14 February 2023
08:28
LESSON 1
Accounting:
➢ Identifies
➢ Records
➢ Communicates
Economic events of an organization.
*Transaction= happens between organization and environment.
WHO uses accounting?
INTERNAL USERS
• Finance: really concerned about cash, sufficient cash to
pay shareholders?
• Marketing: price to maximize income
• HR: pay raises for employees?
• Management: which product line is most profitable?
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EXTERNAL USERS
• Creditors: are due debts payable by company?
• Investors: is or will the company performing well?
(analysis on financial statements)
1. IDENTIFYING
Measurement Principles
➢ Historical cost principle: value of smth is the money
spent when purchased.
➢ Fair value principle: value that smth has right now in
the market.
Assumptions
 Monetary unit assumption: in the accounting records
are included only transaction data expressed in terms
of money.
 Economic entity assumption: company's activities are
separate from the owner's or others' activities, we only
consider transactions of the entity.
Proprietorship
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 Proprietorship
- One owner
- Owner often is manager or operator
- Liability for all debts
 Partnership
- Two or more owners
- Often for retail and service businesses
- Unlimited personal liability
- Partnership agreement
 Corporation
- Shareholders= owners (Adidas)
- Limited liability
- Separate legal entity (corporation law)
- Shares are part of the ownership of a company.
- Shareholders have the right to receive dividends
- Separation between owner and manager
2. RECORDING
➢ Basic accounting equation (bible of accounting):
ASSETS = LIABILITIES + EQUITY
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• Assets
- Resources of a business
- Provide future services or benefits
- Cash, inventory, equipment…
- Mostly tangible, but also intangible (i.e. copyrights,
patent)
- It's the sum of liabilities+equity
• Liabilities
- Debts and obligations that the company has to give
back to creditors; (generally suppliers, but also banks);
claims on company's total assets.
- All the accounts connected to debts
- Accounts payable (suppliers), Notes payable (someone
who lended money), Salaries and wages payable.
• Equity
- Component of assets owned by owners (what they can
claim on total assets)
- Money invested + all profits generated
This relationship implies that whatever the company
owns, must be equal to what it has to give to others, the
equation must be respected.
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equation must be respected.
Increase Equity:
 Investment by shareholders: total amount paid by
shareholders to acquire shares.
 Revenues: increase equity, are the result of activities
done for earning income. (i.e. interests for banks, sales,
fees, services, commissions)
Decrease equity:
 Expenses: cost of assets consumed or service used in
the activities for earning income. (revenues-expenses=
profit).(Salaries expenses, rent, utilities, property tax…)
 Dividends: distribution of cash or assets to
shareholders, they're not expenses.
Transactions= business's economic events/activities
recorded by accountants
- Internal or external
- Each has a dual effect on the accounting equation
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Transaction analysis
Assets
Cash: +15,000 (-7,000) (+1,200) (+1500)
Accounts receivable: +2000
Supplies: ink, pencils… (+1,600)
Equipment: desk, computer… (+7,000)
Liabilities
Accounts payable: +1,600 ; +250
Equity
Share capital: +15,000 (covered by initial investments)
Retained earnings: Rev.-Exp-Div (Rev +1,200) (Exp -250)
(rev +3500)
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*How often does a company pay dividends? It depends
1. Cash +25,000, share capital +25,000
2. Accounts payable +7,000 ; Equipment +7,000 ;
3. Cash +8,000 ; Rev. +8,000
4. Exp. -850 ; Cash -850
5. Div. -1,000 ; share capital +1000
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LESSON 2
16 February 2023
10:14
FINANCIAL STATEMENTS
• Intermediate step : Trial balance
➢ Trial balance: sort of synthesis of ??
- Includes the balance of accounts at a certain specific
point in time. (i.e. Cash accounts for a balance of 8,050
class-2-trial)
• Next step: put each account into the right document?
- Income statement: includes every revenues and
expenses (taken from trial balance), and eventually
infos about net income. The story of how a company
generates revenues and expenses throughout a period
of time (i.e. month of september).
- Retained earnings statement: about how the company
cumulates profit throughout a period of time. Add net
income and then subtract dividends.
- Statement of Financial Position: it's not about a period
of time, but about a specific point in time (i.e. the 30th
September). Includes assets, equity (retained earnings
from previous document) and liabilities. All resources
that the company owns and that will provide future
benefit.
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benefit.
*These 3 should be consulted together to have an overall
view of company, each one starts from a trial balance.
