Summary Accounting
Table of Contents
Chapter 1: Accounting in action........................................................................................................................................ 3
1. Financial reporting .................................................................................................................................................... 3
1.1 Financial reporting .............................................................................................................................................. 3
2. (Consolidated) Financial statements......................................................................................................................... 3
2.1 What is in the (consolidated) financial statements ............................................................................................ 3
2.2 Statement of profit or loss .................................................................................................................................. 4
2.3 Statement of financial position ........................................................................................................................... 4
2.4 Example ............................................................................................................................................................... 5
2.5 Boundaries of financial statements .................................................................................................................... 5
2.6 Characteristics of financial statements : ............................................................................................................. 6
2.7 Financial reporting ethics .................................................................................................................................... 6
3. Financial accounting.................................................................................................................................................. 6
3.1 Accounting principles .......................................................................................................................................... 6
3.2 Accounting equation ........................................................................................................................................... 7
4. The accounting cycle ........................................................................................................................................... 7
4.1 Analyse business transactions ............................................................................................................................ 7
Chapter 2: The recording process ..................................................................................................................................... 8
1. The recording process ............................................................................................................................................... 8
1.1 Double-entry system ........................................................................................................................................... 8
1.2 Value added tax (VAT)......................................................................................................................................... 9
2. Running example ................................................................................................................................................. 9
2.1 Step 1: Analyse the transactions ....................................................................................................................... 10
2.2 Step 2: Direct change on the statement ........................................................................................................... 10
2.3 Step 3: Use a journal ......................................................................................................................................... 10
2.4 Step 4: T-Accounts ............................................................................................................................................ 11
2.5 Trail balance ...................................................................................................................................................... 12
3. Conclusion ............................................................................................................................................................... 13
3.1 To get it right! ................................................................................................................................................... 13
Chapter 3: Adjusting Accounts ........................................................................................................................................ 14
1. Adjusting entries ..................................................................................................................................................... 14
1.1 Accounting timeframes ..................................................................................................................................... 14
1.2 Definition........................................................................................................................................................... 14
1.3 Accrual / cash basis ........................................................................................................................................... 14
1.4 Deferrals & Accruals .......................................................................................................................................... 15
1.5 FX (foreign exchange) Translation .................................................................................................................... 15
1
, 1.6 Depreciation & Amortization ............................................................................................................................ 15
1.7 Adjusted trial balance ....................................................................................................................................... 16
Chapter 4: Closing the Accounts ..................................................................................................................................... 16
1. Financial statements ............................................................................................................................................... 16
1.1 What is it? ......................................................................................................................................................... 16
2. Current / Non-current / Liquidity order statements............................................................................................... 17
2.1 Liquidity ............................................................................................................................................................. 17
2.2 (Non-)Current Assets / Liabilities ...................................................................................................................... 17
2.3 Intangible assets................................................................................................................................................ 18
2.4 Property, plant and equipment ........................................................................................................................ 19
3. Correcting entries .............................................................................................................................................. 21
3.1 What? ................................................................................................................................................................ 21
3.2 Examples ........................................................................................................................................................... 21
4. Closing entries ......................................................................................................................................................... 22
4.1 What? ................................................................................................................................................................ 22
Chapter 5: Companies with inventory ............................................................................................................................ 23
1. Service company ..................................................................................................................................................... 23
1.1 Reporting a service company ............................................................................................................................ 23
2. Merchandise company............................................................................................................................................ 24
2.1 What is it? ......................................................................................................................................................... 24
2.2 Inventory ........................................................................................................................................................... 24
2.3 Returns, Allowances and Discounts .................................................................................................................. 25
2.4 Net realisable value........................................................................................................................................... 25
2.5 Sales discounts .................................................................................................................................................. 25
3. Comprehensive income statement ......................................................................................................................... 26
3.1 What is it? ......................................................................................................................................................... 26
2
,Chapter 1: Accounting in action
1. Financial reporting
1.1 Financial reporting
• Provide information about financial position, financial performance and cash flows
• Report towards all stakeholders
o Financial performance
o Business strategy
o Sustainability
o Risk management
o Corporate governance
o (Consolidated) financial statements
o Other information
• Information published in financial report consulted by different groups of users
o External users?
