Basics of

Accounting
Because in this
process, everything
counts.
 What is
accounting?
Accounting is an information and measurement
system that identifies, records and
communicates relevant, reliable and
comparable information about an
organization’s business activities.

We will show you again the accounting

principles you should follow.
 The Accounting principles
Accrual principle: Your transactions should be
recorded in the period in which they actually
occur, rather than the period in which the cash
flows related to them occur.
Consistency principle: Once an accounting
principle or method is adopted, continue to follow
it consistently in future accounting periods. Only
change an accounting principle or method if the
new version in some way improves reported
financial results.
Cost principle: It is also known as the historical cost
principle. The cost principle requires that assets be
recorded at the cash amount (or its equivalent) at
the time that an asset is acquired.
Economic entity principle: The transactions of a
business should be kept separate from those of its
owners and other businesses. This prevents
intermingling of assets and liabilities among
multiple entities, which can cause considerable
difficulties when the financial statements of a
fledgling business are first audited.
Full disclosure principle: You should include in an
entity's financial statements all information that
would affect a reader's understanding of those
statements.
Going concern principle: The assumption is that a
company or other entity will be able to continue
operating for a period of time that is sufficient to
carry out its commitments, obligations, objectives,
and so on.
 The Accounting principles
Monetary unit principle: Record only business
transactions that can be expressed in terms of a
Must do
currency. Start recording your transactions! It’s easier
than you think. Approach GFB if you have any
Reliability principle: You can record only transactions in questions or concerns about any accounting
the accounting system that you can verify with principle!
objective evidence (accounting document).

Revenue and costs recognition principle: The

accounting guideline requiring that revenues (costs)
be shown on the income statement in the period in
which they are earned (spent), not in the period when
the cash is collected.

Time period principle: You should report the financial

results of its activities over a standard time period,
which is usually monthly, quarterly, or annually.
 Relating to accounting basics
We will present the basics of accounting through a story of a person starting a new business. The person is Joe Perez—a savvy man who sees
the need for a parcel delivery service in his community. Joe has researched his idea and has prepared a business plan and created a
corporation : Direct Delivery, Inc.
He then meets with Marylin, an accountant. At his first meeting, Joe asks her for an overview of accounting, financial statements, and the
need for accounting software. Based on Joe's business plan, Marilyn sees that there will likely be thousands of transactions each year. She
states that accounting software will allow for the electronic recording, storing, and retrieval of those many transactions. Accounting
software will permit Joe to generate the financial statements and other reports that he will need for running his business.
Joe seems puzzled by the term transaction, so Marilyn gives him five examples of transactions that Direct Delivery, Inc. will need to record:
1. Joe will no doubt start his business by putting some of his own personal money into it. In effect, he is buying shares of Direct
Delivery's common stock.
2. Direct Delivery will need to buy a sturdy, dependable delivery vehicle.
3. The business will begin earning fees and billing clients for delivering their parcels.
4. The business will be collecting the fees that were earned.
5. The business will incur expenses in operating the business, such as a salary for Joe, expenses associated with the delivery vehicle,
advertising, etc.
With thousands of such transactions in a given year, Joe is smart to start using accounting software right from the beginning. Accounting
software will generate sales invoices and accounting entries simultaneously, prepare statements for customers with no additional work,
write checks, automatically update accounting records, etc. By getting into the habit of entering all of the day's business transactions, Joe
will be rewarded with fast and easy access to the specific information he will need to make sound business decisions and create the Financial
Statements (we will explain them in detail later).
 Users of
accounting information
External Internal
• Lenders or banks • Executives for
• Shareholders decision making
• Government • Controllers and
• External Auditor managers

The ultimate purpose of accounting is to make financial

statements. There are 4 financial statements:

• Balance Sheet: what do we OWN and what do we OWE

• Income Statement: how much did we EARN and how much did
we SPEND
• Statement of retained earning: What did we do with the
EARNINGS
• Cashflow Statement: how much CASH have we received and
paid.

