- Chapter 3: Accounting concepts and the balance sheet equation
- Chapter 4: Accrual accounting (incl. inventory accounting techniques)
- Chapter 5: Non-current assets and depreciation
- Chapter 6: Refining the accounting system (incl. asset impairment and bad debts)
- Chapter 7: Preparing financial statements
Accounting: the language of business
Accounting - a process of identifying, recording, summarizing, and reporting economic
information (transactions) to decision makers in the form of financial statements
Users of Financial information
Accounting information is useful to anyone who makes decisions that influence business
activities and have economic results.
• Investors / Shareholders want to know if a company is a good investment with
adequate returns
• Creditors (banks/suppliers) want to know if they should extend credit, how
much to extend, and for how long.
• Clients want to know if they can rely on proper after sales service.
• (future) Employees want to know if the company is able to provide job
security and a good salary.
• Government agencies (tax collection, grants);
• The public
Financial Accounting vs. Management accounting
The major distinction between financial and management accounting is the users of the
information.
➢ Financial accounting focuses on the specific needs of decision makers
external to the organization, 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. These might be different depending on the jurisdiction.
This course focuses on the rules issued by the International Accounting Standards
Board (IASB) – International Accounting Standards/International
Financial Reporting Standards (IAS/IFRS).
, ➢ Management accounting serves internal users, such as top executives,
management, and administrators within organizations (a.o. budgets,
forecasts, projections)
INTERNATIONAL ACCOUNTING STANDARDS (IAS)
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
Annual Financial Statements IAS 1
The primary questions about an organization’s success that decision makers want to know
are:
,Balance sheet
snapshot at one point in time in the life of a business
The balance sheet equation:
Assets = Liabilities + Owners’ Equity (entity approach)
or
Assets – Liabilities = Owners’ Equity (proprietary approach)
The Balance Sheet equation basis for double-entry accounting= recording method whereby
at least two accounts are always affected by each transaction
(An account = a summary record of the changes in a particular asset, liability or owners’
equity during a period)
Case Study – NewCo
For the following transactions in Year 1, please post their impact on the balance sheet, the
income statement and cash flow statement.
1. Venture Capital firm invests $1,000 of capital in Newco to start operations
2. Bank lends Newco $1,000 to help fund operation
3. Newco purchases $100 of Property, Plant, & Equipment necessary to begin
production
4. Newco buys $100 worth of inventory on credit
5. Newco pays wages of $100 to employees
6. Newco sells one-half of its inventory for $200 to customers on credit
7. Newco sells remaining inventory for $450 to customer in a cash transaction
8. Newco named in environmental lawsuit for toxic spills. The likelihood of
losing the lawsuit is (a) probable, (b) will likely be paid out in 3 years, and (c) a
reasonable estimate of the cash outlay ranges from $500 - 900
9. Newco records annual depreciation of Property, Plant, and Equipment of $10
, 1. 1000 bij equity en cash
2. 1000 bij lt dept en cash
3. 100 bij property... en 100 weg bij cash
4. 100 bij inventory en accounts payable
The fundamental equation for the Balance Sheet is:
Assets = Liabilities + Shareholders’ Equity
Assets – Liabilities = Shareholders’ Equity
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