Basic accounting concepts
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Basic Accounting Concepts. AA Roundup May 30, 2007. What is Accounting?. Accounting is a process by which financial activities are organized, recorded, analyzed and transformed into information in a consistent manner. Financial activities (Transactions) Accounting Processes,

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Basic accounting concepts

Basic Accounting Concepts

AA Roundup

May 30, 2007


What is accounting

What is Accounting?

  • Accounting is a process by which financial activities are organized, recorded, analyzed and transformed into information in a consistent manner.

    Financial activities

    (Transactions)

    Accounting Processes,

    Internal Controls & Procedures

    Financial Reports


Uses purpose of accounting

Uses at Home

Review accuracy of bank statements

Verify your credit card bills

Make household expenses, pay bills

Uses at Work

Track hours worked

Order supplies

Pay items ordered

Take student payments

Uses & Purpose of Accounting

It is used by everyone at home and at work

The purpose of Accounting is to provide information to help you analyze the financial situation of the company or household


Accounting equation

Accounting Equation

Assets = Liabilities + Fund Balance (General Ledger)

(Revenue – Expenses) (Operating Ledger)


Double entry system

Double-Entry System

Every transaction must be two sided to keep the accounting equation in balance


Assets liabilities fund balance

Assets, Liabilities & Fund Balance

Assets – anything that is owned by the company and has money value

Liabilities – everything the company owes to others

Fund Balance (Equity) – represents how much really belongs to the company and is not owed to someone else.


Ledgers

Ledgers

Assets = Liabilities + Fund Balance (General Ledger)

(Revenue – Expenses) (Operating Ledger)

General Ledger keeps track of all the company’s assets, liabilities and fund balance accounts.

Operating Ledger keeps track of the company’s revenue and expense accounts.

- At STC, most department organizations reflect expense accounts. Revenues are recorded in separate organizations.


Debits credits system

Debits & Credits System

  • Used to keep the accounting equation in balance; every transaction has an equal debit and credit entry.

  • A debit and a credit act as an addition or subtraction depending on the type of account.

  • Debits – used to increase the value of an assets, to increase an expense, to reduce revenue or a liability account

  • Credits – used to increase a liability or revenue, to decrease an expense and an asset account


Debits credits rules

Debits & Credits Rules

Increases = normal balance of account group


T accounts

T-Accounts

Used in traditional manual accounting to analyze the two sided (debit & credit) posting of transactions


Normal balance activity 1

Normal Balance – Activity # 1


Normal balance activity 11

Normal Balance – Activity # 1


Cash vs accrual basis accounting

Cash vs. Accrual Basis Accounting

  • Cash Accounting – transactions are recorded only when cash is involved.

    • Example: a purchase is recorded when the items are paid.

  • Accrual Accounting – transactions are recorded as they happen, even if no cash is involved.

    • Example: a purchase is recorded when the items are ordered.


Financial statements

Financial Statements

  • Financial Statements are the main result of Accounting. The most common statements include:

    • Balance Sheet – reports ending balance of assets, liabilities and fund balance accounts at a point of time (example: as of 8/31/07).

    • Income Statement – reports cumulative revenue and expense transactions for a period of time (example: Sept – Aug)

    • Cash Flow – reports uses and sources of cash


Calendar vs fiscal year

Calendar vs. Fiscal Year

Calendar Year runs: Fiscal Year runs:

January 1st – December 31st September 1st – August 31st


Posting transactions activity

Posting Transactions Activity

  • Student Registers for classes ($600)

2) Student pays registration fee ($35)

3) Order magazine subscription ($100)

4) Pay invoice for magazine subscription ($100)

5) Received refund for magazine subscription ($15)

6) Book in state travel ($300)


Posting to account groups

Posting to Account Groups


Closing the periods

Closing the Periods

  • When periods are closed, the net of revenues and expenditures is added (or decreased) to the fund balance account.

    Revenue – Expenses Income Statement

    $600 - $385 = $215

    Fund Balance

    Beginning Balance as of 9/1/06$ 0

    Increase (Decrease) to Fund Balance$ 215

    Ending Balance as of 8/31/07$ 215

    Assets = Liabilities + Fund Balance Balance Sheet

    $ 515 = $300 + $215


Balance sheet

Balance Sheet


Income statement

Income Statement


Activity 3

Activity # 3


Activity 31

Activity # 3


Activity 32

Activity # 3


Activity 33

Activity # 3


Activity 34

Activity # 3


Activity 35

Activity # 3


Activity 36

Activity # 3


Questions

Questions?


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