Accounting and Finance PDF

Accounting and Finance An Introduction Eleventh Edition Chapter 1 Introduction to accounting and finance Chapter 2 Measuring and reporting financial position  Learning Objectives 1. Understand the nature of business and the role of accounting in...

Accounting and Finance An Introduction Eleventh Edition Chapter 1 Introduction to accounting and finance Chapter 2 Measuring and reporting financial position  Learning Objectives 1. Understand the nature of business and the role of accounting in business 2. List the potential users of financial statements and their needs 3. Know the key Accounting Equation elements 4. Explain the foundations and components of the Balance Sheet/SoFP 5. Understand and be able to prepare basic Balance Sheet/SoFP 6. Appreciate why non-accountants need to understand accounting  Definition of accounting A c c o u n t i n g is the process which involves the u n ti n g is  identification, Acco u a g e n g the la ess.  measurement, and of busin  communication of financial information about a business, to permit informed judgements and decisions by users of the information. The accounting information system A departmental structure organised according to business function (also shows users of accounting information) Main users of financial information relating to a business  Major financial statements The balance sheet/SoFP shows the value of a company’s assets and liabilities at a particular time. The profit and loss account/income statement shows the revenues (sales), expenses and the profit of a company over a period of time. The cash flow statement shows the company’s cash receipts and cash payments over a period of time.  The Balance Sheet Also called the Statement of Financial Position Reports Assets Economic resources – Assets Produce future benefits – Liabilities – Capital / equity Current Non-current Expected to be converted to Will be held longer than one year cash, sold or consumed in Include: the next 12 months Include: – Property, plant and – Cash equipment – Receivables (or Buildings debtors) Computers – Inventory (stock) Equipment – Intangibles  The Balance Sheet Also called the Statement of Financial Position Reports Present obligations – Assets Liabilities Result in an outflow of economic benefit – Liabilities – Capital / equity Current Non-current Obligations or debts Debts payable more than payable within one year one year from balance Include: sheet date Include: – Accounts payable – Long-term loans – Taxes payable – Other long-term – Other payables liabilities  The Balance Sheet Also called the Statement of Financial Position Reports Represents the owner’s – Assets – Liabilities Equity residual claim to the entity’s assets – Capital / equity Represents the ownership interest of the business assets Consists of: – Capital – Retained earnings  The accounting equation Capital / Liabilities Assets Equity The basic accounting equation is rearranged so that: Capital / Assets Liabilities Equity  Exercise 1 Calculate Total Liabilities? 31 December 2023 Total Total Capital / Assets Equity Liabilities? €95,000 €62,000 31 December 2023 Capital / Total Assets Total Equity €151,000 Liabilities? €105,000  Exercise 1 Total Total Capital / Assets Liabilities Equity €95,000 €33,000 €62,000 Total Total Capital / Assets Liabilities Equity €151,000 €46,000 €105,000 €13,000 increase in total liabilities  Brie Manufacturing Statement of financial position as at 31 December Assets Liabilities & Owner’s Equity  Brie Manufacturing Statement of financial position as at 31 December Assets Liabilities Capital/ Owner’s Equity Layouts for the statement of financial position Example: Alex started a PC repair and part sales business Alex paid €42,000 for equipment on 1 April by depositing €50,000 in a bank and now has €8,000 cash. account. During the first week of operations, the following transactions were carried out: Balance sheet as at 2 April Assets € Claims € 2. Purchased equipment for €42,000 cash. Equipment 42,000 Capital 50,000 3. Purchased stock of parts for €12,000 on Bank (50,000 – 42,000) 8,000 ______ credit. 