*There is a separate course to understand the financial statements.

 Accounting
equation

Assets= Liabilities + Equity

• Assets: something of value that we own (i.e. cash in

the bank account, accounts receivable or beamer or
other office equipment)
• Equity: what owners claim against the business (for
AIESEC Reserves)
• Liabilities: obligations we owe (i.e. Office mortgage,
accounts payable for electricity etc).

The accounting equation must remain BALANCED at

all times
 Income
statement
The income statement is a financial statement
that represents the revenues earned and
expenses incurred

Facts:
1. You can only find revenues and expenses
on the income statement
2. When revenues exceed expenses, we
report Net Income. When Expenses
exceed Revenues, we report Net Loss.
3. The amount of Net Income (or Loss) is
transferred to the Retained Earning
Statement at the end of the year
 Statement of
retained earnings
The statement of retained earnings is a financial
statement that contains the retained earnings
from previous year and calculates the ones from
this year

Facts:
1. Beginning Retained Earnings are reported
first (these are from previous fiscal year)
2. Net income is added. Net Loss is
subtracted
3. Cash dividends are subtracted
4. The amount of ending Retained Earning is
transferred to the BALANCE SHEET.
 Balance
sheet
The balance sheet reports the amount of Assets,
Liabilities and Equity at a specific point in time.

Facts:
1. Only the balance sheet reports ASSETS
and LIABILITIES
2. ASSETS= LIABILITIES + EQUITY
3. Retained Earnings is consisted in the
Equity section
 Cash-flow
Statement
The cash-flow statement is a financial statement that
shows an entity’s cash movement and balance at end of
period.

Inflow or outflow for operating, financing, or investing

activities.

Facts:
1. Operating activities: Represents the cash flow
from AIESEC primary activities.
2. Investing Activities: Represents cash flow from
the purchase and sale of assets other than
inventories.
3. Financing Activities: Represents cash flow
generated or spent on raising and repaying debt
together with the payment of interest.
 Accounting program vs. Excel
Official
With the accounting program, we
must do our daily accounting,
overview about current liquidity,
liabilities towards members,
registration of income and expenses,
and generate the official documents.
NOT
We can use excel to see a general
overview about the financial situation,
comparison planned and actual values,
tracking of budget spendings,
consolidation of data but this is only as
a tool to view the data
 Sample transaction
On December 1, 2016 Joe starts his business Direct Delivery, Inc.
The first transaction that Joe will record for his company is his
personal investment of $20,000 in exchange for 5,000 shares of
Direct Delivery's common stock. Direct Delivery's accounting
system will show an increase in its account Cash from zero to
$20,000, and an increase in its stockholders' equity account
Common Stock by $20,000. Both of these accounts are balance
sheet accounts. There are no revenues because no delivery fees
were earned by the company, and there were no expenses.
After Joe enters this transaction, Direct Delivery's balance sheet
will look like this:
Marilyn asks Joe if he can see that the balance sheet is just that-in
balance. Joe looks at the total of $20,000 on the asset side, and
looks at the $20,000 on the right side, and says yes, of course, he
can see that it is indeed in balance.
Marilyn shows Joe something called the basic accounting equation,
which, she explains, is really the same concept as the balance
sheet, it's just presented in an equation format:
The accounting equation (and the balance sheet) should always be
in balance.
Sample transaction
Did the first sample transaction follow the double entry system and
affect two or more accounts? Joe looks at the balance sheet again
and answers yes, both Cash and Common Stock were affected by
the transaction.

Marilyn introduces the next basic accounting concept: the double

entry system requires that the same dollar amount of the
transaction must be entered on both the left side of one account,
and on the right side of another account. Instead of the word left,
accountants use the word debit; and instead of the word right,
accountants use the word credit. (The terms debit and credit are
derived from Latin terms used 500 years ago.)

