Accounting for Executives
Week 1
Lecture Hours: 2.5 hours
5/11/2010 (Fri)
1
Lecturer – Harris H.K. Lui MBA (Accounting
and Finance), ACCA, LLB (China Law)
Email address:
hklui2007@yahoo.com.hk
2
Course Aims
 The module is intended for aspiring managers with little
or no formal financial training or experience, whose
present and future positions will affect the acquisition
and use of business resources.
 This module looks at the financial aspects of managing
business resources.
 The module will help students to understand the basic
terminology, concepts and techniques that underpin both
financial and management accounting.
 This module is designed to improve students’
understanding and use of financial information.
1-3
Examination Style
Time Allowed 2 hours
4 Compulsory Questions on the following
areas –
Budgeting
Prepare financial statements, i.e. income
statement and balance sheet
Accounting ratios and interpretation
Cost-volume-profit Analysis
Variance analysis
1-4
Syllabus Content
1. Introduction to accounting and finance





The role of accounting in business.
Who needs to use accounting information.
The distinction between financial accounting and management
accounting.
Basic concepts and terms underpinning accounting information.
The regulatory framework.
1-5
Syllabus Content
2. Recording and reporting business activity
 The accounting equation.
 Recording business transactions in ledger accounts.
 Function of profit and loss accounts and balance sheets.
 Why adjustments are made to figures in the accounts.
 Simple profit and loss accounts and balance sheets for a
small business.
 Using computerised systems.
 How to deal with assets, stocks and bad debts when
recording and reporting accounting information.
1-6
Syllabus Content
3. Using financial information to manage business
resources – an introduction
 Why cash management is important to an
organisation.
 Cash flow budgets.
 The working capital cycle.
 How cost information can assist managers in
planning and controlling the use of business
resources.
 Costs including variable and fixed costs.
 Breakeven analysis in simple situations.
1-7
Syllabus Content
4.
An introduction to the construction and use of budgets
in managing business resources


Preparing budgets.
Using budgets to control business resources.
1-8
Chapter 1
Introduction of Accounting Equation and
Common Forms of Financial Statements
1-9
Complete Set of Financial Statements
 A complete set of financial statements
includes the following components under
HKAS 1:
 Balance sheet (statement of financial position)
 Income statement (statement of
comprehensive income)
 Statement of cash flows
 Statement of changes in equity
 accounting policies and explanatory notes
1-10
CHEUNG KONG
(HOLDINGS)
LIMITED
– Consolidated
profit and loss
account
1-11
CHEUNG KONG
(HOLDINGS) LIMITED
- Consolidated Balance
Sheet
1-12
CHEUNG KONG
(HOLDINGS)
LIMITED
– Consolidated
statement of
changes in equity
1-13
CHEUNG KONG
(HOLDINGS)
LIMITED
– Consolidated
statement of cash
flows
1-14
The accounting equation
Resources in the Biz = Resources supplied by the owner
(e.g.Capital invested)
The amount of the resources supplied by the owner(s) is called capital.
The actual resources that are in the business are called assets.
Asset= Capital
1-15
The accounting equation
Asset = Capital + Liabilities
It is common for the owner to obtain loans or other
people’s resources to acquire some of the assets, then
these loans is named as liabilities.
1-16
Types of Accounts
Assets:
Capital:
Liabilities:
Land and Building
Motor Vehicles
Furniture and
Fixtures
Investment
Properties
Stock
Debtors
Prepayments
Bank and Cash
Petty Cash
Capital
Ordinary Shares
Preference Shares
Long-term loan
Debentures
Trade Creditors
Utility Creditors
(e.g. water service,
electricity)
Accruals
1-17
Non-current vs Current Asset
Non-current assets are those assets
which are bought for extended use within
the business rather than for trade/ sale.
(e.g. Land and Building, Motor Vehicles, Furniture and
Fixtures)
Current assets are those assets which
within a short period of time will change
their form.
(e.g. Stock, Debtors, Prepayments, Bank and Cash
Petty Cash)
1-18
Double entry system for assets,
liabilities and capital
Title of account
Debit side
Credit side
Assets a/c
Debit,
Credit
Liabilities a/c
Credit,
Debit
Capital
Credit,
Debit
a/c
1-19
Example
Chris Black started a business with $100,000 and save the
money into HSB Bank on 1 Aug 200X.
DR.
HSB BANK
CAPITAL
CR.
100,000
100,000
HSB Bank
1-20
Example
Capital
1-21
Characteristics of Accounting
Equation
 The accounting equation has the following important
characteristics:
 The value of the assets is the same as the value of the
liabilities.
 Both sides of the equation are of equal value, i.e. they
balance.
 The assets of a business must come from somewhere; in
fact, they are financed by the liabilities of the business in
this case the owner’s investment.
 The application of the business entity concept
distinguishes the owner and the business and thus the
business incurs a liability back to the owner of the
1-22
invested capital
Example (con’t)
Chris further borrow £150,000 from the bank as the resources of the
company. This bank loan is a liability of the business, but at the same
time the asset has increased by £150,000. The financial position of the
business can now be represented in the accounting equation as follows:
Bank
Long-term liabilities/ Loan
Dr.
150,000
Cr.
