Financial Concept for Non Finance Manager

Accounting Basic
What Is Accounting Equation?

Assets=what do we have (cash)

Liabilities=where do assets come from (bank loans)
Owner’s equity=where do assets come from (your investment)
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What Is Accounting Equation?

Assets = Liabilities + Owner’s Equity

Economic Claims to
Resources Economic
Resources
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 Assets
 Economic resources, expected to benefit the
business in the future (You own)
 Cash
 Accounts receivable (bookstore sells books on
credit)
 Merchandise inventory (books in a book store)
 Furniture (furniture in a book store)
 Land

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Liabilities
 Liabilities – economic obligations payable to
an individual or organization outside the
business (You owe)
 Accounts payable (You pay later)
 Notes payable (bookstore writes a promissory
note to your aunt to show the store will pay back
loans latter)
 Salary payable (You pay salary later)

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Owner’s Equity
 Owner’s Equity (capital) – claim of business
owner to the assets of the business (Owner
invests)

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Revenues
 $Amounts earned by delivering goods or
services to customers (You earn)
 Sales revenue
 Service revenue
 Interest revenue
 Dividend revenue

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Expenses
 $amount spent in the course of delivering
goods or services to customers (You spend)
 Salary expense
 Rent expense
 Utilities expense
 Interest expense

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Exercise :1.1

Assets Liabilities Owner’s

Equity

Pep Boys $? $60,000 $21,000

Eddie Bauer $72,000 $? $40,000

Benbrook
$100,000 $79,000 $?
Exxon
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Transactions that Affect
Owner’s Equity
OWNER’S
OWNER’S EQUITY
EQUITY
DECREASES
INCREASES

Owner Owner
Investments: $10,000 Withdrawals:$2,000

Owner’s Equity=?

Revenues: $5,000 Expenses:$3,000

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Analyze Business Transactions

 3 steps:
1. What are 2 accounts involved? (think cash first)
2. Increase/decrease of each account?
3. Assets, liabilities, or Owner’s equity?

Assets=Liabilities + Owner’s Equity (Always!)

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Analyze Business Transactions
Transaction 1: Starting the Business
 Increased assets (cash)

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Analyze Business Transactions
Transaction 2: Purchase of Land (Lapp purchases land for an
office location, paying cash of $20,000.)
 No effect on total assets

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Analyze Business Transactions
Transaction 3: Purchase of Office Supplies on account (NOT pay
cash now)
 Increase both assets and liabilities

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Analyze Business Transactions
Transaction 4: Earning of Service Revenue

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Analyze Business Transactions
Transaction 5: Earning of Service Revenue on Account: collect
cash in the future

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Analyze Business Transactions
Transaction 6: Payment of Expenses

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Analyze Business Transactions

Transaction 7:Payment on Account: (pay cash to reduce

liabilities)
 Cookie Lapp pays $300 to the store from which she
purchased supplies in transaction 3.

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Analyze Business Transactions
Transaction 8: Collection on Account (collect cash and can not
claim receivables any more)
 In transaction 5, Lapp performed services for a client on
account. The business now collects $1,000 from the client.

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Analyze Business Transactions
Transaction 9: Withdrawal of Cash
 Cookie Lapp withdraws $2,000 cash from the business for
personal use.

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Financial Statements

 Income statement (Net income/loss during a period)

 Statement of owner’s equity (change in equity during a
period)
 Balance sheet (assets=liabilities+equity at the end of a
period)
 Statement of cash flows (cash movement during a
period)

Not worry now!

We will cover more in later chapters on financial statements.
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Income Statement Illustration
Income statement for the Month Ended July 31, 2006
Revenue:
Fees earned $7,000
Expenses:
Salary expense $1,700
Rent expense 1,000
Utilities expense 300
Total Expenses 3,000
Net income $4,000
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Statement of Owner’s Equity

 Summary of changes in an entity’s owner’s

equity during a specific period

Beginning owner’s equity ($0)

+ Owner’s investments ($45,000)
+ Net income ($4,000)
- Net loss ($0)
- Owner’s withdrawals
($1,000) Ending owner’s equity
($ ?)
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 Balance Sheet Illustration

 Balance sheet: July 31, 2006

Assets Liabilities
Cash $13,000 Accounts payable $500
Medical supplies $1,500 Owner’s equity,
Land $35,000 M. Lange, $49,000
capital
Total assets $ 49,500 Total liabilities and $?
owner’s equity
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What Is Accounting?

