Scarica Financial accounting 1 e più Appunti in PDF di Cost Accounting solo su Docsity!
Lecture 1- October 2025
What is accounting, The basic
financial statements, The role of
accounting standards
What is accounting?
identify which financial events are relevant and those that are not. Until I am not paying something it is not relevant. Accounting captures transactions in a specific way that is called book keeping. The totals at the end will tell what are the final expenditures in total, without the total there is not a way to really perceive what you are spending. —> It’s about identifying the relevant financial information which are the main economic events called transactions, we have to ask ourselves: IS THIS A TRANSACTION? When we keep track of our transaction whether we store it in our brain or we have a list indeed the most important thing is to have a technique about collecting and recording the so called bookkeeping( record, classify and summarize). At the end of the process of collecting we need to aggregate, process and communicate in order to prepare the accounting reports periodically, perhaps every year or month (how much have I spent?) that we give to users to interpret and understand.
Who are the users of accounting info?
There are two main groups of users: —>one are known as internal users : the managers of the company (CEO), managers inside the company infact need to know how well is the company doing, the informations for instance are oriented for the managers. —>There are also external users of the informations, this can be investors like shareholders, and also the creditors (like landers, companies borrow money form banks), the creditors would want to know how the company is going. Also customers are considered as creditors because the customers play a crucial role in the ongoing of the company. In addition the government is considered a creditor because the companies pay taxes and the govt wants to know how the company is going. Shareholders are listed as external, this situation reflects more the american condition with huge companies while in Italy there are smaller ones. When shareholders are listed as external it means all the guys that are holding few shares in the company. While when a shareholders holds a huge quantity of the company he is considered as internal.
Lecture 1- October 2025
An important consequence is that companies must publish their financial report, apart from small companies that generally are not required to do so. Another consequence is that because there are external users are needed accounting rules, because otherwise the CFO will be able to mislead the external users of accounting. So in order to protect external users are needed accounting rules. This rules are called the accounting standards. The accounting information system & its users Distinction between financial a accounting or managerial accounting. Financial accounting reports is what is done for the external users, so the data produced for the external users. Are period ical financial statements and related disclosures and generally is published once a year. Managerial accounting reports are detailed plans and continous performance report, they are only for internal users so they use datas that doesn’t get published. It contains also non financial datas. It is published more frequently (monthly or also weekly) Managers need more specific datas, it provides more specific and frequent datas, it need reference to segments of the company or also non financial indicators. Companies publish their financial report once a year, big companies in stock exchanges need to report more quickly. BASIC FINANCIAL STATEMENTS THE INTUITION The end results of an accounting process is a final report that is composed of 5 main statements, it is a report that contains at lest this 5 financial statements:
- Income statement
- Statements of retained earnings
- Balance sheet also called statements of financial position
- Statements of cash flow
- Statements of comprehensive income
Lecture 1- October 2025
—>The answer to the third question is an income statement, so what has the company produced and sold in a given period and what resources used to produce and sell. —>The fourth question is a stammer of cash flow that is a table that explain how much the company had over a period and why and how much it paid and why. This tables are all related, they are not independent —> exercise : at slide 28 using the datas of 2002 and answer to the questions in the following slide. It also needed to be taken into account what ether was from the previous year. THE BALANCE SHEET Answers to what the company owns and owes in a certain period of time. For instance it provides a snapshot of the entities’ financial position as of one moment in time. What the company owns are called assets, what the company owes to third parties is called liabilities, and the difference between assets and liabilities is known as equity. —>A-L=E A company can have as assets equipments, cash, inventory of supplies, buildings, patents, land, financial investments.. Liabilities can be borrowed form banks, suppliers, employees, government Assets are an economic resource that at a given moment is: controlled by the entity as a result of past transactions (meaning that it is like owned by the entity thanks to an events that allowed the control of that asset), it must be valuable to the entity (that it will provide future benefits), it must be acquired at measurable cost (the assets has cost that is measured, if not able to be measure