Financial Accounting
Accounting= an information system that identifies, measures, records, summarises, and
reports economic information (from business activities) to decision makers in the form
of financial statements. (eg. Sales, purchases, labour activities,…)
Financial statements: economic information about business activities expressed in
monetary values -> all the business activities are summarised.
Accounting information is useful to anyone who makes decisions that influence business
activities and have economic results.
- Investors/ stakeholders are interested if coloury makes profit, because if not they
won’t make an investment = e.g. Dividend
- employees are interested, to be sure that they will last, for their salaries
- the labour union/ vakbond
- creditors (the banks/suppliers) because the company will borrow from them-> risk
for bankruptcy, so they want to know if they should extend credit, how much
and for how long
- competitors
- Government agencies (tax collection, statistics)
- clients/ the public: imagine you buy a laptop then you get a guarantee, but if
company is bankrupt you can’t profit from that
primary objective or financial reporting = useful for making investment and
credit decisions.
Financial accounting: focuses on the specific needs of decision makers external to the
organisation, such as shareholders, suppliers, banks, and government agencies
->Externally disseminated financial statements have to be drawn up by reference to a
set of accounting rules (GAAP = Generally Accepted Accounting Principles). These might
be different depending on the jurisdiction and the form of business organisation.
-> this study : international accounting standards board IASB – international
accounting reporting standards IFRS
Management accounting: serves internal users, such as top executives, management, and
administrators within organisations (a.o. budgets, forecasts, projections, detailed cost
price calculations) -> more detailed
each type of activity needs to be recorded based on a certain rule
international accounting standards IAS <-> international financial reporting standards
IFRS : has to be mandatorily adopted for the listed companies, not every company is
listed
,Personal liability
Limited liability is a form of legal protection where the person is prevented from being
held personally responsible for their company’s depts or financial losses -> they won’t
sell their personal belongings if the company goes bankrupt.
So, highest risk for bank to not get their money back = corporation
Statement of Financial Position / Balance sheet: company’s position at the end of the
financial year-> Assets = Liabilities + Equity Assets – Liabilities = Owner’s Equity
Balance sheet= overview of what the company possesses, what they use to be able to sell
Left side= what the company processes = debit ; Right side= where the money is coming
from to have those assets = credit
Owners’ equity: what the owners invested
Liabilities = dept
->picture at one point in time
->cumulative statement, start at the begin of the accounting year with the balance of
last year
Accounts receivable= when you sell something on credits, client has eg. 30 days to pay
back
conceptual framework from IFRS= we can only include things that will make benefit
double entry accounting= at least 2 accounts will be effected by a transaction
report format= underneath each other
<-> income statement = a moving picture of events over a span of time and explains the
changes that have taken place between balance sheet dates.
= not cumulative, you start at 0
,Companies need to measure their income over time periods
- calendar year: most companies use : 1/01 -31/12
- fiscal year: ends o a date other than 31/12 1st of April, at the low point in annual
business activity -> depends on the company, it should be 12 months no matter
what.
=>companies are also obligated to report to the shareholders with a statement in
interim periods, usually each semester: 6 months; but typically each quarter: 4 monts
Counting stock in a period of low business activity because it’s easier -> depends on the
type of company e.g. Colruyt won’t close during new year’s eve, so their fiscal year won’t
end in January
Revenue – expenses = Net Income = profit/ loss
For Colruyt = 1 billion -> either they will pay their shareholders back in form of
dividends / reinvest in the company and not give anything to the shareholders =
retaining profit in the company -> a new account within owners’ equity in balance sheet
retained earnings= additional owners’ equity generated by income or profits
balance sheet = cumulative, so if last year RE= 100 and this year also 100, then RE
on the balance sheet is 200
RE at the end of the accounting period= RE at the beginning of the period+ what was
generated during the period - dividends
Dividends = not expenses, they are a result of the generation of the revenue, not
necessary for the generation of the revenue
When include something as revenue/ expense in income statement?
