Understanding

Business
Part 2
UGB123
Lecturer: Kumar
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Accounting
Learning Outcomes:
Introduction to Accounting
Financial Statements

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Accounting Equation
The Basic Accounting Equation

Assets

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Liabilities

Owners Equity

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Assets

Assets are resources owned by a business.

They are things of value used in carrying out such activities
as production and exchange.
They are Economic Resources that have a future benefit
Examples:

Cash
Accounts Receivables
Inventory
Prepaid Expenses..?
Land, Plant/Building
Equipment, Furniture, Supplies

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Current Assets

Current assets are cash and other resources

that are reasonably expected to be realized in
cash or sold or consumed in the business
within one year of the balance sheet date or
the companys operating cycle, whichever is
longer.
Listed in the order of liquidity in the
Balance Sheet
Examples of current assets are cash, accounts
receivable, inventory, and prepaids.

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Non Current Assets

Non Current assets are other resources that are

not easily realized in cash or sold or consumed in
the business above one year of the balance sheet
date or the companys operating cycle, whichever
is longer.
Examples of non current assets are plant, building,
equipment, long-term investments

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Liabilities

Liabilities are claims against assets.

They are existing debts and obligations payable
to others
Examples:

Accounts Payable
Note Payable
Accrued Expenses..?

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Current Liabilities

Current liabilities are obligations that are

reasonably expected to be paid from existing
current assets or through the creation of other
current liabilities within one year or the
operating cycle, whichever is longer.
Listed in the order of liquidity in the Balance
Sheet
Examples include accounts payable, unearned
revenue and interest payable

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Non Current Liabilities

Obligations expected to be paid after one

year are classified as non current liabilities.
Examples include long-term notes payable,
bonds payable, mortgages payable, and
lease liabilities.

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Owners Equity

Owners Equity (Stockholders Equity) is equal to total

assets minus total liabilities.
Owners Equity represents the ownership claim on
total assets.
Subdivisions of Owners Equity:
1. Paid-in-Capital Common Stock
2. Retained Earnings
Revenues (+)
Expenses (-)
Drawings/Dividends (-)

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Investments By Owners

Investments by owner are the assets put into

the business by the owner.
These investments in the business increase
owners equity.
Example:

Common Stock/Paid-In-Capital

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Drawings

Drawings are withdrawals of cash or other

assets by the owner for personal use.
Drawings decrease total owners equity.
Example:

Dividends

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Revenues

Revenues are the gross increases in owners

equity resulting from business activities entered
into for the purpose of earning income.
Revenues are amounts earned by delivering goods
or services to the customer.
Revenues usually result in an increase in an asset.
Examples:

Sales Revenue
Service Revenue
Rental Revenue

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Expenses

Expenses are the decreases in owners equity that

result from operating the business.
Expenses are the cost of assets consumed or
services used in the process of earning revenue.
Expenses usually result in increase liabilities
Examples:

Salary Expense
Rent Expense
Utilities Expense

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Increases And Decreases in

Owners Equity
INCREASES

DECREASES

Investments
by Owner

Owners
Equity
Revenues

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Withdrawals
by Owner

Expenses

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Expanded Accounting Equation

The Basic Accounting Equation
Assets

The Expanded
Accounting Equation

Revenues
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Owners Equity

Liabilities

Common
Stock

Retained
Earnings

Expenses

Dividends
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Financial Statements & Reporting

The 4 main Financial Statements are:

1. Income Statement (Profit & Loss

Statement)
Compares the firms expenses against its
revenue over a period of time to show its
net income (or loss):
Net Income = Sales Revenue - Expenses
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Ex: Income Statement

= Operating Income/Profit

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Financial Statements
2. Statement of Retained Earnings
Summarizes the changes in owners equity
for a specific period of time.
Beginning RE + Net Income - Drawings
= Ending RE

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Ex: Statement of Retained Earnings

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Financial Statements & Reporting

Contd

3. Balance Sheet (Statement of Financial

Position)
Estimates the firms worth on a given
date; built on the following accounting
equation:
Assets = Liabilities + Owners Equity

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Ex: Balance Sheet

Current Assets

Current Liability

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Financial Statements & Reporting

Contd

3. Cash Flow Statement

Shows the change in the firms working
capital (cash) over a period of time by
listing the sources and uses of funds.
Cash Inflow Cash Outflow
= Net Increase/Decrease in Cash

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Ex: Cash Flow Statement

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Ratio Analysis

Financial statements can be analyzed by

shareholders, the financial press, and others to
check how well a company is performing.

