Basic Accounting

Animated Accounting • Basic Accounting

Overview of accounting • Understand the accounting equation • The implications of double entry accounting • Distinguish between debits and credits • Understand what a balance sheet is • Know how an income statement is put together

The accounting equation • The Accounting Equation is an essential notion in financial accounting. • The equation derives from assets and claims on assets. • Assets = Liabilities + Owners' Equity • Assets = Liabilities + Owners' Equity $200,000= $50,000 + ? • In using the accounting equation, if two of the three components are known, the third can be solved.

Assets / Claims on Assets • Assets are what a company owns, such as equipment, buildings and inventory. Claims on assets include liabilities and owners' equity. • Liabilities are what a company owes, such as notes payable, trade accounts payable and bonds. • Owners' equity represent the claims of owners against the business.

Double Entry Accounting • For every transaction that is recorded in a business, there have to be two components that make up an entry • Debit is an increase in an asset item; a decrease in a claim or expense item. • Credit is an increase in a claim item; a decrease in an asset or revenue item. • Debits and credits arise whenever a "transaction" occurs, such as a change in assets or a claim on assets.

Assets and Claims on Assets • Debits increase assets or decrease claims on assets (liabilities and owners' equity). • Credits increase claims on assets or decrease assets. • A business owner spends cash to purchase a piece of equipment which is to be used in the business. To record this transaction, the owner debits the equipment account because an asset was increased. The offsetting credit would be to cash.

Balance Sheet • The Balance Sheet is a statement detailing what a company owns (assets) and claims against the company (liabilities and owners' equity) on a particular date. • the balance sheet is a snapshot illustrating a company's financial health. • On assets and claims, it is helpful to remember the "left–right" accounting equation orientation • assets on the left side, • claims on the right. Other characteristics of the balance sheet balancing order of listing valuing of items definitions of items.

Balance Sheet print out

Income Statement • The Income Statement shows a firm's revenues and expenses, and taxes associated with those expenses for some financial period. • The income statement would be thought of in "top–down" terms.

Income Statement preview Income Statement Sales $540,000.00 Cost of Goods Sold $319,680.00 Gross Profit $220,320.00 Selling & Administrative Expenses $132,300.00 Earnings Before Interest & Taxes $88,020.00 Interest $10,356.00 Taxable Income $77,664.00 Taxes $35,726.00 Net Income $41,938.00 Dividends $33,108.00 Transfer to Retained Earnings $8,830.00

Financial statement • Financial statements, are only tools to be used by different entities. • The balance sheet and income statement are both basic statements common to most businesses. • Another group of statements are based on the concept of how funds flow through a business. • retained earnings • cash flows statement

Animated Accounting By Shannon Kelm Animated by Shannon Kelm Produced by Shannon Kelm Edited by Shannon Kelm Graphics by Brainy Betty Thank you for stopping by

Basic Accounting