Anda di halaman 1dari 6

ACCT1501

The Balance Sheet (Statement of Financial Position)


Formal statement of companys financial position at a specified date summarising assets, liabilities
and shareholders equity
Provides a useful picture of the state of the company and is used by outsiders to evaluate the
quality of managements decisions on obtaining, deploying and financing assets
Title identifies the enterprise, point in time that it was drawn up and currency it is measured in
It balances total assets (resources) are equalled by total sources of these assets
Separated into short-term (current) and longer-term (noncurrent) assets and liabilities
Current asset: expected to be used, sold or collected within the next year
Current liability: expected to be paid or otherwise discharged within the next year
Non-current asset: expected to have benefits for more than a year into the future
Non-current liability: due more than a year into the future
Retained profits: past accrual profit not yet given to owners (also retained earnings or past profit
retained)
Entity: separates a company from its owners
Accounting equation:

Sum of assets = Sum of liabilities +

Assets
Cash
Cash at bank
Inventory (goods for
sale/stock)
Prepaid rent
PPE (property, plant,
equipment)
Accumulated depreciation
(negative value)
Accounts receivable

Liabilities
Loans, mortgages and debts
Bank overdraft (withdraws exceed
deposits)
Accounts payable
Unearned revenue (deposits or cash
receipts before completion of sale)
Notes payable (accounts payable but
supported by signed contracts usually
carrying interest)
Accrued wages
Provisions (amount/timing of future
sacrifice is uncertain e.g. warranty
provisions)

Owners Equity
Retained
profits/earnings
Reserves (transferred
from retained profits to
here indicates the
amount is unlikely to
be paid out in
dividends)
Issued capital/share
capital (portion of
companys equity
obtained by issuing
shares in return for
cash)

Assets
Mixture of resources the company needs to do business and resources it has accumulated as a
result of doing business
Formal definition: resources controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity
Three characteristics:
o Future economic benefits used to provide goods and services with the objective of
generating net cash flows
o Controlled by the entity ability of an entity to benefit from the asset and deny/regulate
access of others
o Occurrence of past transactions/events the events give the entity control over the future
economic benefits
Liabilities
Present obligations of the entity arising from past events, the settlements of which are expected to
result in an outflow from the entity of resources embodying economic benefits
Not all are paid in cash; some are paid by providing goods or services e.g. a deposit is received
from a customer for goods to be shipped later (comes out of inventory)
Many house mortgages extend for years into the future but are partly paid each year so the balance
sheet would show both a current and noncurrent portion for them
Two characteristics:

o
o

Present obligation exists obligation involves settlement in the future via the sacrifice of
future economic benefits
Adverse financial consequences for the entity obliged to sacrifice economic benefits to one
or more entities

Equity
The owners interest in the enterprise; often referred to as the book value of the whole enterprise
Can be derived from direct contributions the owners have made or from accumulation of profits that
havent been withdrawn (profits that havent been distributed as dividends)
Generally based on historical transactions and does not equal the current market value of the
business
The Income Statement (Statement of Financial Performance)
Uses accrual accounting to measure financial performance over a period of time, usually a year, six
months, three months or one month, indicating the bottom line net profit for the period
Covers a period of time whereas the balance sheet covers a point in time
Right hand side refers to the parent company (e.g. Woolworths Limited) and on the left are
consolidated figured that refer to the parent company and its controlled subsidiaries (this involves
aggregating revenues and expenses of the parent entity and all the subsidiaries after eliminating
transactions between these entities)
Subsidiary: a controlled entity where the parent company has the capacity to dominate decisionmaking in relation to the financial and operating policies of that subsidiary

