Accounting. How to describe all this? Definition of accounting. This slide show is available at:

Size: px

Start display at page:

Download "Accounting. How to describe all this? Definition of accounting. This slide show is available at:"

Barnard Adams
6 years ago
Views:

1 Accounting Prof. UG, dr hab. Przemysław Lech, Faculty of Management, room 202A This slide show is available at: Additional literature (any of the following): Jones M., Accounting II edition, Jon Wiley & Sons, 2006 Marshall, McManus & Viele, "Accounting. What the Numbers Mean", McGraw- Hill, 7th Edition Robins & Wood, "Book-keeping and Accounting", Prentice Hall, 5th Edition Eisen, "Accounting", Barron's, 5th Edition ) Mr. X and Mrs. Y decided to start an enterprise. They payed EUR each to the bank account 2) For EUR they bought a building 3) But after that they had not enough money, so they took a bank bank loan 4) and bought raw materials for 5) They employed people 6) and paid them salaries ) All the raw materials were used for production of the finished goods 8) Which were sold (and paid in cash to the bank account) for How to describe all this? Definition of accounting Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof. (American Instutute of Certified Puplic Accountants) Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information (American Accounting Association) Accounting is the language of business

2 Purpose of accounting The purpose of accounting is to reflect the true and fair view of the financial situation of an entity as well as its financial results. Accounting is divided into: Financial accounting Supplies financial information to the external users (shareholders, banks, state agencies, tax authorities) Mandatory in most countries Subject to standardization and legal regulations Tax reporting Management accounting Supplies financial information to the managers Non-mandatory Not regulated by law Financial accounting Regulations: Main principles Europe, China, : IFRS (International Financial Reporting Standards) issued by IASB (International Accounting Standards Board) + Country law (ex: UK:Companies Act 2006, France: Code de Commerce and Plan Comptable General, Poland: Accounting Act) US: GAAP Generally Accepted Accounting Principles Entity: business has a separate identity from its owners Monetary measurement: only transactions that are expressed in money are recorded; Periodicity: the information is reported for a given period of time: usually year (fiscal year) divided into months. Ending balance of n period is the beginning balance of n+ period Continuity (going concern): an assumption is made that an enteprise will continue its activities in the future in the same scale Prudence/conservatism: the most pesimistic valuation variant should be chosen if alternatives exist. Historical cost is the first choice Permanence of methods: a company should use the same accounting methods over time Full disclosure/materiality all information and values pertaining the financial position must be disclosed in the records Accruals principle revenues and costs are recorded when they are earned, not paid Monetary measurement + prudence -> conequences for intangible assets (no reliable price) What an entity posesses? Accounting equation Capital (equity) + Liabilities Where does it come from? are resources controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise A= C+ L Capital (Equity) is the owners interest in the assets (after deducting all liabilities) Liabilities are present obligations of an enterprise, arising from past events, the settlement of which is expected to result in an outflow from enterprise s resources (assets) 2

3 Back to example: ) Mr. X and Mrs. Y decided to start an enterprise. They payed EUR each to the bank account 2) For EUR they bought a building 3) But after that they had not enough money, so they took a bank bank loan 4) and bought raw materials for 5) They employed people 6) and paid them salaries ) All the raw materials were used for production of the finished goods 8) Which were sold (and paid in cash to the bank account) for Balance sheet structure Balance sheet is a statement of the financial position of an entity at a given date with a long-term usful life; an asset which is not expected to be turned into cash within a year during the normal course of business with a short-term useful life; to be turned into cash within a year during the normal course of business Capitals and Liabilities A. Capital (Equity) Owners interst in the assets; the equivalent of the value of the assets given to the enterpris for ist lifetime Obligations of an enterprise; the equivalent of the value of the assets which the enterprise has to give back to its creditors in a specified moment in time (fixed assets) I. Intangible assets (goodwill, patents, copyrights, trademarks, software licences bought by the company, cost of finished R&D) II. Property, plant and equipment (tangible assets) III. Long-term receivables (over year) IV. Long-term investments (over year) both financial and non financial I. Inventory (raw materials, trade goods, finished goods, non-finished goods/work-in-progress) II. Short-term receivables (less than year + trade receivables) III. Short-term investments (cash and cash equivalents) 3

