Presented by: Meredith Mostochuk, CBA

Transcription

1 Presented by: Meredith Mostochuk, CBA Types of Businesses Definition of a Business: An organization in which goods and services are exchanged for one another, or for money, on the basis of their perceived worth. Every business requires some form of investment and a sufficient number of customers which will purchase goods or services on a consistent basis. Types of Businesses: Service Business Merchandising Business Manufacturing Business Service Businesses Provide services rather than products to their customers Examples of popular Service Businesses: The Walt Disney Company Airlines (USAirways; Delta; Southwest) Hotels (Marriott, Hilton)

2 Merchandising Business Sell products they purchase from other business to customers Merchandisers bring products and customers together Examples of Merchandising Businesses Wal-Mart Best Buy Supermarkets (Grocery Stores) Amazon.com Manufacturing Businesses Change basic inputs into products that are sold to individual companies General Motors NIKE Pepsi Cola Company Dell, Inc. Business Organizations Proprietorship owned by one individual Most popular form of business ~ approx 70% of all businesses in the United States Limited to the financial resources of the owner Partnership owned by two or more individuals Approx 10% of all business in the United States Corporation Organized under State and Federal guidelines It is a separate legal taxable entity Approx 20% of all businesses in the United States Generates approx 90% of the total business receipts received Limited Liability Company (LLC) - Hybrid of a Corporation & a Partnership It is organized similar to a Corporation, but can elect to be taxed as a Partnership

3 Accounting in Businesses Accounting provides information for managers to use in operating the business Provides information to stakeholders to assess the performance and condition of the company Think of accounting as the language of the business, because the accounting is the means in which the business communicates information to its stakeholders Different Types of Accounting Financial Accounting Primarily concerned with the recording and reporting of financial data Managerial Accounting Uses both financial accounting and estimated financial data to aid management in running the day to day operations and to plan future operations Both Financial and Managerial Accounting engage accountants in either public or private accounting Public Accountants Accountants and staff that are employed to provide fee-based services Private Accountants Accountants employed by a business organization Auditors Individuals who provide services to verify the accuracy and integrity of accounting and financial systems auditing services Generally Accepted Accounting Principles (GAAP) Financial Accountants follow GAAP GAAP are a standard set of rules that allow the comparability of financial performance and condition across all companies. The Financial Accounting Standards Board (FASB) is principally responsible for setting these rules. The FASB releases Statements of Financial Accounting Standards, as well as interpretations to these standards. Securities and Exchange commissions (SEC) is also largely responsible setting these rules They regulate all US Companies that issues securities to the public

4 The Accounting Equation ASSETS = LIABILITIES + OWNER S EQUITY All transactions must be stated in terms of the accounting equation. Example Purchasing Inventory for Cash Inventory and Cash are both Assets to a company The purchase of inventory would increase the inventory balance The use of cash for the purchase would decrease your cash balance The net effect to the equation would be an increase and a decrease to the asset balance. The Accounting Equation Continued The following summary applies to all types of businesses: 1. The effect of every transaction is an increase or a decrease in one or more of the accounting equation elements. 2. The two sides of the accounting equation are always equal. 3. The owner s equity balance is increased by amounts invested by the owner and is decreased by withdrawals by the owner. In addition, the owner s equity is increased by revenues and decreased by expenses. Financial Statements After all transactions have been recorded they are reported in one of the four basic financial statements: Income Statement Statement of Owner s Equity Balance Sheet Statement of Cash Flows

5 Income Statement Summary of revenues and expenses for a specific period of time For the Period Ended 3/31/xx Items are recorded based on the matching concept: Matching the expenses with the revenue generated for that period Reports Net Income or Net Loss Net Income = the excess of revenues over expenses Net Loss = the excess of expenses over revenue Statement of Owner s Equity Reports the changes in the owner s equity accounts for a period of time Prepared after the income statement because the net income/loss for the period must be reported in this statement Prepared before the balance sheet because the amount of owner s equity must be reported in the owner s equity section of the balance sheet Balance Sheet Reports Assets, Liabilities and Owner s Equity as of a particular date As of December 31, 20xx Assets What the firm owns Liabilities What the firm owes to people outside the organization Owner s Equity What the firm owes to internal owners

