Chapter 9 Accounting Basic Accounting Concepts Text 273

Chapter 9: Accounting Basic Accounting Concepts (Text 273 – 280) 1

Basic Accounting Concepts What Accountants Do? Accountants make meaningful and effective decisions based on up to date and accurate records of a company. 2

Basic Accounting Concepts Accounting is the process of recording, analyzing, and interpreting the financial or economic activities of a business. Financial activities in business are recorded as transactions: recording something of value for something else of value. Bookkeeping is the recording of all transactions for a business in a specific format. The principle that each transaction involves two changes is known as double-entry bookkeeping: one increase results in one decrease, two increases results in two decreases, and so on. 3

Basic Accounting Concepts Accounting and Individuals need to keep accurate financial records. People often allow organizations to take preauthorized payments resulting in money taken automatically and on a regular basis from their bank accounts. Assets are things of value that a business or person owns. Liabilities are debts or amounts of money that are owed to others by an individual or a business. Personal Equity or Net Worth A person’s assets, after all liabilities are deducted, is known as personal equity or net worth. 4

Basic Accounting Concepts Owner’s Equity Owner’s equity is the owner’s investment in the business or the financial portion of the business that belongs to the owners or shareholders. Assets – Liabilities = Owner’s Equity Balance Sheet Equations The balance sheet equation can be expressed in two ways: 1. To determine owner’s equity: Assets – Liabilities = Owner’s Equity 2. To determine total assets: Assets = Liabilities + Owner’s Equity 5

Basic Accounting Concepts A balance sheet is one of the financial statements used in a business and prepared by accountants to show the financial position of the business on a particular date. 6

Basic Accounting Concepts Balance Sheet Equations The balance sheet equation can be expressed in two ways: 1. To determine owner’s equity: Assets – Liabilities = Owner’s Equity 2. To determine total assets: Assets = Liabilities + Owner’s Equity 7

Basic Accounting Concepts Cost Principle and Depreciation The accounting practice of always recording an asset at the actual amount it costs the business is known as the cost principle. Even when an asset depreciates or loses value over time the asset value on the books remains the same. Mark’s Repair Shop Here are the assets of Mark’s Repair Shop. cash in the business and in a bank account ($6500) accounts receivable ($8100) invoicing supplies ($500) parts inventory ($4000) business equipment (truck) ($25 500) building and land ($175 000) Total Assets = $219 600 8

Basic Accounting Concepts Mark’s Repair Shop Here are the assets of Mark’s Repair Shop. cash in the business and in a bank account ($6500) accounts receivable ($8100) invoicing supplies ($500) parts inventory ($4000) business equipment (truck) ($25 500) building and land ($175 000) Total Assets = $219 600 9

Chapter 9: Accounting Basic Accounting Concepts Mark’s Repair Shop Here are Mark’s debts or liabilities. accounts payable ($7350) bank loan for truck ($11 050) mortgage payable (on building) ($110 000) Total Liabilities = $128 400 Equity calculation for Mark’s net worth can be calculated as follows: Assets – Liabilities = Owner’s Equity $219 600 - $128 400 = $91 200 10