Accounting Book

Vysokoškolská skripta
ESSENTIALS OF FINANCIAL
ACCOUNTING
FOR NON-SPECIALISTS
doc. Ing. Marcela Žárová, CSc.
Ing. Mariana Peprníčková, Ph.D.
Ing. Libor Vašek, Ph.D.
Ing. Petr Vácha
VYSOKÁ ŠKOLA EKONOMICKÁ V PRAZE
Fakulta financí a účetnictví
Essentials of Financial Accounting

for Non-Specialists
Marcela Žárová, Mariana Peprníčková, Libor Vašek, Petr Vácha
(working study material for students)
2021
Essentials of Financial Accounting for Non-Specialists Essentials of Financial Accounting for Non-Specialists
(working study material) (working study material)
Content
1 Introduction to Accounting .................................................................................................. 5

2 Journal and Ledger ............................................................................................................. 12
3 Primary Financial Statements............................................................................................. 21
4 Financial Statements – Income Statement ......................................................................... 29
5 Financial Statements –Statement of Financial Position / Balance Sheet ........................... 35
6 Trial Balance ...................................................................................................................... 44
7 Accruals and Prepayments ................................................................................................. 47
8 Non-Current Tangible and Intangible Assets ..................................................................... 50
9 Inventories .......................................................................................................................... 55
10 Receivables and Related Allowances (Bad Debt Expense) ............................................. 61
11 Liabilities and Provisions ................................................................................................. 66
12 Equity (Capital and Reserves) .......................................................................................... 71
13 Cash and Cash Flows Statement ...................................................................................... 74
© Vysoká škola ekonomická v Praze, Nakladatelství Oeconomica – Praha 2021

©2021
© Vysoká
KFUAškola ekonomická
, Marcela v Praze,
Žárová, Mariana Nakladatelství
Peprníčková, Oeconomica
Libor Vašek, Petr Vácha – Praha 2017
ISBN 978-80-245-2414-6
ISBN 978-80-245-2187-9
2 3
Roithmeier Martina - maroithmeier@gmail.com #10360
Essentials of Financial Accounting for Non-Specialists Essentials of Financial Accounting for Non-Specialists
(working study material) (working study material)
Content
1 Introduction to Accounting .................................................................................................. 5

2 Journal and Ledger ............................................................................................................. 12
3 Primary Financial Statements............................................................................................. 21
4 Financial Statements – Income Statement ......................................................................... 29
5 Financial Statements –Statement of Financial Position / Balance Sheet ........................... 35
6 Trial Balance ...................................................................................................................... 44
7 Accruals and Prepayments ................................................................................................. 47
8 Non-Current Tangible and Intangible Assets ..................................................................... 50
9 Inventories .......................................................................................................................... 55
10 Receivables and Related Allowances (Bad Debt Expense) ............................................. 61
11 Liabilities and Provisions ................................................................................................. 66
12 Equity (Capital and Reserves) .......................................................................................... 71
13 Cash and Cash Flows Statement ...................................................................................... 74
4 3
hmeier Martina - maroithmeier@gmail.com #10360
Essentials of Financial Accounting for Non-Specialists

(working study material)
1 Introduction to Accounting
Learning outcomes
 Explain the nature and purpose of accounting
 Define accounting
 Identify the main users of accounting and discuss their information needs
 Distinguish between accounting and bookkeeping
 Distinguish between management accounting and financial accounting
 Recognition of accounting equation
 Explain steps in the accounting cycle
 Explain main types of business transactions
 Compare different types of business entity
 Understand accounting regulation
Background from the lectures

Accounting is often called the „language of business“. Accounting is a service provided to
those who need financial information. The purpose of accounting is to provide economic
information that permits users of that information to make informed judgements and decisions.
Users of accounting information may be classified into major groups according to the similar
or same information needs within the group such as:
 owners of business,
 lenders of money [banks],
 suppliers of goods and services,
 managers of a business,
 customers of a business,
 employees,
 governments,
 the public,
 competitors.
Accounting consists of two elements

1. Recording => Transactions must be recorded as they occur in order to provide up-to-date
information for management.
2. Summarising => Transactions for a period are summarised in order to provide information
to interested parties.
The difference in information needs leads to division of accounting into:

 management accounting and
 financial accounting.
5

The whole of financial accounting is based on the accounting equation:

A = L+C
ASSETS = LIABILITIES + CAPITAL
WHERE THE MONEY WENT TO = WHERE THE MONEY CAME FROM
Steps in the accounting cycle

1. The analysis of transactions and business documents
2. Journalizing of transactions (recording the effects of transactions in journal)
Date Account title, Explanation PR Debit Credit
Debit entry XX
Credit entry XX
Explanation
3. Posting journal entries to accounts (to the ledger; summarizing the effects of transactions)
4. Determination of accounts balances and preparation of a trial balance
5. Adjusting entries
6. Closing the books
7. Post-closing trial balance
Dual concept and double entry bookkeeping

The duality concept means that each transaction will affect at least two ledger accounts:
 One account will be debited and the other credited.
 Whether an entry is to the debit or credit side of an account depends on the type of
account and the transaction.
Main types of business transactions:

No. Assets Equity and liabilities
1. + +
2. - -
3. +/- N/A
4. N/A +/-
Types of business structure

In broad terms, the type of structure can be divided into two categories:
 Unincorporated: sole trader (sole proprietorship), partnership.
 Incorporated: company (private or public) / corporation.
6

Accounting regulation
International accounting regulation:
 International financial reporting standards IFRS (IASB)
 US GAAP´s (FASB)
Regulatory framework of accounting in Europe:

 National company law
 EC regulations and EC directives (EU)
 Security exchange rules
Illustration: Items of Balance Sheet (Statement of Financial Position)

Assets Balance Sheet ……… As At …….. Equity and Liabilities
Non-current assets: Equity:
Intangible assets - shareholders’ capital (share capital)
- software - retained earnings (accumulated profits)
- patents, licences, trade marks - reserves/revaluation surplus
Tangible assets
- lands
- buildings
- plant and machinery
- fixtures, fittings and equipment
Investments Liabilities:
- shares in other companies
Non-current liabilities
- debt securities held for investment
- long term bank and other borrowings
- long-term loans provided
- issued bonds
Current assets: - provisions
Inventories Current liabilities
- raw materials and consumables - trade payables (accounts payable)
- work in progress - accrued expenses (such as employees)
- finished goods - current portion of long-term borrowings
- goods for resale - short-term bank borrowings and overdrafts
Receivables - advance payments received
- trade receivables (accounts receivable) - deferred revenue
- advance payments made - provisions
- prepaid expenses - other current liabilities
- short-term loans provided
Investments
- securities held for trading
- short-term financial investments
Cash and cash equivalents
- cash in hand and at bank
- cash equivalents
Total assets Total equity and liabilities
7

Exercises
1.1 Exercise
Task: Determine whether the item is asset, liability or equity. Consider also long-term (non-
current) or short-term (current) classification.
Liability Non-
Item Asset Current
/ Equity current
Receivable from customer
Production machine
Land used in the business
Long-term bank borrowing
Stock of computers for the purpose of
resale
Issued bonds
Acquired share in subsidiary
Payables to employees
Taxes payable
Profit from prior years (retained
earnings)
Purchased shares to be traded
Company’s cars used by employees
Cash in hand
Buildings used in the business
Computers in production process, still
incomplete
Issued shares
Payables to suppliers
Advances received from customers
Advances provided to suppliers
Overdraft
Gifts provided
Software for use in the business
Receivables to employees
Receivables to employees
Building held for trade
Purchased licence for production of
branded beverages
8

Liability / Non-
Item Asset Current
Equity current
Loss for the year
Land (long term deposit of money)
Accounts receivable
Trade debtors
Finished goods
Share capital
Current bank account
Shares held for trading
Cars held for sale
Short-term bank borrowing
Machinery used in the business
Accounts payable
Trade creditors
Long term deposit on bank account
1.2 Exercise
Task: Determine whether the item is asset, liability or equity. Consider also long-term
(non-current) or short-term (current) classification in case of assets and liabilities.
Item Asset or Item Asset or

Liability/Equity Liability/Equity
Material Cash in hand
Loan received Advances paid to
employees
Cash in bank Land
Machinery Goods for resale
Obligations to suppliers Equity securities for
trading
Software Issued bonds
Building Work-in-progress
Profit realized in selling Knowledge and skills of
transaction employees
Licences to produce Franchises to operate
and sell certain Starbucks business
products
Debt securities acquired Bank borrowings
9

Item Asset or Item Asset or

Liability/Equity Liability/Equity
Stockholders’ capital Plant
1.3 Exercise
Task: Prepare the Balance sheet for Mr. White as at 1st January 20X1.
Mr. White, a sole trader, has following items of assets and liabilities as at 1st January 20X1:
Inventory of raw material - iron sheets CZK 100 000, finished goods CZK 200 000, Mr. Whites’
contribution into the business was CZK 800 000, accounts payable CZK 50 000, accounts
receivable CZK 80 000, building (where the enterprise is situated) CZK 700 000, other raw
material CZK 50 000, current bank account CZK 120 000, long term bank borrowing CZK
400 000 (CZK 100 000 is due within one year).
1.4 Exercise
Task: Test your understanding of accounting equation. Prepare the Statement of financial
position at the end of each day.
Day 1: Mr Lampard started his own business through contribution of CZK 50 000 into the
business.
Day 2: He buys a small warehouse for CZK 40 000.
Day 3: He buys 3 luxury riding lawn mowers for sale for total of CZK 9 000 cash.
Day 4: Luckily enough, he managed to sell all those 3 mowers for total of CZK 11 000 cash
and realized he need more cash for building up the stock.
Day 5: Mr Lampard obtains a loan from the bank in the amount of CZK 20 000 and the money
is deposited to the bank account.
Day 6: Buys more riding lawn mowers for CZK 21 000 on 14-day credit.
1.5 Exercise
Task: Use additions and subtractions to show the transactions’ effects on the elements of the
equation. Show new totals after each transaction.
Mrs Williams enters into the following transactions as a part of her business during January (in
CZK):
January 3: Buys car for 10 000 on credit.
January 4: Contributes 5 000 to bank account.
January 5: Purchases inventory for 4 000 in cash.
January 11: Provides advance to one her employees in the amount of 1 000.
January 12: Sells inventory acquired on Jan 5 for 7 000 on credit.
January 15: Pays the price of car (acquired on Jan 3) from bank account.
January 18: Receives advance from customer in the amount of 3 000.
January 21: Receives 5 000 on bank account from one of her customers (related to Jan 12).
10

January 25: Receives a short-term bank loan in the amount of 10 000.

January 29: Takes 1 000 from business to her personal expenses.
1.6 Exercise
Task: Prepare the Statement of financial position (balance sheet) at the reporting date.
Travel agency World Ltd. has run its business for several years and at the end of the current
period (at 31 December 20X1) the company presents following items of assets, liabilities and
equity (in CZK):
 Administrative building 3 815 (accumulated depreciation 500)
 Garage 5 600 (accumulated depreciation 600)
 5 buses 25 000 (accumulated depreciation 15 000)
 2 cars 1 600 (accumulated depreciation 100)
 Common capital 2 000
 Material 150
 Retained earnings (profits accumulated from the prior years) 8 190
 Trade payables to suppliers 95
 Software 520 (accumulated amortization 100)
 Long-term bank borrowings 7 500
 Hardware equipment 600 (accumulated depreciation 100)
 Short-term bank borrowings 5 815
 Interest accrued and unpaid 60
 Office equipment 300 (accumulated depreciation 50)
 Cash 920
 Prepayments to suppliers 45
 Bank account 3 700
 Prepayments from customers 50
 Accounts receivable 250
 Profit for the current year 2 200
 Payables to employees regarding wages and salaries 140
11

2 Journal and Ledger
Learning outcomes
 Understand the process of transforming transaction data into useful accounting
information
 Analyse transactions and determine how those transactions affect the accounting
equation
 Identify the sources of information for the preparation of accounting records and
financial statements
 Explain the need for book of original entry
 Describe the process of recording transactions in a book of original entry
 Identify how to post transactions to ledger
 Identify the effect of debit and credit entries in ledger accounting for the elements of
financial statements
 Specify the double entry needed to record particular transactions

Journal is a book of original entry. A specific format is used in journalizing (recording)
transactions in a general journal. The debit entry is listed at first and the credit entry is listed
subsequently and is intended to the right position. The date and a brief explanation of the
transaction are considered essential parts of the journal entry. Explanation should accompany
each journal entry. It is required for audit and control, to indicate the purpose and authority of
every transaction.
Double entry bookkeeping is the method used to transfer totals from the books of original
entry into ledger. Posting is the process of transferring amounts from the journal to the ledger.
Ledger is a book of accounts in which data from transactions recorded in journals are posted
and thereby classified and summarized.
Ledger accounts for each type of transaction can take the form a T account, the left hand side
is the debit side, and the right hand side is the credit side. Ledger accounts summarise all the
individual transactions listed in the book(s) of original entry.
12

