¡Descarga Understanding the Balance Sheet: Assets, Liabilities, and Income Statement - Prof. Alemany y más Apuntes en PDF de Negocios Internacionales solo en Docsity!
Introduction to financial accounting. Topic 1: Accounting and information systems Accounting: Information system that measures business activities and communicates financial information. It is useful to anyone who must make judgments and decisions that have economic consequences. Accounting can only register accounting events (not all economic events, for example the contract of a very good employee). Users of accounting: -Internal: Management, Board of directors. -External: Shareholders, Creditors, Customers, Students... Types of accounting: -Financial Accounting: used by external parties and it is constrained by laws and rules. It is compulsory and it has to be done at least once a year. -Management Accounting: it is used by internal parties, it has no constraints, it is voluntary, flexible and it uses financial and non-financial data. -Cost Accounting: it is used to determine the cost of a product. IAS (International Accounting Standard) It is used to homogenize European accounting in order to compare between different countries. It is useful for users (shareholders can invest easily in foreign firms. Information is better and faster. Classification of accounting. -Macro Level: national income -Micro Level: -Public & Private companies: -Financial Accounting: Financial statement analysis and audits. -Cost & Management Accounting. -Public Administrations. Audit: Verification about the accounted operations. Stages in the accounting process: 1.Data Collection. 2.Data preparation and processing (classification using the journal and the ledger). 3.Information (balance sheet, income statement, cash-flows statement and shareholders equity statement and Notes): -Balance sheet: information on the financial condition of a business at a certain moment. -Income Statement: information on the income (profit or loss) of a business during a certain period. -Statement of Cash-Flows: information on the origin and use of cash in the company. -Statement of Shareholder's Equity: Individual components of Shareholders' Equity and the changes during last year. -Notes: Information on the criteria, principles and norms used in the balance sheet and income statement. *Statement = Cuenta
Limitation of accounting data: It cannot measure qualitative factors, changes in the price due to inflation, difficulty of comparing firms due to the different accounting processes. Accounting information should be RELEVANT, IN TIME, ACCURATE, AT REASONABLE COST, COMPARABLE and COMPREHENSIBLE. Topic 2: The balance sheet – Outline Relation between Business Activities and Balance Sheet and Income Statement: Goals and Strategies of a firm depend on investing in assets (balance sheet) that needs Financing (Owner's equity and liabilities, which are also in the balance sheet). Then, using this assets and liabilities, you Operate (Income Statement). In conclusion, running a busines requires Making Investments (land, buildings, machinery, vehicles, computers, patents, financial investments in securities, cash etc.). and Obtaining Financing (from owners, subsidies, bank loans, credits etc.) Assets should be equal to Equities (Owner's equity and liabilities). That means that Investments are equal to financing and Resources to Sources of Resources. Assets are things a company possess or control and that are expected to generate a future economic benefit. They are classified using Liquidity (how easy can be these assets converted in money). They are ordered from Non current (Resources held and used for several years) to Current (Resources expected to be turned into cash, sold or consumed within less than one year from the date of the balance sheet). *In the anglosaxon countries, the classification of assets and liabilities is the other way round (from more liquidity to less liquidity). Liabilities are things the company should pay in the future for external services (credits etc.). They are classified using Maturity, from long-term (Obligations that have to be fulfilled within a period of more than one year from the date of the balance sheet) to short-term (Obligations that have to be fulfilled within one year from the date of the balance sheet). Owner's Equity: Funds provided by the owners, the owners' claim on the assets of a firm after deducting liabilities. (Assets – Liabilities) ( Paid-in Capital + Retained Earnings) (Funds provided by the owners + Additional owners' equity generated by profits). Some examples of non current assets are Rights, Patents, Land, Buildings, Equipment, Furniture and Long-term investment in shares (Marketable securities). On the other hand, current assets can
