Intro To Accounting

Who Uses Financial Information?

- Internal Users

- Managers, Owners, Employees

- External Users

- Government, regulatory and taxing agencies

 

Why is it needed?

- To make knowledgeable decisions

- Lenders

 

Accounting: art of analyzing, recording, summarizing, reporting, reviewing, and interpreting financial information

 

Bookkeeping: Process of recording and classifying business financial transactions.

 

Types of Business Organizations:

 

Sole Proprietorship: a business owned by one person and is active in running and managing the business

Partnership: a business is owned by 2 or more. Partners have a formal legal agreement

 

Corporation: organization made up of many owners who normally are not involved in decision making and operations of business.

 

C Corporations: Earnings are taxed to corporation. Shareholders are not liable for income taxes unless dividends are paid

 

Subchapter-S: Passes or transfers earnings to individual share holders who

personally pay the income taxes

Limited Liability Company

LLC is a new business structure that combines benefits of corporation and partnership

 

Factors to consider when choosing an organization:

 

Tax consequences – Federal and State

Ease and cost of formation and recurring registration fees

Degree of control: Amount of control you have over decisions in the business

Liability: DO you have personal assets that need protection?

Ability to get money: do you need investors to fund your business?

Type of business: any special licences needed that can limit the type of organization you can have?

 

Types of Business Activity

 

What are the types of Business activities discussed

 

Businesses that sell products directly to the consumer (retailers)

 

Wholesalers

 

Businesses that provide services to other companies

 

Manufacturers

 

 

Accounting Period

A fiscal tax year is any 12 consecutive months ending on the last day of any month except December 31. Businesses may choose a low activity time for their fiscal year to make the process of closing the books easier.

 

Types of Bookkeeping Systems

 

Single Entry System

- Informal

- Only makes one entry to enter a business financial transaction

- Generally includes cash receipts, monthly record of receipts, etc.

- Checkbook is an example

- Emphasis on determining the profit or loss of a business

- Ok for tax purposes, not enough to adequately report financial affairs

 

Double Entry System

- Standard system used by businesses and organizations to record financial transactions

- Since all transactions consist of exchange, double entry bookkeeping using debits and credits is used to show 2-fold effect

- Self-Balancing

- When used with accrual method of accounting is a complete accounting system

 

Accounting Method

 

Cash Method

- Recognizes revenue and payments when they are received and made

- Strict method follows cash flow exactly

- Modified method follows things from the accrual method like inventor and cost of goods sold

- Many businesses use modified whether they know it or not

- Purpose of cash method is to determine net income or loss for period based on cash received and spent

- Cash method if not generally considered in conformity with generally accepted accounting principles

 

 

Accrual Method

- Records income in period earned and records expenses and capital expenditures such as buildings, land, equipment, and vehicles in the period incurred

- Purpose it t properly match income and expenses in the correct period

- Records revenue when product and/or service is shipped or rendered and invoiced

- Information about amounts billed by suppliers and to clients is recorded unlike in the cash method

 

Difference between both methods

In the accrual method, the company will record the revenues and expenses right away, unlike in the cash method where they would wait to get paid or pay before recording the expense.

 

The Single Entry bookkeeping system is used along with the Cash Method of accounting. 
Debits and Credits are not used to record financial events.

 

The Double Entry bookkeeping system can be used with both the Cash and Accrual methods of accounting. 
Debits and Credits are used to record financial events.

 

The recommended accounting system is usually double entry bookkeeping system and the accrual basis or method of accounting.

 

GAAP is generally accepted accounting principles. GAAP is various rules that accountants must abide by when they are reviewing their materials.