Nothing to worry now, we

have automated
bookkeeping softwares!
 Double entry
bookkeeping system
The double entry system of accounting or bookkeeping means that
every business transaction will involve two accounts (or more). For
example, when a company borrows money from its bank, the
company's ‘cash’ account will increase and its liability account ‘loans
payable’ will increase. If a company pays $200 for an advertisement,
its ‘cash’ account will decrease and its account ‘advertising expense’
will increase.

Double entry also allows for the accounting equation (assets =

liabilities + owner's equity) to always be in balance. In our example
involving ‘advertising expense’, the accounting equation remained in
balance because expenses cause owner's equity to decrease. In that
example, the asset ‘cash’ decreased and the owner's capital account
within owner's equity also decreased.

In AIESEC, we use WAVE (free version for smaller entities) and

Quickbooks for bigger entities.
 The charts Balance Sheet accounts:
● Asset accounts (Examples: Cash, Accounts

of accounts
Receivable, Supplies, Equipment)
● Liability accounts (Examples: Notes Payable,
Accounts Payable, Wages Payable)
To begin the process of setting up Joe's accounting system, he will
need to make a detailed listing of all the names of the accounts that ● Stockholders' Equity accounts (Examples:
Direct Delivery, Inc. might find useful for reporting transactions. This Common Stock, Retained Earnings)
detailed listing is referred to as a chart of accounts. (Accounting
software often provides sample charts of accounts for various types
of businesses.)
Income Statement accounts:
As he enters his transactions, Joe will find that the chart of accounts
will help him select the two (or more) accounts that are involved. ● Revenue accounts (Examples: Service Revenues,
Once Joe's business begins, he may find that he needs to add more Investment Revenues)
account names to the chart of accounts, or delete account names that
are never used. Joe can tailor his chart of accounts so that it best sorts
● Expense accounts (Examples: Wages Expense,
and reports the transactions of his business. Rent Expense, Depreciation Expense)

Because of the double entry system all of Direct Delivery's

transactions will involve a combination of two or more accounts from To help Joe really understand how this works, Marilyn
the balance sheet and/or the income statement. Marilyn lists out
illustrates the double entry with some sample
some sample accounts that Joe will probably need to include on his
transactions that Joe will likely encounter.
chart of accounts:
You can check AIESEC’s chart of accounts in here
 Credit and Debit
Under the double-entry system every business transaction is recorded in at
least two accounts. One account will receive a "debit" entry, meaning the
amount will be entered on the left side of that account. Another account will
receive a "credit" entry, meaning the amount will be entered on the right side of
that account. The initial challenge with double-entry is to know which account
should be debited and which account should be credited.

Debit Credit
Increased with a debit: Increased with a credit:
Dividends (Draws) Gains
Expenses Income
Assets Revenues
Losses Liabilities
Stockholders' (Owner's) Equity
 Accounting
during the year
Please bear in mind for every transaction you should
have documents to support it.
 What to do
Requirements of accounting documents
Documents that prove accounting transactions (i.e.
invoices, vouchers, payrolls, reimbursement forms,
concretely?
receipts). They need to include: Bank reconciliation
Credit Card purchases reconciliation (if
● The identification number of the vendor. applicable)
● The amount to be paid. Petty cash balance
● The date on which payment should be made. Revenue recognition and Accounts
Receivable updates
● The accounts to be charged to record the liability.

Archive all accounting documents physically or virtually!

Have these accounting documents according to national
law, but no less than 5 years:
1. Invoices created and received
2. Reimbursement forms and all receipts
3. Bank statements.
4. Cashbook.
5. List of transaction from the year.
6. Balance Sheet & Profit and loss Statement
 When we issue an invoice on one date, we
Issuing usually don’t receive the payment the same
day that when we issued the invoice. So we

an invoice use the account “accounts receivable”

instead of “bank” at the debit.

Debit Credit
Accounts receivable Income account
VAT (if it is necessary)

Once we receive the payment, we can

charge the money at the “bank” account on
debit and “accounts receivable” on credit.