Exercises
2.1 Exercise
Task I: Journalize all transactions for September and October and do not forget to add relevant
explanation!
Task II: Set up T-accounts and post each of journal entries made in task I.
Three stockholders organized a stock company called Greenhill real estate. A charter was
obtained from state authorizing the new corporation to issue 18 000 shares of capital stock with
a par value of $ 10 a share. Company offers for sale obtained houses and commercial property.
At the time of sale a commission equal to 6 % of the sales price of the property.
September
1. The new business was begun on September 1 with the deposit of $ 180,000 in a bank
account in the name of the business.
2. Greenhill purchased the land suitable as a site for an office. The price for the land was
$ 141,000, and payment was made in cash on September 3.
3. On September 5 Greenhill bought a complete office building in the price of $ 36,000. A
new building would have cost approximately $ 60,000 to build. The terms provided for an
immediate cash payment of $ 15,000 and payment of balance of $ 21,000 within 90 days.
4. On September 10 Grenhill sold a small area of the lot to Carter's drugstore for a price of
$ 11,000. The selling price was the same per square m as the company had paid. It was
agreed that full price would be paid within three months.
5. A complete set of office furniture and equipment was purchased on credit on September
14 for $ 5,400.
6. On September 20, cash in the amount of $ 1,500 was received as a partial settlement of the
debt from Carter's drugstore.
7. On September 30 Greenhill paid $ 3,000 in cash for office furniture.
October
1. October 1 paid $ 360 for publication of newspaper advertising describing various houses
offered for sale.
2. October 6 earned and collected a commission of $ 2 250 by selling a residence previously
listed by a client.
3. October 16 newspaper advertising for October was ordered and invoiced at a price of $ 270,
payment to be made within 30 days.
4. October 20 a commission of $ 8 390 was earned by selling a client's residence. The sales
agreement provided that the commission would be paid in 60 days.
5. October 30 paid salaries of $ 7 100 to employees for services rendered during October.
6. October 30 a telephone bill for October amounting to $ 144 was received. Payment was
required by November 10.
7. October 30 a dividend was declared and paid to the owners of the 18 000 shares of capital
stock. The amount of the dividend was 10 cents per share, total $ 1 800.
13

2.2 Exercise
Task I: Test your understanding of ledger accounts and book the following transactions using
appropriate ledger accounts.
Mrs. Williams enters into the following transactions as a part of her business during January (in
CZK):
January 3: Buys car for 10 000 on credit.
January 4: Contributes 5 000 to bank account.
January 5: Purchases inventory for 4 000 in cash.
January 11: Provides advance to one her employees in the amount of 1 000.
January 12: Sells inventory acquired on Jan 5 for 7 000 on credit.
January 15: Pays the price of car (acquired on Jan 3) from bank account.
January 18: Receives advance from customer in the amount of 3 000.
January 21: Receives 5 000 on bank account from one of her customers (related to Jan 12).
January 25: Receives a short-term bank loan in the amount of 10 000.
January 29: Takes 1 000 from business to her personal expenses.
Task II: Test your understanding of journal and show transactions listed above as
chronologically journal entries.
14
2.3 Exercise
Task I: Based on information provided and using the table below, prepare the opening balance sheet as at January 1st 20X1 (the first column) and recognise
all changes of balance sheet items resulting from the following transactions which happened during January 20X1 (all amounts in ths EUR).
The following have been taken from the records of the company Williams & Son, Ltd. as at January 1st 20X1 (in ths EUR): material 50, suppliers 200, cash
100, retained earnings 300, goods for resale 120, building 2 000, contributed capital 2 850, bank account 500, receivables from customers 80, software 500.
Jan 1st Purchase of goods for resale on 14 days credit (EUR 50). Jan 10th Purchase of car on short-term loan (EUR 300).
Jan 3rd Cash contribution made by owner (EUR 150). Jan 15th Advance received on bank account for delivery of goods (EUR 50).
Jan 5th Payment to suppliers made from bank account (EUR 100). Jan 20th Payment of receivable from customer received on bank account (EUR 80).
BS 1st Transactions BS 31st Equity BS 1st Transactions BS 31st
Assets Jan 1st 3rd 5th 10th 15th 20th Jan and Jan 1st 3rd 5th 10th 15th 20th Jan
20X1 Jan Jan Jan Jan Jan Jan 20X1 liabilities 20X1 Jan Jan Jan Jan Jan Jan 20X1
Total Total
Task II: After filling the columns, post the transactions on ledger accounts.
15

2.4 Exercise
Bananas Ltd. imports bananas into the Czech Republic and sells them to retail stores. At 1/1/20X1 company presents following items (in ths CZK):
 Goods for resale – bananas Latin America 500  Transit car 850 (not depreciated yet)
 Goods for resale – bananas Africa 400  Claims to receive money from customers - TESCO 540
 Bank account – First bank 900  Claims to receive money from – Marks & Spencer 390
 Bank account – Star bank 400  Salaries and wages not paid yet 350
 Cash 100  Taxes not paid yet to tax authority 20
 Office equipment 250  Prepayments to suppliers 400
 Payables to suppliers – bananas 430  Health insurance payables 10
 Payables to suppliers – energy consumed 55  3y issued bonds 600 (200 is due within 1y)
 4y bank borrowing 1 000 (250 is due within 1y)  Common shares 1 000
 Short-term operating borrowings 200  Retained earnings ??? (must be calculated)
 Machinery 450
During the first quarter of the reporting period (from 1/1/20X1 to 31/3/20X1), the following transactions and events occurred (all amounts in ths. CZK):
1. Jan 1st Settlement of unpaid salaries and wages ................................. ??? 5. Feb 14th Marks & Spencer settles its debt on bank account .............. ???
2. Jan 12th Receipt of cash from TESCO on bank account ................... 300 6. Feb 28th Settlement of all taxes including health insurance
3. Jan 25th Receipt of prepayments from new customer on bank obligations .......................................................................................... ???
account ................................................................................................ 100 7. Mar 5th Purchase of goods to resale in cash ......................................100
4. Feb 3rd Repayment of bank borrowing 8. Mar 10th Short-term loan provided to employee from bank
(300 is due within the next year) ........................................................ 250 account .................................................................................................200
16

Task: Using the following table, prepare opening balance sheet at 1/1/20X1, recognise all transactions and events during the period and prepare
closing balance sheet at 31/3/20X1.
Assets Equity and liabilities
Transactions Transactions
Item Opening Closing Item Opening Closing
1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8
17


2.5 Exercise
Task I: Show the influence of individual economic transactions on the basic accounting
equation (all changes of the equation within one table).
Task II: Journalize all transactions and do not forget to add relevant explanation.
Task III: Set up T-accounts and post each of journal entries made in Task I.
1. Friends Company is created when the owners pool $ 5 000 into the business.
2. Next, assume that Friends Company acquires additional $ 2 000 of assets by borrowing
cash from creditors.
3. Assume that Friends Company received $ 3 000 cash for services it provided to customers.
4. Assume Friends Company used $ 1 000 in assets to earn $ 3 000 in revenues.
5. Assume Friends Company transfers $ 500 of assets to its owners.
2.6 Exercise
Task: Prepare the opening statement of financial position (at 1 January 20X1) and subsequently
recognise all transaction and events occurred during accounting period using journal and
ledger accounts.
Mr. Greenwood has got a gift shop in his native village. At the beginning of 20X1 (as at January
1st 20X1) the following have been taken from the records of the company Gifts for you, Ltd.
(in ths. CZK):
Goods for resale (gifts) 1 500, Building 500, accumulated depreciation of building 100, material
(packaging material for gifts) 200, common stock 1 200, retained earnings 400, trade
receivables 100, trade payables to suppliers of goods 300, payables to employees 100, cash at
bank 600, cash in hand 200, 15% long term bank borrowing 1 000 (200 of 1 000 is due within
one year).
During the period 20X1 the following transactions occurred:
1. It was paid to suppliers from bank account CZK 200.
2. Purchase of material for cash in hand CZK 50.
3. Sale of goods for cash in hand in amount CZK 1200.
4. Purchase price of goods sold was CZK 600.
5. Customers paid on bank account CZK 50.
6. Purchase of new gifts on 14 day credit CZK 300.
7. Another sale of goods for cash in hand in amount 800. Purchase price of goods sold in
amount CZK 300.
8. Consumption of packaging material CZK 30.
9. Depreciation of buildings for the year CZK 50.
10. Salaries to employees paid from bank account CZK 100.
11. Salaries and wages of employees in amount CZK 200 not paid within the end of year.
12. Cleaning of shop paid for cash in hand CZK 10.
13. Invoice of electricity consumption for the year CZK 20.
14. Repayment of bank borrowing from bank account CZK 200 (CZK 200 of remaining
outstanding balance is due within next year).
18

15. Payment of interest of bank borrowing CZK 150 from bank account.
16. Transfer of cash in hand to bank account in amount CZK 1 500.
2.7 Exercise
Task: Prepare the opening statement of financial position (at 1 January 20X1) and subsequently
recognise all transaction and events occurred during accounting period using journal and
ledger accounts.
Trade company Coffee Lovers Ltd. purchases and sells coffee machines in the Czech Republic
and presents following items of assets, liabilities and equity as at 1 January 20X1 (in ths. CZK):
Goods for resale 2 000, cash on hand 50, bank account 500, short-term borrowings 100,
machinery and equipment 800, related accumulated depreciation 300, common capital 1 200,
long-term borrowing 470, employees (unpaid salaries and wages) 150, material 120,
receivables from customers 100, suppliers 350 (unpaid purchases), retained earnings 1 000.
During 20X1, the following transactions and events occurred (in ths. CZK):
1. Payables to suppliers settled 250 via bank account.
2. Annual rent 80 of shop facilities paid via bank account.
3. Purchase of equipment using in a shop in exchange of cash 50.
4. Sale of goods (coffee machines) for 2 100, in cash.
5. Costs (purchase price including related direct costs) of goods sold 1 700.
6. Receipt of cash from customers on bank account 100.
7. Installation fee invoiced to customer 20, not paid till the end of the year.
8. Purchase of goods, invoiced amount 900.
9. Sale of goods, invoiced amount 560, costs of goods sold 380.
10. Redemption of short-term borrowing 100.
11. Transfer of cash on bank account.
12. Salaries recognised to employees for work 50.
13. Annual depreciation expense of machinery and equipment 80.
14. Dividends paid to owners 300 from bank account.
2.8 Exercise
Task: Prepare the opening statement of financial position (at 1 October 20X1) and subsequently
recognise all transaction and events occurred in October using journal and ledger accounts.
Window seller Ltd. presents following items of assets, liabilities and equity as at 30 September
20X1 (in ths CZK):
Goods for resale 2 000, cash 50, short-term borrowings 700, machinery and equipment 800,
related accumulated depreciation 300, common capital 200, long-term borrowing 870,
employees (unpaid salaries and wages) 150, material 120, receivables from customers 100,
suppliers 350, bank account 50, retained earnings 1 000.
During October 20X1, the following transaction and events occurred:
1. Payables to suppliers settled 250.
2. Purchase of small equipment in exchange of cash 30.
3. Sale of goods for 2 100, in cash.
19

4. Cost (purchase price including related direct costs) of goods sold 1 500.
5. Receipt of cash from customers on account 100.
6. Sale of goods, invoiced amount 550, cost of goods sold 350.
9. Monthly rent of shop facilities paid in one month later, 80.
11. Salaries recognised to employees for work done in October 30.
20

3 Primary Financial Statements
Learning outcomes
 Understand the basic elements and formats of the primary financial statements
 Recognise the main elements of financial statements: statement of financial position and
income statement
 Explain the purpose of each of the main statements
 Draft a simple statement of financial position (balance sheet)
 Draft a simple income statement
 Prepare and present statement of changes in owners´ equity

Primary financial statements: The statement of financial position (balance sheet), income
statement and statement of cash flows, used by external groups to asses a company´s economic
standing.
Statement of financial position (Balance sheet): The financial statement that reports a
company´s assets, liabilities and owners´ equity at a particular date.
Income statement (Profit or loss statement / Statement of operations): The financial
statement that reports the amount of net income earned by a company during a period.
Statement of cash flows (Cash flow statement): The financial statement that reports the
amount of cash collected and paid out by a company during a period of time (this statement is
also discussed in separate (last) chapter).
Preparation of financial statements is not the first in the accounting process, but it is convenient
to begin study of accounting as financial statements convey to management and to interested
outside users of financial information to concise picture of the profitability and financial
position of the business. Since these financial statements are in a sense the output of the
accounting process, everybody who acquires a clear understanding of the content and meaning
of financial statements will be in good position to appreciate the purpose of the earlier steps of
recording and classifying business transactions.
21

