Accounting Unit
Introduction
Accounting means keeping records about how money is used. A business keeps track of where the money comes from and where it is going. These records are needed to make decisions about the company in the future.
Throughout this accounting unit you will be using the company, Mountain Bike Mania. They sell bicycles and accessories. You will get the opportunity to do accounting for them.
In the accounting field there are many jobs. The job titles include: Auditor, Tax Accountant, Corporate Accountant, Certified Public Accountant (CPA), Bookkeeper, Accounting Clerk, Accounts Payable Clerk, Etc. Also, the level of education needed for an accounting job varies from an accounting class in high school to a Master’s Degree from college.
Accounting skills are also needed for anyone in any business position because all jobs deal with budgets and spending money. Understanding these concepts will be valuable to you even if you are an engineer, ballerina, politician, or musician. Wherever there is money, which is everywhere, there is a need to understand how money flows and is recorded.
You will have the opportunity in the future (if not already) to earn your own money. You will want to manage your own personal finances. Any time you keep records and make decisions about using your own money, you gain experience in accounting.
Activity 1
Accounting Equation
For a business to be successful, it must make money. The owner needs to make good financial decisions for the business to succeed. These decisions require accurate records of how the business is doing. Keeping records of how a business is doing is accounting.
To begin a business you must start with some basic items. Mountain Bike Mania had cash, a computer, equipment,supplies,furniture, building, land, merchandise, accounts receivable when it opened. These items have a value and are necessary to run a business. They are assets. When Mountain Bike Mania started, they did not have enough money to buy all of the assets they needed to run the business. To help them get started, they went to a bank to borrow the needed money. This amount, as well as other expenses, is aliability. Some examples of liabilities are a loan, mortgage, notes payable, and accounts payable.
Accounting is based on the accounting equation. It is :
Assets = Liabilities + Owner’s Equity
(owned) = owe + cash on hand
The total assets (what is owned) will always equal the sum of the liabilities (what is owed) and the owner’s equity. The Owner’s Equity is the difference between your assets and your liabilities.Equity is the Money $$$ the owner has to start with before getting a loan.
To illustrate the accounting equation, think of Mountain Bike Mania buying a computer. The Cost of the computer is $5000. Then business has only $1000 to pay for the computer, so a local bank agrees to lend the business the remaining $4000. The loan becomes a liability of the business. Look at the illustration of the equation below.
$5000.00= $4000.00+$1000.00
Computer=Bank Loan+ owner’s down payment
Complete Activity 1 Worksheet:
Skip Activity 2
Activity 3
Balance Sheet
Accounting statements provide information about how the business is performing by showing the financial changes that have taken place over a period of time. A Balance Sheet is an accounting statement that reports assets, liabilities, and owners equity on a specific date. It tells what the business owns, owes, and is worth on a given day. The balance sheet is based on the accounting equation: Assets = Liabilities = Owner’s Equity. The left side of the balance sheet is for assets. The right side is for liabilities and owner’s equity. Look at the balance sheet below.
MOUNTAIN BIKE MANIAActivity 3 / BALANCE SHEET
JANUARY 27,2010
ASSETS
Cash / $ 4,800.00 / LIABILITIES
Computer / $ 1,700.00 / Accounts Payable / $ 3,400.00
Office Equipment / $ 7,000.00 / Notes Payable / $ 1,800.00
Merchandise / $ 9,500.00 / Bank Loan / $ 4,500.00
Total Liabilities / $ 9,700.00
Total Assets / $23,000.00 / Owner's Equity / assets - liabilities
Mark Reese, Capital / $ 13,300.00
Total Liabilities plus
Owner's Equity / $23,000.00
Capital is another word for Money.
Complete Activity 3 Worksheet, “Balance Sheet”
Activity 4
Net Income or Net Loss
To see if Mountain Bike Mania is making money, and accounting form called an Income Statement is prepared. By studying the income statement, Mark Reese, the owner, can tell if the business is making money.
The Income Statement tells whether there is a Net Income (profit) or a Net Lossby showing the money earned( revenue), and the expenses ( money owed) of the business over a certain period of time. Mountain Bike Mania earns money by selling bicycles and accessories to customers, but it costs money to run the business. For example, Mark Reese has to pay for building rental, electricity, supplies, and employee salaries. All of the cost that are necessary to run a business are EXPENSES.
To figure the net income or net loss, you Subtract expenses from the total Revenue. If the business makes more money than is spent, it is a Net Income. If expenses were greater than revenue then it is a Net Loss. For example: If revenue was $5,000 and expenses were $3,000 the net income is $2000.00 ($5000 - $3,000 = $2,000).
MOUNTAIN BIKE MANIAINCOME STATEMENT
January 27,2000
REVENUE:
Bike Sales / $ 3,800.00
Accessories Sales / $ 1,200.00
TOTAL REVENUE: / $ 5,000.00
EXPENSES:
Rent expense / $ 500.00
Office supplies Expense / $ 50.00
Salary expense / $ 2,350.00
Electricity expense / $ 100.00
TOTAL EXPENSES / $ 3,000.00
NET INCOME or LOSS / (Subtract Expenses) / $ 2,000.00
Activity 4 / TOTAL / TOTAL / NET INCOME or
MONTH / REVENUE / EXPENSES / NET LOSS
JANUARY / $ 3,700.00 / $ 2,050.00 / $ 1,650.00
FEBRUARY / $ 5,500.00 / $ 6,700.00 / $ (1,200.00)
MARCH / $ 2,145.00 / $ 978.00 / $ 1,167.00
APRIL / $ 9,800.00 / $ 9,900.00 / $ (100.00)
MAY / $10,895.00 / $ 11,500.00 / $ (605.00)
JUNE / $ 9,555.00 / $ 8,654.00 / $ 901.00
Six months Net Income of Net Loss / $1,813.00
Complete Activity 4 now.
Activity 5
PAYROLL
Mountain Bike Mania employs people to work in the business. These employees record how many hours they work for Mountain Bike Mania each day. Mountain Bike Mania pays its employees weekly for the number of hours each employee has worked. The amount they get paid per hour is the RATE. The total amount earned by all employees for a pay period is called a PAYROLL. To figure each employee’s pay, the employee’s total hours are added together. Then they are multiplied by the RATEeach employee gets paid. Example: Jimmy Simmons worked 35 hours and he gets paid $5.00 per hour. His Gross Pay is ($5.00X 35 hours) = $175.00
Wouldn’t that be great to earn $175 per week? Don’t get too excited. Jimmy doesn’t get $175 each week because he has to pay taxes. To make this example easier, we will say the taxed are 20% or (.20) of the gross pay (the $175). Taxes would then be $175 (gross pay) multiplied by .20. Jimmy will have $35 (.20X 175= $35.00) taken out of his check for taxes. Jimmy’s NET PAYwould then be figured by subtracting his taxes from his gross pay ($175 - $35 = $140). When Jimmy gets his pay check, he will be paid $140 for one week of work at Mountain Bike Mania.
Look at the following example of a completed payroll.
GROSS / 20% / NETEmployee Name / HOURS / RATE / PAY / TAXES / PAY
Jimmy Simmons / 35 / $5.00 / $175.00 / $35.00 / $140.00
Mark Reese / 40 / $8.25 / $330.00 / $66.00 / $264.00
Julia Godfrey / 60 / $6.75 / $405.00 / $81.00 / $324.00
Amber Williams / 10 / $7.50 / $75.00 / $15.00 / $60.00
Totals = / $985.00 / $788.00
Complete Activity 5 now.