dis not an asset). Assets can be classified into current and not current. -Current= Cash is current, and resources expected to turn into cash within a year, and resources expected to be used within one year -Non- current= long term and those that are not considered current assets. Liabilities are the company’s actual or probable debts or obligations that result from past transactions and will be paid with assets or services. Usually you pay liability with cash. Sometimes you pay liability with other assets. In other cases, when services are prepaid, paid in advance, then the company will satisfy the obligation by providing the service. —>What are the two main ways of creating a liability? Borrowing or purchasing on credit. The two main ways are you borrow money, you have debt, or you buy something and you do not pay immediately and you have debt. When you borrow, or when your creditors lend money to you, the same thing happens.—> That's called financial debt. When you buy on credit, that's called commercial debt. (So the one towards mother is financial debt and the one towards suppliers is commercial debt.) Lending money is also known as financial debt while allowing the company to purchase on credit is commercial debt. —>Liabilities are also classified into current and non-current. -Current= The money that you owe within a year is current. -Non current= The money that you owe beyond a year is non-current. So it depends on when the liability is expected to be settled. —> An example. Suppose I borrow money from her and the money is due June 30th, 2027. So I get at the end of 2025, I prepare my balance sheet. This financial debt, is it current or non- current? Non-current because it is due in 18 months. Another year goes by. I get at the end of 2026 and I prepare another balance sheet. Is my liability towards her current or non-current? Current. So it's not the nature of the liability. At some stage, non-current liabilities become current as the deadline approaches.
Lecture 1- October 2025
Equity is always equal to the difference between assets and liabilities. Or assets equal liabilities plus equity. That is called the double entry concept. That is also called the basic accounting equation. Everything in accounting relies on that identity. Assets equals liabilities plus equity. Equity is provided by financial operations provided by owners: implicitly, by not distributing to the shareholders the profit in the form of dividends and explicitly by investing cash or other assets (contributed capital). —> A=L+E THE INCOME STATEMENT The question says, first of all, it's not at a given point in time. It is what happened in a certain period of time. It says, during the year. Doesn't say at the end of the year. —>What is the income statement presenting? The income statement is presenting the value of what the company produced and sold and the value of the resources that it used. So it describes what happened during a given period of time. It describes the revenues and expanses of a company. !Revenues= value of what is produced and sold! !Expanses= value of resources used for that purpose! The value of what the company produced and sold. The difference between revenues and expenses is called net income. If positive is called a profit. And if negative is called a loss. —>Who gets the profit? The shareholders. Money from the shareholders is compensated by profit. The difference between interest to lenders and profit to shareholders is that interest is defined. A certain interest rate over a certain period of time. The income statement describes what happened during a certain period of time. example—>one year from January 1st to December 31st, 2001. That period is called an accounting period or interim period. The identification of accounting period is artificial. Meaning that the companies, to facilitate and divide their work, they artificially divide the life of the company into accounting periods. —>How Long Are These Accounting Periods? -For external users; when companies publish their financial reports, the accounting period is usually 12 months, a year. Some companies need to report more frequently. But in general, the accounting period for external users is one year. 12 months. So the income statement will cover 12 months. Companies may have calendar years (CY) or financial years (FY). Usually companies prepare financial reports with an accounting period that overlaps with the calendar year. But there are some exceptions. Because companies would want to prepare the financials the moment that they are idle, they would want the financial statements to overlap with the year of activity. -For internal users and for some special cases are needed monthly reports. If a company does monthly reports, those months are called interim periods. This periods are shorter periods for internal users. The Balance Sheet And The Income Statement The income statement covers a period. The related balance sheet will be a picture at the end of that period. —> example: The income statement goes from January 1st to December 31 and the balance sheet is at December 31. The income statement covers a period and the balance sheet is at the final day of that period. Even if you do the income statement every three months, the income statement October 1st to December 31 will have a balance sheet at December 31. The income statement, January 1st to March 31st will be associated with the balance sheet at March 31st. —>What does the Income Statement Shows? The income statement shows revenues, expenses, and net income.
