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ACBG13A16
Basic Financial
Accounting
AMIN SOHEILI
2017-10-31

Chapter 2, Financial Statements and the Annual Report

• Overview: the annual report

• Basic accounting equations

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Qualitative Characteristics of Accounting Information

What makes accounting information useful? (qualitative characteristics)
To ensure financial information is useful for economic decision-making we need to
consider the attributes or qualities that financial information should have

Understandability (for anything to be useful, it must be understandable)

 Relevance (to be useful, information must be relevant

Faithful Representation (information must be complete, neutral and free from error)
 Comparability (to be useful, look for similarities and differences among companies)
Consistency (compare within a company from different periods)
 Materiality: (to be useful, it must be relevant to a decision)
It refers to the significance of information contained within financial statements. It is
considered significant if its inclusion could influence the economic decisions of the users
 Prudence: Conservatism principle: (when two estimates of amounts are equally likely,
use the least optimistic one)
It is the inclusion of a degree of caution in the exercise of the judgments needed in
making the estimates required under conditions of uncertainty, such that assets or
income are not overstated and liabilities or expenses are not understated

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Assets
“…a resource controlled by the entity as a result of past events from which future economic benefits are
expected to flow to the entity” (IASB, para. 49)

three key characteristics:

 must be an expected future economic benefit
 the reporting entity must control the future economic benefit
 a transaction or other past event giving rise to the reporting entity’s control must have occurred

Non-current assets (> 1 year) Current assets (< 1 year)

aka fixed assets
Land Inventory
Property, Buildings Trades receivable
Plant and Machinery Prepayments
Equipment
Computers Bank balances
Motor vehicles Cash balances
2017‐10‐30 *also known as Fixed assets

Non-current assets

• Tangible assets: all assets with physical existence

• Property, Plant and Equipment
• To be used in the production or sale of goods or the rendering of services
• Long-term investments
• Investments intended to be held for an extended period of time
• e.g. equity shares held by the company or land held for investment purposes

• Intangible assets
• Non-current, non-physical assets of a business, the possession of which
provides future benefits to the owner
• e.g. goodwill, trademarkds, patents, copy rights etc.

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Liabilities
“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” (IASB,
para. 49)

three key characteristics:

 there must be an expected future disposition or transfer of economic benefits to other entities
 it must be a present obligation
 a past transaction must have created the obligation
Non-current liabilities (> 1 year) Current liabilities (< 1 year)

Loans due for repayment after Short-term loans, due for

more than one year’s time repayment within one year
Trade payables
Accruals
Bank overdrafts
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Capital / Equity
“the residual interest in the assets of the entity after deducting all liabilities” (IASB,
para. 49c) - The value the owners invested in the business

Income / Revenue
“increases in economic benefit during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity participants” (IASB, para 70)

Expenses
“…decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity participants” (IASB, para.
70b)

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Total Assets = Total Liabilities + Equity

Profit = Revenues – Expenses

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Total Assets = Total Liabilities + Equity

…represented in the balance sheet
A statement showing the assets, liabilities and capital of a business at
a certain point in time

Profit = Revenues – Expenses

…represented in the income statement
A statement showing a company's income and expenses over a given
period (like one fiscal year)

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• Revenue – expenses = profit

• Combined with the rearranged form of the accounting equation:

Assets – liabilities = equity

Change in capital

• Assetst1 – liabilitiest1 = Equityt0 + (revenuet1 – expensest1)

• Assets – liabilities = Equity  Balance Sheet

• Revenues – Expenses  Income Statement

• All + Elephants = Love + Chocolate + Rolls

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The annual report

• Management letter
• Management discussion on the developments
during the year and current state of the company
• The financial statements
• Auditors report
• auditing opinion: the FS are presented fairly in
compliance with IFRS (or respective GAAP)
• Management is responsible for:
• preparation and integrity of FS;
• maintenance of internal control system, to ensure
that assets are safeguarded and transactions are
properly authorised, recorded and reported