50,000 50,000 4. Purchased a motor van for €7,000 cash. The value of your assets His current liabilities have 5. Borrowed €3,000 cash from a relative on increases by €12,000. also increased by €12,000. a long-term, interest-free loan, and Balance sheet as at 3 April introduced a further €2,000 cash from Assets € Claims € Alex’s own resources. Equipment 42,000 Capital 50,000 6. Purchased more stock of parts for €4,000 Bank 8,000 Liabilities – creditor 12,000 cash and introduced Alex’s private motor Stock 12,000 _____ car into the business. The motor car is 62,000 62,000 valued at €9,000. Cash decreased by €7,000. Spent €7,000 to buy a FA 7. €300 cash withdrawn for Alex’s use and Balance sheet as at 4 April stock of parts purchased on credit costing Assets € Claims € €1,000 returned to supplier as it was Equipment 42,000 Capital 50,000 defective. Bank (8,000 – 7,000) 1,000 Liabilities 12,000 Required: Stock 12,000 Prepare a BS using the horizontal format Motor van 7,000 _____ for each day commencing on 2 April. 62,000 62,000 Example (continued): 2. Purchased equipment for €42,000 1,000 + 3,000 + 2,000 Capital increases by €2,000 as owner contributed more cash to the cash. business. 3. Purchased stock of parts for €12,000 Balance sheet as at 5 April on credit. Assets € Claims € 4. Purchased a motor van for €7,000 Equipment 42,000 Capital (50,000 + 2,000) 52,000 Bank 6,000 Liabilities – trade creditor cash. 12,000 5. Borrowed €3,000 cash from a relative Stock 12,000 NC Liabilities - Loan 3,000 on a long-term, interest-free loan, and Motor van 7,000 _____ introduced a further €2,000 cash from 67,000 67,000 Alex’s own resources. Balance sheet as at 6 April 6. Purchased more stock of parts for Assets € Claims € Equipment 42,000 Capital (52,000 + 9,000) 61,000 €4,000 cash and introduced Alex’s Bank (6,000 – 4,000) 2,000 Liabilities – creditor 12,000 private motor car into the business. Stock (12,000 + 16,000 NC Liabilities - Loan 3,000 The motor car is valued at €9,000. 4,000) 7. €300 cash withdrawn for Alex’s use Motor van 7,000 Motor car 9,000 _____ and stock of parts purchased on _ credit costing €1,000 returned to 76,000 Owner withdraws €300 76,000 supplier as it was defective. Balance sheet as at 7 April Assets € Claims € Required: Equipment 42,000 Capital (61,000 – 300) 60,700 Prepare a BS using the horizontal Bank (2,000 – 300) 1,700 Liabilities – creditor 11,000 Stock (16,000 – 1,000) 15,000 NC Liabilities - Loan 3,000 format for each day commencing Motor van 7,000 on 2 April. Motor car 9,000 _____ 74,700 74,700 Example (continued): Balance sheet as at 7 April Balance sheet as at 7 April Assets £ Claims £ Non-current assets Equipmen 42,000 Capital 60,700 t Equipment 42,000 Bank 1,700 Trade creditor 11,000 Motor van 7,000 Stock 15,000 NC Liabilities 3,000 Motor car 9,000 58,000 Motor van 7,000 Motor car 9,000 _____ Current assets 74,700 74,700 Stock 15,000 Prepare a BS as at 7 April using the vertical format. Cash at bank 1,700 16,700 Less Current liabilities Trade creditor 11,000 Less Non-current liabilities Loan 3,000 Capital Opening balance 50,000 Capital introduced 11,000 Less Drawings 300 60,700 Accounting conventions influencing the statement of financial position  Main categories in intangible assets Research and development Goodwill Other intangible assets – Patents – Trademarks – Copyrights – Franchises – Licensing agreements Kyriakos Synopsis Accounting is the language of business. Accounting provides financial information for a range of users to help them make better judgements and decisions concerning a business. Managers are among the most important users of financial information, and they use financial information in planning and controlling business activities. The balance sheet reflects the accounting equation: Assets minus liabilities equals ownership interest The balance sheet sets out the assets of the business, on the one hand, and the claims against those assets, on the other. Balance sheet formats The horizontal format sets out the assets on one side of the balance sheet and the capital and liabilities on the other side. The vertical format begins with the assets at the top of the balance sheet and deducts the liabilities. The resulting figure represents the net assets of the business. The capital of the business is shown at the bottom of the balance sheet.  Thank You for Your Attention Any Questions?