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Summary Financial Accounting VU IBA

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Accounting (E_IBA1_ACC)

Instelling
Vrije Universiteit Amsterdam (VU)

Summary containing all the relevant theory discussed during the course Accounting given in the first year of International Business Administration at the Vrije Universiteit Amsterdam. By learning this summary I personally passed the final exam.

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LECTURES
Accounting provides information to summarize all kind of actions, decisions, results,
transactions into figures to steer the business and inform stakeholders.

Specification of content = accounting
Accounting information systems = organization

Standard setters make a rule based on how users of accounting information get the
most relevant and reliable information.

Financial accounting  external financial reporting and bookkeeping (for
stakeholders)
Management accounting  internal information for decision-making, performance
evaluation, and control.

To discuss:
- Formal relations
- Norms for contents

Balance sheet: overview of the firm’s situation at a point in time
 Assets: what the firm owns, what it has done with the funds it received
 Liabilities: what the firm owes, where the funds came from. Split into equity (funds
from owners) and other liabilities

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.

Cashflow total = cash in – cash out

Equity is the value for the owners (stockholders, shareholders). So, if you earn
money as a firm, EQUITY increases. This should be visible in higher assets [e.g.,
cash (you received money)] or lower liabilities [e.g., you used profits to repay a loan].

Changes in other assets and liabilities correct for the fact that not all value changes
are identical to cash flow changes!

,The basic relationships:

“Revenues” in the income statement are:
- cash receipts, or
- increases in other assets, or
- decreases in liabilities
Thus, also increase in equity (Credit)

“Expenses” in income statement are:
- cash expenditures, or
- decreases in other assets, or
- increases in liabilities
Thus, also decrease in equity (Debit)

Basic relations including transactions with owners:

The basic accounting equation:
Assets = liabilities + owner’s equity
Assets = liabilities + owner’s capital – owner’s drawings + revenues – expenses

Expanded accounting equation:

,Journal for a transaction

Form: name account (debited)
To: name account (credited)

Profit and loss statement provides stakeholders with info on how the firm has
performed during a period!

Assets = liabilities + equity

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

Trial balance: Overview of all net debits and credits of all accounts.
Way to find errors and get a current overview.

Provide services
Accounts receivable | To: sale revenue

Moment of payment insurance
Prepaid insurance (asset) | To: cash (no P&L effect)

Adjustment at the end of each month for part of the insurance premium
Insurance expense (P&L) | To: prepaid insurance

Depreciation of a machine
Depreciation expense (P&L) | To: Accumulated depreciation (correction on
value of asset of the machine)

, Wages are not yet paid but of course work relates to this period Allocate fraction to
this period
Wages expense (P&L) | To: Wages payable (liability)

Balance sheet:
- Helpful to evaluate liquidity, can the firm pay what it has to pay?
- Rule of thumb < 1 year, held for less than one operating cycle

Four basic questions financial
statement analysis:
- Can the firm meet its short-term
obligations?
- Can the firm meet its long-term
obligations?
- How profitable is the firm? / How
does it make its profits?
- What is the value of a share / the
entire firm?

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