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Basic principles of Accounting

Basic principles of Accounting. Financial Management – Module 1 October 2014. Topics to be covered. Accounting Method – cash vs accruals Understanding Assets, Liabilities, an Equity The Accounting Equation Debits and Credits. Why do we need accounting?.

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Basic principles of Accounting

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  1. Basic principles of Accounting Financial Management – Module 1 October 2014

  2. Topics to be covered Accounting Method – cash vs accruals Understanding Assets, Liabilities, an Equity The Accounting Equation Debits and Credits

  3. Why do we need accounting? • Why is it important to do accurate accounting? • How can it help you manage your business?

  4. Accounting Method Cash Basis Accounting When cash actually changes hands vs. Accrual Accounting Record transactions when they occur, even if no cash changes hands

  5. What are…… Assets, Liabilities and Equity?

  6. Assets • Assets are valuable resources that are owned by a firm. • They represent probable future economic benefits and arise as the result of past transactions or events.

  7. Liabilities • Liabilities are present obligations of the firm. • They are probable future sacrifices of economic benefits which arise as the result of past transactions or events.

  8. Owners' Equity • Owners' equity represents the owners' residual interest in the assets of the business. • Residual interest is another name for owners' equity.

  9. Question 1 My business has taken a loan from a bank which it needs to repay over 12 months. Is this: A) An asset B) A liability C) Owner’s equity

  10. Question 2 I have a friend who is interested in investing in my company. He will put in $50,000 USD and become a part owner of the business, sharing in the profits and losses. Is the $50,000 USD: A) An asset B) A liability C) Owners’ equity

  11. Owners’ Equity Owners’ Equity = Assets – Liabilities Net Assets = Owners’ Equity

  12. The Basic Accounting Equation • Financial accounting is based upon the accounting equation. Assets = Liabilities + Owners' Equity • This is a mathematical equation which must balance. • If assets total $300 and liabilities total $200, then owners' equity must be $100.

  13. Double Entry Accounting A double entry system is when you make a transaction entry to one side and then make a second entry to the other side of the general ledger, scorecard or financial statement. This helps to keep it equal or balanced.

  14. Debits and Credits Because keeping the books involves double entry bookkeeping, you have to make at least two entries an a debit- and credit. Whether the debit or credit, adds or subtracts from an account depends solely on the type of account.

  15. Question 3 Complete the accounting equation by filling in the blank below: Assets = Liabilities + ___________ A) Owners’ Equity B) Loans C) Balances

  16. Question 4 • Which of the following is true when recording a financial transaction? A) Debits must always be greater than credits B) Debits can be less than or greater than credits, depending on the situation C)Debits must always equal credits

  17. In the next module… • We will cover Bookkeeping including the following topics: • The entity assumption • Transaction analysis • Journal entries

  18. CONGRATULATIONS! You have completed module 1 of Financial Management

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