Lecture 1- October 2025
- How much capital has the company invested in the company? At the beginning the kids instead 10 euros in the company and then in 2002 they invested another 4 euros, therefore what they vested is 14 euros—> this are the explicit contributions they make, also called common stocks. The profit they had from 2001 they re invested it, and they decided top reinvest it. So they also invested the 30 cents, this are the implicit contributions. This 30 cent are an additional contribution. In 2002 we have a profit of 6.60 euros, so this money was implicitly invested in the company by the shareholders because they give the dividends to the company to reinvest it, and are known as retained earnings. So overall we can say that the Kidds have invested in the company 20.90 euros. The equity is the same number. We can say that equity is how much the shareholders have contributed, either explicitly or implicitly, by not distributing the profits to the shareholders. So equity is made of common stocks and retained earnings, so the profit that the companies earns and doesn’t pays out to the shareholders. Conclusions: ⁃ What I own or owe at the end of the year is what I owe or own at the the beginning of the next year. ⁃ Durable goods are used over and over again while consummate goods are those that cannot be used for many times ⁃ Depreciation is the process though which assets are used over time and you allocate the use over those years. The simplest way of doing it is known as straight line dpercoation but accounting standards allows for other ways of distributing the usage of assets. In the income statement are found the expense so the use in the relevant year, while in the balance sheet there are two alternative, either you find the net value or is found the gross value minus the accumulated depreciation. ⁃ The inventory is t ⁃ Revenues is the sales so the product sold not cash inflow
⁃ Interest is an expense, debt repayment is not
Lecture 1- October 2025
BASIS FOR EXTENDED ACCOUNTING EQUATION AND TRANSACTION ANALYSIS A= L+E --> balance sheet The two components of equity are common stock and retained earnings E is = CS+RE Retained earnings is commuted with the profit of the previous years, so the amount of retained earning from the previous years, plus the retained earnings form the current years , minus the dividends. Net income is computed by revenues minus expenses and therefore —> A= L+Cs+BRE+REV-EXP-DIV. --< extended accounting equation (it is the total used to record transactions in accounting) Sequently the net income is plugged into the statement of retained earnings.
Lecture 1- October 2025
The amount of cash in the balance sheet is the sum of cash from previous year and the inflow and outflow of cash of that year. Especially from operating, investing and financing activities. There are also other sections or statements that are: management discussion and analysis, auditors report and the notes to financial statements. Management discussions and analysis is a commentary by the top management of the company about how the year went. Companies do not published they yearly report few month later after the end pf the year. In this case is how management is presenting the company and essential to understand how the company is doing. The notes to financial statements details additional informations about each and every item in the balance sheet or in the income statement. The auditors report provide assurance that the financial report is correct, because otherwise companies may cheat and nobody is going to find out so there is the need to be in compliance with the laws.
LECTURE 2
Transactions, The accounting
equation, transaction analysis,
the account Journalising &
posting, The unadjusted trial
balance
In order to produce a financial report we need to identify what informations are relevant for accounting purposes and then we need to learn how datas are recorded and collected in order to be able to produce the financial report t the end of the year. Accounting focuses on transactions. We we’ll need to learn how to understand how the transactions impacts on the assets on the liabilities and on the equity and that will be done through the accounting equation through a technique called transaction analysis, how to formally journalist and post the transactions and introduce some adjustments.
1. Business transactions
ACCOUNTING TRNSACTIONS
Accounting focuses on transactions.