Debit Credit
Bank Accounts receivable
 Also, sometimes we don’t pay an invoice the
Paying same day that we receive. In this case we
use the account “accounts payable” in credit.

an invoice Debit Credit

Expense Accounts payable
VAT (if it is necessary)

Once we make the payment, we put

“accounts payable” in debit and “bank” in
credit.
Debit Credit
Accounts payable Bank

*For the rest of examples, we are going to consider that

the money enters the same day as we issue the invoice.
 Outgoing accounting is simple. You just need
Outgoing to put the bank’s account in debit, and in
credit you will put the account for the

operations program.
The number of the account will depend of
each accounting plan of each country.
Check the legality part to know if it is
necessary to pay the VAT for outgoing
activities.

Debit Credit
Bank Outgoing Account
(oGV, oGE, oGT)
VAT (if it is necessary)

Remember: only ONE PAYMENT!

 With the accounting program “wave”, as soon
Incoming you create the invoice, the program calculates
the VAT, books the income, sends the invoice

operations and also automatic payments reminders.

You always need to book the invoice always as
accrual, no matter if you expect the payment
in the same financial period or in the next.

Debit Credit
Bank Incoming Account (iGV,
iGE, iGT)
VAT (if it is necessary)

You will learn much more about

“wave” in the next webinars.
 You have 2 possible ways to handle it:
Reimbursements One-step: you reimburse and book the expense.

Debit Credit
Imagine that a member has spent money from Expense Bank
their own pocket and needs to be reimbursed.
Two-step: you book the expense against an
employee current account and settle this
medium account when you pay out the money.
Set some rules! Advantage is that you can book several receipts on
the account and reimburse everything at once
1. Set DDL for receiving them!
2. Reimburse only forms with receipts! Debit Credit

3. We recommend to scan your Expense 1 LC/MC Member

reimbursements, because the receipts tend Expense 2
to get unreadable by time.
4. Don‘t put your own money into petty cash! Debit Credit
LC/MC Member Bank
 Sometimes you will need to pay service expenses
Bank to the bank. You only need to put this expenses
on the ‘debit’ side, and the bank account at the

interests “credit” side.

Consider if you are paying too much bank
expenses to change your bank, or choose one for
the whole entity, remember that this kind
expenses usually occur when you transfer money
to other banks.

Debit Credit
Services Expenses Bank

*Take your time to consider if your bank

is the best for your LC
 Cash movements need to be documented in your
Cash bookkeeping, but first you need to open a
cashbox: this is a transfer booking.

Debit Credit
Cashbox Bank

Remember to keep all invoices that you pay with

this money, so you can keep track of all
transactions during the cashbox is open with
official documents.
The GFB board has a great guide, you can check
it here!

We honestly recomend to stop using

cashbook, as it needs a lot of control and
tracking to avoid misunderstandings.
 What happens when a LC is not able to pay the
LC Fee, or it can just pay some part of the LC Fee?
LC Fee Don’t be alarmed, economy is full of cycles,
including good ones and bad ones. But always
remember to take actions as soon as possible,
because a huge amount of debt of only one LC
This is how the MC should bookeeping the LC can harm the whole entity.
Fee, to each LC.
Debit Credit Debit Credit
Bank LC 1 Bank LC 1
LC 2 Debt LC 1
LC 3

This is how the LCs can bookeeping the LC Fee. When the LC pays the debt.
Debit Credit Debit Credit
LC Fee Bank Bank Debt LC 1

The LC Fee is calculated with the distribution model.

Here you can check our marvelous guide of how to All LCs with debt must create a payment plan.
make your financial and distribution model.
What is petty cash
Petty cash is a small amount of cash on hand that is used for
paying small amounts owed; rather than writing a check or
small amount of cash kept on hand for making immediate
payments for miscellaneous small expenses.