Illustration: Financial Statements

Income Statement
Smith brothers Company
Income Statement
For the year ended December 31, 20X1
Revenue
Sales $ 17,324
Total revenues $ 17,324
Expenses
Depreciation expense $ 12,495
Salaries expense 3,883
Interest expense 179
Income tax expense 307
Total expenses $ 16,864
Net income $ 460
Earnings per share $ 1.93
Net income – dividends (preferred)
EPS (Earnings per share) = Number of average common shares outstanding
Expenses: Expenses are the cost of goods and services used up in the process of obtaining
revenue. Expenses are often called the „cost of doing business“ that is, the cost of various
activities necessary to carry on a business.
Revenues: Revenue is the price of goods sold and services rendered during a given period
Net income: Net income is the term accountant use for the increase in owner’s equity resulting
from profitable operation of the business. Net income is the excess of the price of goods sold
and services rendered over the cost of goods and services used up during a given time period.
Uses of the income statement:

 Provides information on how effective the business has been in generating wealth
 Provides information on how the profit was made
Income (Profit (or loss) for the period):

Total revenues for the period less total expenses incurred in generating that revenue.
Statement of Owners‘ Equity
TIGER WOODS INC.
Statement of Owners‘ Equity
For the year ended December 31, 20X1
Owners‘ equity at January 1, 20X1 $ 1,050
Add: Net income for the year 360
Less: Dividends 120
Owners‘ equity at December 31, 20X1 $ 1,290
Cash flow statement
22

The statement of cash flow describes how the amount of cash changed between the beginning
and ending balance sheets. Standard layout of the cash flow statement includes three categories
of cash flows as follows:
Cash flow statement for the year ended 31 December 20X1
1. Cash flow from operating activities plus or minus
2. Cash flow from investing activities plus or minus
3. Cash flow from financing activities equals
4. Net increase (or decrease) in cash and cash equivalents over the period
Balance sheet / Statement of Financial Position

Canfield corporation, Inc.
Balance Sheet / Statement of Financial Position
As at December 31, 20X1
ASSETS
Current assets
Cash $ 80
Accounts receivable 161
Notes receivable 131
Inventories 1,283
Total current assets $ 1,655
Property
Land $ 483
Buildings 1,287
Total property $ 1,770
Intangible assets
Trademarks 100
Total assets $ 3,525
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 1,153
Other liabilities 100
Total current liabilities $ 1,253
Long term debt
Debentures, due January 1, 2017 $ 500
Total liabilities $ 1,753
Stockholders’ equity
Common stock $ 1,772
Total stockholders’ equity $ 1,772
Total liabilities and stockholders’ equity $ 3,525
Uses of the balance sheet:
23

 It shows how the business is financed and how these funds are deployed.
 It can provide a basis for assessing the value of the business.
 Relationships between assets and claims can be assessed.
 Performance can be better assessed.
24

Exercises
3.1 Exercise
Task I: Prepare the balance sheet at the beginning of period (as at 1 Jan 20X1).
Task II: Recognise all changes of balance sheet items related to transactions occurred during
the year 20X1 using journal or ledger accounts.
Task III: Prepare the income statement for the period ended at 31 Dec 20X1 and the balance
sheet at the end of period (as at 31 Dec 20X1).
Task IV: How much is the profit or loss for the year 20X1? How much are total assets, total
equity and liabilities as at 31 Dec 20X1?
Mr. Greenwood has got a gift shop in his native village. At the beginning of 20X1 (as at January
1st 20X1) the following have been taken from the records of the company Gifts for you, Ltd.
(in CZK):
Goods for resale (gifts) 1 500, Building 500, accumulated depreciation of building 100, material
(packaging material for gifts) 200, common stock 1 200, retained earnings 400, trade
receivables 100, trade payables to suppliers of goods 300, payables to employees 100, cash at
bank 600, cash in hand 200, 15% long term bank borrowing 1 000 (200 is due within one year).
During the year 20X1 the following transactions occurred:
1. It was paid to suppliers from bank account CZK 200.
2. Purchase of material for cash in hand CZK 50.
3. Sale of goods for cash in hand in amount CZK 1200.
4. Purchase price of goods sold was CZK 600.
5. Customers paid on bank account CZK 50.
6. Purchase of new gifts on 14 day credit CZK 300.
7. Another sale of goods for cash in hand in amount 800, purchase price of goods sold in
amount CZK 300.
8. Consumption of packaging material CZK 30.
9. Depreciation of buildings for the year CZK 50.
10. Salaries to employees paid from bank account CZK 100.
11. Salaries and wages of employees in amount CZK 200, not paid within the end of year.
12. Cleaning of shop paid for cash in hand CZK 10.
13. Invoice of electricity consumption for the year CZK 20.
14. Repayment of bank borrowing from bank account CZK 200 (CZK 200 of remaining
outstanding balance is due within next year).
15. Payment of interest of bank borrowing CZK 150 from bank account.
16. Transfer of cash in hand to bank account in amount CZK 1 500.
25

3.2 Exercise
Task I: Prepare the opening balance sheet of the company as at 1 Jan 20X1.
Task II: Recognise all transactions and events occurred in 20X1 using journal or ledger
accounts.
Task III: Prepare (i) the income statement for the year ended 31 Dec 20X1, (ii) statement of
retained earnings (or statement of changes in equity) for the year ended 31 Dec 20X1, and (iii)
the closing balance sheet as at 31 Dec 20X1.
Task IV: How much is the profit or loss for the year 20X1? How much are total assets, total
equity and liabilities as at 31 Dec 20X1?
Trade company Coffee Lovers Ltd. purchases and sells coffee machines in the Czech Republic
and presents following items of assets, liabilities and equity as at 1 Jan 20X1 (in ths CZK):
Goods for resale 2 000, cash on hand 50, bank account 500, short-term borrowings 100,
machinery and equipment 800, related accumulated depreciation 300, common capital 1 200,
long-term borrowing 470, employees (unpaid salaries and wages) 150, material 120,
receivables from customers 100, suppliers 350 (unpaid purchases), retained earnings 1 000.
During 20X1, the following transactions and events occurred (in the CZK):
1. Payables to suppliers settled 250 via bank account.
2. Annual rent 80 of shop facilities paid via bank account.
3. Purchase of equipment using in a shop in exchange of cash 50.
4. Sale of goods (coffee machines) for 2 100, in cash.
5. Costs (purchase price including related direct costs) of goods sold 1 700.
6. Receipt of cash from customers on bank account 100.
7. Installation fee invoiced to customer 20, not paid till the end of the year.
12. Salaries recognised to employees for work 50.
13. Annual depreciation expense of machinery and equipment 80.
14. Dividends paid to owners 300 from bank account.
3.3 Exercise
Task I: Prepare opening balance sheet of the company as at 30 September 20X1, recognise all
transaction and events occurred in October and prepare closing balance sheet at 31 October
20X1
Window seller Ltd. presents following items of assets, liabilities and equity as at 30 September
20X1 (in CZK):
Goods for resale 2 000, cash 50, short-term borrowings 700, machinery and equipment 800,
related accumulated depreciation 300, common capital 200, long-term borrowing 870,
employees (unpaid salaries and wages) 150, material 120, receivables from customers 100,
suppliers 350, bank account 50, retained earnings 1 000.
26

During October 20X1, the following transaction and events occurred (in CZK):
1. Payables to suppliers settled 250.
2. Purchase of small equipment in exchange of cash 30.
3. Sale of goods for 2 100, in cash.
4. Cost (purchase price including related direct costs) of goods sold 1 500.
5. Receipt of cash from customers on account 100.
9. Monthly rent of shop facilities, paid in one month later, 80.
10. Transfer of cash on bank account (current balance of cash).
11. Salaries recognised to employees for work done in October 30.
3.4 Exercise
Task: The following have been taken from the records of Match, Ltd. On the basis of information
provided, prepare the balance sheet and income statement (profit and loss account) as of
31 December 20X1 and for the year then ended.
 Share capital: 400,000 ordinary shares of EUR 1 per share

 Share premium: EUR 40,000
 Accounts receivable: EUR 350,000
 Accounts payable: EUR 250,000
 Retained earnings (profits from prior years): EUR 100,000
 Cash: EUR 120,000
 Production machines: EUR 320,000
 Buildings: EUR 180,000
 Land: EUR 160,000
 8% debenture loan: EUR 500,000
 Inventory: EUR 410,000
 Accumulated depreciation: Production machines – EUR 20,000. Buildings – EUR 10,000
 Bad debt allowances: EUR 20,000
 Sales: EUR 1,250,000
 Selling expenses: EUR 100,000
 Administration expenses: EUR 220,000
 Interest expense from debenture loan: EUR 40,000
 Cost of sales: EUR 690,000
 Income tax expense: EUR 40,000
 Income taxes payable: EUR 30,000
 Interest income: EUR 10,000
27

3.5 Exercise
Task: The following have been taken from the records of Game, Ltd. On the basis of information
provided, prepare the balance sheet and income statement (profit and loss account) as of 31
December 20X1. Classify the items within the balance sheet on the basis of liquidity.
Additionally, provide comments on financial position of Game, Ltd and on its performance.
 Share capital: 150,000 ordinary shares of EUR 2
 Advances received from customers: EUR 30,000
 Retained earnings (profits from prior years): to be calculated
 Software: EUR 30,000
 Cash: EUR 10,000
 Shares in Set, Ltd. (100% share, long-term holding): EUR 50,000
 Machinery & Equipment: EUR 220,000
 Land: EUR 440,000
 Bank loan: EUR 500,000 (out of which EUR 100,000 payable in 2013)
 Accumulated depreciation: Machinery & Equipment EUR 100,000, Buildings EUR
100,000 Software just acquired at the end of 20X1, not depreciated in the year 20X1.
 Sales: EUR 1,500,000
 Depreciation of tangible assets: EUR 30,000
 Wages to employees: EUR 180,000
 Advertising expense: EUR 10,000
 Services expense: EUR 200,000
 Interest expense on bank loan: EUR 30,000
 Tax expense: EUR 10,000
 Taxes payable: EUR 10,000
 Dividend income: EUR 50,000
 Salaries payable: EUR 20,000
3.6 Exercise
Task: From following data prepare income statement, statement of changes in equity and the
balance sheet.
1. Friends Company is created when the owners pool $5,000 into the business.
2. Friends Company acquires additional $2,000 of assets by borrowing cash from creditors.
3. Assume that Friends Company received $3,000 cash for services it provided to customers.
4. Assume Friends Company used $1,000 in assets to earn $3,000 in revenues.
5. Assume Friends Company transfers $500 of assets to its owners.
28

4 Financial Statements – Income Statement
Learning outcomes
 Discuss the nature and purpose of the income statement
 Understand the basic elements and formats of income statement
 Prepare an income statement from relevant financial information
 Discuss the main measurement issues that must be considered when preparing the
income statement
 Understand types of business activities
 Use revenue recognition criteria to decide when the revenue from a sale or service
should be recorded in the accounting records
Basic Equation: Assets = Liabilities + Owner’s Equity

Expanded Equation: Assets = Liabilities + Owner’s Capital − Owner’s Drawings
+Revenues − Expenses
Profit (or loss) for the period is total revenue for the period less total expenses incurred in
generating that revenue
Revenue, Gains, Expenses, Losses

Income encompasses both revenues and gains.
Revenues
 represent an inflow of assets (or decrease in liabilities) arising from trading operations.
 is described as arising in the course of the ordinary activities of an enterprise and
includes sales, fees, interest, royalties, rent.
Gains
 may or may not arise in the course of ordinary activities,
 may arise on disposal of long-term assets,
 include unrealized gains (e.g. those arising on the revaluation of marketable securities,
from increases in the carrying amount of long-term assets).
Expenses encompass both expenses and losses.
Expenses
 result in an outflow of assets (or increase in liabilities) arising from trading operations.
 is described as arising in the course of the ordinary activities of an enterprise and
includes costs of sales, wages, depreciation.
 are the costs incurred in running a business.
Losses
 may or may not arise in the course of ordinary activities,
29

 may arise on disposal of long-term assets,

 include unrealized losses (e.g. those arising from the effects of increases in the rate of
exchange of foreign currency in respect of the borrowings of an enterprise in that
currency).
Profit measurement and the recognition of revenue

Basic criteria that must be met before revenue is recognised:
 The amount of revenue can be measured reliably.
 It is probable that the economic benefits will be received.
Additional criterion is to be applied where the revenue comes from the sale of goods:
 Control of the item should pass to the buyer.
Uses of the income statement

 Provides information on how effective the business has been in generating wealth.
 Provides information on how the profit was made.
Format of income statement