- Cash basis: recognises the impact of transactions only when cash is received or
disbursed e.g. you sell bread and receive cash -> recognise revenue
You pay the supplier for flour-> recognise expense
=>used in the cash flow statement NOT in income statement
- Accrual basis: recognises the impact of transactions for the time periods when
revenues and expenses occur even if no cash changes hands
Revenue:
-> transfer criteria: goods are delivered or a service is performed
->realized criteria: cash or a claim to cash (on credit) is received in exchange for goods
or services. ( using an invoice in case of credit)
=> e.g. you send someone smt without asking, but if they don’t accept it, then the
realised criteria is not there, so that’s against the accrual principle
=> stage of completion: e.g. Newspaper subscription -> transfer criteria is only met when
you receive the newspaper, even after you already played -> so you can’t recognise it as a
revenue, but you created an obligation : delivering the newspaper to the customer, so it
will be a current liability
, Expenses:
->matching: you can only include expenses in income statement when the revenue to
which it’s related is recognised
Eg. You bought and payed for the bread, but you didn’t sell it yet, so it’s not an expense
in the income statement; it’s an asset, so it goes to the account inventory (it becomes an
expense when you sell it)
E.g. of matching = depreciation
the systematic allocation of the acquisition cost of long-lived assets or fixed assets to
the expense accounts of particular periods that benefit from the use of the assets
->Assets are used up over a period of time, so more and more of their original costs are
transferred from asset accounts to expense accounts
Ex. Car for company = a long term investment, when you use the car in order to make
revenue -> you include part of it in expenses -> you will use it more than a year, so you
will divide the cost under the time that u use it
Balance sheet equation in case study:
Revenue-> total assets of new period – total assets of old period = x
RE of last period + x = RE of new period
Expense-> RE last period – operational expense
In general ; net income = RE new period
you are not 100% sure if you will have to pay it = not payable = > provision
Allocating asset in part of expense -> depreciation
Chapter 3: accrual accounting
Accrual basis -> when something is not recognised as revenue yet, it goes to cash &
liabilities
-> current accounting standard for the measurement of income.
- Presents a more complete summary of what happened during the year as it
reports more than only cash transactions
- Represents best economic reality
RE is not a pot of gold, something can be recognised as revenue when eve if cash is not
received yet
Accounting= an information system that identifies, measures, records, summarises, and
reports economic information (from business activities) to decision makers in the form
of financial statements. (eg. Sales, purchases, labour activities,…)
Financial statements: economic information about business activities expressed in
monetary values -> all the business activities are summarised.
Accounting information is useful to anyone who makes decisions that influence business
activities and have economic results.
- Investors/ stakeholders are interested if coloury makes profit, because if not they
won’t make an investment = e.g. Dividend
- employees are interested, to be sure that they will last, for their salaries
- the labour union/ vakbond
- creditors (the banks/suppliers) because the company will borrow from them-> risk
for bankruptcy, so they want to know if they should extend credit, how much
and for how long
- competitors
- Government agencies (tax collection, statistics)
- clients/ the public: imagine you buy a laptop then you get a guarantee, but if
company is bankrupt you can’t profit from that
primary objective or financial reporting = useful for making investment and
credit decisions.
Financial accounting: focuses on the specific needs of decision makers external to the
organisation, such as shareholders, suppliers, banks, and government agencies
->Externally disseminated financial statements have to be drawn up by reference to a
set of accounting rules (GAAP = Generally Accepted Accounting Principles). These might
be different depending on the jurisdiction and the form of business organisation.
-> this study : international accounting standards board IASB – international
accounting reporting standards IFRS
Management accounting: serves internal users, such as top executives, management, and
administrators within organisations (a.o. budgets, forecasts, projections, detailed cost
price calculations) -> more detailed
each type of activity needs to be recorded based on a certain rule
international accounting standards IAS <-> international financial reporting standards
IFRS : has to be mandatorily adopted for the listed companies, not every company is
listed
,Personal liability
Limited liability is a form of legal protection where the person is prevented from being
held personally responsible for their company’s depts or financial losses -> they won’t
sell their personal belongings if the company goes bankrupt.