Measures
Measures Processes
Processes Communicates
Communicates

Measure business Process data Communicates to

activities into reports decision makers

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Financial vs. Managerial
Accounting

 Financial Accounting – Information for people

outside of the company (e.g., shareholders,
banks, customers)
 Managerial Accounting – Information for
internal decision makers (e.g., corporate
managers)

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 Rules of Debit and Credit

Assets = Liabilities + Equity

Debit Credit Debit Credit Debit
+ - -
Credit
+ - +

Expenses Revenues
Debit Credit Debit Credit
+ - - +

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Debit and Credit

T-Account

Account Name

(Left Side) (Right Side)

Debit Credit

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Normal Balances
Assets = Liabilities + Equity
Debit Debit Credit Debit Credit
Credit
- + - +
+ -

Normal Normal Normal

Balance Balance Balance

Normal balance is where we record an

increase for an account
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General Journal Illustration
Transaction
Transaction
Date Accounts
Accounts Affected
Affected
Date

Journal
Date Page 1
Jul 1 Cash + Description Debit
Lange, Capital + Credit 45,000
45,000
Investment from owner

Explanation
Explanation of
of Dollar
Dollaramount
amountof
ofdebits
debits
transaction
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transaction and
andcredits
credits
Journal Entries Exercise 1.2

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Exercise 1.2
GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Jun 1 Cash+ 25,000

M. Brown, Capital+ 25,000

Owner Invested in business

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Exercise 1.2
GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Jun 2 Medical Supplies+ 10,000

Accounts Payable+ 10,000
Purchased medical supplies

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Exercise 1.2
Analysis of June 2 transaction:

GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Jun 2 Rent Expense+ 4,000

Cash - 4,000
Paid rent for the month

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Exercise 1.2
Analysis of June 3 transaction
GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Jun 3 Accounts Receivable + 12,000

Service Revenue + 12,000

Performed services
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 Exercise 1.2
Cash Accounts Payable Service Revenue
25,000 4,000 10,000 12,000
Bal 21,000 Bal 10,000 Bal
12,000

Accounts Receivable M. Brown, Capital Rent Expense

12,000 25,000 4,000
Bal 12,000 Bal 25,000 Bal 4,000

1. How to get $21,000 for

Medical Supplies
CASH? Note: Same side: +,
10,000 opposite side: -
Bal 10,000
2. How many transactions under CASH? 35
Exercise 1.2 (part 3)
Mike Brown, M.D.
Trial Balance
June 30, 2008
Cash 21,000
Accounts Receivable 12,000
Medical Supplies 10,000
Accounts Payable 10,000
M. Brown, Capital 25,000
Service Revenue 12,000
Rent Expense 4,000
Totals 47,000 47,000 36
Recognizing Revenues and
Expenses
Three new basic accounting principles
 Revenue Recognition

 Matching

 Time Period (Requires that accounting

information be reported at regular intervals,

such as annual and quarterly financial
statements)

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Revenue Principle
 When is revenue recognized?
 When it is earned
 Not necessarily when cash is received
 How much revenue should be recognized?
 Cash value of item transferred to customer

Example:
Your parents book store sold $120 on Jan 1 2019 ANNUAL
subscription for the 12 monthly magazines mailed out each month in
2019 to a student. Your parents mailed out 1 monthly magazine on
Jan 31 2019 to that student.
How much should your parents record revenue?

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The Matching Principle
 Measure all expenses incurred during the
accounting period

 When are expenses recognized?

 Match the expenses against the revenues earned

during the period

Example:
Your parents book store paid $12,000 on January
1 2009 for 2009 yearly rent. On January 30 2009,
how much do you parents record rent expense?
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Accrual Basis vs.
Cash Basis

Accrual Basis Cash Basis

Revenues are Revenues are
recognized when recognized when
earned and expenses cash is received and
are recognized when expenses recorded
incurred when cash is paid
Not GAAP
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Reference :

Alpha Institute
CFA Level 1 Course .