Income statement for the year ended 31 December 20X1
Sales XX
Cost of sale (XX)
Gross profit XX
Other revenues/other income XX
Administration expenses (XX)
Distribution costs (XX)
Financing expenses (XX)
Profit before taxation XX
Tax (XX)
Net income (profit) XX
Overview General Examples

Sales Income earned from selling Sales
goods (may be reduced by
sales returns, i.e. goods
returned by costumers)
Cost of Sales The items directly incurred in = Opening stock + Purchases (may be
selling goods reduced by purchases returns, i.e., goods
returned to supplier) – Closing stock
Gross Profit Sales less cost of sales Measures gain of organisation from
buying and selling
Other Income Non-trading income which a 1. Income from Investments
firm has earned 2. Income from sale of fixed assets
Expenses Items indirectly incurred in 1. Light and heat
selling the goods 2. Employees’ pay
Net Profit Sales less cost of sales less Measures gain of organisation from all
expenses business activities
30

Income statement can be prepared using classification of expenses by function or nature as

follows:
I. Presentation using expenses classified by function of expense
1. Revenue
2. Cost of sales
3. Gross profit or loss
4. Other income
5. Distribution costs
6. Administration expenses
7. Other expenses
8. Operating profit
9. Finance costs
10. Profit before tax
11. Tax on profit (taxation)
12. Profit for the period
II. Presentation using expenses classified by nature of expense

1. Revenue
2. Other income
3. Change in inventories of finished goods and work-in-progress
4. Raw materials used
5. Employee benefit costs
I. Wages and salaries
II. Social security cost
III. Other pension cost
6. Depreciation and amortization
7. Other expenses
8. Operating profit
9. Finance costs
10. Profit before tax
11. Tax on profit (taxation)
12. Profit for the period
31

Exercises
4.1 Exercise
Task: The following have been taken from the records of Leverage, Ltd. on the basis of
information provided, prepare the income statement for the year ended 31 December 20X1 (all
amount in EUR). Prepare the income statements both presenting expenses by nature and by
function.
 Opening inventory as of 1 January 20X1: 3,000
 Purchases of inventory during 20X1: 28,000
 Closing inventory as of 31 December 20X1: 4,000
 Services: 8,000
 Wages and salaries: 7,000
 Depreciation: 4,000
 Energy costs: 5,000
 Raw material and consumables used: 10,000
 Administration expense: 4,000
 Distribution expense: 3,000
 Interest expense: 2,000
 Tax expense: 2,000
 Revenues: 40,000
No closing, no opening balance of production inventory.
4.2 Exercise
Task: Prepare the balance sheet as at 1 January 20X1 and post the transactions on ledger
accounts while considering both of the presentation using expenses by nature and by function.
Prepare also the income statements both presenting expenses by nature and by function.
The company Auto Repairers, Ltd. provides repair services of cars and presents following items
of assets, liabilities and equity as at 1 January 20X1 (in ths CZK): Building 2000, related
accumulated depreciation 400, material 130, van (specially modified to be used as mobile
workshop) 2500, related accumulated depreciation 600, computer 50, related accumulated
depreciation 30, bank account 200, cash in hand 50, payables to employees 25, long term
borrowing 3000, payables to suppliers 65, common capital 800, retained earnings 10.
During the period 20X1 the following transactions and events occurred (in ths CZK):
1. Consumption of material for repairs 25.
2. Recognition of employee salaries for the period – employees carrying out repairs 32, wage
of accountant 15.
3. Tax withhold to employees’ wages 10 that will be paid to government by company.
4. All salaries to employees paid via bank account.
5. The invoice was received for advertisement carried out in news papers 5.
6. The invoice was received for consumption of electricity 20 (the electricity was consumed
mostly by the workshop, the electricity consumption by the office was negligible).
7. Payables to suppliers settled via bank account 65.
32

8. Depreciation of van 10, depreciation of building (where the workshop is situated) 5,

depreciation of computer (used mostly for accounting purposes) 3.
9. Completion of a car repair, a car was handed over customer and the invoice for repair was
sent 150.
4.3 Exercise
Task: Prepare the balance sheet as at 1 December 20X1 and post the transactions on ledger
accounts while considering both of the presentation using expenses by nature and by function.
Prepare also the income statements both presenting expenses by nature and by function.
The manufacturing company Set, Ltd. starts its business and going to produce one type of
product. The following items of assets, liabilities and equity are presented as at 1 December
20X1 (in ths CZK): Non-current assets 3000, common capital 4355, long term bank borrowing
200, bank account 1000, material 555.
Till the end of the month the following transactions occurred (in ths CZK):
1. Raw material used in production 250.
2. Raw material used in production 230.
3. Salaries recognised to workers working in production 300.
4. Depreciation of non-current assets used in production 55.
5. Electricity invoice received for consumption of electricity in production 80.
6. Finished goods transmitted to stock (do estimate finished goods in production costs actually
used for, it has been produced 100 pcs finished goods).
7. Invoice sent to customer – it has been sold 40 pcs of finished goods, purchase price 10
CZK apiece.
4.4 Exercise
Task I: Prepare income statement for 20X1 using classification of expenses by (i) nature and
(ii) function
Task II: How much is the gross profit from sale of goods (finished products) and in which type
of income statement is this information presented?
Task III: How much is change in finished goods and in which type of income statement is this
information presented?
Task IV: How much are costs of goods manufactured and costs of goods sold and explain the
difference between them?
For 20X1, Good-Year, Inc. that manufactures primarily tires for cars recognised total sales of
CZK 2 000 thousands and following expenses:
Depreciation Salaries and wages Raw materials used
Production 400 000 120 000 800 000
Administrative 80 000 60 000 5 000
Selling 100 000 90 000 200 000
Opening balance of work in process (WIP) was CZK 80 000. There were no finished products
on hand at the beginning of the period. Closing balances of work in process and finished
products were CZK 100 000 and CZK 200 000, respectively.
33

4.5 Exercise
Task I: Prepare income statement for 20X1 using classification of expenses by (i) nature and
(ii) function
Task II: How much is the gross profit from sale of goods (finished products) and in which type
of income statement is this information presented?
Task III: How much is change in finished goods and in which type of income statement is this
information presented?
A car manufacturer produces 90,000 cars per year. One car costs 100,000, so the overall costs
are 9 billion, out of which:
 Labourer and mechanic salaries expenses 2 billion
 Raw materials consumption 3 billion;
 Energy consumption 1 billion;
 Depreciation expenses 3 billion.
2/3 of the produced cars are sold for CZK 13 billion. The opening balance of inventory – cars
is zero. A car manufacturer does not care about the sale of his cars. Everything is arranged by
an exclusive agent who is entitled 130 million for a current year for his services.
4.6 Exercise
Task I: Prepare the income statement of Nostress, Ltd. In cost of sales format and, alternatively,
also in by nature format.
Task II: How much are the total production costs in December?
Task III: What effect did the production and put in use of the printing machine for own use have
on the profit of the current year?
Nostress, Ltd. Is engaged in the assembly of printing machines and is starting its operations in
December 20X1. The following transactions took place during December 20X1:
 Consumption of material during production 500 000.
 The wages for December were 100 000, out of which:
o wages of production workers were 60 000
o wages of administration people were 30 000
o wages of distribution workers were 10 000
 Depreciation of production machines and buldings were 20 000
 Depreciation of administrative buildings were 10 000
 Depreciation of distribution cars were 5 000
 Costs of marketing were 80 000
 Interest costs related to loans received were 5 000
 Tax expenses were 3 000
10 printing machines were produced in December. Six of those machines were sold (sales price
of one printing machine was 60 000), one of the printing machines was produced for own
purposes – printing of marketing materials. This printing machine was put in use in December.
The finished products are valued based on production costs. There was no work-in-progress as
of December 31, 20X1.
34

5 Financial Statements –Statement of Financial Position / Balance Sheet

Statement
Learning outcomes
 Discuss the nature and purpose of the Statement of financial position / Balance sheet
statement
 Understand the basic elements of the Statement of financial position / Balance sheet
statement
 Understand formats of the Statement of financial position / Balance sheet statement
 Prepare a Statement of financial position / Balance sheet statement from relevant
financial information
 Discuss the main measurement issues that must be considered when preparing the
Statement of financial position / Balance sheet statement
 Discuss advantageous of different formats of the Statement of financial position /
Balance sheet statement for analytical purpose
ASSETS
Essentially items owned or leased by a business entity which will bring economic benefits to
the entity.
Major characteristics
 resources controlled by the entity
 as a result of past events
 and from which future economic benefits are expected to flow to the entity
Assets are separated into two groups:

Fixed assets / Non-current assets are not intended for resale. Will be used by the business to
assist it to earn income.
A fixed asset is an asset that the firm intends to use within the business, over an extended period,
in order to assist its daily operating activities.
The essential criterion is the intention of the owner, the intended use of the asset. A fixed asset
is often an asset with a long life.
Non-current assets are subdivided into:
1. Tangible non-current assets
 Motor vehicles
 Land and buildings
 Fixtures and fittings
 Plant and machinery
35

2. Intangible non-current assets

 Brands
 Patents
 Copyrights
 Licences
3. Other non-current assets:
 Long-term investments
Current assets are those that continually being converted into cash. These are assets used in
day-to day trading. A current asset is usually defined in terms of time. A current asset is an asset
likely to change its form usually within 12 months.
 Stock/ Inventories
 Debtors/ Trade Receivables
 Cash
LIABILITIES
Liabilities are usually arranged according to the length of period when payment is due.
 a present obligation of the entity
 arising from past events
 the settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits
Essentially these can be divided into:
1. Short-term and long-term third party liabilities; and
2. Capital which is an amount contributed by the owners to the business.
Long-term liabilities represent amounts owing which are not due for payment within 12
months of the balance sheet date
 Bank loan repayable after several years
 Mortgage loan
 Lease obligations
 Employee benefit liabilities such as pensions
Current liabilities represent amounts owing which are due for payment within 12 months of
the balance sheet date
 Creditors/ Trade Payables
 Bank overdraft
 Dividends payable
 Current tax liabilities
36

EQUITY (CAPITAL)
represents the owner’s claim on the business. Owner’s capital is increased by profit, but reduced
by losses.
 is the residual interest in the assets of the enterprise after deducting all its liabilities.
Equity is separated into following groups:
Share capital is the finance received by the company from its owner(s) in exchange for shares.
Reserves:
1. Retained earnings are reserves of profits that are retained in the business to help it grow.
2. Other reserves include funds arising from the issue of share capital at more than its
nominal value.
Main components commonly found in a Statement of financial position / balance sheet

(Listed Companies Overview General Examples
Terminology In Brackets)
Fixed Assets Assets used to run the business 1. Land and buildings
(Property, plant and long-term 2. Plant and machinery
Equipment) 3. Fixtures and fittings
4. Motor vehicles
Current Assets
(i.e., short-term assets)
(i) Stocks (Inventories) Goods purchased and awaiting 1. Finished goods
Use or produced awaiting sale 2. Work in progress
3. Raw materials
(ii) Debtors (Trade Amounts owed to company Trade debtors
Receivables)
(iii) Prepayments Amounts paid in advance Prepayments for services
(iv) Cash and bank Physical cash Cash in till
Money deposited on short-term Cash and bank deposits
Basis with a bank
Current Liabilities
(i.e., amounts falling
due within one year)
(i) Creditors Money owed to suppliers Trade creditors
(Trade Payables)
(ii) Accruals Amounts owed to the suppliers Accruals for services
of services
(iii) Loans Amounts borrowed from third Short-term loans from
parties Financial institutions
And repayable within a year
Long-term Creditors Amounts borrowed from third Long-term loans from
(Non-current Liabilities) parties and financial institutions
repayable after a year
37

Capital Employed Originally, the money the sole The capital at the start of
(Equity) trader introduced into the the year and the capital at
business. Normally represents the end of the year are
the net assets (i.e., assets less generally known as
liabilities) opening and closing
capital
(i) Profit The profit earned during the Taken from the profit and
year loss account, represents
income less expenses
(ii) Drawings Money taken out of the Living expenses
business by the owner. A
reduction of owner’s capital
38

Information to be disclosed in the Statement of financial position using horizontal layout
ASSETS
A Non-current assets
I Intangible assets
1 Development cost
2 Concessions, patents, licences, trade marks and similar rights and assets
Software
II Tangible assets
1 Land and buildings
2 Plant and machinery
3 Fixtures, fittings, tools and equipment
III Investments
1 Shares and equity interest
2 Loans provided
B Current assets
I Stocks
1 Raw materials and consumables
2 Work in progress
3 Finished goods and goods for resale
II Debtors
1 Trade and other debtors
2 Pre-payments and accrued income
III Short-term financial assets
1 Shares held for trading
2 Other investments
IV Cash and cash equivalents
CAPITAL & LIABILITIES
A Capital and reserves
I Common capital
II Share premium account (Additional paid-in capital)
III Revaluation and other reserve
IV Retained earnings (Accumulated profits)
B Non-current liabilities
1 Bank borrowings
2 Provisions
3 Notes payable
4 Accruals and deferred income
C Current liabilities
1 Bank borrowings
2 Trade creditors
3 Current portion of bank borrowings
4 Provisions
5 Notes payable
6 Tax payable and social security
39