o (Potential) investors - equity holders, granting loans, purchasing debt securities issued
o Suppliers
o Competitors
o Trade union/employees
o Government
o Customers
o Students ☺
o …
• Internal users?
o Management
o Finance
o Marketing
o Human Resources
o …
• External & internal users: looking at financial reporting from a specific perspective!
o e.g. historical cost (what was the price on purchase?) versus fair value (how much would I get for it
now?)
2. (Consolidated) Financial statements
2.1 What is in the (consolidated) financial statements
3
, • Financial statements consists of following elements:
o Statement of profit or loss
o Statement of other comprehensive income
o Statement of financial position
o Statement of changes in equity
o Statement of cash flows
o Notes
▪ Accounting policies
▪ Judgement & estimate
▪ Disclosures
2.2 Statement of profit or loss
• Expense: decrease in an asset/increase in liability used to generate revenue
o things that you need to pay for
• Income: increase in assets/decrease in liability of an entity during an accounting period
o things that you get money for
• Are expenses equal to income?
o NO. Usually not
▪ If income > expenses, the entity has profit
▪ if income < expenses, the entity has loss
2.3 Statement of financial position
• Asset: economic resource controlled by an entity as a result of past events
o what you do with your money (hold it in cash, buy property or equipment, invest)
• Liability: present obligation of an entity to transfer an economic resource as a result of past events
o money that you have to pay back eventually (loans, credits)
• Equity: residual interest in assets of an entity after deducting all its liabilities
o money that you do not have to pay back: (startup capital, shares, retained earnings)
• Are assets equal to equity + liabilities?
o YES. Always!
▪ Assets are what you do with money
▪ equity and liabilities are where your money comes from
• You cannot spend money that you do not have and vice versa
4
Table of Contents
Chapter 1: Accounting in action........................................................................................................................................ 3
1. Financial reporting .................................................................................................................................................... 3
1.1 Financial reporting .............................................................................................................................................. 3
2. (Consolidated) Financial statements......................................................................................................................... 3
2.1 What is in the (consolidated) financial statements ............................................................................................ 3
2.2 Statement of profit or loss .................................................................................................................................. 4
2.3 Statement of financial position ........................................................................................................................... 4
2.4 Example ............................................................................................................................................................... 5
2.5 Boundaries of financial statements .................................................................................................................... 5
2.6 Characteristics of financial statements : ............................................................................................................. 6
2.7 Financial reporting ethics .................................................................................................................................... 6
3. Financial accounting.................................................................................................................................................. 6
3.1 Accounting principles .......................................................................................................................................... 6
3.2 Accounting equation ........................................................................................................................................... 7
4. The accounting cycle ........................................................................................................................................... 7
4.1 Analyse business transactions ............................................................................................................................ 7
Chapter 2: The recording process ..................................................................................................................................... 8
1. The recording process ............................................................................................................................................... 8
1.1 Double-entry system ........................................................................................................................................... 8
1.2 Value added tax (VAT)......................................................................................................................................... 9
2. Running example ................................................................................................................................................. 9
2.1 Step 1: Analyse the transactions ....................................................................................................................... 10
2.2 Step 2: Direct change on the statement ........................................................................................................... 10
2.3 Step 3: Use a journal ......................................................................................................................................... 10
2.4 Step 4: T-Accounts ............................................................................................................................................ 11
2.5 Trail balance ...................................................................................................................................................... 12
3. Conclusion ............................................................................................................................................................... 13
3.1 To get it right! ................................................................................................................................................... 13
Chapter 3: Adjusting Accounts ........................................................................................................................................ 14
1. Adjusting entries ..................................................................................................................................................... 14
1.1 Accounting timeframes ..................................................................................................................................... 14
1.2 Definition........................................................................................................................................................... 14
