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