Financial Accounting I: Wealth and Income, Esquemas y mapas conceptuales de Economía

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CHAPTER

2 :WEALTH AND

INCOME

Financial Accounting I

Academic year 2023/

Instructor Laura Arranz Aperte

Wealth and Income Wealth (=Equity) = Assets – Liabilities

Income = Surplus of the

productive proccess during

a financial year

Balance Sheet Assets= Liabilities + Equity Income Statement Net Income = Revenues

• Expenses A company starts the financial year with a certain wealth. Along the year, the economic activity yields revenues and generates expenses. We can find out, at the end of the fiscal year the net income and final wealth.

Balance Sheet

ASSETS EQUITY AND LIABILITY

Property (Plant,equipment, land,

cash)

Equity (Owner’s/shareholder´s

equity)

Rights (Accounts receivable) Liabilities (Economic obligations )

Fundamental Accounting Equation ASSETS= EQUITY + LIABILITIES The Fundamental Accounting Equation always holds!!

ASSETS

EQUITY

LIABILITY

The left-hand side of the balance sheet reflects the economic structure of the company, this means, the use of the company funds. The right-hand side reflects the financial structure of the company , the source (or origin) of the funds (both own funds and outside funding) at the company disposal Assets EQUITY LIABILITIES Economic structure Financial structure USE SOURCE

The elements of the Balance Sheet and the Accounts

• In Financial Accounting, the accounts are records that represent financial and economic elements
• The accounts represent the basic unit where accounting information is recording
• So we will record every economic transaction using the Accounts that the General Accounting Plan proposes Financial Accounting I [email protected]

ASSETS are goods, rights, and other economic resources that the

company owns to carry out their activities. It can be money in the

bank, a car, an office and technology to produce goods and

services.

Assets are organized into two groups: Non-Current Assets and

Current Assets.

Current Assets + Non Current Assets =Total ASSETS

1- Non-current assets are intended to stay in the company for a

period of time exceeding one year. Non-current assets are assets

that cannot be easily and readily converted into cash and cash

equivalents.

• 2- Current assets (or non- fixed assets) assets that are used

within a year. Current assets are assets that can be easily

converted into cash and cash equivalents (typically within a year)

Financial Accounting I [email protected]

Moving to the left side of the BS we have two categories 1- LIABILITIES: Economic obligations and amounts owed to outsiders relating to loans, debts to suppliers etc, As with assets, liabilities can be classified into current and non current Total liabilities = current liab + non current liab Liabilities can also be classified into trade /financial liabilities 2- Shareholders equity (=wealth) Sh equity section is what the business is worth after all liabilities have been paid off Financial Accounting I [email protected]

• At the beginning of the business the shareholder´s equity is equal to the amount that is initially invested in the company (=shared capital)
• Overtime, the balance can go up or down, depending on whether the company makes losses or profits
• However, as the company goes on with its activity , the Shareholders equity will differ and it will be consistent of the common shares and retained earnings
• Sharedholders Equity =TOTAL ASSETS –TOTAL LIABILITIES Financial Accounting I [email protected]

Balance Sheet Accounts NON-CURRENT ASSETS Fixed Assets or long term assets This assets can be tangible/ intangible/ fixed investments -Accumulated Amortization (Depreciation) A representation of the use of the fixed assets along the years CURRENT ASSETS Short term trade debtors Trade receivables (accounts receivables) Short term financial debtors Current investment Cash EQUITY Capital Resources : Capital Profit/Loss NON-CURRENT LIABILITIES Long term creditors CURRENT LIABILITIES Short term trade creditors (accounts payable) Short term financial creditors Financial Accounting I [email protected]

Exercise 2 a company has the following elements at the beginning of a year:

• A lorry valued at 320,000€.
• 150,000€ in debt to its suppliers.
• A customer credit of 100,000€.
• A current account at Bank Z: 60,000€.
• 150,000€ in debt to a Bank that will be repaid in June. TASKS :
• Balance sheet?

ASSETS 480,000 EQUITY AND LIABILITIES 480,

A) NON-CURRENT ASSETS 320,000 A) EQUITY 180,

Fixed-Assets 320,000 Capital resources Capital 180, B) CURRENT ASSETS 160,000 C) CURRENT LIABILITIES 300, Short-term trade debtors/receivables 100,000 Short-term trade creditors/payables 150, Cash 60,000 Short-term financial creditors/payables 150,

Example 2. On January 1st, Luis describes his financial situation. He has 400 euros in a current account in a bank, and a credit to a friend that amounts to 20 euros (the friend will return the money within two months). Luis owns a motorcycle that cost 3.000 €, of which 500 will be paid within 14 months Identify the following elements of the BS (1) Assets (2) Rights (3) Liabilities (4) Net equity (=net wealth)? (5) Balance Sheet? Assets= 3.400 € (= Bank account 400 + Motocycle 3.000) Total Legal rights (financial assets) = 20 € (=Loan to a friend) Liabilities = 500 (=Debt for the motorcycle) Total obligations = Net Equity = Assets –Liabilities = (3.400 +20)-500 = 2.920 € Financial Accounting I [email protected]

Balance Sheet Assets Equity & Liabilities Tangible Assets 3.400 Total Liabilities 500 Legal Rights 20 Net Equity 2. 0 Total Assets 3420 Total Equity and Liabilities

0 The balance sheet must always balance: Total Assets = Equity & Liabilities 3.420 = 500 + 2. Financial Accounting I [email protected]

Short-term trade debtors (ASSETS) are sometimes called “Accounts receivable” Short-term trade creditors (LIABILITIES) are called “Accounts payable” Financial Accounting I [email protected]

Example 3 The financial status of a sole proprietorship company is as follows:

• A building valued at 650.000 €.
• Cash in a bank account: 2.000 €.
• A debt to suppliers: 70.000 €.  (^) Cash in hand: 2.500 €.

1. Assets = 650.000 + 2.000 + 2.500 = 654.500 €. Liabilities = 70.000 €. Equity = 654.500 - 70.000 = 584.500 €.
2. BS

BALANCE SHEET

ASSETS 654,500 EQUITY AND LIABILITIES 654,

A) NON-CURRENT

ASSETS 650,000 A) EQUITY 584,

Fixed-Assets 650,000 Capital resources Capital 584, B) CURRENT ASSETS 4,500 B) NON-CURRENT LIABILITIES - Cash 4,500 Long-term creditors/payables C) CURRENT LIABILITIES 70, Short-term trade creditors/payables 70,