1.3 Accrual / cash basis ........................................................................................................................................... 14
1.4 Deferrals & Accruals .......................................................................................................................................... 15
1.5 FX (foreign exchange) Translation .................................................................................................................... 15
1
, 1.6 Depreciation & Amortization ............................................................................................................................ 15
1.7 Adjusted trial balance ....................................................................................................................................... 16
Chapter 4: Closing the Accounts ..................................................................................................................................... 16
1. Financial statements ............................................................................................................................................... 16
1.1 What is it? ......................................................................................................................................................... 16
2. Current / Non-current / Liquidity order statements............................................................................................... 17
2.1 Liquidity ............................................................................................................................................................. 17
2.2 (Non-)Current Assets / Liabilities ...................................................................................................................... 17
2.3 Intangible assets................................................................................................................................................ 18
2.4 Property, plant and equipment ........................................................................................................................ 19
3. Correcting entries .............................................................................................................................................. 21
3.1 What? ................................................................................................................................................................ 21
3.2 Examples ........................................................................................................................................................... 21
4. Closing entries ......................................................................................................................................................... 22
4.1 What? ................................................................................................................................................................ 22
Chapter 5: Companies with inventory ............................................................................................................................ 23
1. Service company ..................................................................................................................................................... 23
1.1 Reporting a service company ............................................................................................................................ 23
2. Merchandise company............................................................................................................................................ 24
2.1 What is it? ......................................................................................................................................................... 24
2.2 Inventory ........................................................................................................................................................... 24
2.3 Returns, Allowances and Discounts .................................................................................................................. 25
2.4 Net realisable value........................................................................................................................................... 25
2.5 Sales discounts .................................................................................................................................................. 25
3. Comprehensive income statement ......................................................................................................................... 26
3.1 What is it? ......................................................................................................................................................... 26
2
,Chapter 1: Accounting in action
1. Financial reporting
1.1 Financial reporting
• Provide information about financial position, financial performance and cash flows
• Report towards all stakeholders
o Financial performance
o Business strategy
o Sustainability
o Risk management
o Corporate governance
o (Consolidated) financial statements
o Other information
• Information published in financial report consulted by different groups of users
o External users?
o (Potential) investors - equity holders, granting loans, purchasing debt securities issued
o Suppliers
o Competitors
o Trade union/employees
o Government
o Customers
o Students ☺
o …
• Internal users?
o Management
o Finance
o Marketing
o Human Resources
o …
• External & internal users: looking at financial reporting from a specific perspective!
o e.g. historical cost (what was the price on purchase?) versus fair value (how much would I get for it
now?)
2. (Consolidated) Financial statements
2.1 What is in the (consolidated) financial statements
3
, • Financial statements consists of following elements:
o Statement of profit or loss
o Statement of other comprehensive income
o Statement of financial position
o Statement of changes in equity
o Statement of cash flows
o Notes
▪ Accounting policies
▪ Judgement & estimate
▪ Disclosures
2.2 Statement of profit or loss
• Expense: decrease in an asset/increase in liability used to generate revenue
o things that you need to pay for
• Income: increase in assets/decrease in liability of an entity during an accounting period
o things that you get money for
• Are expenses equal to income?
o NO. Usually not
▪ If income > expenses, the entity has profit
▪ if income < expenses, the entity has loss
2.3 Statement of financial position
• Asset: economic resource controlled by an entity as a result of past events
o what you do with your money (hold it in cash, buy property or equipment, invest)
• Liability: present obligation of an entity to transfer an economic resource as a result of past events
o money that you have to pay back eventually (loans, credits)
• Equity: residual interest in assets of an entity after deducting all its liabilities
o money that you do not have to pay back: (startup capital, shares, retained earnings)
• Are assets equal to equity + liabilities?
o YES. Always!
▪ Assets are what you do with money
▪ equity and liabilities are where your money comes from
• You cannot spend money that you do not have and vice versa
4