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English Swedish

Balance sheet Balansräkning

Income statement resultaträkning

Cash flow
statement Kassaflödesanalys

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Financial disclosure:
Mandatory, Voluntary disclosure

Balancesheet Balancesheet
Income Income
statement statement
Cash flow Cash flow
statement statement
Sustainability
reporting

3P, Triple bottom line

Multiple bottom line

Financial disclosure:
Mandatory, Voluntary disclosure
Ethical aspects, GRI, CSR
Implementing standards

The balance sheet

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Balance sheet:
A balance sheet is a financial statement that reports a 
business’s financial position (assets, liabilities and equity) at a 
specific point in time (closing date). 
A balance sheet is always in balance, i.e. if something 
happens on one side of the balance sheet, it is offset by 
something on the other side of it.

Accounting Equation formula   Assets = Liabilities + Equity

Balance sheet:

Innovative Design AB
Balance sheet
December 31, 2016

Debit side of Credit side of

the balance the balance
sheet sheet
(Debit) (Credit)

Balance sheet
Innovative Design AB
Balance sheet
December 31, 2016

Liabilities
(Skulder)
Assets
(Tillgångar) Equity
(Eget
kapital)

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Complete the balance sheet with some examples

Total Assets = Equity + Total Liabilities

Balance sheet

Non-current assets Equity

Non-current liabilities

Current assets

Current Liabilities

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Balance sheet:

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Balance sheet:

First balance sheet of the Schachgesellschaft Zürich, dated 9 
February 1810

Basic accounting equations

Assets = Liabilities + Equity

Contributed capital Retained

(capital stock) earnings

Retained earnings: The accumulated total profit earned by the

business but not paid dividends

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What type of account?

Identify assets, liabilities and equity
1. Equipment
2. Retained earnings
3. Patent
4. Common stock
5. Loan
6. Land held for investment purposes
7. Trade receivable (aka accounts receivable)
8. Trade payable (aka accounts payable)
9. Raw materials

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Should we recognise an asset?

1. A firm issues a 12 mEuro check to an insurance company for insurance over the next year.
2. A firm buys equity shares from another company for 325 Euro
3. A well-known scientist is hired to manage the R&D function for 480 Euro per year.
4. A firm acquires chemicals to be used as raw material in production for 800 Euro
5. The firm receives an order for 15 Euro in products
6. The firm has sold products for 10 Euro on credit to be paid next month

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Should we recognise a liability?

1. The firm owes its attorneys 50 Euro in legal expenses
2. The firm borrows 60 Euro form the bank for a 90-day period
3. The firm pays the scientist managing the R&D function the first monthly salary

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Human resource: IFRS: Assets are

items that carry
Should HR be considered as an asset? future economic
One of the most valuable assets for the company
benefits
If yes, then put it in the balance sheet!
Accounting for HR:
Current financial accounting standards do not recognize the
investments made by companies on their human resources either as
assets or equity.

Reasons:
the value of human assets are not measureable
If we are assets then current, non-current, tangible, intangible
Lack of control over HR

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Accounting for
professional
sport teams

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Recap: The income statement

• The income statements presents the performance of a company over a period of time.

• The summary of all income (revenue + other income) and expenditure for the financial
period

• Part of the double entry bookkeeping system

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The results of operating performance

• Revenues: sales or services operating
business

• Gains: income from e.g. selling a non-

current asset

• Expenses: cost of goods sold, other

operating expenses
• Losses: e.g. loss from selling a non-
current asset

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Chapter 3, Processing Accounting Information

Primary definitions
Transactions:
For accounting purposes, transactions are a financial 
representation of a business event, measured in 
monetary terms
Source document:
In these documents, the transactions are recorded. They 
form the basis for recording in a business’s accounting 
system. Examples: invoices, cheques
Accounts:
Accounts are the “buckets” that contain similar 
transactions
4 types of accounts: assets, liabilities, income and 
expenses

