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Basic Accounting Concepts. AA Roundup May 30, 2007. What is Accounting?. Accounting is a process by which financial activities are organized, recorded, analyzed and transformed into information in a consistent manner. Financial activities (Transactions) Accounting Processes,
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Basic Accounting Concepts AA Roundup May 30, 2007
What is Accounting? • Accounting is a process by which financial activities are organized, recorded, analyzed and transformed into information in a consistent manner. Financial activities (Transactions) Accounting Processes, Internal Controls & Procedures Financial Reports
Uses at Home Review accuracy of bank statements Verify your credit card bills Make household expenses, pay bills Uses at Work Track hours worked Order supplies Pay items ordered Take student payments Uses & Purpose of Accounting It is used by everyone at home and at work The purpose of Accounting is to provide information to help you analyze the financial situation of the company or household
Accounting Equation Assets = Liabilities + Fund Balance (General Ledger) (Revenue – Expenses) (Operating Ledger)
Double-Entry System Every transaction must be two sided to keep the accounting equation in balance
Assets, Liabilities & Fund Balance Assets – anything that is owned by the company and has money value Liabilities – everything the company owes to others Fund Balance (Equity) – represents how much really belongs to the company and is not owed to someone else.
Ledgers Assets = Liabilities + Fund Balance (General Ledger) (Revenue – Expenses) (Operating Ledger) General Ledger keeps track of all the company’s assets, liabilities and fund balance accounts. Operating Ledger keeps track of the company’s revenue and expense accounts. - At STC, most department organizations reflect expense accounts. Revenues are recorded in separate organizations.
Debits & Credits System • Used to keep the accounting equation in balance; every transaction has an equal debit and credit entry. • A debit and a credit act as an addition or subtraction depending on the type of account. • Debits – used to increase the value of an assets, to increase an expense, to reduce revenue or a liability account • Credits – used to increase a liability or revenue, to decrease an expense and an asset account
Debits & Credits Rules Increases = normal balance of account group
T-Accounts Used in traditional manual accounting to analyze the two sided (debit & credit) posting of transactions
Cash vs. Accrual Basis Accounting • Cash Accounting – transactions are recorded only when cash is involved. • Example: a purchase is recorded when the items are paid. • Accrual Accounting – transactions are recorded as they happen, even if no cash is involved. • Example: a purchase is recorded when the items are ordered.
Financial Statements • Financial Statements are the main result of Accounting. The most common statements include: • Balance Sheet – reports ending balance of assets, liabilities and fund balance accounts at a point of time (example: as of 8/31/07). • Income Statement – reports cumulative revenue and expense transactions for a period of time (example: Sept – Aug) • Cash Flow – reports uses and sources of cash
Calendar vs. Fiscal Year Calendar Year runs: Fiscal Year runs: January 1st – December 31st September 1st – August 31st
Posting Transactions Activity • Student Registers for classes ($600) 2) Student pays registration fee ($35) 3) Order magazine subscription ($100) 4) Pay invoice for magazine subscription ($100) 5) Received refund for magazine subscription ($15) 6) Book in state travel ($300)
Closing the Periods • When periods are closed, the net of revenues and expenditures is added (or decreased) to the fund balance account. Revenue – Expenses Income Statement $600 - $385 = $215 Fund Balance Beginning Balance as of 9/1/06 $ 0 Increase (Decrease) to Fund Balance $ 215 Ending Balance as of 8/31/07 $ 215 Assets = Liabilities + Fund Balance Balance Sheet $ 515 = $300 + $215