*equity: part of assets that is owned by owner?
 Income statement:
- Profitability
- First revenues then expenses (taxation is an expense)
- Net income or net loss
- No investment nor dividends transactions between
shareholders and company
 Retained
- Same period as income statement
- Changes in retained earnings
- Reason(s) of changes in retained earnings
 Statement of Financial Position
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 Statement of Financial Position
- Assets at the top, then equity and liabilities
- Total assets = tot. equity and liabilities.
- Company's financial condition at a specific moment in
time (usually end of month or year)
5 Financial Statements:
▪ Income statement
▪ Retained earnings statement
▪ Statement of Financial Position
▪ Statement of Cash Flows
▪ Comprehensive Income Statement
EXCERCISE
a) Assets= equipment 10,000 + Cash 8,000 + Accounts
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a) Assets= equipment 10,000 + Cash 8,000 + Accounts
Receivable 9,000 = 27,000
b) Net income: tot. Revenues - tot. Expenses= (36.000) (11,000+4,000+7,000)=36,000 - 22,000=14,000
c) Equity: share capital (notes payable - Accounts
payable) 16,500-2,000=14,5 ; rev - exp - div= 36,000 22,000 - 5,000=9,000
NO NEED FOR DIVIDEND FOR EQUITY??
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LESSON 3
21 February 2023
08:17
THE RECORDING PROCESS
➢ ACCOUNT
- Two columns: debt(left) and credit (right) column.
- They literally mean just left and right, no other
meaning attached to them.
- We use account every time we record transactions
(more than one)
- It's the record of increases and decreases in a specific
asset, liability, stockholders' equity, revenue or
expenses.
• Debits and Credits
- When debits>credits (in balance), the account has a
"debit balance".
- Balance= sum of every entry we have in each column
- We need to sum all debits and then subtract the sum
of credits and we obtain debit balance (and
viceversa)
• Double-entry-system
Each transaction must affect at least two accounts
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- Each transaction must affect at least two accounts
(crediting one and debiting the other, otherwise
there's no balance)
- For each transaction DEBITS=CREDITS
▪ Assets: debits should exceed credits; increase on
debits side and decreasing on credits side. Balance
should be (debits - credits), so debit balance.
▪ Liabilities: credits should exceed debits. On the
opposite of assets, they decrease left and increase
right. They'll have a credit balance (credits - debits)
▪ Equity: 1) share capital and revenues decrease on
debits and increse on credits; 2) dividends and
expenses instead increase on debit and decrease on
credit.
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credit.
SUMMARY OF DEBIT/CREDIT RULES
*The equation must be in balance after each
transaction, so tot. debits must equal tot. credits.
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transaction, so tot. debits must equal tot. credits.
Steps in account recording process:
1. Analyze transactions (analyzing)
2. Enter transactions in a journal (journaling)
3. Transfer journal information to ledger accounts
(posting)
1) The Journal
- Transactions are in chronological order
- It helps to account all the effects of a transaction, put
transactions in a chronological order and prevent or
locate errors (through debits/credits compraison)
- Cash increases on the debits side, while share capital decreases
on the credits side (two entry, one debit and one credit)
- Equipment (asset) increases on debit side, while cash decreases
on credit side
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on credit side
- Equipment increases on debit side, cash decreases on credits
- Accounts payable (liabilities) increase on credit side
Excercise:
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1. Cash= +20,000 on debit side; share-captal +20,000 on
credit side.
2. Equipment= +4,800 on debit side; accounts payable=
+4,800 on credit side.
3. No entry
2) The Ledger
- It contains all the asset, liability and equity accounts.
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- Explanation: i.e. receving cash from a customer (25,000 cash)
Key:
- 1 Post to debit account-date, journal page number and amount.
2 enter debit account number in journal reference column.
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- 2 enter debit account number in journal reference column.
- 3 post to credit account-date, journal page number and amount
- 4 enter credit account number in journal reference column.
ISN'T THE GENERAL JOURNAL ENOUGH?
NO BECAUSE IF YOUNREMEBER YOU START FROM A TRIAL
BALANCE (INCLUDING THE BALANCES OF ALL ACCOUNTS AT A
CERTAIN POINT IN TIME), THE GJ GIVES A LOT OF INFOS BUT DOES
NOT GIVE THE BALANCE OF EACH SINGLE ACCOUNT, THAT'S WHY
THERE'S THE GENERAL LEDGER.