Information to be disclosed in the Statement of financial position using vertical layout

A Non-current assets
I Intangible assets
1 Development costs
2 Concessions, patents, licences, trade marks and similar rights and assets
3 Software
II Tangible assets
1 Land and buildings
2 Plant and machinery
3 Fixtures, fittings, tools and equipment
III Investments
1 Shares and equity interest
2 Loans provided
C Current assets
I Stocks
1 Raw materials and consumables
2 Work in progress
3 Finished goods and goods for resale
II Debtors
1 Trade and other debtors
2 Pre-payments and accrued income
III Short-term financial assets
1 Shares held for trading
2 Other investments
IV Cash and cash equivalents
E Current liabilities
1 Bank borrowings
2 Trade creditors
3 Current portion of bank borrowings
4 Provisions
5 Notes payables
6 Tax payable and social security
F Net current assets (liabilities)
G Total assets less current liabilities
H Non-current liabilities
1 Bank borrowings
2 Provisions
3 Notes payables
K Capital and reserves
I Common capital
II Share premium account (Additional paid-in capital)
III Revaluation and other reserve
IV Retained earnings (accumulated profits)
40

Exercises
5.1 Exercise
Task: Prepare the Statement of financial position (balance sheet) at the reporting date.
Travel agency World Ltd. has run its business for several years and at the end of the current
period (at 31 December 20X1) the company presents following items of assets, liabilities and
equity (in CZK):
 Administrative building 3 815 (accumulated depreciation 500)
 Garage 5 600 (accumulated depreciation 600)
 5 buses 25 000 (accumulated depreciation 15 000)
 2 cars 1 600 (accumulated depreciation 100)
 Common capital 2 000
 Material 150
 Retained earnings (profits accumulated from the prior years) 8 190
 Trade payables to suppliers 95
 Software 520 (accumulated amortization 100)
 Long-term bank borrowings 7 500
 Hardware equipment 600 (accumulated depreciation 100)
 Short-term bank borrowings 5 815
 Interest accrued and unpaid 60
 Office equipment 300 (accumulated depreciation 50)
 Cash 920
 Prepayments to suppliers 45
 Bank account 3 700
 Prepayments from customers 50
 Accounts receivable 250
 Profit for the current year 2 200
 Payables to employees regarding wages and salaries 140
Extension:
Task: Prepare the Income statement (statement of profit or loss) for the current reporting
period.
The business of the company is to render travel services – making city trips, trips to the nature
etc. The company realized a profit of CZK 2 200 the for the current period (following items are
in CZK) – sales 8 900, employee benefits (wages and salaries) 3 400, depreciation and
amortization 1 200, subcontractor services 1 640, energy 300, material consumption 100,
interest 60.
41

5.2 Exercise
Task: The following have been taken from the records of Match, ltd. On the basis of information
December 20X1 and for the year then ended.
 Share capital: 300,000 ordinary shares of EUR 1,100,000 preference shares of EUR 1
 Share premium: EUR 40,000
 Retained earnings (profits from prior years): EUR 100,000
 Cash: EUR 120,000
 Production machines: EUR 320,000
 Land: EUR 160,000
 8% debenture loan: EUR 500,000
 Accumulated depreciation: Production machines – EUR 20,000. Buildings – EUR 10,000
 Bad debts provision: EUR 20,000
 Sales: EUR 1,250,000
 Interest from debenture loan: EUR 40,000
 Interest income: EUR 10,000
5.3 Exercise
Task: The following have been taken from the records of Game, Ltd. On the basis of information
December 20X9. Classify the items within the balance sheet on the basis of liquidity.
Additionally, provide comments on financial position of Game, Ltd and on its performance.
 Share capital: 100,000 ordinary shares of EUR 2; Additional paid-up capital: EUR 20,000
 Advances received from customers: EUR 30,000
 Retained earnings (profits from prior years): information missing
 Software: EUR 30,000
 Cash: EUR 10,000
 Shares in Set, Ltd. (100% share, long-term holding): EUR 50,000
 Machinery & Equipment: EUR 220,000
 Land: EUR 140,000
42

 Bank loan: EUR 500,000 (out of which EUR 100,000 payable in 2013)
 Inventory: EUR 230,000 (1 product only, sale value EUR 190,000)
 Accumulated depreciation: Machinery & Equipment – useful life of 11 years in total,
acquired on 1 January 20X5. Buildings – useful life of 20 years in total, acquired on 1
January 20X0. Software just acquired at the end of 20X9.
 Bad debts: Game, Ltd. has one customer which is in bankruptcy proceedings and repayment
is not likely, balance is EUR 20,000. No other problems with debtors noted.
 Sales: EUR 1,100,000
 Interest expense on bank loan: EUR 30,000
 Dividend income: EUR 5,000
 Salaries payable: EUR 20,000
5.4 Exercise
Task: Record the following transactions into ledger accounts as of 31 December 20X1. Discuss
the basis accounting concepts relating to these transactions.
1. 100 products in total price of EUR 10,000 were delivered to and accepted by customer on
December 29, 20X1. Invoice was sent to customer on January 10, 20X2.
2. The company A sold the car to company B on December 10, 20X1 for EUR 20,000 in cash.
Simultaneously, a contract was closed through which the company A is obliged to buy the
car back on June 10, 201X2 for EUR 21,000.
3. The company C is at the end of 20X1 involved in litigation in which its customer claims
EUR 30,000 for faulty delivery. The Company expects that the litigation will end in 20X2
and it will be forced to pay EUR 15,000.
4. The company D acquires production building for EUR 100,000 on June 15, 20X1. At the
end of 20X1, the market value of the building is EUR 120,000.
5. The company’s E receivable against the company F turns to be doubtful debt as F has
financial problems. The commercial director expects that the amount that will not be repaid
will be approximately EUR 100,000. However, he also thinks that it could be EUR 101,000
or EUR 99,000.
6. The company G sends invoice to customer on December 28, 20X1 in the amount of 150,000
EUR for products sale. The delivery to customer occurs on January 12, 20X2.
7. The Company acquires a building in 20X1 for EUR 80,000. However, the Chief accountant
fears that if the company would be liquidated, the value of building would drop to EUR
40,000.
8. The company calculated the warranty provision at the end of 20X1 in the amount of EUR
10,000 based on the calculation of expected future warranty costs. Similar calculation was
performed in 20X0. However, CFO would like to have a better profit in 20X1 and therefore
changes the calculation to reflect only expected warranty costs in 20X2. The amount of
provision after this change drops to EUR 5,000 as of December 31, 20X1.
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6 Trial Balance
Learning outcomes
 Prepare a trial balance from accounting records and identify the uses of a trial balance
 Prepare and present financial statements from the accounting records and trial balance
in a format which satisfies the information requirements of the entity
 Understand adjustments in the accounting cycle
 Use worksheet

Trial balance is a list of all accounts that actually have a balance remaining on them at a
particular date. The balances in trial balance are arranged in two columns, one for debits and
one for credits. The trial balance usually lists the items in the following order:
 Assets
 Capital
 Liabilities
 Revenues (Income)
 Expenses
Assets, expenses have debit balances // Capital, liabilities, revenues have credit balance.
Trial balance
At the date
Company name
Debit Credit
EUR EUR
Asset XX
Capital XX
Liabilities XX
Revenues (Sales) XX
Expenses XX
Total XX XX
Uses and limitations of the trial balance

The trial balance provides proof that the ledger is in balance. If the double-entry process has
been completed correctly, each debit will be matched by an equal and opposite credit entry.
There will thus be equal amounts on the debit and credit sides. The agreement of the debit and
credit totals of the trial balance gives assurance that:
1. Equal debits and credits have been recorded for all transactions.
2. The debit or credit balance of each account has been correctly computed.
3. The addition of the account balance in the trial balance has been correctly performed.
44

The debit and credit totals of the trial balance do not agree. If the trial balance fails to balance
- and it often will even for experts – then you know a mistake has been made in the double-
entry process. You need, therefore, to find it.
This situation indicates errors:
1. The posting (recording) of a debit as a credit, or vice versa
2. Arithmetic mistakes in balancing accounts
3. Clerical errors in copying account balances into the trial balance
4. Listing a debit balance in the credit column of the trial balance, or vice versa
5. Errors in addition of the trial balance
This process of trial and error is the reason why a trial balance is so called.
The Basics of Adjusting Entries

 Adjusting entries are necessary because accounting books may not contain up-to-date
and complete data.
 Ensure that the revenue recognition and expense recognition principles are followed.
 Required every time a company prepares financial statements.
 Will include one income statement account and one balance sheet account.
Exercises
6.1 Exercise
Key Insurance Agency was organized on September 1, 20X1. Assume that the accounts are
closed and financial statements prepared each month. The company occupies rented office
space but owns office equipment estimated to have a useful life of 10 years from date of
acquisition, September 1. The trial balance for Key Insurance Agency at November 30 is shown
below.
Cash $ 3,750 -
Accounts receivable 1,210 -
Office equipment - $ 80
Accounts depreciation: office equipment - 1,640
Capital stock - 6,000
Retained earnings - 1,490
Dividends 500 -
Commissions earned - 6,220
Advertising expense 800 -
Salaries expense 3,600 -
Rent expense 770 -
$ 15,430 $ 15,430
Instructions:
1. Prepare the adjusting journal entry to record depreciation of the office equipment for the
month of November.
2. Prepare an adjusted trial balance at November 30, 20X1.
3. Prepare an income statement and a statement of retained earnings for the month ended
November 30, 20X1, and a balance sheet in report form at November 30, 20X1.
45

Worksheet:
Post adjusted Income Balance

Account Trial balance Adjustments
No Trial Balance statement sheet
title
DR CR DR CR DR CR DR CR DR CR
x Sum
46

7 Accruals and Prepayments
Learning outcomes
 Distinguish between accrual basis accounting and cash basis accounting
 Record and account for transactions and events resulting in income, expense, assets,
liabilities and equity in accordance with the appropriate basis of accounting and the
laws, regulations and accounting standards applicable to the financial standards
 Describe how accrual accounting allows for timely reporting and a better measure of a
company´s performance
 Explain the need for adjusting entries and make adjusting entries for accruals and
prepayments
 Differentiate between accruals and prepayments

Adjusting entries at the end of each accounting period to recognize, on an accrual basis,
revenues and expenses for the period and to report proper amounts for assets, liabilities and
owners´ equity accounts.
The areas most commonly requiring analysis to see whether adjusting entries are needed:
1. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.
2. Accrued revenues: Revenues earned but not yet received in cash or recorded.
3. Prepaid expense (Deferred expense): Expenses paid in cash and recorded as assets before
they are used or consumed.
4. Unearned revenues (Deferred revenues): Cash received and recorded as liabilities before
revenue is earned.
47

Exercises
7.1 Exercise
Task I: The following transactions were performed by Leverage, Ltd. during December 20X1.
Analyse the transactions from the perspective of accrual basis of accounting and decide about
the presentation. Record the transactions on the ledger accounts and identify which of those
accounts are balance sheet accounts and which of them are income statement accounts.
1. December 8: Received 10,000 CZK on bank account relating to the rent of warehouse for
the period December 1, 20X1 – January 31, 20X2.
2. December 10: Paid 1,200 CZK in cash for the subscription of newspapers for the period
January, 1, 20X2 – December 31, 20X2.
3. December 15: Received advance in the amount of 2,000 CZK on bank account from the
customer. It relates to future sales that are intended to be delivered in January 20X2.
4. December 20: Closed contract with its customer to rent another premises from December
20, 20X1 till December 19, 20X2. Immediately received an extra payment in the amount
of 6,000 CZK (non-refundable) and first monthly rent payment of 9,000 CZK.
Task II: Consider whether transactions 1, 2 and 4 above should require any accounting entries
in January 20X2. If yes, propose bookings on ledger accounts.
7.2 Exercise
Task I: Record the transactions using relevant accounts (both journal and ledger can be
considered).
Task II: Draft a solution how to account for the transactions in journal and ledger of the entity`s
business partner.
Entity GoodYear has an accounting year ended 31 December 20X1. It rents office space at a
rental cost of EUR 5 000 per quarter, payable in arrears. During the year to 31 December 20X1,
cash payments of rent have been as follows:
 31 March for the quarter to 31 March 20X1
 29 June for the quarter to 30 June 20X1
 2 October for the quarter to 30 September 20X1
The final payment due on 31 December 20X1 for the quarter to that date was not paid until 4
January 20X2.
7.3 Exercise
Task I: Record the transactions using relevant accounts (both journal and ledger can be
considered).
Task II: Draft a solution how to account for the transactions in journal and ledger of the entity`s
business partner
Entity GoodNews pays the rental expense on its office space in advance starting 1 January 20X1
when it pays EUR 1 200 in respect of the first quarter`s rent. During the first year the entity
pays the following amounts:
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 EUR 1 200 => 3 March in respect of the quarter ended 30 June

