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FINANCIAL ACCOUNTING
CONCEPT OF BALANCE SHEET AND
INCOME STATEMENT AND BASIC
ACCOUNTING EQUATION
SESSION 2
Indian Institute of
Management
Tiruchirappalli
Account Categories
Groups of related items.
Main categories.
TRANSACTION
TRANSACTION IN FINANCIAL ACCOUNTING IS
Income statement
Open the HUL income statement
What is the name used to describe this
statement?
What differences do you find between
Balance Sheet
Statement of Financial Position.
Point in time or status report.
More formally, Statement of
Financial Position.
Contains (and shows equality of
amounts of):
Assets = Liabilities + Owners equity.
Assets = Liabilities + Shareholders
equity.
Balance Sheet
Resources and Claims View
Assets = Claims on assets
liquidating values.
Owners equity as a claim is unclear
(i.e., residual claim).
Claim is a legalistic view (i.e., better
suited to liquidation, not to going
concern).
Balance Sheet.
What do you find there?
BASIC ACCOUNTING
EQUATION
Subscript denotes end of the period
Superscript denotes during a period
We will use subscript for balance
Dual Aspect
Fundamental accounting equation:
Dual Aspect
Transactions are events that affect
accounting records.
Every transaction has a dual
impact on accounting records.
Dual impact:
Results in maintaining equality of
accounting equation.
Double-entry accounting system.
liabilitiesbeg.
Contributed capitalbeg. + Retained
Assetsend =
Assetsbeg. + Assetsadded
Assetsdisposed Accumulated
depreciation write off impairment
liabilitiesend =
liabilitiesbeg. + liabilitiesadded
liabilitiespaidoff
Contributed capitalend =
Contributed capitalbeg. +
contributed capital added
contributed capital bought back
Net worthend =
Net worthbeg. + revenuefor the
year expensesfor the year
dividends for the year
Balance Sheet
Assets: Resources of entity.
Cash.
Accounts Receivable.
Inventory.
Equipment.
Investments.
etc.
1-17
Balance Sheet
Liabilities: Claims by creditors.
Accounts payable.
Notes payable.
Owners Equity: Claims by
investors.
Amounts provided directly by
equity investors (Paid-incapital).
Amounts retained from
earnings, i.e. profits (Retained
1-18
Assets.
economic resources of an entity.
recorded at cost (i.e., price paid).
Book value of assets.
recorded value.
Fair value of assets.
amount for which asset could be
(i.e., in US).
Current assets (almost)
always shown separately.
Check with the balance sheet
Current Assets
Cash.
Funds available for
disbursement.
Other assets expected to be
realized in cash, or sold, or
consumed, within one year.
Or normal operating cycle, if
longer.
Other Assets
Investments (not expected
Liabilities
Obligations to transfer assets or
indicated.
Reported at amount that would
Current Liabilities
Satisfied or extinguished
Current Liabilities:
Accounts (and Notes) Payable
Accounts Payable:
Suppliers (i.e. vendors) claims for
goods or services furnished, but not
yet paid.
Unsecured.
Notes payable:
Short-term loans.
Formal written note.
Includes amounts owed to financial
institutions.
Current Liabilities:
Taxes Payable
Owed to government
Current Liabilities:
Accrued Expenses
Current Liabilities:
Deferred Revenues
revenues or pre-collected
revenues.
Advance payment received,
but company has not yet
performed service or
delivered product.
Current Liabilities:
Current Portion of Long-Term Debt
upcoming year.
Gives complete picture
of entitys short-term
obligations.
Long-Term Liabilities
Also called:
Long-term debt.
Non-current liabilities.
Due beyond upcoming
year.
Owners Equity
Amount owners have invested
in entity.
Also know as Net assets (i.e.,
Assets minus Liabilities).
For a corporation:
Shareholders or
stockholders equity .
Shares of stock evidence
ownership interest.
Two Categories of
Shareholders Equity
Paid-in or contributed
capital.
Retained earnings.
Shareholders Equity:
Paid-in Capital
Amount owners have paid in to
Shareholders Equity:
Retained Earnings
Reinvested earnings from inception
Unincorporated Businesses
Proprietorship.
Business owned by one person.
Partnership.
Business owned jointly by two or
more persons.
Utilize a Capital account for each
partner.
Capital account decreased by
withdrawals by each owner (i.e.,
drawings).
Thank
You