Ch1 Introduction to Accounting.docx

Module One – An Introduction to Accounting and the Accounting Equation Objectives: the value to various groups in society of a knowledge of accounting the role of accounting in management the need for, use for, accounting information in decision making within any organization the accounting equation the basic layout of the P&L a/c (also called the income statement), the balance sheet and the cash flow statement the distinction between financial accounting and management accounting Accounting may be defined as series of processes and techniques used to identify, measure and communicate economic information which users find helpful in making decisions. Accounting: is a Service function – providers information to decision makers deals with Economic Information – usually expressed in money values (accountants deal with other stuff like raw tons etc.) Economic Information must be identified and then measured – sometimes easy (sales of car), sometimes hard (depreciation) is a Communication Device – accounting info must be relevant for the for the purposes for which it was designed, but them must also communicate information in a comprehensible way User of Accounting Information: Directors – Effective employment of resources to maximize profit? Senior Execs – Are we managing money efficiently? Managers – Are our lines profitable? How could we increase profitability Employees – What should we be paid? Are our jobs secure? Shareholders – Should we buy or sell shares in the company? Analysts – Should we advise our shareholders to buy or sell? Creditors – Is company a good credit risk? Tax Man – How much tax should they be paying Public – Environmental questions The Accounting Equation: ASSETS=OWNERS EQUITY + LIABILITIES ASSETS EQUITY LIABILITIES Cash Owners Equity Creditors Plant & Equipment - Administrative Wages Raw Material +Profit Processed Inventory -Depreciation Labor for creation of product -Cost of doing business Finished Goods inventory - Expenses like maintenance - Depreciation to Plant & Equip Debtors Balance Sheet: Fixed Assets Plant & Equipment at cost 12000 Less Depreciation 500 11950 Current Assets Inventories 5500 Debtors 750 Cash 4960 11210 Less Current Liabilities Creditors 3000 8210 Net Assets of the company 20160 Represented by: Capital Introduced 20000 Profits earned 160 20160 Profit and Loss Sales 750 Less: Cost of Sales Materials 500 Labor 20 Depreciation 50 570 Gross Profit 180 Less: Selling & Admin Costs Advertising 10 Salaries 10 20 Net Profit 160 Cash Flow Statement: Sources of Cash Profit from operations 160 Adjusted for non-cash items (Depreciation) 50 210 Capital Introduction 20000 Increase in Creditors 3000 23000 23210 Uses of Cash Purchase of Plant 12000 Increase in Debtors 750 Increase in Inventory 5500 18250 Closing balance of cash 4960 Example: Action 1 50000 (CASH) = 40000 (EQUITY) + 10000 (Loan) Actions2: 16000 (CASH) + 5000 (Plant & Equip) + 25000 (Warehouse) +8000 (Raw Materials) = 40000 + 4000 (Creditors) + 10000 (Loan) Action 3: 15400 (CASH) + 5200 (Plant & Equip) + 25000 (Warehouse) +4000 (Raw Materials) + 4400 (Finished goods Inv) = 40000 + 4000 (Creditors) + 10000 (Loan) Action 4: 11400 (CASH) + 5200 (Plant & Equip) + 25000 (Warehouse) +4000 (Raw Materials) + 2200 (Finished goods Inv) + 4000 (Debtors) = 41800 + 10000 (Loan) Action 5: 11200 (Cash) + 5400 (P&E) + 25000 (F&W) + 3000 (MV) + 4000 (RM) + 2200 (FGI) + 4000 (Debtors) = 41800 + 10000(Loan) + 3000 (Creditors) Note: Purchase of Typewrite for 200 goes towards P&E Action 6: 19000 (Cash) + 5400 (P&E) + 25000 (F&W) + 3000 (MV) + 4000 (RM) + 100 (Debtors) = 43500 + 10000(Loan) + 3000 (Creditors) Note: 19000 = 11200 + 3900 (from debtors) + 3900 (from sales of FGI) Action 7: 12600 (Cash) + 5400 (P&E) + 25000 (F&W) + 3000 (MV) + 6000 (RM) + 4300 (FGI) + 100 (Debtors) = 43400 (Equity) + 10000(Loan) + 3000 (Creditors) Action 8: No change Action 9: 12600 (Cash) + 5400 (P&E) + 25000 (F&W) + 3000 (MV) + 6000 (RM) + 0 (FGI) + 3100 (Debtors) = 45100 (Equity) + 10000(Loan) + 0 (Creditors) 12600 (Cash) = 12600 (org. cash) + 3000 (for sale of FGI) – 3000 (pays off creditors) Action 10: 11000 (Cash) + 5400 (P&E) + 25000 (F&W) + 3000 (MV) + 0 (RM) + 7000 (FGI) + 3100 (Debtors) = 44500 (Equity) + 10000(Loan) + 0 (Creditors) Action 11: 11000 (Cash) + 4860 (P&E) + 25000 (F&W) + 2250 (MV) + 0 (RM) + 7000 (FGI) + 3000 (Debtors) = 43110 (Equity) + 10000(Loan) + 0 (Creditors) Action 12: 16000 (Cash) + 4860 (P&E) + 20000 (F&W) + 2250 (MV) + 0 (RM) + 7000 (FGI) + 3000 (Debtors) = 43110 (Equity) + 10000(Loan) + 0 (Creditors) 16000 = 11000 (org cash) + 7000 (from sale of F&W) – 2000 (withdrawal of cash) 43110 = 43110 (org equity) + 2000 (profit from sale of F&W) – 2000 (withdrawal of cash) Profit & Loss Sales 13900 Cost of Sales Materials 80001 Labor 700 Depreciation 540 9240 Gross Profit 4660 Less General Expenses Advertising 400 Audit 200 Repairs to Van 100 Bad Debt 100 Depreciation to MV 750 1550 Net Operations Profit 3110 Extraordinry Profits from sale of F&W 2000 Net Profit 5110 1 8000 is made up only of the RM that ends up actually being sold: RM Sold: Action 4: Sells 2000 worth of RM Action 6: Sells 2000 worth of RM Action 9: Sells 4000 worth of RM Note: these figures do not include the wages to create these goods Balance Sheet Fixed Assets Factory & Warehouse 20000 P & E 4860 MV 2250 27110 Current Assets Finished Goods 7000 Cash 16000 Debtors 3000 26000 53110 Current Liabilities - 0 0 Net Assets 53110 Represented by Capital Introduced 40000 Net Profit 5110 45110 Less Drawings 2000 Owners Equity 43110 Long Term Loan 10000 53110 Cash Flow (Income Statement) Sources of Cash Profits from Operations 3110 Adjusted for Non Cash items - Depreciation 1290 4400 Capital Introduction 40000 Long Term Loan 10000 50000 Sale of F&W 7000 61400 Uses of Cash Purchase of Plant & E 54001 Purchase of MV 3000 F&W 25000 Increase in Inventory 7000 increase of Debtors 3000 Cash Drawings 2000 45400 Closing Balance in Cash 16000 1P&E includes installation & typewriter A Sole Trader is one who has unlimited liability – creditors can go after his personal assets as well as his business ones. There is no requirement on him to make his P&L and balance sheet public. His is still taxed on yearly profit A Partnership is similar to sole trader in that a number of individuals agree to setup business together , bringing various assets to the business. An agreement is usually drawn up amongst them specifying how they will share in profits. Creditors can go after their personal assets as well as their business ones. There is no requirement on them to make their P&L and balance sheet public. A Company limits the liability of its owners (shareholders) to the amount of equity (share capital) they have in the company – so they cannot lose any more money then the sum they paid for their shares. They must make public their annual accounts and have them audited. The nominal value of a share is the face value of the share. Review Questions: b c d c d a b b b 10000 (Cash) + 5000 (Van) + 8000 (RM) =15000 (Eq) + 8000 (Creditors) : d 10000 (Cash) + 5000 (Van) + 8000 (RM) =15000 (Eq) + 8000 (Creditors) : b 10000 (Cash) + 5000 (Van) + 8000 (RM) =15000 (Eq) + 8000 (Creditors) 4000 (P) +10000 (Cash) + 5000 (Van) + 8000 (RM) =15000 (Eq) + 12000 (Creditors) 4000 (P) +9800 (Cash) + 5000 (Van) + 8200 (FGI) =15000 (Eq) + 12000 (Creditors) 4000 (P) +16800 (Cash) + 5000 (Van) + 4100 (FGI) =17900 (Eq) + 12000 (Creditors):b c a 3600 (P) +11450 (Cash) + 5000 (Van) + 4100 (FGI) =17150 (Eq) + 7000 (Creditors):b d b 3600 (P) +11450 (Cash) + 5000 (Van) + 0 (FGI) + 8500 (debtors) =21550 (Eq) + 7000 (Creditors) 3600 (P) +10950 (Cash) + 5000 (Van) + 0 (FGI) + 8500 (debtors) =21050 (Eq) + 7000 (Creditors) 3600 (P) +8950 (Cash) + 5000 (Van) + 0 (FGI) + 8500 (debtors) =21050 (Eq) + 5000 (Creditors):a 19:d 20:Current Assets = 8950 + 8500 = 17450:b 21. c 22. d 23. d 24. c 25. a 26. c Rough: Action 7: Cash 4960 + Plant $11950 + Raw Materials $5500 + Debtors $750 = Owners Equity $20160 + Creditors $3000 Balance Sheet Cash 4960 Owners Equity 20160 Plant 11950 Creditors 3000 Inventories 5500 Debtors 750 23160 23160 Proper Layout Fixed Assets Plant & Equipment 12000 Less Depreciation 50 11950 Current Assets Inventories 5500 Cash on hand 4960 Debtors 5500 11210 Less Current Liabilities (8210) 20160 Represented by Owners Equity 20160 19.1 DIY Example 1. 