 EUR 1 200 => 14 June in respect of the quarter ended 30 September
 EUR 1 400 => 25 September in respect of the quarter ended 31 December
 EUR 1 400 => 13 December in respect of the first quarter of 20X2
7.4 Exercise
Task: Globe, Ltd is a company that is selling electronic appliances. Prepare the Statement of
financial position as of December 31, 20X1 and Income statement for the year ended December
31, 20X1 based on the information in the trial balance below and additional information
provided.
Trial balance
December 31, 20X1
Globe, Ltd
Description / Closing balances EUR EUR
Owner’s capital 20,000
Retained earnings 30,000
Sales of electronic appliances 110,000
Costs of electronic appliances sold 75,000
Dealers’ cars 30,000
Administrative building 50,000
Inventory 6,000
Creditors 11,000
Wages payable 2,000
Accumulated depreciation cars 12,000
Dealers’ wages expense 15,000
Advertising expenses 2,000
Insurance expenses 500
Car expenses – petrol, etc. 2,500
Cash in bank 3,000
Owner’s drawing 12,000
Administration expenses 3,000
Bank borrowings repayable 20X4 10,000
Bank interest expense 1,000
Accumulated depreciation – Admin 5,000
building
200,000 200,000
Additional information:
 Inventory in the amount of 2,000 is damaged and could only be sold for 500.
 500 of advertising expense relates to year 20X2 marketing campaign.
 Bonus of 1,000 is expected to be paid to CEO for the 20X1 results in 20X2 and is not
included in wages yet.
49

8 Non-Current Tangible and Intangible Assets
Learning outcomes
 Identify non-current assets and depreciation
 Explain the objective of depreciation
 Calculating depreciation
 Accounting for depreciation
 Non-current assets disposals
 Intangible non-current assets

Classification of non-current assets (fixed assets):
 Intangible assets
 Property, plant and equipment
 Investment
Property, plant and equipment (PPE / Tangible fixed assets)

Plant assets are resources that have
 physical substance (a definite size and shape),
 are used in the operations of a business,
 are not intended for sale to customers,
 are used to generate income directly or indirectly and are expected to provide service
to the company for a number of years, except for land.
Determining the Cost of Plant Assets

Cost Principle - requires that companies record plant assets at cost.
Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended
use such as transportation and installation costs.
Depreciation
Process of allocating costs of a plant asset to expenses over its useful (service) life in a rational
and systematic manner so that depreciation charges match revenue generated from the usage of
the asset.
 Process of cost allocation, not asset valuation.
 Applies to land improvements, buildings, and equipment, not land.
 Depreciable, because the revenue-producing ability of asset will decline over the asset’s
useful life.
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Depreciation Methods
Management selects the method it believes best measures an asset’s contribution to revenue
over its useful life.
1. Straight-line method.
2. Declining-balance method.
3. Units-of-activity method.
Revising Periodic Depreciation

 Accounted for in the period of change and future periods (Change in Estimate).
 Not handled retrospectively.
 Not considered error.
PPE Disposals
Companies dispose of plant assets in three ways – Retirement, Sale, or Exchange. Company
shall record depreciation up to the date of disposal. At this date, the asset is eliminated by (1)
debiting accumulated depreciation account and (2) crediting the asset account.
51

Exercises
8.1 Exercise
Task: The following non-current assets were present in the accounts of Construction, Ltd. as of
31 December 20X6. The company has policy to start the depreciation from next month after the
acquisition. Calculate and determine the following:
(i) Purchase costs and accumulated depreciation/amortization of all non-current assets as

of December 31, 20X6.
(ii) Depreciation/amortization for the year 20X7 and accumulated depreciation /

amortization as of December 31, 20X7 considering no disposals were made in 20X7
and the only new acquisition was the purchase of new production machine with useful
life 10 years, purchase cost 50,000 EUR, residual value 0, acquired on June 22, 20X7.
(iii) The net book value of non-current assets as of December 31, 20X7.
(iv) Divide the amount of depreciation/amortization for the year 20X7 into the following
categories: Cost of sales, Administration costs, Distribution costs (Selling expenses).
Non-current assets as of 31 Dec 20X6:

 Production software, useful life 8 years, purchase cost 16,000 EUR, residual value 0,
acquired on December 16, 20X1.
 Production building, useful life 25 years, purchase cost 200,000 EUR, residual value 0,
acquired on December 8, 20X0.
 Administrative building, useful life 20 years, purchase cost 150,000 EUR, residual value 0,
acquired on June 10, 20X0.
 Production machines, useful life 12 years, purchase cost 260,000 EUR, residual value
20,000 EUR, acquired on December 16, 20X1.
 Office furniture in administrative building, useful life 8 years, purchase cost 16,000 EUR,
residual value 0, acquired on December 2, 20X0.
 6 administrative cars, useful life 5 years, purchase cost in total 180,000 EUR, residual value
in total 30,000 EUR, acquired on December 6, 20X4.
 10 distribution cars, useful life 5 years, purchase cost in total 200,000 EUR, residual value
in total 20,000 EUR, acquired on June 25, 20X5.
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Item Purchase Accumulated Depreciation Accumulated Net book

costs depreciation expense for depreciation value
31 Dec 20X6 20X7 31 Dec 20X7 31 Dec 20X7
8.2 Exercise
Task I: What should be the cost of the machine in the company`s balance sheet?
Task II: Calculate the value of the machine at the end of the first year of the useful life that
should be presented in the balance sheet.
Entity GoodFactory bought a new machine. The purchase price of the machine was EUR
80 000. The installation costs were EUR 5 000 and the employees received specific training on
how to use this particular machine, at a cost of EUR 2 000. Before using the machine to
manufacture products for customers, a test was undertaken which used material costing EUR
1 000. The entity expects machine to be used in manufacturing over following 4 years.
8.3 Exercise
Task I: Calculate depreciation expense in particular accounting years.
Task II: Post the transactions which occurred in each year on leger accounts.
Task III: Prepare balance sheets of accounting entity at the end of particular years.
Year 20X1
Accounting entity has following opening balances for year 20X1: Cash at bank and common
capital in amount 10 000 CZK. All amounts are stated in ths. CZK (including opening
balances).
Molding machine was acquired for the purpose of four-year manufacturing program. Producer
indicates capacity of the molding machine in amount of 400 000 pcs moldings. Purchase costs
of molding machine were 6 000, invoiced by a supplier during March in 20X1 and then paid
from bank account. Molding machine started to be used immediately after acquisition at 9th
March 20X1. Accounting entity assume, that after the capacity of machine will be used up, it
will be still possible to sell some the useable machine parts for 600.
53

The accounting entity has policy to start depreciate the assets from next month after the
acquisition and till the end of month when derecognised.
In particular years the molding machine produced:
 100 000 pcs moldings in 20X1
Year 20X4
The planned sale was at 19th September 20X4 for 600 (invoiced amount).
Extension:
Task IV: What would change, if the planned sale will be realised for 800 due to unexpected
changes in demand?
8.4 Exercise
Task I: The following transactions with long term assets were undertaken by Buildings &
Machines, Ltd. Record all necessary entries relating to those assets in 20X1, 20X2, 20X3 on
ledger accounts
Building was acquired on June 30, 20X1 as administrative building. Price of the building was
300,000 EUR. Useful life of the building was set to 20 years. No residual value. In January 22,
20X3, the company suddenly decided to move its office to another town and sold the building
for 280,000 EUR.
Land was acquired on April 12, 20X1. The price of land was 50,000 EUR.
54

9 Inventories
Learning outcomes
 Identify what items and costs should be included in inventory and cost of goods sold
 Account for inventory purchases and sales using both a perpetual and a periodic
inventory system
 Calculate cost of goods sold using the results of an inventory count and understand the
impact of errors in ending inventory on reported cost of goods sold
 Apply four inventory cost flow alternatives: specific inventory identification, FIFO,
LIFO, and average cost
 Practise accounting concept of LCM/Net realisable value in inventory costing
 Identify inventory costing effects on income statements and balance sheets
 Disclose inventory in major financial statements

Regardless of the classification, companies report all inventories under current assets in the
balance sheet. Inventory consists of:
 Goods purchased for resale
 Consumable stores (such as oil)
 Raw-materials and components (used in production process)
 Partly-finished goods (usually called work in progress – WIP)
 Finished goods (which have been manufactured by the business)
Classifying Inventory
Merchandising Company:
 Goods for resale
Manufacturing Company:
 Raw Materials
 Work in Process
 Finished Goods (products)
Determining Inventory Quantities

Taking a physical inventory involves counting, weighing, or measuring each kind of inventory
on hand. Physical inventory taken for two reasons:
 Perpetual System
o Check accuracy of inventory records.
o Determine amount of inventory lost (wasted raw materials, shoplifting, or
employee theft).
55

 Periodic System
o Determine the inventory on hand.
o Determine the cost of goods sold for the period.
Inventory Costing
Application of accounting concept “Lower-of-Cost-or-Market (LCM) / Net realisable value”
Cost
Cost is purchase price plus additional directly attributable costs such as transportation costs.
Unit costs can be applied to quantities on hand using the following costing methods (cost
formulas):
 Specific Identification
 First-in, first-out (FIFO) - cost flow assumptions
 Average-cost - cost flow assumptions
 Last-in, first-out (LIFO) - cost flow assumptions
Using cost flow methods consistently. Cost flow assumptions do not need to match the physical
movement of goods
Specific Identification
 Actual physical flow costing method in which items still in inventory are specifically
costed to arrive at the total cost of the ending inventory.
FIFO- First-in, first-out

 Cost of earliest goods purchased are first to be sold.
 Often parallels actual physical flow of merchandise.
 Generally good business practice to sell the oldest units first.
Average Cost
 Allocates cost of goods available for sale on the basis of weighted-average unit cost
incurred.
 Assumes goods are similar in nature.
 Applies weighted-average unit cost to the units on hand to determine cost of the ending
inventory.
LIFO - Last-in, first-out

 Cost of the most recent units purchased is transferred to cost of goods sold.
 The last goods purchased are assumed to be the first goods sold.
 Ending inventory consists of the first goods purchased.
56

Net realizable value (NRV)

NRV is expected selling price less costs to sell. Inventories cannot be stated in carrying amount
that is higher then expected proceeds from the sale. Therefore:
 If net realizable value is higher than cost, inventories are stated at cost.
 If net realizable value is lower than cost, inventories are stated at NRV and relevant
impairment loss shall be recognised in income statement.
57

Exercises
9.1 Exercise
Task: Prepare the opening statement of financial position as of January 1, 20X1.
Task II: Record the transaction on ledger accounts using cost of sales format classification.
Task III: Calculate the decrease in finished products mentioned in step 11 in two alternatives:
FIFO method and weighted average cost method.
Task IV: Prepare the statement of financial position as of December 31, 20X1 and income
statement for the year then ended.
Toys For Kids Ltd. (the Company) had the following assets and liabilities as of January 1, 20X1
(in ths EUR):
 Suppliers 70,
 Bank account 400,
 Long-term assets 800,
 Accumulated depreciation to long-term assets 100
 Capital 1,100
 Receivables 100
 Cash in hand 20
 Material 150
 Finished products 100 (8 toys)
 Payables to employees 300
During the year 20X1, the following transactions took place (in ths EUR):
1. The Company partly paid its debts to employees in the amount of 150.
2. Supplier delivered and invoiced the material in the amount of 150.
3. The invoice from supplier in the amount of 150 was paid from the bank account.
4. The Company paid further payables to suppliers in the amount of 40 directly through
drawing of short-term bank loan.
5. The Company despatched to production the material for the production of 65 pcs of toys.
The price of the material despatched was 250.
6. The employees of the Company were entitled for salaries in the amount of 600, out of
which 300 related to production workers, 250 related to administrative staff and 50 related
to distribution people.
7. Depreciation of long-term assets was 100, out of which 60 related to production assets and
40 related to administrative assets.
8. The Company received the invoice for the annual consumption of energy in the amount of
50, out of which 40 related to production consumption and 10 related to consumption of
energy in administrative department.
58

