Accounting Background:

• Accounting is the information system that reports, records, analyzes, and communicates data to the appropriate people.

• The two major fields of accounting are financial accounting and managerial accounting.

  • Financial accounting is external to the business, mostly targeted for potential investors, creditors, and taxing authorities.

  • Managerial accounting is internal to the business, usually guiding budgets and meant for certain employees.

• Five main categories use accounting information.

  • Investors use accounting information to decide whether to invest.

  • Creditors use accounting information to evaluate whether a company can pay back loans.

  • The business itself uses accounting information to budget money.

  • Taxing authorities use accounting information to determine the tax to be paid by the company.

  • Individuals use accounting information to make a personal budget.

• The two certifications available for accountants to earn are CPAs and CMAs.

  • A CPA is a Certified Public Accountant, and they work for the general public.

  • A CMA is a Certified Managerial Accountant who specializes in managerial accounting, and usually works for a specific company.

• The FASB and GAAP are correlated.

  • FASB stands for the Financial Accounting Standards Board, and their role as a private company is to oversee the creation and governance of accounting standards in the USA.

  • Generally Accepted Accounting Principles (GAAP) are the guidelines for accounting information and are monitored by the FASB.

• The four types of businesses are sole proprietorships, partnerships, corporations, and Limited-Liability companies (LLCs).

  • Sole proprietorships are owned and operated by a single person. The business ends when the owner chooses to or dies. The owner is liable for the company and pays a single layer of tax.

  • Partnerships are owned by two or more people. The business ends when a partner chooses to or dies. Partners are liable for the company and pay a single layer of tax.

  • Corporations are a separate entity and have many owners, called stockholders. The lifespan for a corporation is indefinite. The corporation pays a separate layer of tax.

  • An LLC is a company where each partner is only liable for their own actions, and there are one or more owners. The lifespan for an LLC is indefinite.

• The International Financial Reporting Standards (IFRS) are a set of global accounting guidelines. They were made and overseen by the International Accounting Standards Board (IASB), a private organization.

Process of Bookkeeping (General Transactions)

• There are certain principles in place for adding transactions.

  • The going concern principle assumes a business will be in operation for the foreseeable future.

  • The faithful representation principle states that all accounting information is complete, neutral, and free from material error.

  • The monetary unit assumption assumes that financial statement measurements are in terms of a monetary unit. In the USA, dollars are recorded because it is legal tender.

NOW TO ACTUALLY DOING TRANSACTIONS:

Assets = Liabilities + Owner’s Equity

• Assets are anything the business owns that has values.

  • CASH, LAND, OFFICE SUPPLIES, ACCOUNTS RECEIVABLE

• Liabilities are anything of value the business owes.

  • ACCOUNTS PAYABLE, OWNERS EQUITY

• Owner’s equity is the owner's contribution to the company.

  • OWNER CAPITAL, OWNER WITHDRAWAL, REVENUE, EXPENSES

When adding transactions:

• What elements are affected? (Assets, liabilities, and/or owner’s equity)

• What accounts are affected? (Cash, accounts receivable, accounts payable, etc)

• By how much are the accounts affected? (Negative, positive, cash amount?)

For example…

A business owner adds $500 to the company from their own investment.

• Assets are modified. Owner’s equity is modified.

• Cash is modified. Owner’s capital is modified.

• Cash is increased by $500. Owner’s capital is increased by $500.

  • If you’re ever confused on whether something is increased or decreased, focus on the assets. This is the easiest thing to remember (if you get more assets it increases, if you get less assets it decreases).

  • You should do the SAME operation per account in a single transaction. If you increase one side by x, increase the other side by x.

The business purchases office supplies totalling $200 on account.

• Assets are modified. Liabilities are modified.

• Office supplies are modified. Accounts payable are modified.

• Office supplies are increased by $200. Accounts payable are increased by $200.

  • If you paid off this debt, accounts payable would be decreased by $200, and so would cash.

Elements. Accounts. Amount. View here for an example.

There are four statements:

• Income statements

  • Revenue - expenses

  • Reveals net income or net loss

• Statements of Owners Equity

  • Owner’s capital (beginning date), owner contribution, net income/loss for month, owner withdrawal

    • Net income/loss comes from the income statement

  • Reveals owner’s capital (ending date)

• Balance Sheet

  • Take assets on the left side, liabilities and equity on the right.

    • The owner’s equity comes from statement of owner’s equity

  • Both sides should be equal!!

• Cash flow statement

  • operating, investing, and financing activities

ROA = Net income / Average Total Assets

• Average total assets = (Beginning + Ending Assets) / 2