Introduction to Accounting Quiz

What is Accounting?

• Accounting is a system that records, summarizes, and reports a business's financial activities.
• Its purpose is to summarize information using financial statements and provide data for decision-making.

Why is Accounting Important?

• Accountability & Transparency: Ensures those handling cash are responsible and financial activities of public corporations are reviewed.
• Budgeting: Helps estimate future sales and expenses.
• Taxation: Records must be maintained to calculate and pay taxes.

Financial Statements

• Definition: Reports summarizing a business's financial performance and health.
• Examples: Annual reports, shared with shareholders and potential investors.

Users of Financial Information

• Internal: Business owners, managers.
• External: Government, bankers/lenders, potential investors.

The Balance Sheet Equation

• Assets = Liabilities + Owner's Equity
• Or, Assets - Liabilities = Owner's Equity

Key Terms Explained

• Assets: Items of value owned by a business or person. (Examples: Cash, House, Car)
• Liabilities: Debts owed by a business or person. (Examples: Credit Card, Bank Loan)
• Owner's Equity: The difference between total assets and liabilities, representing net worth.

Steps to Create a Balance Sheet

• Heading: Include the business/individual's name, "Balance Sheet," and the date.
• Assets Section: List short-term (e.g., Cash, Accounts Receivable) and long-term assets (e.g., Land, Buildings) in a specific order.
• Liabilities Section: List liabilities (e.g., Accounts Payable, Mortgage) in order of due date
• Owner's Equity: List owner's capital.

Example Balance Sheet Data (Indra Nooyi, 2023)

• Assets: Cash 2,000,HouseholdItems2,000, Household Items 2,000,HouseholdItems5,000, Car 5,000,House5,000, House 5,000,House300,000. Total Assets: $312,000.
• Liabilities: Credit Card 2,000,CarLoan2,000, Car Loan 2,000,CarLoan500, Bank Loan 20,000,Mortgage20,000, Mortgage 20,000,Mortgage200,000. Total Liabilities: $222,500.
• Owner's Equity: Indra Nooyi, Capital 89,500.TotalLiabilitiesandEquity:89,500. Total Liabilities and Equity: 89,500.TotalLiabilitiesandEquity:312,000.

Additional Terms

• Accounts Receivable: Money owed to a business by customers for goods/services sold, typically due in 30-60 days.
• Accounts Payable: Money owed by a business to creditors for goods/services purchased, typically due in 30-60 days.