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Accounting Lectures Summary - IBA VU
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Full summary of the Accounting lectures of the course Accounting in Year 1 IBA VU.
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Lecture 1Financial accounting: external financial reporting and bookkeeping (for stakeholders).
Management accounting: internal information for decision-making, performance evaluation,
and control.
Financial accounting consists of the balance sheet, the cash flow statement and the profit
and loss (income) statement.
Balance sheet: provides an overview of the firm’s situation at a point in time.
The balance sheet consists of two equal sides:
- Assets: what the firm owns: what is done with the funds it received.
- Liabilities: what the firm owes: where the funds come from. Split into equity (funds
from owners) and other liabilities.
Equity is the value for the owners (stockholders, shareholders). So, if you earn money as a
firm, equity increases. But this should be visible in higher assets or lower liabilities.
For the balance sheet, assets = liabilities. So profit = cash flow + (∆other assets - ∆liabilities) –
share issues + dividends, which can be written as: profit = cash flow + “accruals” – net funds
contributed by shareholders.
Profit and loss statement: the results of a company over a period of time.
Cash flow statement: the flow of money into and out of the company over a period of time.
Revenues in the income statement are cash receipts, increases in other assets or decreases
in liabilities.
Expenses in the income statement are cash expenditures, decreases in other assets or
increases in liabilities.
Retained earnings are profits that are left in the company.
Lecture 2, Bookkeeping as a technique
Bookkeeping is the technique for systematically collecting and organizing the required
information in order to determine profit and provide an overview of what the firm owns and
owes.
All the opening accounts are recorded in a ledger. The ledger is a T-format for every element
on the balance sheet. Left page = debit, right page = credit.
Closing an account is done by sending the difference in equality to the balance. This is
indicated on the lower side of the 2, by B/S = the difference. If, on the account, the
difference is on the credit side, it will go onto the debit side of the balance. Same if the
, difference (lower side) of the account is on the debit side, it will go onto the credit side of
the balance.
The balance sheet shows the balances of the ledger accounts at a point in time.
We can create ledger accounts to record different types of movements in equity. These
ledger accounts will be used to determine profit and loss. These will not be included on the
balance sheet, but on profit and loss (P&L) ledgers.
The P&L ledger accounts are closed to the profit and loss account. We close the P&L to
equity. Then equity can be put on the balance sheet.
We usually don’t show the profit and loss account (income statement) in T-format. But in
any format, P&L or income statement can be thought of as ‘subsidiary account’ of equity, so:
gains and revenues are credits and expenses, and losses are debits.
We use a systematic numerical approach to keep track of the accounts.
Closing the books:
- At any moment in time, debit = credit.
- Close all books: sum of all debit = sum of all credit.
- Actual closing: get overview by following steps:
* Close assets and liabilities to balance sheet.
* Close revenues and expenses to P&L
* Close P&L to equity
* Close equity to balance sheet
* All equal?
- Trial balance: overview of all net debits and credits of all accounts. The trial balance is
a way of finding some errors.
You can easily record the adjusting entries on the trial balance if not yet done. Therefore,
you make the adjusted trial balance, make corrections, and close the books.
The liquidity of the firm tells if the firm can pay what it has to pay. On the debit side of the
balance, we rank assets from ‘non-current’ to ‘current’. We start with the assets that are +1
year in the company (non-current) and end with the assets that will leave the company first
(<1 year in the company).
In order to close the entries for a period, we have to allocate the revenues and expenses to
this period in the financial figures, even if there was no transaction!
Lecture 3, Accounting for merchandising organizations
In practice, we use rules to define (∆ other assets - ∆ liabilities).
Realization principle: (WKK: revenue recognition principle) recognize revenues (profits) only
when ‘realized’ (cash or close to cash). Two rules that have to be satisfied:
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