What is Accounting? • Class Discussion • Are there any common misconceptions? • What ISN’T Accounting?
What is Accounting? • A system that records the day to day financial activities of a business • Summarizes information with Financial Statements • Provides information for decision making
Why do we have Accounting? • The purpose: • To provide financial information for decision making
Accounting vs. Bookkeeping BOOKKEEPING • A method of recording day-to-day transactions for a business in a specific format (the data, i.e. journal entries, recording sales and expenses) ACCOUNTING • The process of recording, analyzing, and interpreting the economic activities of a business (turning data into useful information, i.e. financial statements)
What do Accountants do, anyways? • Gather financial data • Prepare and collect records • Summarize and classify financial information • Prepare reports to help others make decisions • Establish controls to promote accuracy and honesty
Why is Accounting Important? • Accountability, Transparency • People who handle cash in the company are responsible for it; the business’ financial activities are not secretive, but open to public knowledge (for public corporations) • Budgeting • This allows businesses to estimate its future sales and expenses • Taxation • Records must be kept in order to pay taxes
Why is Accounting Important? • Financial Statements • These are reports that summarize the financial performance of a business • These reports indicate the business’ economic health • Annual Reports • Financial statements are presented to shareholders and potential investors in the form of annual reports
An Information System What financial questions might you have about your business? • Is the business earning profit? • Are selling prices too high/low? • How much does ABC company owe me? • What is the value of my inventory? • How much did John Smith earn last year? • Do we have enough money to pay our bills?
An Information System Who else may want financial information about the business? • Government • Bankers • Lenders • Potential Investor
Do you ever want to own a business? • Accounting is the BACKBONE of BUSINESS • Without it, all the other functions of business fall apart • Provides accurate sales data • Affects marketing decisions • Needed for keeping track of cash • How else would an owner know if they are making money (PROFIT)?
Owning a Business If you decide to operate your own business, you will find yourself facing such accounting tasks as: • Banking • Payroll • Keeping track of amounts owed by and owed to customers • Keeping track of amounts owed to the government • Producing an income statement for income tax purposes
Let’s look at some important Accounting Terms • GAAP’s • Assets • Liabilities • Owner’s Equity (Personal Equity) • Fundamental Accounting Equation
GAAP’s • Generally Accepted Accounting Principles • These are the rules for Accounting • They are important because all Accountants must follow them!
Assets • Items of value owned by a business or person • What are some examples of personal assets? • House • Car • Cash • RRSP’s
Liabilities • The debts of a business or person; what you owe to others • What are some examples of personal liabilities? • Mortgage • $$ Owed to Parents • Credit cards • Bank Loan • School debt
Owner’s Equity • The net worth of a business (Owner’s Equity) or person (Personal Equity) • It is the difference between the total assets and total liabilities of a business
Fundamental Accounting Equation • Assets = Liabilities + Owner’s Equity OR Assets – Liabilities = Owner’s Equity • A = L + OE OR A – L = OE • Think about it: • Everything you own – Everything you owe = Your Net Worth • Also called “The Balance Sheet Equation”
ActivityWhat’s your net worth? • Make a list of all of your assets and all of your liabilities • Calculate your total assets and your total liabilities by giving an approximate $ value to each one • Now calculate your net worth (personal equity) (remember the fundamental accounting equation) • Once completed, estimate your net worth 10 years from now. Repeat the steps above. • THINK: Will I have a car? A house? What kind of car – how much would it be worth? Will I have any student loans? Car loans? Approximately how much $$ would I have in the bank? • BE REALISTIC or… Have some fun with it!