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Accounting Chapter 17.2
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What You Will Learn...
� Purpose of Accounting � Basic Accounting Equation � 3 Main Financial Statements
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Review… � Purpose of a financial plan: ◦ Outline of essential financial facts and used as
a guide/roadmap � What does an effective financial plan do:
1. Identifies assets 2. Determines needed capital 3. Describes start-up and operating expenses 4. Describes records management 5. Forecasts the future 6. Describes growth
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Discuss…
� What do you already know about accounting?
� What comes to mind when you think of the
word “accounting”?
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What is Accounting?
� Accounting: The systematic process of recording and reporting the financial position of a person or organization ◦ Collect ◦ Record ◦ Report
� Accountant: Maintains and reviews business records ◦ Small firms
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Auditing
� Audit: Review of accounting records and procedures
� “Big Four”- Operate World Wide ◦ Pricewaterhouse Coopers ◦ Deloitte & Touche ◦ Ernst & Young ◦ KPMG
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Importance of Accounting
� “The language of business” ◦ Vital in communicating how well a business is
doing
� Just like a foreign language… ◦ Different words ◦ Different meanings
� Everyone involved in business should understand accounting basics
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Rules for Accountants
� Generally Accepted Accounting Principles (GAAP): Set of rules all accountants use to prepare reports
� All businesses must follow GAAP rules
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Financial Claims in Accounting
� Assets: Property and other items of value; owned by business ◦ Current Assets: Used up or converted into
cash in normal business cycle ◦ Fixed Assets: Items of value that are held
more than one year
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Current or Fixed Assets? � Land ◦ Fixed
� Merchandise ◦ Current
� Cash ◦ Current
� Equipment ◦ Fixed
� Office Supplies ◦ Current
� Buildings ◦ Fixed
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Financial Claims in Accounting
� Accounts Receivable: Total amount of money owed to a business ◦ Money received in payments after goods/
services are sold on credit
� Equity: Financial claim to all assets; present value of an asset less all claims against it
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Financial Claims Cont.
� Liabilities: Creditor’s claims to the assets of the business; company debts ◦ Accounts Payable: Short-term liabilities that
a business owes to creditor’s ◦ Wages, taxes, salaries, etc.
� Owner’s Equity: Owner’s claim to the assets of a business
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The Accounting Equation
� Accounting Equation: Rule that all assets must be equal to the sum of all liabilities plus owner’s equity
Assets = Liabilities + Owner’s Equity
� Ensures that all accounting records will be correct
� Must always balance
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The Accounting Equation
Assets = Liabilities + Owner’s Equity Right Side: The value of everything owned by a business
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The Accounting Equation
Assets = Liabilities + Owner’s Equity Left Side: The rights to those assets
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A Company Has…
� Assets = $100,000 � Liabilities against those assets = $40,000
� What are the owner’s rights to the assets (Owner’s Equity)?
A = L + OE 100,000 = 40,000 + OE
OE = $60,000
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Financial Statements
� Financial Statements: Documents that summarize business transactions that occur during the accounting period
1. Income Statement 2. Balance Sheet 3. Statement of Cash Flows
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Income Statement
� Income Statement: Report of the revenue, expenses, and net income/loss over an accounting period
� How much money did you make/lose? Revenue – Expenses = Net Income/Loss
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Net Income or Net Loss?
� If Revenue > Expenses ◦ Net Income (+)
� If Expenses > Revenue ◦ Net Loss (-)
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Balance Sheet
� Balance Sheet: Report of the balances in all assets, liability, and owner’s equity accounts at the end of an accounting period
� Reflects the accounting equation ◦ Determine if liabilities (claims against assets)
are increasing too much
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Statement of Cash Flows
� Cash Flows: Money that is available to a business at any given time
� Statement of Cash Flows: Report that
shows incoming and outgoing money during an accounting period
� Firms can run out of cash even when
they’ve made a profit (sales on credit)
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Accounting Today
� Computerized Systems ◦ Peachtree, QuickBooks, Oracle
� Spreadsheets ◦ Microsoft Excel
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Summary
� What is the set of rules accountants abide by called? ◦ GAAP (Generally Accepted Accounting
Principles)
� What is the accounting equation? ◦ A = L + OE
� What are the 3 main financial statements? ◦ Income Stmt., Balance Sheet, Stmt. of Cash
Flows
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Prepare a Personal Balance Sheet
� List all of your assets. Price your assets at the cost that you paid for them.
� List your liabilities (debts). � Figure out how much you have in owner’s
equity. � Compare your financial status with someone
else in the class. ◦ Write a paragraph explaining the similarities/
differences. ◦ Write 2 financial goals for yourself based on your
balance sheet.
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Resources � Textbook (Teacher-Edition): Brown, B. J., &
Clow, J. E. (2008). Introduction to business. Woodland Hills, CA: The McGraw-Hill Companies.
� Google Images