EX:
1. Cash and share-capital (assets and equity)
2. Cash increase by 10,000 and so does share-capital.
3. Cash increase in debits side while share-capital increases in
credits side.
EX:
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EX:
- Unearned service revenue (firm receives cash in advance,
before offering the service). So it's not a revenue (recorded
when product/service is delivered).
- Cash increase at first and also "unearned service revenue" (or
receipt for future service?) (liabilities) increase by the same
amount. These become a real revenue on December 31 (when
the service will be delivered)
EX:
1. Assets: cash -900; equity: expenses +900
2. *Debits: *rent expenses +900; credits: cash -900.
3. Oct. 3
Cash deb cred
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Cash deb cred
Oct.3
900
*specify *always start with debits
EX:
- Purchasing something that will benefit for a long period (asset=
pre-paid insurance)
- Reducing cash, and increase a new asset called "pre-paid
insurance"
- It's not an expense because it covers for more than 1 month.
- Debits increase by 600 for insurance, credits decrease by 600 for
cash.
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EX:
- Adv supply (asset) increases, accounts payable* increase too.
- Debits increase by 2500 for adv supply material, credits increase
by 2500 for accounts payable.
- *It's not an expense because you will use it for more than 1
month (3 months)*
EX:
EX:
- Cash decreases (asset), dividends increase (equity)
- Debits increase by 500 for dividends, credits decrease by 500 for
cash.
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EX: how to deal with salaries
EX: how to deal wit revenues
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DO IT!:
Cash
Accounts receivable
Prepaid insurance
equipment
Accounts payable
Salaires and wages payable
Notes payable
DEBITS CREDITS
7,000
4,000
6,000
88,000
22,000
2,000
19,000
Share-capital
20,000
Salaries and wages expenses 42,000
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Salaries and wages expenses 42,000
Utilities expenses
3,000
dividends
8,000
Service revenue
95,000
BALANCE
158,000 158,000
*usually you list assets how far they are from becoming cash
(equipment at last because it's more difficult to become cash)
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LESSON 4
28 February 2023
08:16
Unadjusted trial balance= there may be errors, things
missing or incomplete
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LESSON 5
28 February 2023
08:16
Depreciation: …?
Accrual: a company uses a service but doen not
account its expense (yet).
Adjusting entries for accruals
➢ Accruals can be used to record:
- Revenues: services performed but not recorded (paid
in advance by customers?)
- Expenses: incurred but not paid yet or not recorded
at the statement date.
➢ Accrued revenues
- Increase accounts receivable in debit
- Increase liabilities or revenues? On credit
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➢ Accrued expenses
- Using something before paying cash (interest, taxes,
salaries)
- Increasing expense account (debiting)
- Increasing liability account (crediting)
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• Accrued salaries and wages
- Salaries of 29-30-31 are not paid yet, they'll be paid
in November, but you account them in october
anyway.
- Debit salaries expense (400$ x 3 days)
- Credit salaries payable ( = = =)
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EXERCISE (On Excel)
1. Accounts payable +8000$ credit, salaries expenses +
8000$ debit.
2. Cash +300.000$; interest expenses (300,000 x 10%)
in debit; interest payable (…) in credit
3. Accounts receivable +11000$ in debit; revenues +
11000$ in credit.
• Adjusted trial balance: made after journal and
posting of adjusted entries.
- Done to prove the equality of debit and credit
balance
- It's the basis for the preparation of financial
statements
➢ Financial statements
Income statement: covers a period (1 month), only
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- Income statement: covers a period (1 month), only
accounts revenues and expenses
- Retained earnings statement: covers a period too (1
month), ret.earn. + net income - dividends
- Statement of financial position: covers a specific date
(Oct 31), (accumulated depr. Reduces assets)
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LESSON 6
28 February 2023
09:10
Completing the Accounting Cycle
At the end of the accounting period, to get ready for next
period we need:
- Close all temporary accounts (set the balamnce to 0),
why?
- Not close permanent accounts (assets, liability, equity,
retained earnings), don't set them to 0, because they'll
keep changing in this period (updates)
➢ Temporary accopunts
Closing entries:
• Net income (close revenues to income summaries and
to expenses, then close them to retained earnings)
• Dividends (close to retained earnings)
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- Normal balance of revenue account? = on credit
- Income summary: needed for the operation of closing
temporary accounts.
- To close: add entry to debit side for revenue (balance in
credit) and viceversa with expenses.
- In income summary a credit balance of 200 i.e. means
profit for the company, because revenues are higher
than expenses.