Classification of Accounting Transactions: -Exchanging: -Classical Theory: The transaction does not change the owners' equity (computers for cash (only changes assets). Only qualitative changes. -Modern Theory: The transaction does not change total amount of assets or equities. -Modifying: -Classical Theory: The transaction results in a quantitative change of the owners' equity -Modern Theory: The transaction results in a quantitative change in assets and equities. -Mixed: -Classical Theory: The transaction results in a quantitative and qualitative (for example customers for cash) change in the owners' equity -Modern Theory: The transaction results in a quantitative and qualitative change in assets and equities. *Classical Theory (Assets – Liabilities = Owners' Equity) Modern Theory (Assets = Equities) *Classical Theory (Proprietorship Theory) Modern Theory (Entity Theory). Income Statement is done during a period of time, while the Balance Sheet is the photo on the status of the company in a certain moment. Income statement is represented in the Balance Sheet (Proffit or Loss Statement). *Expenses + Profits = Revenues The calculation of the periodic income helps to evaluate the realized income of a certain period, to make decisions for the future, to distribute dividends to the owners, to assess income taxes or to meet legal requirement. Owners' Equity: Formed by Paid-in Capital (Owners' contribution to the business) – Owners' Withdrawals from business (reduction in pain-in capital dividends). It is also formed by Retained Earnings (Profit or Loss statement and reserves). (Owners' Equity = Owners' contribution to the business – Owners' Withdrawals from business + Revenues and Gains – Expenses and Losses) Income = Revenues – Expenses. If revenues are higher than expenses (profit) and if revenues are lower than expenses (loss). Retained Earnings ( reserves ): Additional owners' equity generated by income minus dividends since the firm began operations. (Beginning balance + Income for the current period – Dividend declared) Ways of Measuring Income: -Accrual Basis (current standard for the Income Statement). Revenues are recorded when earned and Expenses when incurred (regardless of payment or not (credit for example)). -Cash Basis: Revenues and expenses are recorded when paid (for example sales only recorded as revenues at time of payment) Income versus Operating Cash flow: -Income on accrual basis: Revenues minus expenses. -Operating Cash flow: cash received from sales of goods and services minus cash paid for operating goods and services. From Net Income to Operating Cash Flow (indirect method): Yous should adjust net income for
non-cash items (add non-cash expenses (for example depreciation), adjust for changes in the balances of current assets and short term liabilities (subtract increases in current assets or decreases in short term liabilities and add decreases in current assets or increases in short term liabilities). Topic 4: The Recording Process – Outline The Account: Any device that summarizes increases and decreases relating to a single asset, liability or owners' equity item, including revenues and expenses. There are some possible forms to account, but the most useful for learning purposes is the T-Account. You start using a balance, you account the increases and decreases and you end with another balance. When doing the T form, you put on the left Debit ( Debe ), that takes into account increases in an assets account and decreases on debt (and the opening balance on assets). On the right Credit ( Haber ), which takes into account the decreases of assets or the increases on liabilities (and the opening balance on liabilities). You also can account the Income Statement using the T-form. When talking about expenses, you put Increases in the left (Debit) and Decreases and Balance on the right (Credit). On the other hand, when talking about Revenues, you put Decreases and Balance on the left (Debit) and Increases on the right (Credit). On the Income Statement you put the Expenses and Profits on the left and Revenues on the right. The balance of an account is the difference between the total left-side amounts and the total right- side amounts. Classification of Accounts: You can classify them using two different criteria: -According to the normal balance: -Debit-balance accounts: assets and expense accounts. -Credit-balance accounts: liability, owners' equity and revenue accounts. -According to whether they appear on the balance sheet or not: -Permanent (real) accounts: accounts that appear on the balance sheet (assets, liabilities and owners' equity) -Temporary (nominal) accounts: Expense and revenue accounts. Chart of Accounts: -Financiación básica (pasivo fijo) -Inmovilizado (activos fijos) -Existencias. -Acreedores y deudores por operaciones comerciales (parte de pasivos circulantes y activos circulantes). -Cuentas financieras (el resto de pasivos circulantes y activos circulantes). -Compras y gastos (gastos ( expenses )). -Ventas e Ingresos (ingresos ( revenues )). -Gastos imputados al patrimonio neto (valoración de activos y pasivos). -Ingresos imputados al patrimonio neto (valoración de activos y pasivos). The Recording Process Transactions, Documentation, Journal, Ledger*, Trial Balance, Corrections, Financial Statement.