Net profit for the period = Revenues


Revenues
Increases in the companys wealth arising from the provision of services or the sale of goods to
customers
Wealth increases as customers pay cash for goods or services (sales)
Revenue is recognised if the goods or services have been rendered
Expenses
Decreases in the companys wealth that are incurred in order to earn revenue
Wealth decreases as operating costs have to be paid and customers have to be given the goods
they paid for
Includes cost of goods sold, rent expense, depreciation expense, advertising, income tax expense
When an enterprise buys goods to sell it is listed in the balance sheet under inventory of unsold
goods but when they are sold their cost is transferred to the income statement under cost of goods
sold
Does not include payments of returns to owners this is considered the distributions of net profit to
owners and the undistributed remained is kept in the company as retained profits
Profit
Difference between revenue and expenses represents the net inflow of wealth to the company
during the period (however if company is losing money it presents a net outflow of wealth)
Gross profit = Revenue cost of goods sold
Net profit = Gross profit other expenses
Net profit after tax = Net profit tax
Retained profits at end of period
beginning of period

= Retained profits at

+ Net profit for the period


Dividends declared during the
period
Declaring Dividends
Board of directors (operate company on behalf of owners) deduct the amount from retained profits
and so the company has a liability to the owners which it will pay off later by sending the owners
the promised cash

Involves two principles of financial accounting:


o Transactions with owners are taken out of retained profits they are not an expense so they
are not deducted in calculating profit for the period
o Owners can be creditors too if they are owed dividends or have lent money to the company

Connecting Balance Sheets and Income Statements


Revenue
Expense
Articulation: knitting
Increase
Increase
sheet and income
Wealth Increase
Decrease
Profit is part of the
Assets Increase
Decrease
accounting equation
Liabiliti Decrease
Increase
es
Per-share data: profit
Equity
Increase
Decrease
number of ordinary
company (EPS = earnings per share)

together of the balance


statement
equity component in the
through retained profits
figure divide by the
shares issued by the

Transaction Analysis
- A useful way of understanding how any transaction or event affects a companys financial
statements (accounting equation)
- Transaction: events that affect the operations or finances of an organisation
- Expanding the accounting equation:
Assets
= Liabilities + Shareholders equity
= Liabilities + (Issued capital + Retained profits)
= Liabilities + Issued capital + (Opening retained profits + Net profit Dividends)
= Liabilities + Issued capital + Opening retained profits + (Revenue Expenses)
Dividends
Double-entry Bookkeeping
- Double-entry records are called journal entries; a system of accounting involving debits and credits
- Debits: increases to resources (assets) on the left side where the money goes to
- Credits: increases to sources (liabilities and equity) on the right side where the money comes from
- The previous reverses when they are decreasing instead of increasing e.g. decrease in assets is a
credit
- Because revenues increase SE they are credits and expenses decrease SE so they are debits
- Every transaction has two or more effects and requires a debit and credit entry
- Account: a record of the dollar amounts comprising a particular asset, liability, equity, revenue or
expense
- Ledger: all the accounts collected together
- Trial balance: list of the account balances from the ledger to make sure the sum of debits equals the
sum of credits
- Bookkeeping provides underlying data on which accounting information is built
- Management decision-making and evaluations of management performance depend on accounting
information
Importance of Good Records
- The provide the observations and history of the enterprise
- Investors and managers cannot make plans for the feature and learn from past actions without
knowing what has happened
- Enterprises have become very large so the number of events/transactions is too great for anyone
to keep track of without keeping complete and accurate records
Steps in Accounting Information System

Accounting is an information system to filter and summarise data


to produce specific kinds of information. It is useful because
decision-makers cannot cope with masses of raw, unorganised
observations.
1. Raw data is admitted
2. Recorded and stored in bank of data e.g. accounts, ledgers
(BOOKKEEPING)
3. Classified, summarised and organised to produce usable
information e.g. financial statements and report (ACCOUNTING)
Types of Transactions
- Cash transactions: feature the concurrent exchange of cash
- Credit transactions: feature partial or full promises to exchange cash in the future
- Some events are not transactions e.g. CEO breaks leg, main warehouse burns down, customer
orders machine to be delivered next month (only when machine has been delivered), companys
land has gone up 14% in value (recorded when directors decide to revalue land)
- Human ingenuity: some large companies record events that arent transactions and some smaller
companies would ignore or leave to be done as special adjustments e.g. internal transfer of goods
To qualify as a transaction:
- Economic and legal characteristics
o Must involve exchange of goods, money, financial instruments, legal promises, etc
(exchange)
o Must have happened (past)
o Must have been between the entity and someone else e.g. customer, an owner, supplier,
employee (external)
- Supplementary characteristics
o Must be some documentation of what has happened (evidence)
o Must be measurable in dollars or in the currency relevant to the country it happens in
(dollars)