Ratios are determined from a company's

financial information and used for comparison
purposes, e.g. operating profit to sales revenue.

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Ratios
Current Ratio - Measures solvency by showing
the firm's ability to pay current liabilities out of current
assets.
Current Ratio =

Current Assets = $19,126

Current Liabilities
$7,156

= 2.67

Debt Ratio - Measures the percentage of total assets

financed by creditors rather than owners.
Debt Ratio
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Total Debt
Total Assets

= $16,156
$27,261

= 0.59

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Operating Profit Margin

Operating Profit is often called earnings before income

and taxes or EBIT.
The operating profit margin gives the business owner a
lot of important information about the firm's profitability,
particularly with regard to cost control.
Alternatively, it can be set out as a percentage.
Operating Profit = Operating Income = $4,400 = 11.8%
Margin
Sales Revenue
$37,436

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Transaction Analysis
Marc Doucet decides to open a computer
programming service.

BANK

Softbyte

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Transaction Analysis - Template

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Transaction Analysis

Transaction 1
On September 1, M.Doucet invests $15,000 cash in
the business, which he names Softbyte.
Trans. #

(1)

Assets
Cash
15,000

Supplies

= Liabilities +
Owner's Equity
Accounts
M. Doucet,
Equipment
Payable
Capital
=
15,000 Investment

There is an increase in the asset Cash, $15,000, and

an equal increase in the owners equity, M. Doucet,
Capital, $15,000.
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Transaction Analysis
Transaction 2
Softbyte purchases computer equipment for $7,000 cash.
Trans. #
#
Trans.

(2)
Balance

Assets
Assets
Cash
Supplies
Cash
Supplies
15,000
15,000
(7,000)
8,000 +

= Liabilities
Liabilities +
+
Owner's Equity
Equity
=
Owner's
Accounts
M. Doucet,
Doucet,
Accounts
M.
Equipment
Payable
Capital
Equipment
Payable
Capital
15,000 Investment
Investment
15,000
7,000
7,000 =
15,000

Cash is decreased $7,000, and the asset

Equipment is increased $7,000.
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Transaction Analysis

Transaction 3
Softbyte purchases computer paper and supplies expected to last
several months from Chuah Supply Company for $1,600 on account.
Trans. #

Balance
(3)
Balance

Assets

== Liabilities
Owner's
Liabilities ++
Owner's Equity
Accounts
M.
Accounts
M. Doucet,
Cash
Supplies
Equipment
Payable
Capital
Equipment
8,000
7,000
15,000
8,000
7,000
15,000
1,600
1,600
8,000 +
1,600 +
7,000 =
1,600 +
15,000

The asset Supplies is increased $1,600, and the liability

Accounts Payable is increased by the same amount.
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Transaction Analysis

Transaction 4
Softbyte receives $1,200 cash from customers for
programming services it has provided.
Trans. #

Balance
(4)
Balance

Assets

= Liabilities +
Owner's Equity
Accounts
M. Doucet,
Cash
Payable
Capital
Supplies
Equipment
1,600
7,000
1,600
8,000
15,000
1,200
1,200 Service Revenue
9,200 +
1,600 +
7,000 =
1,600 +
16,200

Cash is increased $1,200, and

M. Doucet, Capital is increased $1,200.
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Transaction Analysis

Transaction 5
Softbyte receives a bill for $250 for advertising its business
but pays the bill on a later date.
Trans. #

Balance
(5)
Balance

Assets

= Liabilities +
Owner's
Owner's Equity
Accounts
M. Doucet,
Cash
Supplies
Equipment
Payable
Capital
9,200 +
1,600
7,000
1,600
16,200
1,600 +
7,000 =
1,600 +
16,200
250
(250) Advertising Expense
9,200
1,600
7,000
1,850
15,950

Accounts Payable is increased $250, and M.