4 Goodwill Difference between the fair (market) price paid for an enterprise or its organized part and the sum of the fair (market) price of its net assets (assets minus liabilities) Fair price of assets: 00 Price paid for an enterprise: 40 Building: 70 Equipment: 30 Employees:? Market share:? Goodwill 40 Capital and Liabilities A. Capital (Equity) equivalent of the money invested in the enterprise by the owners/shareholders II. Retained profit - profit reinvested in the enterprise after the deduction of any distributions to owners/shareholders, such as dividend payments I. Long-term liabilities (debt) - with due date over a year II. Short-term liabilities (debt) - with due date within a year Company name Balance sheet Balance sheet date: I. Intangible assets II. Property, plan & equipment III. Long-term receivables IV. Long-term investments A. Capital II. Retained profit I. Inventory II. Short-term receivables III. Short-term investments I. Long term liabilities II. Short term liabilities total = Capital and liabilities total 4

5 Example exercise: Prepare the balance sheet of an enterprise X basing on the following data: amount payable to the contractor (for raw materials delivery): building of the production department: loan from the bank: to be paid within the next year: to be paid later: amount payable to the tax authorities: ERP system software licence (system is used by the company): production machine: amount receivable from the customer for the goods sold: treasury (government) bonds with maturity date in 2 years time: current bank account: petty cash: raw materials: retained earnings: finished goods: common stock:. Is the financial situation of an enterprise X stable? Examples of financial ratios derived from the balance sheet Debt ratio = Equity to fixed assets ratio Debt ratios Measure firm s ability to finance its long-term activity Equity to total = assets = Liabilities Total assets Capital (equity) Total assets Capital (equity) Non-current assets Liquidity ratios Measure firm s ability to pay its debt Current ratio = Current assets Short term liabilities Current Quick assets - Inventory ratio = Short term liabilities Cash ratio = Short-term investments Short term liabilities Example exercise: Compare the financial situation of companies A,B,C and D using the debt and liquidity ratios Company A I. Intangible assets II. Property, plant & equipment III. Long-term receivables IV. Long-term investments A. Capital II. Retained profit I. Inventory II. Short-term receivables III. Short term investments I. Long-term liabilities II. Short-term liabilities Company B I. Intangible assets II. Property, plant & equipment III. Long-term receivables IV. Long-term investments A. Capital II. Retained profit I. Inventory II. Short-term receivables III. Short term investments I. Long-term liabilities II. Short-term liabilities

6 Example exercise continued Company C I. Intangible assets II. Property, plant & equipment III. Long-term receivables IV. Long-term investments A. Capital II. Retained profit I. Inventory II. Short-term receivables III. Short term investments I. Long-term liabilities II. Short-term liabilities Company D I. Intangible assets II. Property, plant & equipment III. Long-term receivables IV. Long-term investments A. Capital II. Retained profit I. Inventory II. Short-term receivables III. Short term investments I. Long-term liabilities II. Short-term liabilities ) Balance sheet transactions Capital and Liabilities + A + C or L 2) - A - C or L - A 3) 4) + A 2 - C + C 2 - L + L 2 A = C+L General Ledger Balance Sheet accounts Intangible assets I. Intangible assets II. Property, plant & equipment III. Long-term receivables IV. Long-term investments A. Capital II. Retained profit Capital stock Profit/loss Inventory Cash I. Inventory II. Short-term receivables III. Short term investments I. Long-term liabilities II. Short-term liabilities Short term liab. Current bank accnt. 6

