credit card, or through a preauthorized payment

A preauthorized payment occurs when you have given prior permission for someone else to automatically take money from your bank account, usually on a regular basis Example: Your power bill could be preauthorized and therefore the

amount owing be deducted by the power company from your chequing account

Increasing the value of an account is done through a deposit which many are done electronically today

Individuals must keep good records of deposits and withdrawals to make sure you do not write cheques on an account that does not have insufficient funds to cover the cheque

Individuals will also determine their net worth

Net worth is the value of everything you own after everything you owe, known as debts, are paid

Own – Owe = Net Worth

An asset is something of value that is owned by a person or business

An asset is a resource controlled by an individual as a result of past events and from which future economic benefits are expected to flow

If you own a bicycle it is considered an asset, even if it was given to you

Even if you owe money on a bicycle you purchased it is still considered an asset

Examples of business assets: Cash the business has in the bank Money owed to a business by customers –

known as accounts receivable Supplies on hand needed to operate the

business such as pens and paper Equipment, such as a computer, and

vehicles needed to operate the business Buildings and Land Merchandise inventory

Sometimes you have to borrow money to acquire assets

When you purchase assets of higher value, such as a car, you may have to borrow money from the bank to do so

The result of borrowing money on credit is known as debt

Liabilities are debts or amounts that are owed to others

If you purchased a stereo for $150, giving $50 as a down payment, you have a debt, or liability, of $100

Remember though, the stereo is still your asset valued at $150, even though you have not fully paid for it yet

As the stereo gets old, it will lose some of its value, but that does not mean it is not useful to you

Liabilities of a business can include:

Debts owed to another business – known as Accounts Payable

Money borrowed from the bank Mortgage on the building you business

operates in – known as Mortgage Payable

If you can put a dollar figure on what you own and if you know how much money you owe you can calculate your personal equity

Personal equity or net worth is what you would have left if you paid all your debts

You can calculate a person’s or business’ net worth using this formula

Assets – Liabilities = Net Worth

Sonia calculated her total assets at $1400 and her debts at $300

$1400 - $300 = $1100

Sonia’s net worth is $1100

Like people, businesses also have assets and liabilities

Accounts use this information to calculate the net worth of the business – the owner’s equity

There are many types of business ownerships with either one owner (sole proprietorships) or potentially several owners (partnerships, corporations, cooperatives, and franchises)

Owner’s equity is the net worth of the business

Owner’s equity is calculated the same way as it is for an individual

Assets – Liabilities = Owner’s Equity

Because shareholders own corporations, owners equity is referred to as shareholder’s equity

Accountants using these terms form what is known as the balance sheet equation

This equation can be expressed in two ways depending on what part of the equation is unknown

To determine the owner’s equity use:

Assets – Liabilities = Owner’s Equity

To determine the total assets use:

Assets = Liabilities + Owner’s Equity

A balance sheet is one of the financial statements used in business and is used by accountants to show the financial position of that business on a particular date

Assets = Liabilities + Owner’s Equity is the formula used to set up a balance sheet

If the information on the balance sheet is correct the left side and the right side will balance, that is, be equal in value

Mark’s Repair Shop has the following assets and liabilities:

Assets – Liabilities = Owner’s EquityAssets – Liabilities = Owner’s Equity$219,000 - $128,400 = $91,200

Assets Value Liabilities Value

Cash $6500 Accounts Payable $7350

Accounts Receivable $8100 Bank Loan $11,050

Supplies $500 Mortgage Payable $110,000

Parts Inventory $4000

Equipment and Truck $25,500

Building and Land $175,000

Total Assets $219,000

Total Liabilities $128,400

Assets will increase and decrease in value over time but balance sheets are not set up for this

The cost principle is where the value of assets are always recorded as the actual amount they originally cost the business regardless if the owner believes the assets have increased or decreased in value

An asset can be sold for more than the value it was purchased for

Depreciation is where an asset loses value over time, but the original value will remain “in the books”