So, highest risk for bank to not get their money back = corporation
Statement of Financial Position / Balance sheet: company’s position at the end of the
financial year-> Assets = Liabilities + Equity Assets – Liabilities = Owner’s Equity
Balance sheet= overview of what the company possesses, what they use to be able to sell
Left side= what the company processes = debit ; Right side= where the money is coming
from to have those assets = credit
Owners’ equity: what the owners invested
Liabilities = dept
->picture at one point in time
->cumulative statement, start at the begin of the accounting year with the balance of
last year
Accounts receivable= when you sell something on credits, client has eg. 30 days to pay
back
conceptual framework from IFRS= we can only include things that will make benefit
double entry accounting= at least 2 accounts will be effected by a transaction
report format= underneath each other
<-> income statement = a moving picture of events over a span of time and explains the
changes that have taken place between balance sheet dates.
= not cumulative, you start at 0
,Companies need to measure their income over time periods
- calendar year: most companies use : 1/01 -31/12
- fiscal year: ends o a date other than 31/12 1st of April, at the low point in annual
business activity -> depends on the company, it should be 12 months no matter
what.
=>companies are also obligated to report to the shareholders with a statement in
interim periods, usually each semester: 6 months; but typically each quarter: 4 monts
Counting stock in a period of low business activity because it’s easier -> depends on the
type of company e.g. Colruyt won’t close during new year’s eve, so their fiscal year won’t
end in January
Revenue – expenses = Net Income = profit/ loss
For Colruyt = 1 billion -> either they will pay their shareholders back in form of
dividends / reinvest in the company and not give anything to the shareholders =
retaining profit in the company -> a new account within owners’ equity in balance sheet
retained earnings= additional owners’ equity generated by income or profits
balance sheet = cumulative, so if last year RE= 100 and this year also 100, then RE
on the balance sheet is 200
RE at the end of the accounting period= RE at the beginning of the period+ what was
generated during the period - dividends
Dividends = not expenses, they are a result of the generation of the revenue, not
necessary for the generation of the revenue
When include something as revenue/ expense in income statement?
- Cash basis: recognises the impact of transactions only when cash is received or
disbursed e.g. you sell bread and receive cash -> recognise revenue
You pay the supplier for flour-> recognise expense
=>used in the cash flow statement NOT in income statement
- Accrual basis: recognises the impact of transactions for the time periods when
revenues and expenses occur even if no cash changes hands
Revenue:
-> transfer criteria: goods are delivered or a service is performed
->realized criteria: cash or a claim to cash (on credit) is received in exchange for goods
or services. ( using an invoice in case of credit)
=> e.g. you send someone smt without asking, but if they don’t accept it, then the
realised criteria is not there, so that’s against the accrual principle
=> stage of completion: e.g. Newspaper subscription -> transfer criteria is only met when
you receive the newspaper, even after you already played -> so you can’t recognise it as a
revenue, but you created an obligation : delivering the newspaper to the customer, so it
will be a current liability
, Expenses:
->matching: you can only include expenses in income statement when the revenue to
which it’s related is recognised
Eg. You bought and payed for the bread, but you didn’t sell it yet, so it’s not an expense
in the income statement; it’s an asset, so it goes to the account inventory (it becomes an
expense when you sell it)
E.g. of matching = depreciation
the systematic allocation of the acquisition cost of long-lived assets or fixed assets to
the expense accounts of particular periods that benefit from the use of the assets
->Assets are used up over a period of time, so more and more of their original costs are
transferred from asset accounts to expense accounts
Ex. Car for company = a long term investment, when you use the car in order to make
revenue -> you include part of it in expenses -> you will use it more than a year, so you
will divide the cost under the time that u use it
Balance sheet equation in case study:
Revenue-> total assets of new period – total assets of old period = x
RE of last period + x = RE of new period
Expense-> RE last period – operational expense
In general ; net income = RE new period
you are not 100% sure if you will have to pay it = not payable = > provision
Allocating asset in part of expense -> depreciation
Chapter 3: accrual accounting
Accrual basis -> when something is not recognised as revenue yet, it goes to cash &
liabilities
-> current accounting standard for the measurement of income.
- Presents a more complete summary of what happened during the year as it
reports more than only cash transactions
- Represents best economic reality
RE is not a pot of gold, something can be recognised as revenue when eve if cash is not
received yet
