AccountingAccounting

What is Accounting?What is Accounting?

The system used by an The system used by an organization to keep a record of organization to keep a record of all of the money that comes in all of the money that comes in and goes out of the businessand goes out of the business

Why are records Why are records important?important?

Records are important because they Records are important because they show the financial success of the show the financial success of the company and are a good reference company and are a good reference for future decisionsfor future decisions

Generally Accepted Accounting Generally Accepted Accounting PrinciplesPrinciples

GAAPGAAP Accounting records are kept Accounting records are kept

according to strict principles and according to strict principles and rules. This allows for uniformity rules. This allows for uniformity so that businesses can be so that businesses can be compared and it makes the compared and it makes the information more accessible to information more accessible to most peoplemost people

The Financial StatementThe Financial Statement

Accounting records are Accounting records are published in the form of financial published in the form of financial statements which are formal statements which are formal documents that use a standard documents that use a standard format to provide key format to provide key information about a company’s information about a company’s financial position.financial position.

GAAPsGAAPs

Business Entity conceptBusiness Entity concept: the : the finances of a business are kept finances of a business are kept separate from the personal ones of the separate from the personal ones of the ownerowner

Time Period ConceptTime Period Concept: use time : use time periods of equal and appropriate periods of equal and appropriate length to measure the health of the length to measure the health of the business – usually financial statements business – usually financial statements show the whole business yearshow the whole business year

GAAPsGAAPs

Cost Principle: Cost Principle: the actual cost of a the actual cost of a business purchase is recorded as the business purchase is recorded as the cost in the bookscost in the books

Consistency Principle: Consistency Principle: Accountants must apply the same Accountants must apply the same rules, methods, and procedures from rules, methods, and procedures from one financial period to the nextone financial period to the next

Financial StatementsFinancial Statements

The purpose of financial statements The purpose of financial statements is to provide accurate information on is to provide accurate information on a regular basis , according GAAPsa regular basis , according GAAPs

Statements may be produced for Statements may be produced for different time lengths. For example: different time lengths. For example: daily, weekly, monthly, quarterly, daily, weekly, monthly, quarterly, yearlyyearly

Fiscal YearFiscal Year

A period of 12 consecutive months, A period of 12 consecutive months, at the end of which the business at the end of which the business produces its annual financial produces its annual financial statementsstatements

This does not have to follow the This does not have to follow the calendar yearcalendar year

For example, Redeemer uses the For example, Redeemer uses the school year as its’ ‘fiscal’ yearschool year as its’ ‘fiscal’ year

Why a financial Why a financial statementstatement

Businesses (sole proprietorships, Businesses (sole proprietorships, partnerships, and companies) are required partnerships, and companies) are required by law to produce financial statements to by law to produce financial statements to verify income for income tax purposesverify income for income tax purposes

They are used by business owners and They are used by business owners and managers, investors, lenders, and managers, investors, lenders, and governmentgovernment

Also, if a business is trying to borrow Also, if a business is trying to borrow money, the bank will always ask for a recent money, the bank will always ask for a recent financial statementfinancial statement

Personal Balance SheetPersonal Balance Sheet

A balance sheet is a statement of net worthA balance sheet is a statement of net worth Net worth is the difference between what Net worth is the difference between what

you own (assets) and what you (liabilities)you own (assets) and what you (liabilities)

Net Worth = Assets-Liabilities orNet Worth = Assets-Liabilities or

Assets = Liabilities + Net WorthAssets = Liabilities + Net Worth

This is called the FUNDAMENTAL This is called the FUNDAMENTAL ACCOUNTING EQUATIONACCOUNTING EQUATION

FUNDAMENTAL FUNDAMENTAL ACCOUNTING EQUATIONACCOUNTING EQUATION

The two sides of must balanceThe two sides of must balance Have a look at page 219 – Have a look at page 219 –

Homework:Homework: Page 219 #1-4Page 219 #1-4