Doucet, Capital is decreased $250.
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Transaction Analysis

Transaction 6
Softbyte provides programming services of $3,500 for
customers and receives cash of $1,500, with the balance
payable on account.
Trans. ##

Balance
Balance
(6)
Balance

Cash
9,200
9,200
1,500
10,700

Assets
== Liabilities
Liabilities ++
Owner's
Owner's Equity
Account
Account
Accounts
Accounts
M.
M. Doucet,
Doucet,
Receivable
Receivable Supplies
Supplies Equipment
Equipment
Payable
Payable
Capital
Capital
++
00 ++ 1,600
1,600 ++
7,000
7,000 ==
1,850
1,850
15,950
15,950
2,000
3,500 Service Revenue
2,000
1,600
7,000
1,850
19,450

Cash is increased $1,500; Accounts Receivable is

increased $2,000; and M. Doucet, Capital is
increased $3,500.
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Transaction Analysis

Transaction 7
Expenses paid in cash for September are store rent,
$600, salaries of employees, $900, and utilities, $200.
Trans. #

Balance
(7)

Balance

Cash
10,700
(600)
(900)
(200)
9,000 +

Assets
Account
Receivable
Supplies
2,000
1,600

2,000 +

= Liabilities +
Owner's Equity
Accounts
M. Doucet,
Equipment
Payable
Capital
7,000
1,850
19,450
(600) Rent Exp.
(900) Salaries Exp.
(200) Utilities Exp.
1,600 +
7,000 =
1,850 +
17,750

Cash is decreased $1,700 and M. Doucet,

Capital is decreased the same amount.
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Transaction Analysis

Transaction 8
Softbyte pays its advertising bill of $250 in cash.

Trans. #
Balance
Balance
(8)
Balance

Cash
Cash
9,000
9,000
(250)
8,750 +

AccountAssets
Account
Receivable
Supplies
Receivable
Supplies
2,000
1,600
2,000
1,600
2,000 +

1,600 +

Equipment
Equipment
7,000
7,000
7,000

= Liabilities
Owner's Equity
Accounts + M. Doucet,
Accounts
M.Capital
Doucet,
Payable
Payable
Capital
1,850
17,750
1,850
17,750
(250)
=
1,600 +
17,750

Cash is decreased $250 and Accounts

Payable is decreased the same amount.
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Transaction Analysis

Transaction 9
The sum of $600 in cash is received from customers who
have previously been billed for services in Transaction 6.
Trans. #

Balance
(9)
Balance

Assets
= Liabilities +
Owner's Equity
Account
Accounts
M. Doucet,
Cash
Receivable
Supplies
Payable
Capital
Equipment
8,750 +
2,000 +
1,600 +
7,000 =
1,600 +
17,750
600
(600)
9,350 +
1,400 +
1,600 +
7,000 =
1,600 +
17,750

Cash is increased $600 and Accounts

Receivable is decreased by the same amount.
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Transaction Analysis

Transaction 10
Marc Doucet withdraws $1,300 in cash
from the business for his personal use.
Trans. #

Balance
(10)
Balance

Assets

Cash
9,350
(1,300)
8,050

= Liabilities
Owner's
Liabilities ++
Owner's Equity
Account
Accounts
M.
Accounts
M. Doucet,
Doucet,
Receivable Supplies
Equipment
Payable
Capital
Equipment
Payable
Capital
1,400
1,600
7,000
1,600
17,750
1,600
7,000
1,600
17,750
(1,300) Doucet, Drawings
+
1,400 +
1,600 +
7,000 =
1,600 +
16,450

Cash is decreased $1,300 and M. Doucet,

Capital is decreased by the same amount.
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Tabular Summary of Softbyte

Transactions

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Income Statement

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Retained Earnings Statement

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Statement of Cash Flows

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Balance Sheet

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End

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