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Accounting and Finance complete course notes
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Accounting and FinanceSession 1: Introducing to Accounting; Assets and Liabilities
What is accounting?
- A method of measuring, processing and communicating financial information about
economic agents
- It is the “language of business”
- You must learn the basis of accounting to understand the financial position of any agent
(family, company, association...)
The basic equation of accounting (1)
- The most important relationship in accounting is this one;
Assets – Liabilities = Net worth
“What you own minus what you owe is equal to what you are worth.”
- Another way to look into this equation is;
Assets = Liabilities + Net worth
- The value of the assets must always be equal to the sum of liabilities and net worth – they
are always in balance!
- Double entry bookkeeping; any increase in total assets must also increase either liabilities
or net worth
--> (And vice versa: any increase in the sum of liabilities plus net worth must come from an
increase in total assets)
Assets
- The present economic resource of an entity
- By “economic resource” we understand anything that “eventually results in cash inflows
to the entity or a reduction in cash outflows from the entity”
- Examples;
o Inventory of merchandises
o House
o Patent
o Computer
o Public debt
o Prepaid insurance premiums
, - By “economic obligation” we understand an “obligation to provide or stand ready to
provide its economic resources to others, or to forgo economic resources that it might
otherwise be able to obtain”
- Examples;
o Mortgage
o Bonds
o Credit card debt
o Student loan debts
o Salaries payable
o Accounts payable
Session 2 – The Balance Sheet
What is the balance sheet?
- Financial statement that summarizes and classifies a company’s assets, liabilities and net
worth at a specific point in time
- It is a way of expanding the basic equation of accounting
Assets – Liabilities = Net worth
Current assets
- Those assets that are expected to be converted into cash in less than an accounting period
o They are revolving part of the business model
o They are held for short term sale
o They are easily convertible into cash
Current assets can be divided into:
- Cash: ultimate liquid asset (on demand deposits and banknotes)
- Accounts receivable: cash owed to the enterprise from customers who were shipped
goods but have not yet paid for them
- Inventory: Finished products for sale ready and materials to be transformed into products
, Fixed assets
- Assets used in the production of goods and services for more than an accounting period
o They are the structure of the business model
o They are not held for the short-term sale
o They are not easily convertible into cash
Fixed assets can be divided into:
- Tangible assets: fixed assets w physical form (buildings, machinery, land...)
- Intangible assets: fixed assets w no physical form (patents, copyrights, brands,
goodwill...)
o Financial assets: a type of intangible asset whose value is derived from a
contractual form (bonds, deposits...)
Fixed assets are registered at cost: either their cost of production or their original purchased
price
--> the accounting value of fixed assets is diminished every period by the amount of
depreciation
Liabilities
- Can be divided into current and non-current liabilities
- Long term debts are bills that must be repaid in more than one accounting period
- Current liabilities are debts that must be paid within one accounting period
- Current liabilities are grouped depending on to whom the debt is owed:
o Accounts payable: debt owed to suppliers
o Accrued expenses: debt owed to employees and other regular service suppliers
o Current debt: debt owed to landers
o Taxes: debt owed to the government
Shareholder's equity (net worth)
- It is equal to total assets –(minus) total liabilities
- It is divided into:
o Capital stock: the original amount of money invested in the company plus any
secondary offerings
o Retained earnings: all earnings of the company that have not been distributed to the
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