150,000
1-23
Example (con’t)
Chris Black carried out the following transactions during the
first week of trading. He:
1 Purchased a motor vehicle for £15,000 paying by cheque.
2 Withdrew £1,000 from the bank for use as cash float.
3 Purchased shop premises for £60,000 paying by cheque.
1-24
1-25
Example (con’t)
Transaction 1
£100,000 (owner) + £150,000 (debt) = £235,000 (bank) £15,000
(vehicle)
£100,000 (owner) + £150,000 (liabilities) = £250,000 (assets)
Transaction 2
£100,000 (owner) + £150,000 (debt) = £234,000 (bank) + £15,000
(vehicle) + £1,000(cash)
£100,000 (owner) £150,000 (liabilities) = £250,000 (assets)
Transaction 3
£100,000 (owner) + £150,000 (debt) = £174,000 (bank) + £60,000
(premises) + £15,000 (vehicle) + £1,000 (cash)
£100,000 (owner) + £150,000 (liabilities) = £250,000 (assets)
Note that following all these transactions the accounting equation is still
in balance.
1-26
Capital
The initial cash put in by the owner is called the capital. Capital is a
liability of the business to the owner. The size and value of this initial
capital may increase over the life of the business. The capital can
increase in at least two ways:
1 The owner can put in more of their own money into the business.
The new funds increase the capital of the business.
2 The business itself can generate additional capital by selling goods
or services at a profit. This profit is earned on behalf of the owner by
the business. The profit belongs to the owner and, provided it is not
taken out of the business by the owner, will increase the capital
element of the accounting equation. These profits are called
retained profits.
1-27
Liabilities
Liabilities are the debts of the business. They represent what the
business owes to external parties other than the owner. The external
liabilities or obligations, called the creditors of a business, may be
classified according to the time period within which they have to be
settled. Thus there are:
Long-term liabilities: Liabilities which fall due for payment after one
year or longer.
Current liabilities: Liabilities which fall due for payment within one
year, including that part of the long-tem loans due for repayment within
one year.
1-28
Example (con’t)
1-29
Intangible assets
Assets that are not physically exist, the owner of it can
derived economic benefits from the use of it.
Example
Patents where the governments grants the patent owner the exclusive
right for a period of years to produce and sell an invention such as a
mini music system, personal disc assistant (PDA).
 Trademarks or brand names are the distinctive identifications by
which customers recognise a product or service, for example the logos
of Heinz, Coca Cola or AOL.
1-30
Balance Sheet (Statement of Financial Position)
The balance sheet (or statement of financial position) is a development
of the accounting equation. The balance sheet has the primary purpose
of reporting the financial position of an organisation at a single point in
time.
Recall the accounting equation we have learnt:-
Fixed assets+ Current assets - Current liabilities –
Long Term liabilities = Initial capital + Retained
profits
1-31
Pro forma
XXX Company Balance Sheet as at 31-Dec-200X
Fixed Assets
Premises
Vehicles
Current Assets
Bank
Cash
Less: Current liabilities
Net Current Assets
Less: Long-term liabilities
Bank loan
£
XX,XXX
XX,XXX
Capital
Add: Retained Profits (or Less: Accumulated loss)
£
£
X,XXX
X,XXX
X,XXX
XX,XXX
(X,XXX)
(XX,XXX)
X,XXX
XXX,XXX
XXX,XXX
XX,XXX
XXX,XXX
1-32
Example (con’t)
Chris Black Balance Sheet as at the end of week 1
Non-current Assets
Premises
Vehicles
£
£
£
Current Assets
Bank
Cash
Less: Current liabilities
Net current assets
Less: Long-term liabilities
Bank loan
(
)
Capital
Add: Retained Profits
1-33
Stock and Trading Profit
Chris Black buys and sells computers. Computers are the goods the
business buys with the intention of reselling. These are called stocks.
In order to start, Chris Black decides in week 2 of trading to purchase
£50,000 of computers on credit. This activity does not generate any
profit as the transaction is only increasing the current asset stock and
creating a creditor, or current liability, of £50,000.
Stock
Creditors/ Trade payables
Dr.
50,000
Cr.
50,000
After entering the above transaction into the book of Chris the revised
balance sheet should appears as:
1-34
Example (con’t)
1-35
Example (con’t)
During the third week of trading Chris Black’s computers, which cost £10,000,
were sold for £14,000. The customers all paid by cheque.
The profit Chris made:
Sales - Cost of Goods Sold = Profit
£14,000 - £10,000 = £ 4,000
Stock decreased by £10,000
Bank increased by £14,000
Retained Profit increased by £4,000
1-36
1-37
Trade on credit
During week 4, Chris sells computers costing £6,000 for £11,000 but
the customer was granted 30 days credit. He further paid wages £500
by cheque.
Profit on this transaction £11,000 - £6,000 = £5,000
New retained profits £4,000 + £5,000 = £9,000
The wages paid reduce the profits by £500
Retained profits = £9,000 - £500 = £ 8,500
Other affected account balance:
Stock decreased by £6,000
Bank decreased by £500
Debtors Increased by £11,000
1-38
1-39
Profit and Loss Account (Income Statement)
Pro forma
Chris Black Trading ,Profit and Loss Account for the month ended 31-Jan-200X
£
Sales
£
X,XXX
Trading
Account
Less: Cost of goods Sold
Opening Stock
XXX
Add: Purchases
XXX
Less: Closing Stock
(XXX)
Cost of goods sold
(XXX)
Gross Profit
X,XXX
Less: Expenses
Wages
XXX
Electricity
XXX
Insurance
XXX
Rent and rates
XXX
Net profit
Profit and
Loss Account
XXX
X,XXX
1-40
Example (con’t)
Chris Black Trading ,Profit and Loss Account for the month ended 31-Jan-200X
£
£
Sales
Less: Cost of goods Sold
Opening Stock
Add: Purchases
Less: Closing Stock
Cost of goods sold
(
)
(
)
Gross Profit
Less: Expenses
Net profit
1-41