Transcript Accountability

» Accounting is a system of dealing with financial
information that provides information for
decision-making
ACCOUNTING
» The process of recording, analyzing, and
interpreting the economic activities of a business
BOOKKEEPING
» A method of recording all transactions for a
business in a specific format
» Accountability
˃ People who handle cash in the company are responsible
for it
» Budgeting
˃ This allows businesses to estimate its future sales and
expenses
» Taxation
˃ Records must be kept in order to pay taxes
» Financial Statements
˃ These are reports that summarize the financial
performance of a business
˃ These reports indicate the business’s economic health
» Annual Reports
˃ Financial statements are presented to shareholders and
potential investors in the form of annual reports
What financial questions might you have about your
business?
˃ Is the business earning profit?
˃ Are selling prices to 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?
Who else may want financial information about
the business?
˃ Government
˃ Bankers
˃ Lenders
˃ Potential Investor
˃ A Lawyer
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
Routine Daily Activities
o Processing Bills
Periodic Accounting
Activities (these activities
occur at regular intervals)
o Preparing Cheques

o Daily Banking

o Recording Transactions

o Preparing Business
Papers

Paycheques(bi-weekly)
Bank accounts
(balanced monthly)
Financial reports
(monthly, quarterly,
yearly)
Income tax returns
(yearly)
Miscellaneous Activities
˃ Employee resignation
˃ An advertisement is prepared
˃ New capital equipment is purchased
˃ A new loan
˃ A new employee is hired
» The fundamental accounting equation states that:
ASSETS – LIABILITIES = OWNER’S EQUITY
OR
ASSETS = LIABILITIES + OWNER’S EQUITY
» An asset is anything that the business owns that
has value
» What are some examples of personal assets?
˃ House
˃ Car
˃ Cash
˃ RRSP’s
» A liability is anything that the business owes; any
debts of the business
» What are some examples of personal liabilities?
˃ Credit Line
˃ Mortgage
˃ Owed to Parents
˃ Credit cards
» Owner’s Equity is also referred to as capital or
net worth
» It is the difference between the total assets and
total liabilities of a business
Here is a list of my assets:
˃ House
˃ Car
˃ Furniture
˃ Cash in Bank
˃ Savings
˃ RRSP’s
˃ Teachers Pension
Here is a list of my liabilities:
˃ Mortgage
˃ Credit card ( paid of every month, but still a potential liability)
˃ Line of credit
» What do I need to do to calculate my net
worth?
» Take my total assets and subtract them from my
total liabilities
» We can see how this looks by examining a Balance Sheet containing my
personal assets, liabilities, and net worth
Mrs. Drummond
Balance Sheet
May 20, 2012
Assets
Cash in Bank
Savings
RRSP's
Teachers Pension
Household Items
Car
House
Total Assets
$ 2,000.00
$ 2,000.00
$ 5,000.00
$ 5,000.00
$ 20,000.00
$ 30,000.00
$ 400,000.00
$ 464,000.00
Liabilities
Credit Card
Car Loan
Credit Line
Mortgage
$ 1,500.00
$ 25,000.00
$ 10,000.00
$ 170,000.00
Total Liabilities
$ 206,000.00
Net Worth
Mrs. Drummond’s Equity
Total Liabilities and Equity
$ 258,000.00
$ 464,000.00
» Make a list of all of your assets and all of
your liabilities
» Calculate your total assets and your total
liabilities
» Now calculate your net worth (remember
the fundamental accounting equation)
» Make a new net worth statement for
yourself for 10 years from now!
Assets (Things owned) =
Liabilities
(debts you owe)
+
Owners Equity
(the owner’s share of the assets)
» ASSETS = LIABILITIES + OWNERS EQUITY
A=L+OE
» A “freeze frame” or snapshot of what the
business owns, owes and the owners invested
interest.
» A financial picture of the business at a point in
time.
» The balance sheet does not indicate whether a
business has made a profit, only whether it is
financially strong.
» The Balance Sheet looks like the Fundamental
Accounting Equation
» A = L + OE
» Assets are on the left side and the liabilities and
owner’s equity are on the right side
» A Three Line Heading is Used
» WHO? – The name of the individual, business or
other organization
» WHAT? – The name of the financial statement (in
this case the balance sheet)
» WHEN? – The date on which the financial position
is determined
What?
WHO? – The name of the
individual, business or other
organization
Metropolitan Movers
Balance Sheet
August 31, 2005
Assets
Cash
Accounts Receivable
B. Cava
K. Lincoln
Equipment
Trucks
2
1
13
42
Total Assets
Owners' Equity
J. Hofner, Capital
60 6 2 5 00 Total Liabilities and Equity
1 1 5 0 00
0
4
5
5
0
0
7
0
0
0
5
0
00
00
00
00
Liabilities
Accounts Payable
Central Supply
Loan Payable
