Accounting basics

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Basics of Accounting (The Language of Finance) Devotional Introduction Video Discussion of Fundamentals Basic Accounting Problem Grade on Neatness – Bring Back Problem on Wednesday Note: Use a Pencil & Take Good Notes Business & Accounting Accounting is the universal language of Business and Finance More CEO’s from fortune 500 companies have come up through the ranks of accounting than from any other area in business Currently: 54% Small businesses and usually fail because of poor accounting understanding Marriages usually fail because of poor financial management (80% of divorces are $$$$ related.) If you want to get ahead in business & marriage determine that you are going to understand accounting basics What Accountants Account For? Everything of value! Terms Assets: Tangible and Non-tangible resources of a business that have future value Usually sub-classified as follows:  Quick Assets (Liquid Assets) Cash – Petty Cash – Receivables - Securities  Current Assets (Turn into cash/use annually) All the above + Inventories, Supplies  Fixed Assets (Depreciated over several yrs.) Buildings, Equipment, Natural Resources   Land (Fixed, but never depreciated) Intangible Assets: Patents, Trademarks, Copyrights What are your Assets? Bank Account & Money in your pocket Car Clothes Books Stocks/Bonds/CD’s Prepaid rent Computers & Electronic Equip Knowledge???? Abilities???? Accounting Term: Liabilities Other people’s claims against your assets!   What you owe!! Debts! Classified as: Current Liabilities (one year debt)  Credit Card Debt, Accounts Payable Long Term Liabilities  Car, Mortgage, Note Payable Unearned revenues Bonds (usually super long term) What are your liabilities? School Loan Car Loan Credit Card Balance J.C Penny Account BYU-Idaho Amount Due Capital or Owners Equity The portion of your assets that you can legally claim (Net Assets) What you really own legally Assets – (minus) Liabilities = Owners Equity (or Capital) Example (purchased a building for $500,000 with a 10% down payment ($50,000)    Cost of a building (sales price = Asset amount) $500,000 Less: What you still owe on the building (Liability) $450,000 Equals: Your equity in the building (Capital) or your net worth in the building $50,000 Formula universally used in all financial and personal financial institutions:   Assets = Liability + Owners Equity (Balance Sheet Equation) (Resources you have) =(What you owe on them) + (the principle you have paid on them.) Owners Equity Account Titles Single Proprietorship:  Capital Corporation:    Common Stock (what owners paid in) Preferred Stock (what owners paid in) Retained Earnings (profits that the business keeps in the business) What is your net worth??? What you have minus what you owe What format we use in business and in personal finance to show our net worth?  A Balance Sheet Financial Statement List of Assets (classified by type in accounts) Compared or balanced with:  List of Liabilities and Owners Equity (classified by type and in accounts) Text Book Example Page 660 Debits and Credits Terms used to increase or decrease an account and keep everything in balance Assets = Liabilities + O.E Increases Increases Increases (Debits) (Credits) (Credits) Decreases Decreases Decreases (Credits) (Debits) (Debits) Steps in the Accounting Cycle Analyze the transaction source documents and decide what accounts are involved What account needs to be increased and what account needs to be decreased… what account(s) needs to be debited and what account(s) need to be credited Examples of Source Documents:  Deposit Slips, Invoices, Sales Slips, Contracts, memos, packing slips, electronic memos, etc Source documents are usually kept on file (three years) as backup for tax and company audits Step #2 - Enter source document data in a chronological journal (Data Entry on the Computer) The Journal is called the book of original entry, and is on the computer in most companies    It gives the date of the transaction It gives a record of the accounts debited and credited in the transaction (the accounts increased or decreased) It gives the post reference number of the ledger accounts involved (after the transaction has been posted to the ledger accounts) Step #3 – Post (transfer) transaction data from the journal to the individual ledger accounts The “Ledger Accounts” are individual records of all the assets, liabilities, and owners equity accounts Each Ledger Account is updated daily and keeps a ongoing record of activity in the account and balance of the account All data that goes into the ledger accounts must first be put into the journal and then posted from the journal to the ledger account on the day the information is journalized Step #4 – Adjustments Adjustments are the internal transactions of a company that a good accountant will make to set in order each account They must be journalized first and then posted to the ledger Adjustments are usually made at the end of an accounting period Examples: Depreciation, Use of pre-paid rent or insurance, interest earned or expensed, use of supplies and materials, unearned revenues earned during the period Step #5 – Trial Balance Before preparing your statements, make sure that all of your accounts have the correct balance List of all accounts with debit and credit balances……DEBITS MUST EQUAL CREDITS If not in balance you must go back in your audit trail and find your errors #6 Prepare your Financial Statement – Income Statement, Statement of OE, & Balance Sheet This is the main product of the accounting system that outsiders/investors/creditors etc will look at to see the financial health of your business These statements and how to read them and create profitability ratios from their numbers should become second nature to a business owner, or anyone interested in finance This knowledge is essential #7 – Close all the temporary accounts and start over Close the temporary accounts:    All Expense Accounts All Revenue Accounts All Drawing or Dividend accounts Transfer the net increases or decreases of these temporary accounts into the permanent owners equity account of capital or retained earnings This makes it possible for the company to start a new set of reports to compare with the old etc #8 Analyze Data A list of the accounts you start the new accounting period with A check to see if Debits = Credits with these continuing accounts If total DEBITS DO NOT EQUAL total CREDITS a mistake has been made and needs correction Final Quiz Define:      Asset: Liability: Capital: Expense: Revenue: Write out the proper accounting equation: (formula) Final Quiz: What is the first accounting book called that is used to record transactions chronologically? For any and all transactions Debits must always equal _? If I wanted to know what balance I had in cash what record/book would I turn to? Cash carries what kind of a balance? Quiz: The use of a fixed asset over a period of time is called what? What is ROI and what two figures in accounting you use to determine it? The accounting cycle is also known as the _ _? Quiz – Last Question 10 Using the following accounts, format in titles only the Income Statement and the Balance Sheet (List titles and total lines were appropriate.)         Cash, Accounts Payable, Accounts Receivable, Equipment, Advertising Expense, Depreciation Expense, Service Revenue, Capital Monday’s Assignment Using the “Balance Sheet Format,” prepare your own personalized or family Balance Sheet Report listing at least seven accounts (Make it neat (with heading) and type it up) Using the “income statement format,” complete a cash flow personalized income statement showing all the revenue (money) you received in January, and the expenses (money) you spent The bottom line would be your net profit or net loss for January Show at least seven items in this report Examples of Revenue: (money from parents) (money from pell grant) (money from savings) (money earned from work) (money borrowed from roommates) (money received from loans) etc Examples of expenses: (money paid for tuition) (money paid for books) (food) (entertainment) (utilities) (phone) etc Both Reports need to have headings and both need to be in the format for balance sheet and income statement that we have learned in class Both Need to be typed Monday Turn in your neat & complete accounting problem with three statements Be prepared for a quiz on the basics of accounting   Know the steps of the accounting cycle Know the financial report formats for the income statement and balance sheet….and the format of a ledger account Also debits & credits Turn in your personal balance sheets and income statements for January
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