introduction to accounting debbie gahr. accounting it is an information system that reports on the...
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Introduction to accountingIntroduction to accounting
Debbie GahrDebbie Gahr
AccountingAccounting
It is an information system that reports on It is an information system that reports on the economic activities and financial the economic activities and financial condition of a business or other condition of a business or other organization.organization.
There needs to be a system or set of rules There needs to be a system or set of rules so you are able to compare entities to each so you are able to compare entities to each other.other.
The language of businessThe language of business
It will help you succeed in businessIt will help you succeed in business
It is the means that business information is It is the means that business information is communicated to the stakeholders in the communicated to the stakeholders in the businessbusiness
StakeholdersStakeholders
Stakeholders are individuals and Stakeholders are individuals and organizations that need information about a organizations that need information about a business.business.
They include lenders, government agencies, They include lenders, government agencies, employees, news reporters and others.employees, news reporters and others.
How accounting can help youHow accounting can help you
Help you prepare a budget and keep on Help you prepare a budget and keep on target.target.
Realize how much cash you have and if Realize how much cash you have and if there is enough to pay bills.there is enough to pay bills.
Uncover places where costs can be cut.Uncover places where costs can be cut.
Financial accountingFinancial accounting
Branch of accounting associated with Branch of accounting associated with preparing reports for external userspreparing reports for external users
i.e. the bank, shareholdersi.e. the bank, shareholders
Managerial accountingManagerial accounting
Accounting to guide management in making Accounting to guide management in making decisions about the businessdecisions about the business
i.e. break even analysisi.e. break even analysis
Objectives of financial accountingObjectives of financial accounting
To report the financial condition of a To report the financial condition of a business at a point in time.business at a point in time.
To report changes in the financial condition To report changes in the financial condition of a business over a period of time.of a business over a period of time.
Objectives continuedObjectives continued
First, record the economic events affecting a First, record the economic events affecting a business.business.
Second, summarize the impact of these Second, summarize the impact of these events in a report called financial events in a report called financial statements.statements.
Generally Accepted Accounting Principles Generally Accepted Accounting Principles (GAAP)(GAAP)
Who’s who in accountingWho’s who in accounting
Bookkeepers-record each transactionBookkeepers-record each transaction
Accountants-prepare financial statementsAccountants-prepare financial statements
Auditors-review the company’s books and look for Auditors-review the company’s books and look for errors and discrepancies (could be internal or errors and discrepancies (could be internal or external)external)
Controller-in charge of the accounting departmentController-in charge of the accounting department
Who’s who in accountingWho’s who in accounting
CPAs-certified public accountantsCPAs-certified public accountants
Typically work for an accounting firm called public Typically work for an accounting firm called public accountingaccounting
Once a year come in and do an audit of the books Once a year come in and do an audit of the books of the company and do the related tax returnsof the company and do the related tax returns
CPAs also work for private companiesCPAs also work for private companies
Four financial statementsFour financial statements
Balance sheetBalance sheet Income statement (profit/loss)Income statement (profit/loss) Statement of cash flowsStatement of cash flows Statement of changes in equityStatement of changes in equity
Elements of financial statementsElements of financial statements
The information in the financial statements The information in the financial statements is organized into 10 categories called is organized into 10 categories called elements. elements.
The elements include: assets, liabilities, The elements include: assets, liabilities, equity, contributed capital, revenue, equity, contributed capital, revenue, expenses, distributions, net income, gains expenses, distributions, net income, gains and losses.and losses.
AccountsAccounts
The elements are divided into classifications The elements are divided into classifications called accounts. called accounts.
For instance there are different kinds of For instance there are different kinds of assets. A business would have a cash assets. A business would have a cash account like a checking account and they account like a checking account and they might also own a building.might also own a building.
Chart of accountsChart of accounts
Every company has a chart of accounts, Every company has a chart of accounts, sort of like a table of contents in a book. sort of like a table of contents in a book.
Each account is assigned a numberEach account is assigned a number
Usually assets start with 1, liabilities 2, Usually assets start with 1, liabilities 2, stockholder’s equity 3, income 4, cost of stockholder’s equity 3, income 4, cost of goods sold 5, other expenses 6.goods sold 5, other expenses 6.
General ledgerGeneral ledger
Think of it like a book that keeps track of all the Think of it like a book that keeps track of all the accountsaccounts
It is a chronological record of all the business It is a chronological record of all the business transactionstransactions
Sometimes it is called the company’s booksSometimes it is called the company’s books
Everything in the general ledger flows to the Everything in the general ledger flows to the financial statementsfinancial statements
Balance sheetBalance sheet
Highlights the relative strength of a company Highlights the relative strength of a company at a point in time.at a point in time.
Terms related to the balance sheet: assets, Terms related to the balance sheet: assets, liabilities, owner’s equity.liabilities, owner’s equity.
AssetsAssets
Assets are things you own or resources a business owns. Assets are things you own or resources a business owns.
The assets of a business belong to its creditors and The assets of a business belong to its creditors and investors.investors.