Accounting Cycle

Source
documents

Basis for journal entries


Set of documents to show that transactions have occurred so that accounting
records can be checked and verified to to correct errors e.g. purchase order,
cheque, invoice, bank deposit
Evidence of transacation e.g. receipt

Journal
entries

When the business event is first recorded by the accounting system (original entry)
Provides a complete record of all transactions recorded by an organisation in
chronological order
Includes accounts debited and credited

Post to
ledgers

Books (or computer records) that have a separate page for each account with a
summary of all the transactions relating to that particular account
Accountants may use a simplified version of an account called a 'T-account'
Basis of financial statements - the central record of the financial accounting system

Trial
balance

Errors may have been made so this checks that the total of debits equals the total
of credits
If it doesn't balance then re-add the trial balance, check you posted the correct
amounts, check each journal entry balances, determine the different between DR
and CR then look for an account with that balance (you may have left this ledger
balance out)

Recording special alterations to the revenue and expense accounts

Adjustmen Adjustment is posted to the relevant ledger accounts


ts

Adjusted
trial
balance

Closing
entries

Postclosing
trial
balance

Another trial balance is prepared once adjustments have been made

Close the revenue, expenses and dividend amounts to retained profits to make all
of those accounts' balances zero in preparation for the next period
Revenue have credit balances so they are closed with a debit and then a credit to
the P&L summary
Expenses have debit balances so they are closed with a credit and then a debit to
the P&L summary

Prepared after closing entries to ensure that the total of debits still equals the total
of credits

Financial Items in P&L summary can be used as a basis for the income statement
statement Items in post-closing trial balance can be used to prepare the balance sheet
s

Electronic Commerce

Many business transactions are now being entirely conducted in an electronic format
E-commerce is a challenge to financial accounting because its essence is the absence of the paper
trail which has traditionally supported accounting records enterprises still need good records
- Most see little cash and cheques with more payments being made by credit card and EFT and
paying employees by depositing their pay directly into their personal bank accounts
Implications
- Needs to be some compatibility between computer systems on both sides of a transaction
- Needs to be trust in the electronic media to make the system work e.g. encryption and WebTrust
- Can be a lot of in transit activities because physical transfers are usually slower than the electronic
system which can be a challenge to control and reconcile
- Parties can be bound together quite closely with the ability to make enquiries into each others
computer systems
- Becoming continuous rather than waiting for the ritual quarterly or annual reporting dates
- Likely to change accounting and financial reporting dramatically in future years
Conceptual Foundation of Accrual Accounting
Cash accounting involves recording transactions at the time the cash is received or paid. Conversely,
accrual accounting recognises transactions regardless of when cash transactions occur. Its extends the
measurement of financial performance and position by recognising phenomena before and after cash
flows, as well as at the point of cash flows (which cash accounting already does) i.e. it recognises a
revenue and expense before, at the same time, and after cash inflow or outflow. Revenues are inflows
of economic resources whereas expenses are outflows of economic resources.
Accrual accounting spreads out events over time. For example, a building is originally recorded as an
asset and cost is periodically recognised as a depreciation expense over the life of the asset.
Transaction
Recognition of revenue before cash collection
Recognition of expense before cash payment
Recognition of unearned revenue when cash is
collected

Effect
Increase accounts receivable
Increase accounts receivable
Increase in liabilities (unearned revenue)

Accrual Accounting Adjustments


Transaction records require adjustments in order to implement the accrual accounting system; this is
called adjusting journal entries. The degree to which they are needed depends on the sophistication of
the system i.e. many large companies have monthly adjustments whereas many small companies dont
bother until annual financial statements are needed. The purpose of adjustments is to augment the
transaction-based figures
Up to p211
Glossary
Debtor: customer with accounts receivable
Creditor: supplier with accounts payable
Debit card: requires cash in bank depositing cash is a liability from the banks perspective as they
need to pay you back
Cash disbursement: payment of cash by organisation

Anda mungkin juga menyukai