Introduction to Accounting
What is Accounting?
The process of recording, analyzing and interpreting the economic activities of a business
Any business activity that involves money is recorded as a transaction Exchanging something of value for
something else that has value Bookkeeping
The recording of all business transactions
Accounting and You
Individuals must keep accurate accounting records too
You should record your cheques, debit card transactions to ensure you don’t overdraw your bank account
Pre-authorized Payment Giving permission for someone else to
take money from your account on a regular basis, e.g. utilities
Asset
Something that is owned and has value e.g. bicycle, cell phone, computer
Even if you still owe money on the asset, you still own it
Liability
Debts or amounts that are owed to others
Common for large purchases such as cars, houses where the entire amount can’t be paid in cash
Personal Equity or Net Worth
The amount you would have left after all your debts (or liabilities) are paid
Net Worth = Assets - Liabilities
Accounting and Business
Businesses also have assets and liabilities that can be used to calculate net worth
Owner’s equity The net worth of a business= Assets - Liabilities
Fundamental Accounting Equation
Owner’s Equity = Assets – Liabilities Can also be rearranged to highlight
assets or liabilities
Assets = Owner’s Equity + Liabilitiesor
Liabilities = Assets – Owner’s Equity
Company Profit
Helpful to calculate how much money the business made
Terminology
Net Income The difference between revenue and
expenses
Revenue The money a business receives for the
products or services it sells
Expenses Expenditures that help a business earn
revenue e.g. utilities, telephone
Profit and Loss
Profit When a business’s revenues are
greater than its expenses
Loss When a business’s expenses are
greater than its revenues
Using Financial Information
Preparing reports regularly helps business owners and managers keep track of the financial health of the business
Can also communicate information about a business to outsiders that have an interest in the business such as bankers, the government
Usually compare current year with previous year to identify changes
Using Financial Info continued…
Analyzing helps to determine what needs to be changed and/or improved and what strategies are working
Useful to analyze current and prior year’s: Net income (profit) Revenue and expenses Owner’s equity (net worth of company)
Who is Interested in Financial Information?
Creditors Banks, credit unions
Owners of the Business Investors (current and potential) Government