9. Half of the produced toys was transferred to the finished products warehouse. The finished
products are valued at actual production costs.
10. The Company sold 30 toys. Total sales price was 900.
11. Corresponding decrease in finished products – calculate the value.
12. The owner made contribution into the capital in the amount of 300 that was deposited on
the bank account.
9.2 Exercise
Task: Calculate the cost of purchase.
A retailer imported goods at a cost of 130 EUR, including 20 EUR non-refundable import duties
and 10 EUR refundable purchase taxes. The risks and rewards of ownership of the imported
goods were transferred to the retailer upon collection of the goods from the harbour warehouse.
The retailer was required to pay for the goods upon collection. The retailer incurred 5 EUR to
transport the goods to its retail outlet and a further 2 EUR in delivering the goods to its customer.
Further selling costs of 3 EUR were incurred in selling the goods.
9.3 Exercise
From the following figures prepare answers for the tasks mentioned under the table:
Bought Sold
January 120 at EUR 16 each June 125 at EUR 22 each
April 80 at EUR 18 each November 210 at EUR 25 each
October 150 at EUR 19 each
Tasks I: Calculate closing balance of inventory presented in the balance sheet at the end of the
year. Consider zero opening balance.
Task II: Calculate expenses – costs of goods sold – recognised in profit or loss statement for
the year.
For calculation use (i) FIFO and (ii) AVCO (Average costs) methods on a perpetual inventory
basis.
9.4 Exercise
Task: Recognize a sale of inventory using ledger accounts and journal.
On 14 December 20X5 a machine manufacturer sold an item of machinery it manufactured in

20X5 to a customer for 8 000 EUR cash. The cost of the machine was 5 500 EUR. The customer
took immediate delivery of the inventory.
59

9.5 Exercise
Task: Calculate the gross profit of Duplex for the year under the assumption that Duplex uses
a) FIFO method for valuation of rubber, b) AVCO method for valuation or rubber.
Duplex, Ltd. is producing rubber for automotive purposes. At the beginning of the year, the
amount of rubber on finished products stock was 1,000 tons in the value of 10,000 EUR. The
following is the information about the production in current year:
 Produced rubber: 5,000 tons
 Material consumed during production in the amount of 38,000 EUR
 Depreciation of production building and production machines: 6,000 EUR
 Wages of production workers: 8,000 EUR
 Energy consumed in production: 8,000 EUR
 Duplex sold during the year 4,500 tons of rubber in the sales value of 80,000 EUR
60

10 Receivables and Related Allowances (Bad Debt Expense)
Learning outcomes
 Properly account for collection of cash and describe the business’ controls necessary to
safeguard cash
 Record the losses resulting from credit customers who do not pay their bills
 Identify bad debt expense (irrecoverable debts)
 Present bad debt expense (irrecoverable debts) in income statements
 Use the allowance method and direct write-off methods for irrecoverable debts and
receivables allowances
 Estimate uncollectible accounts receivable as a percentage of total receivables
 Estimate uncollectible accounts receivable as a percentage of credit sales
 Use method of aging accounts receivable
 Present accounts receivable in the balance sheet

Accounts receivable are amounts due from individuals and other companies that are expected
to be collected in cash. Three accounting issues:
 Recognizing accounts receivable.
 Valuing accounts receivable.
 Disposing of accounts receivable
Recognizing Accounts Receivable

 Service organization – records a receivable when it provides service on account.
 Merchandiser – records accounts receivable at the point of sale of merchandise on
account.
Valuing Accounts Receivables
 Current asset.
 Valuation (net realizable value).
Uncollectible Accounts Receivable

 Sales on account raise the possibility of accounts not being collected.
 Seller records losses that result from extending credit as Bad Debts Expense /
Irrecoverable debts expense
Methods of Accounting for Uncollectible Accounts:

1. Allowance Method => losses are estimated:
 Better matching.
 Receivable stated at cash realizable value.
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 Required by IFRS / US GAAP and other accounting systems

 Methods of estimation of uncollectible accounts receivable:
o Estimate uncollectible accounts receivable as a percentage of total receivables
o Estimate uncollectible accounts receivable as a percentage of credit sales
o Use method of aging accounts receivable
 Recovery of uncollectible account receivables
2. Direct Write-Off - Theoretically unfavourable
 No matching.
 Receivable not stated at cash realizable value.
 Not acceptable for financial reporting.
Irrecoverable debts: A debt which is not expected to be paid.
Irrecoverable debts expense is shown as an administrative expense.
Writing off: Charging the cost of the debts against the profit for the period
62

Exercises
10.1 Exercise
Task I: Calculate the bad debt allowance in books of Daylight, Ltd. As of December 31, 20X1
considering the Company’s policy is to create provision of 100 % for all receivables overdue
for more than 120 days.
Daylight sold products for 120,000 EUR in 20X1. At the end of 20X1, 25,000 EUR was unpaid,
out of which 8,000 EUR was overdue, out of which 4,000 EUR was overdue for more than 120
days.
Task II: Calculate the bad debt allowance in books of Daylight, Ltd. As of December 31, 20X2
considering the Company’s policy is to create provision of 100 % for all receivables overdue
for more than 120 days. Calculate the bad debt expense for the year 20X2.
Task III: Alternatively, calculate the bad debt allowance in books of Daylight, Ltd. as of
December 31, 20X2 considering the Company’s policy is to create provision of 2 % from year-
to-date revenues.
During 20X2, one customer went into liquidation and the Daylight’s receivable of 3,000 EUR
was left finally unpaid and needed to be written off.
During 20X2, Daylight sold products for 150,000 EUR. At the end of 20X2, 30,000 EUR was
unpaid, out of which 10,000 EUR was overdue, out of which 3,000 EUR was overdue for more
than 120 days.
Task IV: Calculate revenues for 20X3 considering the market interest rate is 10 % p.a.
On June 30, 20X3, Daylight sold products in the amount of 30,000 EUR for 2-year credit.
10.2 Exercise
Task: Post all accounting entries related to events occurred during six years and prepare
balance sheet at the end of each year.
Yellow Support and Services (YSS) always sells surplus stock with discount before expiration
date to Airport Food & Beveridges.
Chief finance officer, who came from rival company, knows that:
 50 % of account receivables, which are more than 60 days overdue, will never be collected,
 100 % account receivables, which are more than 180 days overdue, will never be collected.
Cost of sales are 1 000, sales are 1 400 and other expenses are 100.
This information is the same for all years.
Year 20X1
At the end of first year YSS has account receivables in amount 100 (other receivables were
collected during the year, or sales were in cash), out of which:
 70 receivables not overdue yet
 30 receivables overdue: out of which
o 20 overdue more than 180 days and
o 10 overdue more than 60 days.
63

Year 20X2
Information regarding account receivables recognised last year:
 Receivables in amount 20 (category 180 days overdue): debtor went into bankrupt
 Receivables in amount 10 (category 60 days overdue): debtor who owed 5 went into
bankrupt, 5 was paid with delay
 Receivables 70 (not overdue) were all paid
At the end of the year YSS has account receivables in amount 100 out of which:
Year 20X3
 Receivables in amount 20 (180 days overdue): debtor went into bankrupt
 Receivables in amount 10 (60 days overdue): debtor who owed 8 went into bankrupt, 2 was
paid with delay
 Receivables 70 (not overdue) were all paid except 10 (debtor went into bankrupt)
Year 20X4
 Receivables in amount 20 (180 days overdue): were paid
 Receivables in amount 10 (60 days overdue): debtor who owed 5 went into bankrupt, 5 was
paid with delay
64

Year 20X5
 Receivables in amount 20 (180 days overdue): debtor went into bankrupt
 Receivables in amount 10 (60 days overdue): all 10 still not collected, but debtors still exists
At the end of the year YSS has new account receivables in amount 100 and old ones in amount
10 (see above) out of which:
Year 20X6
Receivables in amount 22 were identified as uncollectable.
65

11 Liabilities and Provisions
Learning outcomes
 Describe nature of liabilities
 Define current liabilities and explain how this classification is used in interpreting
statement of financial position
 Structure accounts payable
 Distinguish liability and provisions as liability of uncertain timing or amount
 Explain accounting treatment of warranty provision
Liabilities as a component of balance sheet

In general liability is defined as a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources embodying
economic benefits. According to the period for which they are likely to be outstanding:
 Current liabilities – payable within a short period (usually within the next accounting
period); a debt with two key features as follows:
o Company expects to pay the debt from existing current assets or through the
creation of other current liabilities.
o Company expects to pay the debt within one year or the operating cycle
whichever is longer.
Examples of current liabilities:
o short-term bank borrowings and overdrafts,
o accounts payable (trade payable),
o unearned revenues,
o accrued expenses,
o advances received,
o current portion of long-term bank borrowings (portion of long-term debt that
comes due in the current year),
o other current liabilities.
 Non-current liabilities – payable in the future but not within the next accounting
period. Long-term liabilities are debts or other obligations that will not be paid or
satisfied within one year.
Examples of non-current liabilities:
o bonds,
o notes payable,
o bank borrowings,
o mortgage payable and
o lease obligation.
66

Measuring long-term liabilities

Conceptually, the value of a liability is the cash that would be required to repay the liability in
full today. Therefore liabilities to be paid in the future usually involve interest.
Present value concepts, which equate the value of money received or paid in different periods,
are used to measure long-term liabilities.
Long-Term Notes Payable

May be secured by a mortgage that pledges title to specific assets as security for a loan.
Typically, terms require borrower to make instalment payments over the term of the loan. Each
payment consists of
 interest on the unpaid balance of the loan and
 a reduction of loan principal.
Companies initially record mortgage notes payable at face value.
Lease Liabilities
A lease is a contractual arrangement between a lessor (owner of the property) and a lessee
(renter of the property).
The issue of how to report leases is the case of substance versus form. Although technically
legal title may not pass, the benefits from the use of the property do.
Provisions
Provision is a liability of uncertain timing or amount but which is probable (more than 50 %).
An entity shall measure a provision at the best estimate of the amount required to settle the
obligation at the reporting date. The best estimate is the amount that an entity would rationally
pay to settle the obligation at the end of the reporting period or to transfer it to a third party at
that time. Judgement has to be used in deciding how much provision should be for.
Methods used for measurement of provisions:
 Most likely amount
 Expected value
Examples:
 Legal claims
 Warranties
 Customer refunds
67

Exercises
11.1 Exercise
Task I: Prepare all relevant entries since June 1 till end of 20X1.
Task II: How much is the balance of short-term borrowings including accrued interest as at 30
June 20X1?
Task III: What is the total financing cost for 20X1?
On June 1, 20X1, Melendez Company borrows EUR 90,000 from First Bank on a 6-month,
EUR 90,000, 12% interest rate p. a.
11.2 Exercise
Task: Recognized all relevant entries regarding bonds using journal and answer following
questions:
 In which amount the company recognised issued bonds as at November 1, 20X1?
 How much is the interest for annual period and how much shall be recognised in the
income statement for 20X1 (till December 31, 20X1)?
 How much is the interest recognised in the income statement for 20X2?
 How much is interest payable as at December 31, 20X1?
On November 1, 20X1, Long-Beach Company issued 20 bonds with nominal value of CZK 3
000 each. The interest rate is 8 % per year and interest is paid annually on October 31. The
nominal value of the bonds is fully repaid on October 31, 20X4.
11.3 Exercise
Task: Recognized all relevant entries regarding zero-coupon bond using journal and determine
interest income for relevant years.
On 1 January 20X0 an entity acquires a zero-coupon bond in the market for EUR 98 in an arm’s
length transaction. The entity incurs transaction fees of EUR 2. The bond will be redeemed at
EUR 126 on 31 December 20X4. Effective interest rate is 4.73 % p. a.
Year Carrying amount Interest income Cash Carrying amount

at start of period at 4,73 % inflow at end of period
20X0 100,00 4,73 - 104,73
20X1 104,73 4,96 - 109,69
20X2 109,69 5,19 - 114,88
20X3 114,88 5,43 - 120,31
20X4 120,31 5,69 -126,00 -
68