- Purchase/Sales allowances: Reduction in invoice ( factura ) price granted because goods do not meet the requirements (unsatisfactory quality, small damages). No return of goods. -Purchase/Sales returns: Products returned by the customer. -Inventory shrinkage ( diferencias de inventario ): Inventory lost, stolen, or spoiled during the period (Difference between ending inventory according to record on the inventory account and ending inventory according to physical count). -Gross Sales: Sales revenues shown on the corresponding account. -Net Sales: Sales revenues minus sales returns and sales quantity discounts. -Net Purchases: Purchases minus purchase returns and purchase quantity discounts. -Gross Profit: Net Sales minus cost of goods sold (Often expressed as a percentage of sale: Gross Profit % = Gross Profit / Sales. Accounting for Inventories: We can divide it into: -Permanent Inventory System: it is shown at the beginning of the balance, is continuously updated after each purchase or sale. The current balance shows the value of inventories in stock. This type of Inventory system is more timely but also more costly. It provides more information, and it is used if being “out of stock” lead to costly consequences (small volume of high-value items). -Periodic Inventory System: it is shown at the beginning of the balance, is periodically adjusted at the end of the accounting cycle. It does not show the value of inventories in stock during the accounting cycle. The ending balance is shown after adjustments at the end of the accounting cycle. This type of Inventory System is less costly to administer, and it is used for large volume of items with a small value per unit. *The Inventory Account is a Current Asset PERMANENT INVENTORY SYSTEM Accounting for different types of Inventory Systems: -Purchase of Inventories: Inventories (at acquisition price) TO Cash, Bank, Suppliers or Notes Payable. -Sale of Inventories: -Cash, Bank, Customers or Notes receivable TO Sales revenue (at selling price). -Cost of Goods Sold TO Inventories (at acquisition price). -Return of Purchases: Cash, Bank, Suppliers or Notes Payable TO Inventories (at acquisition price). -Return of Sales: -Sales Returns (at selling price) TO Cash, Bank, Customers or Notes receivable. -Inventories (at acquisition price) TO Cost of Goods Sold.
-Purchase Allowance: Cash, Bank, Suppliers or Notes Payable TO Inventories (at acquisition price). -Sales Allowances: Sales Revenues (at selling price) TO Cash, Bank, Customers or Notes receivable. -Quantity Discounts on Purchases (commercial discount based on total quantity purchased): Cash, Bank, Suppliers or Notes Payable TO Purchase Quantity Discounts (Revenues account). -Quantity Discount on Sales: Sales Quantity Discounts (Expenses account) TO Cash, Bank, Customers or Notes Receivable. -Discount on purchases for prompt payment (discount received if payment is made within a certain period). -Inventories TO Cash, Bank and Discounts on purchases for prompt payment (Revenues account). *If the invoice is paid immediately. -Suppliers TO Cash, Bank and Discounts on purchase for prompt payment (Revenue account) *If the invoice is paid within a certain period after delivery. -Discount on sales for prompt payment (discount granted if payment is received within a certain time period). -Cash, Bank and Discounts on sales for prompt payment (Expense account) TO Sales revenues (at selling price). -Cost of Goods Sold TO Inventories. *If the invoice is paid immediately. -Cash, Banck and Discounts on sales for prompt payment (Expense account) TO Customers. *If the invoice is paid within a certain period after delivery. The Cost of Goods Sold in the Permanent Inventory System: It is updated after each sale and sales return on the account “Cost of Goods Sold”. The Cost of Goods Sold consists on The Gross Cost of Goods Sold MINUS the Purchase Quantity Discounts MINUS the Discount on purchases for prompt payment PLUS the Inventory Shrinkage. The Gross Profit (Margin) in the Permanent Inventory System: It consists on the Gross Sales MINUS the Sales Returns MINUS the Sales Quantity Discounts MINUS the Discount on sales for prompt payment MINUS the Cost of Goods Sold. *Can also be considered as the Net Sales MINUS the Cost of Goods Sold. PERIODIC INVENTORY SYSTEM Record of Purchases and Sales in the Periodic Inventory System -Purchase of Inventories in the Periodic Inventory System is recorded on Purchase of Inventories (Expense Account). -Purchase of Inventories (at acquisition price) TO Cash, Bank, Suppliers or Notes Payable. -Sales of Inventories in the Periodic Inventory System is recorded on Sales Revenues (Revenue Account). -Cash, Bank, Customers or Notes receivable TO Sales Revenues (at selling price). *Remember that in the Periodic Inventory System you DON'T record during the accounting cycle.
