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Summary Chapters 1 -8 Mid-Term Financial Accounting 1 UvA
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Detailed Notes and Summaries from Chapters 1 -8 and Lectures 1 - 6 of the Financial Accounting 1 Course at the UvA.
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Financial Accounting 1 Chapter 1 – 8 SummaryChapter 1: Introduction to Accounting (incl. Lecture 1 Notes)
What is accounting?
- Identifying (select economic events – transactions).
- Recording (record, classify and summarize – bookkeeping).
- Communicating (prepare accounting reports).
an organization’s economic events to interested parties.
Used by:
- Companies (from sole proprietorships to huge conglomerates)
- Non-profits
- Privat entities
Proprietorships v Partnerships:
- Many companies start out as proprietorships.
- Very small companies often stay proprietorships for their entire lifetime.
- Characteristics of sole proprietorships: no clear distinction between private money and
company money; proprietors have unlimited liability for all debts of their company; profit is
private income.
- Partnerships are generally the same yet, ownership is split between 2 or more people.
Corporations:
- Formal separation of ownership and decision making.
- Corporation is a legal entity that has many of the same rights as individuals have.
- It can complete transactions (e.g., buy, sell own)
- Corporations are owned by multiple shareholders.
- Owner shares can be transferred.
- Owners have limited liability.
Accounting in Corporations:
- Owners of the corporation are not necessarily actively involved in decision making.
- Managers are hired to run the corporation.
- Owners invest their money in the corporation in the expectation of receiving a positive
monetary return.
- Owners want periodic updates on the financial state of the company.
,Structure of a Corporation:
- Is owned by one or more owners – owners can be people as well as other corporations or
hedge funds.
Decision Making within a Corporation:
- Owners typically hire mangers to make decisions on their behalf (the major shareholders
make executive board).
Assets & Liabilities:
- Assets – everything that a company or individual owns. Examples – cash, inventory,
buildings, patents, IT systems, trademarks, accounts receivable, machines.
- Liabilities – everything that a company or individual owes. Examples – bank loans, other type
of loans (bonds), accounts payable, unpaid salaries, unpaid taxes.
Equity:
- The value of a corporation to its owners.
- The difference between what the corporation owns – Assets – minus what the corporation
owes – Liabilities.
- Equity = Assets – Liabilities
Revenues and Expenses:
- Company activities result in revenues and expenses.
- Positive revenues and negative expenses changes in the value of equity.
- Common source of revenue are: sales, feeds, interest, etc.
- Expenses are the costs that arise from using the firms’ assets to sell etc.
Changes in the Value of Equity:
- The value of a corporation’s equity can change in 2 different ways: operations – revenues and
expenses resulting in a net incomes
Transactions with owners:
- Share purchases – investments in the firm
- Dividend payments – return on investments to the owners.
Changes in Equity:
- Increases caused by investments by shareholders and revenues
- Decreased by: expenses and dividends to shareholders
2
, Equity Components:
- Share capital-ordinary (‘paid in capital’) – amount the shareholders invested in the
corporation.
- Retained income – all profits earned by the firm that has not yet been distributed via
dividends.
The Basic Accounting Equation:
Equity = Assets – Liabilities
A = L + SC + REV – EXP – DIV
Accounting Interested Users:
- Potential Owners
- Owners
- Creditors e.g. banks or venture capitalists
- Suppliers
- Customers
- Non-profits
- Government’s agencies - Chamber of Commerce, SEC, AFM, DNB, etc.
- Tax Authorities
- As well as internal users, i.e. anyone from top executive managements to regular employees
at the bottom of the pyramid.
Types of Accounting:
- Management Accounting: users inside the organization. This accounting is not subject to
specificity unless company conduct codes.
- Financial Accounting: users outside the organization. This accounting is subject to laws,
regulations and standards e.g. IFRS.
Chapter 2: The Recording Process (incl. Lecture 2 Notes)
Statement of Financial Position:
- Discloses an organizations’ financial position at a specific point in time (typically at the end
of the fiscal period (usually quarter or year).
Types of Assets:
- Intangible – goodwill, patents and licenses, copyrights and trademarks.
- Natural Resources.
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