Tangible assets-this you can touch like machinery, Tangible assets-this you can touch like machinery, buildings, land, computers, etc.buildings, land, computers, etc.
Intangible assets-things you cannot tough such as right to Intangible assets-things you cannot tough such as right to patents, rights to payments from customers, copyrights or patents, rights to payments from customers, copyrights or trademarks.trademarks.
LiabilitiesLiabilities
Things you owe, future obligations of the Things you owe, future obligations of the businessbusiness
Creditor claimsCreditor claims
Examples include a bank loan or car loan, or Examples include a bank loan or car loan, or buying supplies for your business on creditbuying supplies for your business on credit
EquityEquity
Rights of stockholders or their claim on Rights of stockholders or their claim on assetsassets
There are two types of equityThere are two types of equity– Common stock is issued by corporations to Common stock is issued by corporations to
finance their operationsfinance their operations– Retained earnings which is the portion of Retained earnings which is the portion of
earned assets kept in the businessearned assets kept in the business
Accounting equationAccounting equation
This equation is how the balance sheet is This equation is how the balance sheet is completed.completed.
Assets=ClaimsAssets=Claims
Assets=Liabilities + EquityAssets=Liabilities + Equity
Assets=Liabilities + Common stock + Retained Assets=Liabilities + Common stock + Retained earningsearnings
Accounting equationAccounting equation
The equation always needs to balance on The equation always needs to balance on both sides of the equal sign.both sides of the equal sign.
This is what people mean when they say This is what people mean when they say balance the books.balance the books.
Example of accounting equationExample of accounting equation
ABC Company has assets of $20,000 and ABC Company has assets of $20,000 and liabilities of $5,000. How much is liabilities of $5,000. How much is stockholder’s equity?stockholder’s equity?
A=L+OEA=L+OE 20,000=5,000+?20,000=5,000+? 20,000-5,000=15,00020,000-5,000=15,000
Income statementIncome statement
Also called the P&L (profit and loss statement)Also called the P&L (profit and loss statement)
Shows your revenues and expenses over a period of time Shows your revenues and expenses over a period of time (month, year)(month, year)
Revenue is income from the sale of goodsRevenue is income from the sale of goods
If revenue is more than expenses, you have net incomeIf revenue is more than expenses, you have net income If expenses are more than revenue, you have a net lossIf expenses are more than revenue, you have a net loss
Income statementIncome statement
Terms used on the income statement: Terms used on the income statement:
Revenue or salesRevenue or sales Cost of goods sold or Cost of merchandise Cost of goods sold or Cost of merchandise
soldsold Gross profitGross profit Operating expensesOperating expenses Net income or net lossNet income or net loss
Statement of changes in Statement of changes in Stockholder’s EquityStockholder’s Equity
Sometimes called statement of changes in Sometimes called statement of changes in owner’s equityowner’s equity
Explains the effects of transactions on Explains the effects of transactions on stockholder’s equity during the accounting stockholder’s equity during the accounting period.period.
Statement of changes in Statement of changes in Stockholder’s EquityStockholder’s Equity
Starts with beginning common stock and Starts with beginning common stock and adds any additional shares of stock issued.adds any additional shares of stock issued.
Then it takes the beginning retained Then it takes the beginning retained earnings and adds on net income (subtracts earnings and adds on net income (subtracts net loss) net loss)
Then it subtracts any dividends paid to Then it subtracts any dividends paid to shareholdersshareholders
Cash flow statementCash flow statement
This explains how a company obtained and This explains how a company obtained and used cash during the accounting period.used cash during the accounting period.
Receipts of cash are called cash inflows.Receipts of cash are called cash inflows.
Payments of cash are called cash outflows.Payments of cash are called cash outflows.
Cash flow statementCash flow statement
There are three sections to the cash flow There are three sections to the cash flow statement: operating, investing and statement: operating, investing and financing.financing.
Operating section is first. Operating Operating section is first. Operating activities include receiving cash from activities include receiving cash from revenue and paying cash for expenses. revenue and paying cash for expenses.
Cash flow statementCash flow statement
Investing section includes paying cash to Investing section includes paying cash to buy productive assets (like machinery or buy productive assets (like machinery or equipment) or receiving cash when you sell equipment) or receiving cash when you sell productive assets. productive assets.
Financing section includes receiving cash Financing section includes receiving cash from owners or paying cash to owners from owners or paying cash to owners (dividends) It can also include borrowing (dividends) It can also include borrowing cash from the bank or repaying the cash.cash from the bank or repaying the cash.
Cash flow statementCash flow statement
It tells you whether your cash increased or It tells you whether your cash increased or decreased and why.decreased and why.
How the financial statements are How the financial statements are interrelatedinterrelated
The income statement is prepared firstThe income statement is prepared first The income from this statement flows to the The income from this statement flows to the
statement of changes in stockholder’s equitystatement of changes in stockholder’s equity
The stockholders equity total and common stock The stockholders equity total and common stock totals flow to the balance sheettotals flow to the balance sheet
The cash from the balance sheet flows to the The cash from the balance sheet flows to the statement of cash flowsstatement of cash flows
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