Mercury Finance
Total Liabilities
When?
1 3 5 0 00
25 1 7 0 00
26 5 2 0 00
34 1 0 5 00
60 6 2 5 00
» Cash is arguably the MOST valuable asset of a business.
» WHY??
˃ It can easily be exchanged for other assets
» Liquidity – how easily an
asset can be exchanged for
any other asset or converted
to cash.
» Ownership (title- legal right to use) is separate
from financing (source of funds used to purchase
asset).
» With ASSETS, an owner can:
˃
˃
˃
˃
Use
Sell
Give away
Leave to heirs
» Whether bought for cash or on credit, the owner
still has “title” to his/her property
» Current Assets – things a business owns that
disappear quickly, usually in less than one year.
» Long-term Assets (Capital Assets or Fixed
Assets) – assets that a business keeps for a long
time.
»
» In order of liquidity, assets include:
˃ cash, bank balances,
˃ accounts receivable (listed in alphabetical order),
˃ inventory and supplies, and
˃ furniture, equipment, fixtures, vehicles, property and
buildings (listed in the order in which they will be used up).
» Customers of the business will often buy goods or
services with the understanding that they will be
paid for in the future
» These debts owed represent a dollar value to the
business, so the business has a right to include them
among the assets on the balance sheet
» Each of these customers that owes money to the
business is one of its debtors
ORDER
Of
LIQUIDITY
CLOSEST
TO
CASH
FARTHEST
FROM
CASH
•
»
»
»
»
»
Current Assets
Cash
Accounts Receivable
Inventory
Supplies
Total Current Assets
$ 50,000
$ 30,000
$120,000
$ 15,000
$215,000
IN ORDER OF
REVERSE
DEPRECIATION
ONE THAT
WILL BE
AROUND THE
LONGEST
ONE THAT
WILL BE
AROUND THE
LEAST
AMOUNT OF
TIME
•
»
»
»
»
»
»
Fixed Assets
Land
Building
Equipment
Furniture
Vehicles
Total Fixed Assets
$
$
$
$
$
$
200,000
1,100,000
950,000
225,000
215,000
2,690,000
» Liabilities are the debts of a business.
Businesses acquire debt in two main ways:
1) Accounts Payable – purchasing inventory and
supplies on credit.
2) Loans Payable (Notes Payable) – acquired by
borrowing money from investors, banks, etc.
» Liabilities are listed in order of priority, or
how quickly they need to be paid off.
» Current Liabilities – debts such as invoices
for merchandise inventory, that are paid
off quickly.
» Long-term Liabilities – debts such as a
mortgage loan, that may not be repaid for
decades.
» A business often purchases goods and services from
its suppliers with the understanding that payment will
be made later
» These debts to suppliers represent a dollar obligation
of the business, the business must include them
among its liabilities
» Each of the suppliers owed money by the business is
one of its creditors
ORDER
Of
MATURITY*
FIRST
TO BE
PAID
LAST
TO BE
•
»
»
»
»
»
Current Liabilities
Wages Payable
Accounts Payable
Other Liabilities
Current Portion - Mortgage
Total Current Liabilities
$
$
$
$
$
10,000
80,000
50,000
15,000
155,000
PAID
* Maturity – When a debt is “mature” it’s payment is due
ORDER OF
MATURITY*
SHORTEST
TERM
LONGEST
TERM
•
»
»
»
»
Long Term Liabilities
Vehicle Loans
Equipment Loan
Mortgage
Total Long Term Liabilities
$ 150,000
$ 900,000
$ 850,000
$1,900,000
ORDER SHOWN
CAPITAL +/(-)
INCOME/ (LOSS)
THEN SUBTOTAL
SUBTRACT
DRAWINGS
AND THEN TOTAL
•
»
»
»
»
»
Owner’s Equity
Owner’s Capital
Plus: Net Income
Less: Drawings
Total Owner’s Equity
$ 750,000
$ 150,000
$ 900,000
($ 50,000)
$ 850,000
Working Capital = Current Assets – Current Liabilities
˃ Working capital indicates a business’s ability to pay its
short-term debts.
˃ Working Capital has to be positive
Current Ratio = Total Current Assets / Total Current Liabilities
˃ Current Ratio shows how many dollars of liquid assets (cash
or near cash) a business has for every dollar of short-term
debt.
˃ Current ratio has to be over 1.2
Total Debt to Total Asset Ratio = Short Term Debt + Long Term
Debt/Total Assets
˃ A metric used to measure a company's financial risk by
determining how much of the company's assets have been
financed by debt. Calculated by adding short-term and
long-term debt and then dividing by the company's total
assets.
Current Assets – Current Liabilities =
(1150+2000+1400)-(1350)= 3200
Working Capital
Metropolitan Movers
Current Assets/Current Liabilities =
Balance Sheet
(1150+2000+1400)/(1350)=
3.37
August 31,
2005
Current Ratio
Assets
Cash
Accounts Receivable
B. Cava
K. Lincoln
Equipment
Trucks
2
1
13
42
Total Assets
Owners' Equity
J. Hofner, Capital
60 6 2 5 00 Total Liabilities and Equity
1 1 5 0 00
0
4
5
5
0
0
7
0
0
0
5
0
00
00
00
00
Liabilities
Accounts Payable
Central Supply
Loan Payable
Mercury Finance
Total Liabilities
1 3 5 0 00
25 1 7 0 00
26 5 2 0 00