- Only retained earmimgs account stays open
(permanent account)
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NET INCOME
debit
18,000
credit
18,000 (1)
DIVIDENDS
debit
15,000 (2)
credit
15,000
RETAINED EARNINGS
debit
credit
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debit
15,000 (1) ??
credit
18,000 (2)
➢ Post-closing trial balance
- Where you list all permanent accounts and their
balances. (only the ones appearing in the statement of
financial position)
- All temporary accounts= 0 balances, so not included.
SUMMARY OF ACCOUNTING CYCLE
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➢ Statement of financial position
- What a company owns and what owes to others, at a
point in time.
• Types of assets in the SFP
- Intangible assets: no physical substance. Listed first
because it's more difficult to transform them into cash.
(patents, goodwill* or value of a brand, cost of
development)
*difference between value of physical assets and money paid to
acquire the company
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- Property, Plant and Equipment: long useful lives, used
in operations.
▫ Depreciation= strictly related to this type of assets,
allocating the cost of assets to a number of years.
▫ Accumulated depreciation= in the SFP is subtracted
from total "Property, Plant and Equipment".
▫ Diff. between historical cost and accumulated
depreciation= net-book value
- Long-Term Investments: non-current assets and not
used in operating activities.
- Current Assets: convert to cash or use up within one
year or the operating cycle (the longest of the two)
(i.e. inventory)
• Equity
- Proprietorship/sole traders
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• Types of liability
- Non-Current liabilities: obligations expected to be paid
after one year (i.e. long term debts, provisions)
- Current Liabilities: to be paid within the current year or
operating cycle; notes payable before accounts
payable.
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LESSON 7
07 March 2023
08:17
MERCHANDISING OPERATIONS
- Income statement: to find out if it's a services'
company. After service revenue you will find a list of
things.
➢ Merchandising companies: sell tangible goods
(sales revenue); purchase from wholesaler and
resell to customers.
- Why are different from service company? Two
additional elements to the income statement: gross
profit and cost of goods sold.
• Cost of goods sold= cost of the products sold during
the period. Separated from normal operating
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the period. Separated from normal operating
expenses
• Gross profit= sales minus cost of goods sold.
➢ Operating cycle: in merchandising companies it's
longer than in service ones. There are more
additional steps, like for example buy inventory and
having inventory stored somewhere. (the faster
they sell the inventory the better).
➢ Flow of costs
- How do you calculate cost of goods sold?
Subtract ending inventory from cost of goods
available for sale. (periodic system)
➢ Recording purchases of merchandise
When a company purchases inventory (asset), it
Class notes 1 midterm Page 42
- When a company purchases inventory (asset), it
debits inventory account, while crediting either
accounts payable or cash.
- Purchase invoice should be made for each
purchase.
• Delivery or Freight (costs)= who pays deoenbds on
agreement between supplier and buyer and there
are two possible solutions:
1. FOB- Free of board-shipping point= the buyer pays
(debit inventory, credit cash/acc. Payable), ownership is
acquired when the seller give the goods to the
carrier (transport)
2. FOB destination= seller/supplier pays (operating
expense= debit freight expense and credit cash), ownership
only when the buyer receives the items. (debit
inventory, credit cash
➢ Purchase returns and allowances
- If the buyer's not satisfied (i.e. damaged items)
How to account returns?
- Debit accounts payable/cash, credit inventory.
(opposite of buying)
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• Allowance: don't have to return goods but get
money back (some)
How to record an allowance?
- Debit accounts payable, credit inventory (same
journal entries different scenario in reality).
➢ Purchase discounts
- Credit terms may permit the buyer to obtain
discounts of price if paying within a certain time.
(reducing cost of inventory by the discount)
Invetory:
- Increases= when you buy items.
Decreases= when you sell or return it, or if there are
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- Decreases= when you sell or return it, or if there are
discounts.
*70= discount of 2% on 3500 due.
➢ Recording sales of merchandise
• Seller/Supplier focal point: double journal entry
1. Debit Cash/accounts receivable, credit sales
revenue.
2. Debit cost of goods sold (expense), credit inventory.
➢ Sales Returns and Allowances (seller focal point)
• Two steps again:
- Debit Sales returns and allowances account* (new),
credit accounts receivable.
- Debit inventory, credit cost of goods sold. (when
return good still have a scrap/fair value)
Class notes 1 midterm Page 45
return good still have a scrap/fair value)
*we use this instead of sales revenue because we want to keep
track of sales returns and allowances, otherwise we would miss
this info, which is important to assess the quality of products.