LECTURE 2
Accounts and chart of accounts Each company has a list of accounts called chart of accounts. Accounts are a standardized format used by companies to accumulate the dollar effect of transactions. The chart of accounts is needed to make sure it is used the same label. Companies are free to choose and set up their own char of accounts. Chart of accounts are a list of all account titles and their codes, usually organized by final statements elements. Event Explanation Effect on Accounts a) New company is formed and sells 100 shares @ $12 each Company receives cash in exchange for stock → increases both cash and common stock. Cash +1.2k , CS +1.2k b) Purchases a delivery truck for $18,000 (list price $21,000) Buying equipment → exchange of one asset for another (cash decreases, equipment increases). Cash -18k , Equipment +18k c) Orders 30 display stands for future delivery Only an order, no payment or delivery yet → no transaction. Not a transaction d) Orders and receives 10 PCs, signs a $25,000 note Receives equipment but promises to pay later → both equipment and notes payable increase. Equipment +25k , Notes Payable +25k e) Signs a $500, construction contract, pays $50,000 deposit Only $50,000 paid so far → decreases cash , increases construction in progress (asset). Cash -50k , Construction in progress +50k f) Purchases a copyright for $40,000 cash Copyright = intangible asset. Cash decreases, intangible increases. Cash -40k , Intangibles +40k g) Pays shareholders a $100,000 dividend Cash decreases and dividend is recorded (reduces retained earnings). Cash -100k , Dividends +100k g) Pays shareholders a $100,000 dividend Record at purchase price (not appraisal). Cash -50k , Land +50k i) Acquires patent, pays $500,000 cash, signs $400, note Receives a patent worth $900k, pays cash and signs note → both cash and liabilities change. Cash -500k , Notes Payable +400k , Intangibles +900k j) Owner buys a car with personal money Personal transaction → not recorded by the company. Not a transaction k) Purchases shares in another company for $5,000 cash This is an investment → one asset (cash) decreases, another (investment) increases. Cash -5k , Investments +5k l) Borrows $1,000 from bank, signs 6-month note Liability increases (note payable) and cash increases. Cash +1k , Notes Payable +1k m) Pays $1,500 principal on its note payable Cash decreases and liability decreases. Cash -1.5k , Notes Payable -1.5k
LECTURE 2
Example of a chart of account Transaction analysis technique Step 1: Identify and classify accounts and effects –Identify the transaction –Identify the accounts (by title) affected and make sure at least two accounts change –Classify such accounts by type. Was each account an asset (A), a liability (L), or a stockholders’ equity (SE)? –Determine the direction of the effect. Did the account increase [+] or decrease [-]? –Hint: Because most relevant transactions are exchanges:
- It is useful to identify what “comes in” (+) & what “goes out” (-)
- One of the two flows (in or out) will often be cash or a promise to pay (A/R & A/P) Step 2: Verify acctg equation remains in balance Exercise at pag. 18
LECTURE 2
- Payment of Dividends The company paid €1,300 in cash dividends to shareholders.
- Cash decreases by €1,.
- Dividends increase by €1,300 (reducing equity). Dividends are not expenses; they are distributions of profit to shareholders. At the bottom of the tables are found the totals. The raws are the individual events, in the columns at the end there are the totals. The totals of the column are called the unadjusted trial balance. (UTB) Unadjusted because at some stage there are needed to make adjustments. TRANSACTION ANALYSIS EXERCISE 2
N
o.
Transaction Accounts Affected
Effect on
Accounting
Equation
Notes / Explanation
Investment by
owners
+$10,000 Cash +$10,
Common Stock
Assets ↑, Equity
Cash received from investors in
exchange for stock.
Borrowed
from Castle
Bank
+$5,000 Cash +$5,
Notes Payable
Assets ↑,
Liabilities ↑
3-month, 12% note payable
(interest due later, not recorded
yet).
Purchased
equipment
–$5,000 Cash +$5,
Equipment
Assets ↔ (no
net change)
Cash used to purchase
equipment.
Received
client advance
+$1,200 Cash +$1,
Unearned Service
Revenue
Assets ↑,
Liabilities ↑
Payment received before service
— a liability until earned.
