Lecture 1

You're not the center of the earth!

If you aren’t motivated try to get the motivation from somewhere

Its 70% easier this year lol you cant fail

A lot of easy questions but hard questions

Practice is key, things will be changed in the exam

Change numbers, change information, make it so its easy to make mistakes

Weighting

- Mid term (30%) → 6 chapters → 4th of december

- Class participation (10%)
- Only received if you attend all tutorials and all the practicals
- Final exam (60%) → whole course
- Resit (100%)

When

- December 4 (midterm)
- January 17 (final exam)
- April 10 (resit)

Subject to examination

- Book chapters (see course rules on Brightspace)

- Mix of 2 different books
- Problems and exercises

Participation in tutorials and practicals

- Don’t be late
- Actually participate

Course coordinator email: [email protected] (Dr. Carel Huijgen)

About these lectures

- Explain main topics for the week
- Lively examples that will help you remember the material
- Each lecture tells a complete story; has a logical structure that ties the different topics together
- Slides are designed to allow u to go through content on your own
What is accounting?

Accounting: an information system that measures, processes and communicates financial information about a
company

- Businesses try to earn money

- System of disseminating information which is accounting
- Anything that is there that takes into account all of the information
- If you have a business, you are very innovative, you hire everyone here, make tiktok videos, for every
innovative video they get 10 euros, employing everyone which is called operations
- Invested in someone/people
- Operations are performed by employees which has a cost
- This cost is being managed by an accounting system

Different forms of accounting

Financial accounting
- Driven by law and principles
- External users
- Information being provided is more standardized
- Emphasis on the past
- Looks at business as a whole
- Is an end in itself

Management accounting
- Internal users (employees, managers, all corporate governance board people, directors)
- Have a course on management accounting

New field to earn a lot of money

- Sustainability accounting
- A large amount of elements
- Become more specialized
- Have general information, go for specific certifications

Balance sheet
Assets Liabilities
Equity

- Tells you if a company has enough assets, liabilities, and shareholders equities
- Good or bad company → financially look at balance sheet
- Last statement that is being prepared in the accounting process

Income statement
- If company is making profit/loss
- Revenues - expenses = net income (profit)
 - Takes all the revenues (sold) and all of the expenses (cost) and subtracts costs from revenues to get costs
- Profit goes into statement of shareholder equity
- How much money invested by shareholders (ppl who invested financial resources into a company)
- Once you calculate final balance of shareholder equity, it goes into balance sheet

Cash flow statement

- Actual value of the cash you have in your company
- Operating act. Investing act. Financial act. = change in cash + starting balance

IN A BALANCE SHEET LEFT = RIGHT

- Left hand side, assets

- Right hand side, liabilities and stockholders equity
- External financing (eg. loans)

-
- Suggestion: go home and google list of all of the assets, liabilities, shareholders equity components, equities,
revenues
- If you have all 5, keep looking and keep remembering
- Expense
- Liability
- Shareholder equity
- Expenses
- Revenues

Accounting equation

Left = right

Assets = liabilities + shareholders equity

To make the statement, you need to have specific inputs

- Journal entries, first step in accounting process

- Something on debit side
- Something on credit side
- Certain rules of debit and credit

Example

T ACCOUNT

- Journal entry
- Debit
 - Credit
- Both sides should be equal
- If debit side is not equal, they do not have equal credits and it is invalid

Chapter 2

- Starts with figure

- Summarizes all rules of debit and credit
- IMPORTANT to pass

- Always be a debit and credit side

- Journal entry
- Balance sheet
- Leger
- Closing entries
- Etc.
- Everysingle aspect of accounting
- When asset increases, will always be on debit side
- When asset decreases, will always be on the credit side
- Shareholder equity/expenses/etc. Opposite to assets
- Eg. if you pay utility bill, debit is increasing
- When expenses increase, it decreases shareholder equity

Example
- Example plumbing company
- Needs 3 things
- Cash
- Building
- Need car
- First step, make list of x y and z
- Assets
- Liability
- Owner’s equity
- Revenue
- expenses
- Sold shares to shareholders
- Cash is asset → debit side
- If cash increases so does shareholder equity
- SH equity increases → goes on credit side
- Sell shares, SH equity goes on credit side, cash goes up goes on debit side
- Should appear on T accounts
- Next prepare a balance sheet
- Based on accounting equation
- Assets must equal liabilities!!!!!
- BALANCE sheet must be BALANCED
 - Company purchases awesome building
- Only has 100,000
- Building costs 200,000
- Asks for a mortgage from the bank
- Increase asset bc purchased asset (building) → debit
- Loan goes on credit side
- Go into T accounts
- Then goes into balance sheet
- Company uses cash to purchase 16,000 in cash
- Cash goes down (asset)

Anything that decreases shareholder equity should be on the debit side

If you don’t distribute profits to shareholders, becomes retained earnings
Lecture 2

MIDTERM

- 50% of difficulty of midterm in this lecture → has implications later

- Debit and credit
- Rules of entries are gonna facilitate conducting the cash flow
- Make a list of assets, liabilities, equity, revenues and expenses

RECAP

- Accounting equation
- What it means
- What assets are
- How they are equal to liabilities
- Net income through accounting equation

- 5 major components of accounting

- Subcomponents to each
- Memorize rules and all components under each category

ADJUSTING ENTRIES / CLOSING ENTRIES

- Footnote on page 169 but WILL BE IN THE EXAM

Will discuss chapter 3 and 4 – adjusting and closing entries

What is accrual accounting?