11.4 Exercise
Task: Recognized all relevant entries regarding fixed-interest-bearing loan using journal and
determine interest expense for relevant years and a balance of loan presented at the balance
sheet at the end of each year.
An entity A provides an entity B with a four-year loan of EUR 5,000 on normal market terms,
including charging interest at a fixed rate of 8 per cent per year. Interest is payable at the end
of each year. The figure of 8 per cent is considered the market rate for similar four-year fixed-
interest loans with interest paid annually in arrears.
Year Cash Discount factor Present value

received (8 % p.a.)
20X1 400 0,9259 370,37
20X2 400 0,8573 342,94
20X3 400 0,7938 317,53
20X4 400 0,7350 294,01
20X4 5 000 0,7350 3 675,15
Total x x 5 000,00
11.5 Exercise
Task: Recognized all relevant entries journal and determine interest expense for relevant years
and a balance presented at the balance sheet at the end of each year.
On 1 January 20X2 an entity purchases a machine for 2 000 CZK with payment in two years’
time. The current cash sale price for that item if customers pay on delivery is 1 650 CZK.
Year Carrying amount Interest income Cash Carrying amount

at start of period at 4,73 % inflow at end of period
20X0 1 650,00 166,59 - 1 816,59
20X1 1 816,59 183,41 -2 000 -
11.6 Exercise
Task I: How much is closing balance of warranty provision as at 31 December 20X2?
Task II: How much is effect on profit or loss for 20X2?
Task III: Provisions are presented in the balance sheets within current or non-current
assets/liabilities?
Task IV: Give an example of any other provision.
Company WH, Ltd. manufactures various types of windows – glass, plastic, aluminium. There
is a one-year warranty on the goods and the company expects that settling the warranty claims
during the warranty period will cost 10 % of the revenues earned. For 20X2, revenues
recognised in income statement are CZK 2 200 000. Opening balance of warranty provision
was CZK 130 000 as at 1 January 20X2 and real warranty costs for 20X2 were CZK 120 000.
69

11.7 Exercise
Task I: Determine the impact on the net income of The First Building Company in 20X1 and
20X2. Distinguish solution for (i) and (ii) of final settlement.
Task II: Determine measurement of provisions presented in the balance sheet as at 31

December 20X1 if appropriate.
In 20X1, The First Building Company built office building for its significant client. In
December 20X1, there was a fire accident in the building caused probably due to inappropriate
construction and technological procedures. The estimate of the damages was CZK 4 600
thousand and the client required the company to settle this amount. Following several meetings
between the company and its client, both sides has make a decision (in May 20X2) that the
company will pay amount of (i) CZK 4 000 thousand or (ii) CZK 5 000 thousand to its client
till the end of June 20X2.
11.8 Exercise
Task: Calculated warranty provision as of December 31, 20X2.
Daylight expects that the future costs of warranty repairs will be approximately 1 % of annual
sales. The warranty period is 1 year and costs of repairs related to 20X2 sales incurred already
during 20X2 were 800 EUR.
70

12 Equity (Capital and Reserves)
Learning outcomes
 Distinguish between debt and equity financing
 Describe the advantages and disadvantages of organizing a business as a proprietorship,
partnership, corporation
 Specify the unique features of equity: share capital and reserves
 Describe the basic characteristics of a corporation and the nature of common and
preferred stock
 Understand balance sheet presentation of equity
 Understand elements of Equity: retained earnings and other reserves
Corporate Capital
 Paid-in Capital
o Common Stock
o Preferred Stock
o Additional Paid-in Capital / Share premium
 Retained Earnings
Paid-in capital is the total amount of cash and other assets paid into the corporation by
stockholders in exchange for capital stock.
Retained earnings are net income that a corporation retains for future use.
The following categories normally appear as part of stockholders´ equity:
 Capital stock / Share capital
 Additional paid-in capital / Share premium
 Retained earnings
The two most typical types of share capital / capital stock are:
 Ordinary shares / equity shares/common stock
 Preference shares / preferred shares
Share capital value

Each share has its nominal value that is represented by common capital in the accounting and
financial statements. The shares are issued for issue price that is usually higher than nominal
value but can be also lower. The difference between issue price and nominal value if issue price
is higher than nominal value is share premium.
Market value of shares fluctuates according to the success and perceived expectation of a
company. If a company is listed on the stock exchange, the value is determined by reference to
recent transactions between buyers and sellers of shares.
71

A rights issue is the offer of new shares to existing shareholders in proportion to their existing
shareholding at a stated price (normally below market values).
Reserves
Any balances representing profits or surplus owed to the shareholders are reserves that can be
divided into two theoretical categories:
1. Capital reserves that are required by law in certain circumstances and cannot be paid out
as dividends.
 Share premium records any premium on issues of shares
 Revaluation reserve records any unrealised gain arising on non-current asset
revaluation.
2. Revenue reserves that are created from profits of the business and may be paid out as
dividends.
 Accumulated profits (retained earnings) records all retained profits of the company.
 General reserve is an extension of the accumulated profits reserve.
72

Exercises
12.1 Exercise
Task I: Open the ledger accounts for above mentioned equity items and record the effects of the
May Annual meeting. Subsequently, record the effects of the payment of dividends in June.
Task II: Prepare equity part of balance sheet as at May 1 (before annual meeting) and as at
May 31 (after annual meeting).
Task III: What is the impact on equity after decisions made at annual meeting?
Trocadero, Ltd. has the following components of equity (in ths EUR):
 Common capital 5,000
 Retained earnings (Accumulated profits) 3,500
 Profit of the current year 2,500
On the annual meeting of Trocadero in May 2013, the following distribution of profit was
approved:
 800 transferred to accumulated profits account
 Rest will be paid to shareholders in June
12.2 Exercise
Task I: Journalize transactions.
Task II: Illustrate the relevant section of the statement of financial position at year-end 20X5.
Upon incorporation in 20X4, The Jammy Dodger, a limited liability company, issues 1 000 50c
shares at nominal value. Needing further funds, in 20X5 it makes a right issue of 1 for 5 at $
0,75. This offer is fully taken up.
73

13 Cash and Cash Flows Statement
Learning outcomes
 Distinguish between cash and profit
 Define cash and cash equivalents
 Specify the usefulness of cash flows statement
 Distinguish between operating, investing and financing cash transactions
 Be able to prepare cash flows statement using indirect and direct method

Cash is cash on hand and bank accounts available for entity.
Cash equivalents are short-term (three months or less from the date of acquisition), highly
liquid investments held to meet short-term cash commitments rather than for investment or
other purposes.
Cash flows statement is a component of financial statements and it explains a difference
between opening and closing balance of cash and cash equivalents presented on the balance
sheet. The usefulness of cash flows statement is to provide information about cash transactions
and their effects on cash balance.
Categories of cash flows

 Operating – cash transactions related to core business of entity such as cash received
from customers, cash paid to suppliers and employees, also income taxes and interest
paid / received.
 Investing – cash transactions related to purchase (and sale) of tangible and intangible
assets and also financial investments such as shares and bonds.
 Financing activities – cash transactions related to borrowings and transactions with
owners.
Methods
 Direct method – used always for financing and investing cash flows, can be used for
operating cash flows.
 Indirect method – used for operating cash flows if direct method is not appropriate.
74

Exercises
13.1 Exercise
Task: Use following income statement, balance sheet and additional information prepared and
provided in relation to year 20X1 and prepare cash flows statement using indirect method.
Income statement for the year ended 31 December 20X1

In EUR 20X1
Sales of revenue 507,000
Costs of goods sold -150,000
Operating expenses (except for depreciation) -111,000
Depreciation expenses -9,000
Loss on sale of equipment -3,000
Interest expense -42,000
Income before income tax 192,000
Income tax expense -47,000
Net income 145,000
Balance sheet
In EUR 31 Dec 20X1 1 Jan 20X1 Change
Cash 55,000 33,000
Accounts receivable 20,000 30,000
Inventory 15,000 10,000
Prepaid expenses 5,000 1,000
Land 130,000 20,000
Building 160,000 40,000
Acc. Depreciation -11,000 -5,000
Equipment 27,000 10,000
Acc. Depreciation -3,000 1,000
Total assets 398,000 138,000
Accounts payable 28,000 12,000

Income taxes payable 6,000 8,000
Bonds payable 130,000 20,000
Common stock 70,000 50,000
Retained earnings 164,000 48,000
Total liabilities and equity 398,000 138,000
Additional information for the year 20X1:
75

1. The company declared and paid EUR 29,000 cash dividend.

2. Issued EUR 110,000 of long-term bonds in direct exchange for land.
3. A building costing EUR 120,000 was purchased for cash. Equipment costing EUR 25,000
was also purchased for cash.
4. The company sold equipment with a book value of EUR 7,000 (cost EUR 8,000, less
accumulated depreciated EUR 1,000) for EUR 4,000.
5. Issued common stock for EUR 20,000 cash.
6. Depreciation expense was comprised of EUR 6,000 for building and EUR 3,000 for
equipment.
13.2 Exercise
Task: Use following income statement, balance sheet and additional information prepared and
provided in relation to year 20X1 and prepare cash flows statement using direct method.
In EUR 20X1 20X0

Accounts receivable 725 850
Trade payables 310 425
Inventory 625 550
Increase in other expenses payable – services 15 -
Increase in wages and salaries payable 65 -
Increase in accrued interest 2 -
Increase in current tax payable 3 -
Purchases of inventory 5,425 -
Sales revenue from the sale of goods and rendering 16,540 -
services
Other expenses – services 210 -
Wages and salaries expense 4,690 -
Interest expense 95 -
Income tax expense 205 -
The group classifies interest paid in operating activities and interest received in investing
activities. In 20X1 the group:
 Borrowed (and received) EUR 590 (long-term loan)
 Paid EUR 90 to settle long-term borrowing
 Received interest of EUR 5 (related to general bank account)
 Paid EUR 265 for property, plant and equipment acquired
 Received EUR 150 from the sale of equipment
 Paid EUR 135 to acquire a software licence custom-made for its production process
76

 Paid EUR 345 to acquire an investment property

 Purchased a second investment property on credit for EUR 345
 Paid EUR 110 as a reduction of financial lease liability.
The group had EUR 130 in cash and cash equivalents at beginning of the 20X1 and EUR 5,940
in cash and cash equivalents at the end of the 20X1.
77
Stránky našeho nakladatelství
https://oeconomica.vse.cz/
Název Essentials of Financial Accounting for Non-Specialists

Autoři doc. Ing. Marcela Žárová, CSc.
Ing. Mariana Peprníčková, Ph.D.
Ing. Libor Vašek, Ph.D.
Ing. Petr Vácha
Vydavatel Vysoká škola ekonomická v Praze
Nakladatelství Oeconomica
Doporučeno pro bakalářské studium na VŠE v Praze
Vydání 1. vydání v elektronické podobě
Návrh obálky Daniel Hamerník, DiS.
Počet stran 78
DTP Vysoká škola ekonomická v Praze
Nakladatelství Oeconomica
Sazba autoři
Doporučená prodejní cena 140 Kč
Tato publikace neprošla redakční úpravou.

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Vysokoškolská skripta

Essentials of Financial Accounting

1 Introduction to Accounting .................................................................................................. 5

© Vysoká škola ekonomická v Praze, Nakladatelství Oeconomica – Praha 2021

1 Introduction to Accounting .................................................................................................. 5

Essentials of Financial Accounting for Non-Specialists

Background from the lectures

Accounting consists of two elements

The difference in information needs leads to division of accounting into:

Essentials of Financial Accounting for Non-Specialists

The whole of financial accounting is based on the accounting equation:

Steps in the accounting cycle

Dual concept and double entry bookkeeping

Main types of business transactions:

Types of business structure

Essentials of Financial Accounting for Non-Specialists

Regulatory framework of accounting in Europe:

Illustration: Items of Balance Sheet (Statement of Financial Position)

Essentials of Financial Accounting for Non-Specialists

Essentials of Financial Accounting for Non-Specialists

Item Asset or Item Asset or

Essentials of Financial Accounting for Non-Specialists

Item Asset or Item Asset or

Essentials of Financial Accounting for Non-Specialists

January 25: Receives a short-term bank loan in the amount of 10 000.

Essentials of Financial Accounting for Non-Specialists

2 Journal and Ledger

Background from the lectures

Essentials of Financial Accounting for Non-Specialists

Essentials of Financial Accounting for Non-Specialists

hmeier Martina - maroithmeier@gmail.com #10360

hmeier Martina - maroithmeier@gmail.com #10360

hmeier Martina - maroithmeier@gmail.com #10360

Essentials of Financial Accounting for Non-Specialists

Essentials of Financial Accounting for Non-Specialists

Essentials of Financial Accounting for Non-Specialists

Essentials of Financial Accounting for Non-Specialists

3 Primary Financial Statements

Background from the lectures

Essentials of Financial Accounting for Non-Specialists

Illustration: Financial Statements

Uses of the income statement:

Income (Profit (or loss) for the period):

Cash flow statement

Essentials of Financial Accounting for Non-Specialists

Balance sheet / Statement of Financial Position

Uses of the balance sheet:

Essentials of Financial Accounting for Non-Specialists

Essentials of Financial Accounting for Non-Specialists

Essentials of Financial Accounting for Non-Specialists

Essentials of Financial Accounting for Non-Specialists

 Share capital: 400,000 ordinary shares of EUR 1 per share

Essentials of Financial Accounting for Non-Specialists

Essentials of Financial Accounting for Non-Specialists

4 Financial Statements – Income Statement

Background from the lectures

Basic Equation: Assets = Liabilities + Owner’s Equity

Revenue, Gains, Expenses, Losses

Essentials of Financial Accounting for Non-Specialists