➢ Sales Discount
- Debit cash (getting cash but not the whole, the remaining
parti is the discount), credit accounts receivable.
Sales discount and sales returns= increase debit,
decrease credit = contra-revenue account because
sales revenue decrease debit and increase credit.
a
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LESSON 8
09 March 2023
11:10
Forms of Financial Statement
➢ Income statement
- Primary source to assess company's performance
- Only considers temporary accounts
→ It has a specific structure:
• Net sales= sales revenue minus any returns, discounts
and allowances.
• Gross profit= net sales minus cost of goods sold (a
company needs to match purchases with sales, what
buys and what sells)
• Gross profit rate= gross profit/net sales
• Operating expenses= that have to be done ?daily?, the
core operations to run the business.
- Whatever comes after these, it's not related to the core
business (i.e. "other income and expense")
• Net income
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➢ Statement of Financial Position
- Different from service company because there's also the
"inventory" account.
EX.
- Accounts payable= statement of fiancial position;
current liabilities
- Accounts receivable= statement of financial position;
current asset
- Accumulated depreciation-buldings= statement of
financial position; non-current asset (property, plant and
equipment) its purpose is to reduce the historical
cost/value of assets.
- Accumulated depreciation-equipment= statement of
financial position; non-current asset
- Advertising expense= income statement; operating
expenses
- Buildings= statement of financial position; property,
plant and equipment (non-current asset)
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plant and equipment (non-current asset)
- Cash= statement of financial position; current asset
- Depreciation Expense= income statement; operating
expense
- Dividends= income statement; other income and
expense (deduction section)
INVENTORY
➢ Merchandising company
- Inventory
➢ Manufacturing company
- Raw materials
- Work in progress
- Finished goods
How to assess inventory on hand?
• Perpetual system
- Traces movement in inventory every time something
happens (with bar codes i.e.)
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happens (with bar codes i.e.)
- Check accuracy of inventory records
- Determine amount of inventory lost (wasted, shoplifting
or employee theft)
• Periodic system
- Once in a while you count items in the warehouse (no
automatic system)
- Determine inventory on hand
- Determine cost of goods sold for the period (cogs of
good available for sake minus goods sold)
➢ Taking a physical inventory
- Counting, weighing, measuring each inventory on hand.
- Usually done when business is closed or slow, at the end of
the accounting period.
➢ Determining ownership of goods
• Goods in transit:
- Purchased goods not yet received
- Sold goods not yet delviered
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• Consigned goods= owner of the shop doesn't own the
good but tries to sell it for someone else, and then keeps a
part of the revenue (a fee)
EX.
1) 200.000-15.000
2) 185.000 + 10.000
3) This was correct
= 195.000
➢ Classifying and determining inventory
• Cost of inventory: all the necessary expenditures to
acquire goods and make them ready to sale.
• Three ways to assess cost of ending inventory
Specific identification
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- Specific identification
- First-in, first-out
- Average cost
➢ Inventory costing
- Cog available for sale= 700+750+800
1. Specific identification: to know exactly which tv was
sold.
- Cogs= 700+800
- Ending inventory= 750
• Most companies make assumptions, this method is rare.
→ Cost Flow Assumptions= do not know exactly which goods
are sold, no need to be consistent with physical movement
of goods.
- First-in, First-out
Average-cost
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- Average-cost
How to calculate COGS?
2. First-in, First-out
- Assume the first units to be purchased were the first
one to be sold (i.e. in the food industry)
- Implication: the amount left in ending inventory are the
last purchased(?)
- Cogs= cog available for sale minus ending inventory.
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3. Average-cost
- Calculate weighted-average unit cost
- Applies WAUC to units on hand to determine ending
inventory.
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EX.
- Cog available for sale at beginning= 36.000
- Sales= 84.000
- Units sold= 7.000
- Ending inventory= 3.000
- cog available for sale ending= 3000x4$= 12.000$
a) (FIFO method)
- COGS: 36.000-12.000=24.000
b) (average-cost method)*
- Average cost per unit: 36.000/10.000=3,6
- Average-cost: 36.000-(3.000x3,6)=25.200
*This method gives an higher COGS than fifo method, so
smaller gross profit.
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➢ Income statement effects:
➢ SFP effects
- FIFO advantage: more effecting in providing a more
updated picture of your inventory.
- Average-cost disadvantage:
• Using a method consistently because:
- Comparisons are possible
• Presentation
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*skip "basis of accounting"
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