Accounting As an art: Art of organizing, maintaining, recording and analyzing financial activities

Library book on loan Grocery list

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o As a science: Interpretation of financial data in making business decisions language of business 3 areas o Public accounting employed as independent contractor by business to perform an auditing function Private accounting records business activities and prepares periodic financial statements Governmental accounting performs same as private accountant but is employed by a federal, state or local governmental agency o

Since the accountant does not keep track of all the assets individually, he/she combines assets of a similar nature into common groups Types: Current cash and others that can be reasonably expected to be converted to cash, used up or sold within one year or less Cash, accounts receivable (obligations due to customers), supplies, notes receivable, merchandise

Everyone uses accounting information, ex: o Manager- calls upon accounting info provided to make decisions Investors need info about financial status and future prospects of an org Bankers and suppliers grant loans and extend credit to orgs based on financial soundness as evidenced by accounting info Customers are concerned about companys ability to provide a product/service Employees concerned about ability of employer to pay wages and fringe benefit packages

Investments long-term nature, not used in normal operations of org and are not expected to be converted to cash within a year Stocks, bonds, mortgaged notes receivable

Property, plant and equipment long-term or long-life assets used in continuing operations of org and are expected to be used for more than a year Also known as Plant Assets Land, building, machinery, equipment, furniture and fixtures

An accountant keeps track of all the business transactions. o Business transactions any business activity that affects what a business owns or owes, as well as ownership of that business

Intangible long-term nature and have no physical substance but are of value to owners of org Patents, copyrights, goodwill, franchise

Accounting information Business transactions Position of any business is represented by assets, liabilities, capital Monetary principle value of items in a business are expressed in terms of money

ASSETS o o Things owned by the business Requirements so something can be called an asset: Ownership must be owned by org, it is the exclusive right to possess, use and dispose of the property Money value exists if buyer is willing to pay money to a seller for the property Asset (yes or no) Yes Yes no Yes Yes

RECOGNIZING PROPRIETORS OWNERSHIP Proprietor in a business contributes assets to business Since proprietor = owner, assets = ownership/entity A record is set up by accountant to represent proprietors ownership in business This record is called CAPITAL ownership of assets by proprietor

Item Cash Automobile Rented apartment Checks Computer

May be interchangeably used with equity At the start of any business, ASSETS = CAPITAL Types Permanent proprietors capital (investment) Temporary revenue, expenses, withdrawals Expenses costs of doing the business Revenue result of sale of a service by a business

Assets

liabiliti es

+ capital

Cas h

Accts receivabl e

Accts payabl e

+ capital

+P50 P50 Different side: Assets = liabiliti es + capital

Cas h P50

Accts receivabl e

Accts payabl e -P50

+ capital

*profit income that business earned o Transaction Owners investment Owners withdrawals Revenue Expense Capital vs Transaction Effect on capital Increase Decrease Increase decrease

Pay attention to the keywords to know which column you must foot the transactions Paid (amount) for assets (e.g. limousines, tricycles, oils for limousines, repairs for taxis, etc) (-) capital, (-) expense (you automatically use subtraction to expenses when you compute, but technically your expenses increase) If there is a column that says taxis for example, do not confuse fuel for taxis to be under the Taxis column. It has to be under the expenses column.

LIABILITIES ownership of assets by their creditors The most obvious way in which additional assets can be obtained for business is by borrowing When cash is borrowed, the firm is said to have incurred a debt or liability Since a liability is closely related with the ownership of business assets, it is shown on the equation on the same side of capital Liabilities may take many forms o Account payable if owner of a business has to borrow money and ORALLY promises to pay back the obligation Note payable if promise is made in the form of a written document, e.g. promissory note Financial Statements

Earned (amount) (+) cash, (+) income Issued a cheque (meaning the owner is the one who has a debt) (-) cash, (-) accounts payable Lent money to someone (someone owes the owner) (-) cash, (+) accounts receivable

Prepared at least once a year o Period of time covered in a statement accounting period

ACCOUNTING EQUATION: ASSETS = CAPITAL + LIABILITIES BALANCING BUSINESS TRANSACTIONS Tips: o There are two main columns [Assets] and [Liabilities + Capital]. Remember that the pattern is this if you are going to put add/subtract an amount of money in the same column, they should have the same sign. Otherwise, they should have different signs. This signifies that there is a balance. Example: Same side:

3 basic reports that keep track of accounting info o Income statement presents revenue, expenses and resulting net income/net loss Net income revenue > expenses Net loss revenue < expenses Divided into 2: heading & body Heading asks 3 questions

Whose business is it? What statement is being prepared? When is it being prepared?

Body lists revenue & expenses

Statement of capital shows changes that take place in owners capital over a period of time o It is prepared after the income statement. The net income from the income statement is INCLUDED in the statement of capital so its important that you get the correct net loss/net income. Net Income Withdrawals = Net Increase in Capital

**please see Sir Jabins attached file of the long test reviewer answer key to see the format of the income statement & statement of capital