7 G/L accounts - construction Capitals and Liabilities Dt (Debit) Cash Ct (Credit) Bb/f Dt (Debit) Bank loan Bb/f Ct (Credit) Bc/f Bc/f General ledger accounts Double entry rule (reflects the accounting equation on the accounts) Each transaction is recorded: - on at least two accounts - on their opposite sides (debit on one account and credit on the other account) - the amounts on both sides must equal ) + A Capitals and liabilities Current bank account + C/L Bank loan 2) - A - C/L Petty cash Short term liabilities 3) - A Petty cash Raw materials + A 2 - C - L Profit Retained profit 4) + C 2 + L 2 Example exercise: Recording G/L transactions 7

8 G/L Account creation horizontal division - example Inventory Merchandise inventory Raw materials Materials Auxiliary materials Work in progress General purpose mat. Finished goods Subledger creation horizontal division - example Raw materials Accounts payable (liabilities) The subledger must balance with its corresponding G/L account, so: each transaction posted to the G/L account MUST be posted to one of the subledger accounts, to the same side and the same amount Trial balance is used to check the consistency of the subledger and its corresponding G/L account (example) Accounts payable subledger Bimet Axel Copa PL Leasing... Example exercise: Recording sub-ledger transactions 8

9 Valuation allowance account creation vertical division Before division After division Asset X Asset X Certain transaction type 6 6 Asset X valuation allowance account Contra-asset account 4 5 Example depreciation account Before division After division Fixed assets Fixed assets Beginning value Quantityvalue changes Beginning value Quantityvalue changes Value changes (usage) Deppreciation Value changes (usage) Linear depreciation calculation y = V t or y% = 00% t y = y%*v 00% m = y 2 Initial value (V) Fixed assets Depreciation Costs Depreciation is the gradual decrease of the fixed asset value due to its normal use 9

10 Example exercise: Calculating and posting depreciation Profit & Loss transactions Short term investments: Capital: Capitals and liabilities 2 Inventory: Capital: Short term investments: Inventory: Capital: Profit/loss: Short term investments: Total capital = Inventory: Capital: Short term receivables: Profit/loss: Short term investments: Total capital = Expense (cost) is decrease in economic benefits during the accounting period in the form of outflows of assets or incurrences of liabilities that result in decreases in capitals (equity) Income (revenue) is increase in economic benefits during the accounting period in the form of inflows of assets or decreases of liabilities that result in increase in capitals (equity) incomes expenses = profit/loss Profit & Loss transactions Inventory Capitals Bb/f Bb/f Cost Expense Accounts receivable Cash Revenue Income Bb/f

11 Capitals II. Profit Creation of income and expense accounts Liabilities Profit account Decrease - expenses Increaseincomes - C + C Expenses are registered here Expenses (costs) - C Incomes (revenues) Incomes are registered gere + C Profit and loss statement + Sales (income) - Cost of goods sold = Gross profit (margin) - Operating expenses Selling expenses General and administrative expenses = Operating income + Other incomes - Other expenses = Net profit before tax - Income tax = Net profit after tax Operating income of a merchandising company Merchandise inventory Cost of goods sold Profit/loss acount Sales income Balance sheet accounts I I IV IV 4 4 Balance sheet accounts Selling expenses 2 2 II II Administrative expenses 3 3 III III

12 Example exercise: Operating income of a marchandising company Operating profit of a service company Balance sheet accounts Service expenses COGS Profit/loss account Sales income Balance sheet accounts 3 3 I I II II 5 5 Administrative expenses 2 2 III III Example exercise: Operating income of a service 2

13 Operating profit of a manufacturing company Balance sheet accounts Manufacturing costs Finished goods COGS Profit/loss account Balance sheet accounts I I Administrative expenses 2 2 III III II Sales income II 6 6 Example exercise: Operating income of a production company 3

Prepared and solved by Cyberian www,vuaskari.com

Prepared and solved by Cyberian www,vuaskari.com Franchise rights, goodwill and patents are the examples of: Liquid assets Tangible assets Intangible assets Current assets Any expense that gives benefit for a period of less than twelve months is called.