- You become an entrepreneur and you hire people OR you start a job → two choices in a career
- Become an expert in some kind of field
- No matter what field, you deal with accounting numbers

- Accounting works with time → starting and ending point

- Deal with issues in between (biggest issue is matching all of your expenses)

Imagine you start today, and you need to pay for your rent for the next 5 years; even if you charge it to your business
today, your profits will be significantly reduced for the first year

Matching principle / rule: revenues and expenses are recorded in the periods in which they occur rather than in the
periods in which they are received or paid

● Matching your revenues with the expenses / profit you received in that time
Why is it important?

● If you don’t do it, you can end up in jail or pay significant fines

The adjustment process (adjusting entries)

- Keep in mind whenever you are doing any kinds of adjusting entries THERE IS NO CASH INVOLVED
- Do not touch the cash

- Two types of adjusting entries

- Deferral: something going to happen in the future
- Accrual: something happened in the past and now you are recording it

- 4 types of adjusting entry under these two primary categories

Basic technique

- In every adjusting entry, you are being asked to adjust either rent paid in advance, utilities paid in advance,
wages have not been paid yet, services performed but customers have not been billed
- In all of these, it seems cash must be used BUT DON'T

Four types of adjusting entries:

- Income and balance sheet accounts

- On an income statement:
- Revenues
- Expenses

1. Expenses and assets: adjust expenses with assets

a. Expenses must be recorded
b. Accrual: something was paid/done and is now recorded
2. Expenses interact with liabilities
a. On one hand, assets and liabilities on the other expenses and revenues
b. Expenses have already occurred and now you are trying to record that expense
Lecture 3

● Covered all concepts in the mid term after this lecture

Need to know
- Income statement
- Discounts
- Inventory systems
- Transportation costs
- Receivable management
- Depreciation

50% of mid term → rules of debit and credit, adjusting and closing entries
Other 50% is mentioned above

Slide 4

- Four types of adjustments

- Quadrant table with 4 types of adjustments

Advice

- Read exercise twice before starting to attempt

- Don’t attempt until you understand what is being asked
- Read text carefully, understanding journal entries, trial balances, balance sheet, income statements etc.

Slide 7

- Multi Step income statement

- Most important → calculate net sales (always always have 2 credits)
- Then calculate gross profit → will have subcalculations about COGS

*for tutorial → about multistep income statement

- If asked to calculate net profit from multistep and you use single step, your answer will be right but you will
get 0 credits → if asked to follow a series of steps, follow those steps

Slide 8

A merchandising business buys and sells goods, called merchandise inventory

- Merchandising business → purchase from suppliers, keep in facility, sell it to the customer (don’t produce in
place where you are’
- You are not a producer, you are a trader
- The goods are the products they sell and they are called merchandising inventory
Slide 9

- When you start a business you have money, goes into purchasing product, once you purchase a product you
have merchandising inventory
- Can purchase and sell on cash → make profit
- You have to work in customers, customers don’t always pay you, you may not be able to pay
suppliers so you purchase and sell on credit
- All this must be covered by the accounting books
- Unless you record it you will forget it
- To not mess up the accounting record, you must record everything
- You have to record paid the case, cash goes down on credit, if you don’t pay the cash you create a liability
which will be on the credit and merchandising inventory which is an asset will be on debit
- You fill up whole storage place with inventory → some inventory you sell (once you scan in the counter, the
inventory decreases - eg. ikea

Slay - felix

- Question about operating cycle → this is the answer (buying on credit or cash and selling them to customers
and receiving money)
- Within operating cycle, can calculate many rations
- Eg. fixed asset turnover, return on assets, return on equity
- Logic is important

Slide 10

- Two types: sales and purchases discount

- When you make a sale or purchase, you get a discount → called sales discount
- Reduces revenue and cash
- Contra (opposite) accounts → eg. accumulated depreciation, purchase discount
- Goes opposite to a specific asset

- The time the cash comes from the customer is when you record it
- First thing you record is accounts receivable + revenue on the credit side
- Within 10 days (discount)
- Supposed to retire accounts receivable with 1000
- You only receive 98% of the amount
- The difference between accounts receivable and the amount of money in the cash i receive is
called sales discount
- Goes in that particular entry to balance out
- Debit = credit → if not true, you made a mistake

Slide 11
When you make a purchase in the merchandise inventory system, you can also receive some discount