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Primary definitions
Chart of Accounts:
The numerical list of all assets, liabilities, sources of 
revenue, and expenses in the company's operating 
business that is used to organize and track all financial 
transactions
Assets: 
Resources owned by a business

Liabilities: 
Total funds owed (debt) for assets supplied to the 
company or expenses incurred but not yet paid

Primary definitions

The results of operating performance

Income:
Revenue: income generated in the course of ordinary business 
activities, e.g. sales of product and services, fees, interest, dividends 

Gains: increase in economic benefits such as disposal of an asset, 
revaluation of securities

Primary definitions

Expense:
Costs incurred in the ordinary course of business, e.g. 
production costs, salaries, depreciation 

Profit:
Easy to calculate
Profit = Income ‐ Expenses

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The process of recording transactions

Source: Collier, P.M., (2006), p. 26.

Debits and Credits Applied to Transactions
(1) Issuance of capital stock
Cash Capital Stock
(1)100,000 100,000 (1)

2017‐10‐30
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Debits and Credits Applied to Transactions
(2) Acquisition of property on credit
Building Notes Payable
(2) 150,000 200,000 (2)

Land
(2) 50,000

2017‐10‐30
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Debits and Credits Applied to Transactions
(3) Sale of monthly memberships on account
Accounts Receivable Membership Revenue
(3) 15,000 15,000 (3)

2017‐10‐30
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Debits and Credits Applied to Transactions
(4) Sale of products  for cash
Cash Revenue
(1)100,000 5,000 (4)
(4) 5,000
T Accounts reflect 
current and previous
postings to the account 
for each period
2017‐10‐30
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Debits and Credits Applied to Transactions
(5) Payment of wages and salaries
Cash Wage & Salary Expense
(1)100,000 10,000 (5) (5) 10,000
(4) 5,000

2017‐10‐30
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Chapter 4

Income Measurement and
Accrual Accounting

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Accrual Accounting Principles
 Recognition: process of recording an item as an asset, a liability, a 
revenue, an expense
 Measurement: requires two choices to be made
1. The attribute to be measured
• Historical cost
• Current value
2. The unit of measure
• Money

2017‐10‐30
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 1
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Accrual Basis (accruals accounting or matching principle):

The effects of transactions and other events are recognised when they occur, rather than when cash or its
equivalent is received or paid, and they are reported in the financial statements of the periods to which they
relate. - Matching revenues with expenses

Accruals basis: the income statement measures the performance regardless of when cash is
exchanged.
• Revenues are recognised when earnings process is substantially complete and cash
collection is reasonably certain
• Expenses are recognised when they occur (not when cash is exchanged)
• Match efforts with benefits
• Capitalise expenditures that will benefit future periods, expense as benefits are realised
(prepayments = current asset)
• Recognise liabilities when efforts benefitting the current period require cash payment in the future
(accruals = current liability)
 produces a difference between cash flows and earnings
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Cash and Accrual Bases of 
Accounting

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Accruals and Deferrals
 Deferral (Prepayments)
 Cash has been paid or received but expense or revenue has not yet 
been recognized

 Deferred expense
 An asset resulting from the payment of cash before the incurrence of 
expense

 Accrued asset: when we record before payments 

2017‐10‐30
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Closing Entries
 Made at the end of an accounting period
 Serve two purposes:
1. Return the balance in all nominal accounts to zero
2. Transfer the net income or loss and the dividends to Retained Earnings

Real and Nominal Accounts
 Real accounts: balance sheet accounts
 Permanent
 Not closed at the end of the period
 Nominal accounts: revenue, expense, and dividend accounts
 Temporary
 Closed at the end of the period  

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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 3: LO 7
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Summary
• 5 components of financial statements: balance sheet, income statement, statement of
changes in equity, cash flow statement, notes

• The balance sheet – a list of balances (assets, liabilities, equity) at a specific point in time

• The income statement – performance of the company over a specified period (year, quarter,
month)

• The basic accounting equations and their relation to the balance sheet and the income
statement

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