Performed
advertising
service
+$10,000 Cash +$10,
Service Revenue
Assets ↑, Equity
Revenue earned — increases
retained earnings.
LECTURE 2
THE REVENUE PRINCIPLE
Revenues are recognized when the delivery has occurred or services have been rendered, when there is a persuasive evidence of an arrangement for customer payments, the the price is fixed or determinable and the collection is reasonably assured. Cash may be received before, when and after the serving is provided. While revenues are recorded at the monist of delivery of the service. MATCHING PRINCIPLE -expenses Expense are recorded when the cony or user use a service. Resources consumed to earn revenues in an accounting period should be recorded as expenses in that period, regardless of when: –The resources were purchased –Cash is paid.
Paid office rent
(for October)
–$900 Cash +$
Prepaid Rent
Assets ↔
Prepaid expense — not yet used
(treated as an asset).
Paid one-year
insurance
–$600 Cash +$
Prepaid Insurance
Assets ↔
Coverage for next 12 months —
prepaid, not an expense yet.
Purchased
supplies on
account
+$2,500 Supplies +
$2,500 Accounts Payable
Assets ↑,
Liabilities ↑
Supplies purchased on credit, to
be used later.
Hired
employees
(start Oct 15)
No entry —
Hiring only; no financial impact
until employees begin work.
10 Paid dividends
–$500 Cash +$
Dividends
Assets ↓, Equity
Distributes profits to
shareholders (not an expense).
Paid employee
salaries
–$4,000 Cash +$4,
Salaries Expense
Assets ↓, Equity
Salaries earned by employees
— recognized as expense.
LECTURE 2
TRANSACTION ANALYSIS EXERCISE
- +21000 cash and +15000 on accounts receivable and 36000 in sales revenues
- +400cash, +100 in revenues of franchise and 300 in unearned revenues (because the corny had not delivered those amount of service yet)
- -7000 cash and 7000 in general and administrative expenses
- +29000 supplies, -9000 in cash and 2000 in accounts payable
- -14000 cash and 14000 in salaries expenses
- -2000 cash and 2000 prepaid insurance, -6000 cash and 6000 in prepaid expanse and - cash and 1000 prepaid expanses
- +4000 cash and -1000 in PPeE and the gain of sale on land is 3K
- +15500 cash, -12800 in accounts receivable and 2700 in franchise revenues
- -10000 cash and -10k accounts payable
- +1000 cash and 1000 in investment income THE ACCOUNT It records the increase or decrease in a specific asset, liability, equity, revenue or expanse system Debits are found on the left of the T-account and credits on the right. It is based on a double entry system: –Each transaction must affect two or more accounts to keep the basic accounting equation in balance. –Recording done by debiting at least one account and crediting another –DEBITS must equal CREDITS If the debits are greater than the credits the account will have a debit balance, if credits are greater than debits the account will have a credit balance. It is based on the expanded accounting equation rearranged: A+exp+div=L+Rev+CS —> for those accounts that are assets or expenses or dividends, that are found on the left of the equation, the increases go left and the decreases goes right. Those that are liabilities, revenues and those things that are the right of the accounting equation is the other way around.
- Journalizing and posting Source documents / Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. The transactions are recorded in chronological order Steps in the recording process: 1.Discloses the complete effects of a transaction 2.Provides a chronological record of transactions 3.Helps to prevent or locate errors because the debit and credit amounts can be easily compared —> errors can be longer deadly because of the structure of the journal is easy to see where the balance is more done and where the errors are. THE LEDGER A ledger records all debit and credit transactions from the journal (or sub-ledgers) into separate accounts — such as Cash, Accounts Receivable, Sales, Expenses, etc. Structure Each ledger account (also called a T-account) typically includes: - Date of the transaction - Description or reference
LECTURE 2
- Debit amount - Credit amount - Running balance