6 Statement of Cash Flows Provides information about cash inflows and outflows Reports on a specific period of time For the Period Ended 3/31/xx Consists of three sections Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities The ending cash balance is shown on this statement Statement of Cash Flows Continued Cash Flow from Operating Activities Includes cash flows from transactions that affect the net income of a company Sale of Goods Purchase of Inventory Payments on Operating Expenses Cash Flow from Investing Activities Includes cash flows from transactions that affect the investments in noncurrent assets of a company Acquiring or disposing of securities Lending money/collecting loans Cash Flow from Financing Activities Includes cash flows from the transactions that affect debt and equity of the company Borrowing from Creditors or repaying principle on loans Obtaining resources from the owners Relationships Among Financial Satements The income statement and the statement of owner s equity Net income/loss appears on both of statements The statement of owner s equity and the balance sheet The owner s capital appears on both statements The balance sheet and the statement of cash flows The cash balance appears on both statements These interrelationships serve as a check as to whether the financial statements were prepared correctly

7 Using Accounts to Record Transactions Financial statements provide an effective format for users to analyze data, but they are not an efficient format for companies to handle day to day activity. Accounting systems are designed to show increases or decreases in individual accounts. Multiple individual accounts may make up a balance as reported in the financial statements. For example, the total of multiple customer accounts receivable (AR) accounts would equal the total AR reported on the balance sheet. Using Accounts to Record Transactions, Continued Accounts in their simplest form have three parts First, the title Second, each has a space for recording increases in the account Third, each has a space for recording decreases in the account Title Left Side Debit Right Side Credit Using Accounts to Record Transactions, Continued Due to its three part design, the format on the preceding slide is often called a T Account. Regardless of the account title, amounts entered on the left side of an account are called debits to the accounts. Likewise, regardless of the account title, amounts entered on the right side of an account are called credits. Debits are often abbreviated as Dr. Credits are often abbreviated as Cr.

8 Using Accounts to Record Transactions, Continued Sample: Titl e Cash Left Side, Debit $10,000 $15,000 $25,000 $14,000 = Net Debit Balance $5,000 $4,000 $2,000 $11,000 Right Side, Credit Chart of Accounts A group of accounts is called a ledger. A list of accounts on a ledger is called a chart of accounts. In the Chart of Accounts, accounts are normally listed in the order that they appear on financial statements. Assets Liabilities Owner s Equity Revenue Expenses Balance of Accounts The normal balance of an account is what causes an account to increase. For Balance Sheet Accounts Assets Normal balance is a Debit Liabilities Normal balance is a Credit Owner s Equity Normal balance is a Credit For Income Statement Accounts Revenues Normal balance is a Credit Expenses Normal balance is a Debit

9 Journal Entries The sum of all the debits must equal all the credits. The equality of debits and credits is built into the accounting equation and is often referred to double entry accounting system. The process of transferring the debits and credits from the journal entries to the accounts is referred to as posting to a ledger. Trial Balance Once all journal entries are transferred to the ledger, a trial balance is prepared. The trial balance will help to determine the equality of the debits and credits. The trial balance does not provide complete proof of the accuracy of the ledger. If the debits and credits do not equal there is an error. Adjusting Entries Financial statements prepared in accordance with GAAP must be prepared using an accrual basis of accounting. Revenues are reported in the income statement in the period in which they are earned. Expenses are reported in the same period as the revenues to which they relate. Adjusting entries affect at lease one income statement account and one balance sheet account. An adjusting entry will always involve a revenue or an expense and an asset or liability account.

10 Adjusting Entries, Continued Four basic types of accounts that will require adjusting entries: Prepaid expenses Items that have been initially recorded as assets, but will become expenses over the normal course of business. Unearned revenues/deferred revenue Items that have been initially recorded as liabilities, but willbecome expenses over the normal course of business. Accrued revenues Revenues that have been earned but not yet recorded on accounts Accrued expenses Expenses that have been incurred but not yet recorded on the accounts Steps in the Accounting Cycle 1. Transactions are analyzed and recorded in the journal 2. Transactions are posted to the ledger 3. An unadjusted trial balance is prepared 4. Adjustment data is assembled and analyzed 5. Adjusting entries are journalized and posted to the ledger 6. An adjusted trial balance is prepared 7. Financial statements are prepared 8. Closing entries are journalized and posted to the ledger 9. A post closing trial balance is prepared