There are some necessary adjustments at the end of the period in the Periodic inventory system. -Changes in inventories TO Inventories (beginning balance) -Inventories (ending balance) TO Changes in inventories. The Cost of Goods sold for a period consists of: -Purchase of Inventories (expense account) MINUS Purchase Returns MINUS Purchase Quantity Discounts MINUS Discount on Purchases for prompt payment PLUS Beginning Balance in Inventories MINUS Ending Balance in Inventories. *Also expressed as NET PURCHASES – CHANGES IN INVENTORIES. The Gross Margin (Profit) in the Periodic Inventory System. It consists of Gross Sales MINUS Sales Returns MINUS Sales Quantity Discounts MINUS Discount on Sales for prompt payment MINUS Costs of Goods Sold. Also expressed as NET SALES – COST OF GOODS SOLD. _Record assets at their acquisition Price and Recognize Revenues when goods are sold independently of payment. Periodic Income = Gross Margin – General Expenses._ _Understand final slides of Topic 5._ Topic 6: The Accounting Cycle Accounting cycle: Steps taken each year in order to determine the income of the period and the financial position at the end of the year. 1.Opening Stage: We have the Starting Balance, and we use them to open the accounts of the Journal and the Ledger. 2.Development Stage (Journalizing and posting of transactions): We record the transactions done in the journal and the ledger. At the end of this stage, we will have an unadjusted trial balance (sums and balances) before adjustments and corrections. 3.Closing Stage: We make the adjustments (Operations before the final closing). We record some transactions in order to adjust the financial position at the end of the period (Depreciation/Amortization, Periodification, Regulation of the Inventories and Reclassification). -Income Statement closings: *Income Statement TO Expenses *Revenues TO Income Statement *Income Statement TO Retained Earnings (if there are gains) *Retained Earnings TO Income Statement (if there are losses) -Closing of the Ledger and the Journal: We should equal the accounts in order to be able to close the books. We will put the statement of the balance sheet to equal the accounts and close them. Accounting Principles -Going-concern Assumption: The firm will continue in operation indefinitely. It partially justifies acquisition cost principle than liquidation or exit value basis. -Accrual Bases of Accounting: Method of recognizing revenues when goods are sold independently of payment and expenses when they are occurred independently of payment. -Consistency Principle: Similar transactions are reported in a consistent way from period to period to facilitate comparison between them. Changes are appropriate when justified by changing
circumstances. -Prudence Concept: No record of anticipated revenues and profits, but anticipation of all known expenses and losses. -Principle of Non-compensation: No compensation of part of the assets with liabilities or owners' equity; separate valuation of each item. -Relative Significance Principle: Accounting reports should disclose enough information that they will not mislead careful readers reasonably well informed in financial maters. Topic 7: The Periodic Income Adjustments for Revenues and Expenses -Accrual Basis of Accounting: Recognize revenues when earned independently of payment, and expenses when occurred independently of payment. We should match related expenses and revenues of a period. The accounts used for Collection of Revenues or Payment of Expenses in advance are: *Current Assets: Prepaid Expenses (advance cash payments for future services to be received (claim for delivery). Some examples are Prepaid Interest, Prepaid Advertising etc. *Short-term liabilities: Unearned Revenues: Advance cash collections for future services to be rendered; obligation to deliver ( Unearned Interest, Unearned Ren t). Accrual of Unrecorded Expenses or Revenues: Expenses incurred or revenues earned in period N that have not been paid yet. Accounts used for unrecorded Expenses and Revenues: *Current Assets: Revenues receivable (amount owed by customers or clients for goods or services provided (there is rights to collect). Rent receivable, Interest receivable. *Short-term Liabilities: Expenses payable (amount owed for goods or services provided for the company (there is obligation to pay). Rent payable, Interest payable, Wages payable. Revenues and Expenses – Classification Operating Revenues: Revenues relating to the company's main line of business. Examples are Sales Revenues, Service Revenues, Commission Revenues, Rent Revenues and Gain on sale of non- current assets. Operating Expenses: Cost of Goods sold, Wage expenses, Rent Expenses, Advertising Expenses,
customers). Accounts Payable: -Accounts payable: Amount owed to a creditor arising from purchase of merchandise. -Notes payable: Accounts payable that are put into writing in the form of a formal note. -Creditor: the one who lends. -Advances from customers: Payments received in advance for goods or services for delivery in the future (non-monetary liability). If you think is probable that a customer fails to pay, and he finally doesn't pay you, you will record the transaction as: 1.Doubtful Customers TO Customers (to classify the customer) 2.Doubtful debt expense TO Allowance for doubtful customer (contra-asset account, put on the balance sheet). 3.Allowance for doubtful customer TO Revenue on Excessive Allowance. OR 1.Doubtful Customers TO Customers 2.Cash TO Doubtful Customers 3.Allowance for doubtful customers TO Revenue on Excessive Allowance. Expenses for the Personnel There are divided in Wages and Salaries, Social security taxes and Other social expenses. The way of recording them is: 1.Wages and Salaries TO Withheld Income Tax payable, Social security payable, Wages payable. 2.Social security tax TO Social security payable 3.Wages payable TO Cash 4.Withheld Income tax payable, Social security payable TO Cash Topic 8-2: Accounting for Basic Transactions of Non-current assets and depreciation. Non-current assets: resources expected to provide future benefits for the firm which are held and used for several years (intangible assets, tangible assets and financial investments). Depreciation Expense (expense) TO Accumulated depreciation on sth. (assets).