- Whenever you receive a purchase discount, you reduce the amount you charge to your inventory
- Eg, you purchase something for 1000 and pay within 10 days so get a discount
- When first recording, you record initial balance because not sure i will pay enough
- *very important bc chapter 5 and 8 you may get confused
- When you receive purchase discount → reduce total amount of inventory costs

Slide 12

- Sales discount terms

- The conditions in any transaction will be described as 2/10, n/30

- Either pay within 10 days get 2% discount
- Or wait 30 days and pay the full amount
- Can get difficult with days
- Make purchase on 10th of november
- Condition if you pay within 10 days you get 2% discount
- In between 15 transactions
- 19 november, you make a payment of purchase you made → go back to description of transaction
and see if you are still able to get a discount
- If you can, you put into journal entries, if you don’t, journal entry will be wrong

Slide 13

- Transportation costs
- In merchandising, you purchase product then sell it
- You pay shipping costs

Fob shipping point

- Buyer pays shipping costs, called freight in

- Title of merchandise passes from seller to buyer at the point merchandise is shipped
- No entry for seller

Fob destination

- Seller pays shipping costs, called freight out

- Title of merchandise passes from seller to buyer when the merchandise reaches its destination
- No entry for buyer

Slide 14

Sales returns and allowances

 - Use separate contra-account called sales returns and allowances

- The sales returns and allowances account → everything you need to know ignore book
- Is a contra-sales account
- Carries a normal debit balance
- Is deducted from sales on the income statement

Entry
- Sales return and allowances to
- Account receivable or cash

Slide 15

- Two ways of costing your inventory:y is not correct at all times

- Periodic inventory system
- COGS calculated at the end of the accounting period → the balance of merchandise inventory
- Do not count the inventory

Whenever you make any sales in the perpetual system → you have to have 2 entries
One will be about sales and cash will be receivables
The other will be about COGS (COGS an expense → whenever it goes up, it goes on the debit side)

Inventory costing → slide 24

FIFO → products that came in first, you sell them first, you charge the inventory cost to whatever you have purchased
earlier

LIFO → latest purchase, you charge that price to all of your products

Four types of inventory costing

In your exam, there is a combination of periodic and perpetual and all four costing systems
Lecture 4

Dont fail the final lol bc the resit is rlly fucking hard

TODAY

- Notes payable
- Present value of money
- Bond amortization

In line with the matching rule: the circle of uncollectible accounts

Estimating uncollectible accounts

Writing off uncollectible accounts

- We had nothing about receivables so expect uncollectible receivable in the final

- We have to create an allowance and then create the number …

- Depreciation methods
- If we have straight line method then expect production method of double declining on the final

- Once you master the way of calculating these expenses then we calculate it

New knowledge

3 new terms

- There are tables at the end of the chapter we have to know how to use those values, multiple and then get
the value
- The concept is what's hard to understand
- If you have to receive smth in the future, what is the value of that thing today

Product warranty liability

- Eg phones, laptops → give a warranty guarantee
- You purchase technology things and they give you a warranty
- Within that warranty period, you can go back to them, and return the product, get a new one or get it fixed,
and that new one that the agency gives to you is called warranty expense
- They do not know in advance what that expense will be
 - You use an allowance (maintain for receivables) allowance for product warranty liability
- Based on your estimations and past knowledge, you will treat it as a liability
- Goes on credit side (increasing)

Notes payable
- Written promise from anyone who owes you money writes you a letter and promises to give that money back
to you with a certain amount of interest
- It is a current liability, maintain as short term liability
- Questions about it on final
- So be careful when solving questions about it in tutorial and practical

Long term liabilities

- Long term implications
- Riskiness
- More long term liabilities, more risky your company can get

Bond

- A bond is a secuiriotyu, usiua;ly long term, representing money that a corporation borrows form the investing
public
- As with other loans, the amount borrowed and interest have to be (re)paid at a specified rate at a specifie
times, so bonds are a type of liability

- Ways to collect money

- Get loan or bond
- These bonds are called corporate bonds issued by the company
- Provides an insurance to the people who are lending the money to the company that they will always
receive some profit in the form of interest (get a semiannual) they will get some money from the
company because i am going to use your money
- Called coupon or interest on the bond

Face value
- Written very visible for people who are going to invest their money into the bond
- Will be written on the face of the bond
- When you are calculating the depreciation of any asset you must take care of the book or total value
of the asset that the company has paid to purchase that asset

Bond amortization
- People put money in the bank and earn interest
● Imagine there is a company heavily investing in artificial intelligence, people will see the company as much
more secure because they see the company as investing in the future
○ A bond is a way in which a company can borrow from institutional investors, international investors,
and general public
○ Don't only issue bonds in the land they are operating but also outside of the land they are operating
○ Markets fluctuate →
Two different methods to issue the bond
- Issue bond on discount (bond price is lower than face value)
- Issue bond on premium (bond piece is higher than face value)

Arise because of certain flexibility and fluctuations in the interest rate

- If you put money in the bank, you cant have the samne interest rate forever because interest rates fluctuate

Amortization method which will be apart of our exam is only explained in the appendix of the chapter