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CLASS 1
Joan Ferreira Hostos Community College
Class Objectives
Explain what accounting is Identify users and uses of accounting Understand why ethics is a fundamental business concept Explain the meaning of generally accepted accounting principles and the cost principle
Objectives Cont.
Explain the difference between the cash method and the accrual method. State the basic accounting equation and explain the meaning of assets, liabilities, and owners equity. Analyze the effect of business transactions on the basic accounting equation
What is accounting?
Financial activities in a household, small business, company, non-profit organization, corporation, or government. the language of business."
Internal Users
Insolvency (can we pay our bills?) Budgeting and Planning (Can we give employees a raise?) Costs of goods/services sold (how much profit do I get from selling a shirt?) Profitability (what product/service is making money?)
What else?
External users
Profitability (is the company making money?) Benchmarking (how is the company performing against competition?) Credibility (would the company be able to pay me?) Legal Compliance (is the company paying taxes?) Assurance (is the company acting ethically?)
What else?
Accounting
Includes bookkeeping and so much more Record, organize, maintain, analyze, communicate
Bookkeeping
Public Accountants
Bookkeeping, Tax Preparation, Consulting, Budgeting, Financial Reporting, Financial Analysis, Audit.
Private Accountants
Individuals in companies involved in activities including cost and tax accounting, systems, and internal auditing.
Reporting and control for government units, foundations, hospitals, labor unions, universities, and charities.
Ethics
Assumptions
Monetary Unit
Only data that can be expressed in terms of money is included in the accounting records.
Assets are resources owned by a business. They are used in carrying out such activities as production, consumption and exchange.
(1) it must be owned by the organization, and (2) it must have money value.
OWNERSHIP is the exclusive right to possess, use, enjoy, and dispose of property. MONEY VALUE exists if a buyer is willing to pay money to a seller for the property. Which of these are assets?
Cash Automobile Rented Apartment Checks
Computer
Grocery List
Clothing
Postage Stamps
Excersice
Prepare a list of ten assets that you personally own. Prepare a list of ten assets that a business organization would own
Types of Assets
CURRENT ASSETS
Cash and other assists that can be turn into cash. (< 1yr) Assets not used on the operation of organization but have value. (> 1yr) Long-term or long-life assets
INVESTMENTS
INTANGIBLE ASSETS
Examples of Assets
Cash Receivables (Money people owe you) Office Building Furniture & Fixtures Office Equipment Office Supplies Inventory Vehicle Bond Purchases Copyright Franchise
2.
3.
4.
5.
What is the difference between office supplies and office equipment? A toner cartridge is considered an office supply, even though it is an integral part of the computer printer. why? Will we replace a typewriter as frequently as a typewriter ribbon? Why or why not? What type of asset is a supply? (Short-life or longlife?) What type of asset is a computer? (Short-life or long-life?)
Recognizing Ownership
CAPITAL (EQUITY) is the ownership of the assets of the business by the proprietor.
Seed money Machinery Purchased Supplies Cash Furniture
Example
Ms. Taylor began a business on April I, 203, contributing to the business the following assets:
Cash $3,000 Office Supplies $275 Office Equipment $700 Furniture and Fixtures $2,100
What if I borrow money to start my business? LIABILITY is defined as the ownership of the assets of a business by its creditors.
A creditor claims against assets Existing debts and obligations Assets = Capital (Owners Equity)
No Debt:
Debt:
A sole proprietor has $14,000 in cash an borrows $6,000 more from the local credit union to start up a Child Care business.
How much cash does the sole proprietor has? Does that make him/her richer?
Investments are the assets the owner puts in the business increase owners equity
Purchase of a Car for the business Initial public offering of a Corporation. Investing in your Brothers Restaurant
Drawings are withdrawals of cash or other assets by the owner for personal use .
Your Brother returns your investment with interest. You take your car back from the company
Sales receipts
Expenses decreases in owners equity that result from operating the business
INCREASES
DECREASES
Investments by Owner
Owners Equity
Withdrawals by Owner
Revenues
Expenses
Exercise
A. L. Brandon is the owner of the Brandon Small Appliance Repair Shop. On January I, 2013, the assets, liabilities, and proprietor's capital in the business were:
Cash, $2,000; Accounts Receivable S400; Supplies, $5OO; Equipment $6,000; Accounts Payable, S900; A. L. Brandon Capital $8,000.
1. Paid $3OO of the outstanding accounts payable. 2. Received $100 on account (part payment) from customers. 3. Purchased $250 worth of supplies on account (on credit}. 4. Returned a defective piece of equipment that was purchased last month and received a cash refund of $1,200. 5. Borrowed $1,OOO from a supplier, giving word to repay the loan in thirty days. 6. Paid creditor $200 on account (part payment). 7. Purchased equipment for $800, giving $200 cash and promising to pay the balance in sixty days. 8. Bought supplies paying $65 cash. 9. Received a S250 check from customer on account.
Summary
Accounting is the art of organizing, maintaining. recording, and analyzing financial activities. Business transactions represent economic elements that affect the financial condition of the business. The position of the organization is represented by assets, liabilities, and capital. Assets represent anything that is owned and has money value.
Summary (cont)
Liabilities (debt) are the claims upon the assets of the business by its creditors. Liabilities may either be short-term or long-term obligations. Capital is the ownership of the assets of the business by the proprietor. The accounting equation is: ASSETS = LIABILITIES + CAPITAL
Next Class
FINANCIAL STATEMENTS
What are financial statements? The Income Statement The Statement of Capital The Balance Sheet