Bookkeeping 31st August 2021 (Lecture
1) Ch 1, Ch 2, Ch3.1-3.2
1. Know the basic economic definition in accounting
Economic Value
The economic value of a firm is defined as the discounted value of
all future net benefits that the firm is expected to generate, which is
the higher of the value in exchange and the value in use
Value in Exchange
Exchanging all machines and housing for cash for example.
Value in Use
Continuing to generate revenue through normal production.
Value in use is the profit.
Comparison
If value in exchange is higher, than sell the company, if value
in use is higher, keep investing
Financial Accounting
Language of business
Difficult to determine
Financial accounting thus produces an accounting value that
approximates the economic value, and accounting net income that
approximates economic net income as closely as possible.
Objective of financial accounting
Measure and present a true and fair view of financial position and
financial performance to interested parties
Interested parties may include
External Users
Government for tax information
Investors to know circumstances of investments
Internal Users
Owners of company
Employees
,The past and future information related to a company
The price you are willing to pay for heineken today depends on the past or
the future information
Future
Important to know the future because as investors we invest in the
future of the company
Discussion: Monthly Income and Expenditure
If you have a monthly budget of 500 Euros for Sep 2021, and you happen to
pay a one year subscription for your Eramsus Sports pass for 139 euros.
How/how much will you record this expenditure?
, Accrual vs Cash based
Cash accounting measures the accounting value of a firm by her
cash position and accounting income by the change in cash position
Does not provide a true and fair view
If you put 139 Euros as an expenditure for September, your
spending will spike in the month.
Accrual Accounting
An accounting method where revenue or expenses are recorded
when a transaction occurs rather than when the corresponding
cash receipts or cash payments occur
Recognition Principles
Revenues are recognized when goods or services are
provided (revenue recognition principle)
Expenses are recognized in the same period as the
revenues they helped to generate (expense recognition
principle)
If Heineken provides 1000 Beers to Erasmus on the
1st and collects the revenues from the beers at the
end of the month, they would note their expenses
and revenues at the end of the month
Most common examples of accrual accounting are
given below:
•Sales on Credit →Accounts Receivable•Purchase
on Credit →Accounts Payable•Rent Paid in Advance
→Prepaid Rent•Customer payment in advance
→Unearned Revenue•Depreciation
The Accounting Equasion and Balance Sheet
, An asset is a resource that is (1) controlled by the entity, (2) as a result
of past events, and (3) from which future economic benefits are
expected to flow to that entity
Heineken piece of machinery
A liability is present obligation of the entity that (1) arises from past
events and (2) the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits
Payments owed such as salaries or loans
Equity is the residential interest in the assets after deducting all its
liabilities. Equity is defined as what remains of the entity's assets when
all liabilities have been fulfilled
Expanded Accounting Equation
Equity=Share Capital+Retained Earnings. Equity is the value an owner can
take away from a company.
Retained Earnings=Prior Retained Earnings + Net Income - Dividends.
Basically all of the profits made, subtracted by whatever you give to
shareholders and such through dividends.
Assets=Liabilities+Capital+Prior retained earnings-Dividends+revenues-
expenses
Dividends are
not an expense
distributions of retained earnings to shareholders
Recorded as a reduction of retained earnings on the declaration date
)creates a liability until payment date)
Stock vs Flow Varibales
1) Ch 1, Ch 2, Ch3.1-3.2
1. Know the basic economic definition in accounting
Economic Value
The economic value of a firm is defined as the discounted value of
all future net benefits that the firm is expected to generate, which is
the higher of the value in exchange and the value in use
Value in Exchange
Exchanging all machines and housing for cash for example.
Value in Use
Continuing to generate revenue through normal production.
Value in use is the profit.
Comparison
If value in exchange is higher, than sell the company, if value
in use is higher, keep investing
Financial Accounting
Language of business
Difficult to determine
Financial accounting thus produces an accounting value that
approximates the economic value, and accounting net income that
approximates economic net income as closely as possible.
Objective of financial accounting
Measure and present a true and fair view of financial position and
financial performance to interested parties
Interested parties may include
External Users
Government for tax information
Investors to know circumstances of investments
Internal Users
Owners of company
Employees
,The past and future information related to a company
The price you are willing to pay for heineken today depends on the past or
the future information
Future
Important to know the future because as investors we invest in the
future of the company
Discussion: Monthly Income and Expenditure
If you have a monthly budget of 500 Euros for Sep 2021, and you happen to
pay a one year subscription for your Eramsus Sports pass for 139 euros.
How/how much will you record this expenditure?
, Accrual vs Cash based
Cash accounting measures the accounting value of a firm by her
cash position and accounting income by the change in cash position
Does not provide a true and fair view
If you put 139 Euros as an expenditure for September, your
spending will spike in the month.
Accrual Accounting
An accounting method where revenue or expenses are recorded
when a transaction occurs rather than when the corresponding
cash receipts or cash payments occur
Recognition Principles
Revenues are recognized when goods or services are
provided (revenue recognition principle)
Expenses are recognized in the same period as the
revenues they helped to generate (expense recognition
principle)
If Heineken provides 1000 Beers to Erasmus on the
1st and collects the revenues from the beers at the
end of the month, they would note their expenses
and revenues at the end of the month
Most common examples of accrual accounting are
given below:
•Sales on Credit →Accounts Receivable•Purchase
on Credit →Accounts Payable•Rent Paid in Advance
→Prepaid Rent•Customer payment in advance
→Unearned Revenue•Depreciation
The Accounting Equasion and Balance Sheet
, An asset is a resource that is (1) controlled by the entity, (2) as a result
of past events, and (3) from which future economic benefits are
expected to flow to that entity
Heineken piece of machinery
A liability is present obligation of the entity that (1) arises from past
events and (2) the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits
Payments owed such as salaries or loans
Equity is the residential interest in the assets after deducting all its
liabilities. Equity is defined as what remains of the entity's assets when
all liabilities have been fulfilled
Expanded Accounting Equation
Equity=Share Capital+Retained Earnings. Equity is the value an owner can
take away from a company.
Retained Earnings=Prior Retained Earnings + Net Income - Dividends.
Basically all of the profits made, subtracted by whatever you give to
shareholders and such through dividends.
Assets=Liabilities+Capital+Prior retained earnings-Dividends+revenues-
expenses
Dividends are
not an expense
distributions of retained earnings to shareholders
Recorded as a reduction of retained earnings on the declaration date
)creates a liability until payment date)
Stock vs Flow Varibales