50000 Cash = 40000 Equity + 10000 Long term Loan 2. 16000 Cash + 5000 Plant + 25000 Factory+ 8000 raw materials = 40000 Equity + 10000 Long term Loan + 4000 Creditors 3. 15400 Cash + 5200 Plant1 + 25000 Factory + 4000 raw + 4400 finished = 40000 Equity + 10000 Long term Loan + 4000 Creditors 1 The installation cost was necessary to get the equipment working, hence it is capitalized. Any further work (maintenance) would be expensed – i.e. written off against owners equity 4. 11400 Cash + 5200 Plant + 25000 Factory + 4000 raw + 2200 finished + 4000 Debtors = 41800 Equity + 10000 Long term Loan 5. 11200 Cash + 5400 Plant + 3000 Van + 25000 Factory + 4000 raw + 2200 finished + 4000 Debtors = 41800 Equity + 10000 Long term Loan + 3000 Creditors 6. 19000 Cash + 5400 Plant + 3000 Van + 25000 Factory + 4000 raw + 100 Debtors = 43500 Equity + 10000 Long term Loan + 3000 Creditors 7. 12600 Cash + 5400 Plant + 3000 Van + 25000 Factory + 6000 raw +4300 finished + 100 Debtors = 43400 Equity + 10000 Long term Loan + 3000 Creditors 8. 12600 Cash + 5400 Plant + 3000 Van + 25000 Factory + 6000 raw +4300 finished + 100 Debtors = 43400 Equity + 10000 Long term Loan + 3000 Creditors 12600 Cash + 5400 Plant + 3000 Van + 25000 Factory + 6000 raw + 3100 Debtors = 45100 Equity + 10000 Long term Loan 11000 Cash + 5400 Plant + 3000 Van + 25000 Factory + 7000 finished + 3100 Debtors = 44500 Equity + 10000 Long term Loan 11000 Cash + 4860 Plant + 2250 Van + 25000 Factory + 7000 finished + 3000 Debtors = 43110 Equity + 10000 Long term Loan 16000 Cash + 4860 Plant + 2250 Van + 20000 Factory + 7000 finished + 3000 Debtors = 43110 Equity + 10000 Long term Loan Balance Sheet Fixed Assets Plant 5400 Less Depreciation 540 4860 Van 3000 Less Dep 750 2250 Factory 20000 27110 Current Assets Cash 16000 Finished Inv 7000 Debtors 3000 26000 53110 Represented by Owners Equity 43110 Long term loan 10000 53110 Turned into finished goods RM Labor 2000 200 200 4000 300 8000 700 total Sales = 4000+3900 + 6000=9900 P&L Sales 13900 Cost of Sales Raw Material 8000 Depreciation 540 Labor 700 9240 Gross Profit 4660 Less General Expenses Advertising 400 Bad Debt 100 Audit 200 Repair 100 Depr on Van 750 1550 3110 Profit on sale of factory 2000 Net Profit before Tax 5110 Cash Flow Cash Inflow Profit 5110 Add Depciation 1290 7200 Loan 10000 Capital Introduction 40,000 Sale of Factory 5000 61,400 Cash Outflow Purchase of Plant & Equip 5400 Purchase Van 3000 Purchase of factory 25,000 33,400 Increase in inventory 7,000 Increase in Debtors 3000 Personal Withdrawal 2000 45400 Cash balance 16000 Case Study 1.1 25000 Cash = 25000 Equity 23000 Cash = 23000 Equity 7000 Cash + 10000 Equip + 6000 Car = 23000 Equity 3000 Cash + 10000 Equip + 6000 Car + 8000 Raw materials = 23000 Equity + 4000 Credit 1000 Cash + 10000 Equip + 6000 Car + 2000 Raw materials + 8000 Finished goods = 23000 Equity + 4000 Credit 8500 Cash + 10000 Equip + 6000 Car + 2000 Raw materials + 3200 Finished goods + 4500 Debtors = 30200 Equity + 4000 Credit 7600 Cash + 10000 Equip + 6000 Car + 2000 Raw materials + 3200 Finished goods + 4500 Debtors = 29300 Equity + 4000 Credit Equipment Dep over 6 months = 10000/10 = 1000 Car Dep over 6 months = 6000/6 = 1000 7600 Cash + 9000 Equip + 5000 Car + 2000 Raw materials + 3200 Finished goods + 4500 Debtors = 27300 Equity + 4000 Credit P&L Sales 12000 Cost of goods sold Materials 3600 Labor 1200 Depreciation (Equip) 1000 5800 Gross 6200 Salaries 600 Rent 2000 Dep (car) 1000 Expenses (Petrol) 300 3900 Net Profit 2300 Balance Sheet Fixed Assets Equipment 10000 Depreciation 1000 9000 Car 6000 Depreciation 1000 5000 14000 Current Assets Cash 7600 Finished Inv 5200 Debtors 4500 17300 31300 Less Creditors 4000 27300 Represented by: Owners Equity 27300