34 1 0 5 00
60 6 2 5 00
» Remember: a Balance Sheet is a snapshot of a
business on one day in time
» An Income Statement shows what happens over
a period of time in a business, it could be one
month, six months, or a year
» An Income Statement shows how much money a
business made or lost over a period of time
» As a business operates it makes money from daily
activities
» Through these daily activities the business also
accumulates expenses
» What are some of the expenses of day to day
operations for a business?
RECALL:
» What is the difference between a cost
and an expense?
» Cost 
» Expense 
» Just like the Balance Sheet, the Income
Statement has a three line heading:
˃ Who? (the name of the business/individual)
˃ What? (in this case, an Income Statement)
˃ When? (period of time ending on a certain date)
» The sources of Revenue are listed next
˃ These are listed in alphabetical order
» Revenue (Sales or Income) is the money, or
the promise of money, received from the
sale of goods or services
» Then Cost of Goods Sold is listed or calculated (if applicable)
» Cost of Goods Sold is the cost of inventory that was sold to
generate business revenue for a specific period of time
» Cost of Goods Sold is calculated using information from the
balance sheet, from invoices that detail the year’s purchases, &
from the physical inventory count at the end of the fiscal year
» Purchases show the total amount of the goods bought by the
business in a year.
COST OF GOOD SOLD (COGS)
=
BEGINNING INVENTORY + PURCHASES – ENDING INVENTORY
Example:
Inventory, May 1st, 2012 - $50,000
Inventory, May 31st, 2012 - $20,000
Purchases - $30,000
COGS = $50,000 + $30,000 – $20,000
» Then Gross Profit is calculated (if applicable)
» Gross Profit = Total Revenue – COGS
» Gross Profit shows how much money covers
the cost of the product and how much is left
over to cover the business expenses.
» Expenses are listed next, in alphabetical order
» Operating expenses or overhead are the costs of
operating the business during the period the sales
took place.
» Expenses include things like salaries, advertising,
maintenance, and utilities, and are used to help
generate the revenue of a business.
» Matching Principle – all the costs of doing
business in a particular time period are
matched with the revenue generated
during the same period.
˃ Example:
+ If you run a hot dog stand, you would report
the cost of the buns & sausages in the same
period that you sell the hot dog
» Lastly, a net income, or net loss is calculated
˃ This is calculated by subtracting the expenses
from the revenue
˃ Net Income/Net Loss = Gross Profit – Expenses
» A net income occurs when the revenue is
larger than the expenses, and a net loss
occurs when expenses are greater than
revenue
Donahue's Shoe Store
Income Statement
For the Year Ending December 31, 2011
Revenue
Shoe Sales
Total Revenue
$250,000
Cost of Goods Sold
Beginning Inventory, Jan 1, 2011
Inventory Purchased
Cost of goods available for sale
Ending Inventory, Dec. 31, 2011
Total Cost of Goods Sold (COGS)
$50,000
$75,000
$125,000
$40,000
$250,000
$85,000
Gross Profit
Expenses
Advertising
Rent
Salaries
Supplies
Utilities
Total Expenses
Net Income
$165,000
$1,200
$12,000
$60,000
$350
$15,000
$88,550
$76,450
» Management looks at income statements to
measure profitability.
» Rate of Return on Net Sales = (Net Profit / Total
Revenue) x 100%
» Rate of Return on net sales indicates, as a
percentage, the portion of a business’ sales that are
kept as profit.
» Gross Profit Percentage = (Gross Profit / Total Revenue) x 100%
» The gross profit percentage indicates how much of the
revenue is left after costs (COGS) have been covered.
» Management can see how much of its potential profit
pays for product (cost of goods sold) and how much is
left to pay for expenses (overhead).
» If a business has a high gross profit percentage, it
means the business is earning a high margin on its
sales.
» Margin is the difference between the cost of the
product and the selling price of the product.
» Profit Margin= (Net Income/ Total Revenue) x 100%
» A ratio of profitability calculated as net income divided by revenues, or net profits
divided by sales. It measures how much out of every dollar of sales a company
actually keeps in earnings.
Profit margin is very useful when comparing companies in similar industries. A
higher profit margin indicates a more profitable company that has better control
over its costs compared to its competitors. Profit margin is displayed as a
percentage; a 20\% profit margin, for example, means the company has a net
income of $0.20 for each dollar of sales.
Also known as Net Profit Margin.