Rules
- You need to save all the cash on safety place
- Counting amount of petty cash every month and
making a written note about it at the beginning and
at the end of each term. In this note it needs to be
written who is responsible for the cash and how
much money there are for the exact date. LCP, VPF
and one additional person need to be present and
sign this note.
- All money paid or received in cash need to be
documented with vouchers and receipts.
- All the payments have to be written in a cash book.
 What is a petty
cash voucher Example
The petty cash vouchers serve as proof of cash spending or
purchase advances to employees (members) in case the
responsible or internal auditor makes an unannounced audit
of the petty cash fund. The vouchers also serve as
documentation showing what expenditures were made with
petty cash and are used to prepare the petty cash journal
when the fund is replenished.

A petty cash voucher typically includes the following

information:
● Voucher number
● Organization name (usually stamp)
● Date
● Amount of money
● Expense account
● Vendor name
● Signature
 How to use
petty cash
You need to have box big enough to keep all the money
1 and receipts in, but small enough to be inconspicuous
and easily hid. Make sure you get one with a money
tray so the bills and change can be easily organized.
Assign responsibility: usually the LCVP F is in charge of
petty cash and account. The person you assign should
2 be generally available to any members who might have
need of petty cash.
Once you have the basics covered, you need to put
sufficient money into petty Cash to handle most cash
3 purchases for the time period you choose. The money
should be placed into the petty cash box.

How to use
petty cash
part II
Establish the petty cash fund on the accounting record
of the entity. Cash, Bank and petty cash account are
4 both asset account. When initially opening the petty
cash fund, cash is simply transferred from asset
account to another with no effect on the balance of the
entity assets.
Once there is enough cash in the petty box, the
operations can start using it for small transaction. The
5 LCVP F should require a receipt for each petty cash
purchase. When presented with the receipt of
purchase, the LCVP F should note the date and the
name of the purchaser on the receipt and deposit the
receipt in the petty cash box
After sorting and totaling the receipts in each of the
6 expense categories, the accounting should properly
record the expenses associated with the petty cash
receipts
• LCVP F should credit the cash account first for
the total amount of the reimbursement to petty
cash, which reduces the balance of the main
cash account by the same amount.
• LCVP F should then debit the individual
expense accounts for the sums spent in each.
The total debit in the expense account will
equal the credit of the petty cash account (for
example if you have $200 in petty cash receipts,
you would then need to record that $200 in the
appropriate accounts. If it all the $200 were
“overhead cost office”, you would debit the
•
overhead cost office account $200).
The accounts for each type of expense will
increase by the amount spent in each category
to show that the entity spent that much on
those items. Then, the net income of the entity
will decrease by the amount spent on the
expense statement.
What is cash book
A cashbook is a simple accounting tool that is a reliable method
of recording basic information of all financial cash transactions.
It is an easy tool that allows you to know how much money is
coming in and what bills are getting paid.

By using a cashbook you know exactly how much cash your

entity has and where you have spent your cash on. The cash
book should be a record of transactions that are legitimate
business expenses and, thus, in order to expense them you
need to transfer the records of these transactions to your
general ledger. Furthermore, the cash book is useful for your
accounting, because it allows you to record all cash payments
systematically and provides information about cash
management more easily. Moreover, your cashbook is
supposed to be part of your entity’s petty cash fund. Petty cash
fund is the amount of money that is reserved for purchases
that are not expensive and that are not convenient to make by
using a credit card.

Def Ledger: a book that a company use to record information

about the money it has paid and received
 How to use a
cash book
All the headlines do speak for themselves: LC, Name, Month
(/quarter/week, depends how often you want to record
everything) and page. In order to start working with your cash
book you write down your petty cash fund on opening balance:
this is the amount of cash where you start with.

When you used your entire petty cash find, you need to add
more money by withdrawing from your bank account and
transferring to your petty cash fund, while noting this
transaction in your banking ledger. Make sure that you use
appropriate categories in the description field.
Example
 Accounting
at the end of the year
 What is a
fiscal year?
A fiscal year (FY) is a period that a LC or entity
uses for accounting purposes and preparing
financial statements. A fiscal year may not be
the same as a calendar year in companies, but
in AIESEC usually fits with the natural year
(Jan-Dec).

At the end of the fiscal year you need to

generate your financial statements, such as the
balance sheet or the profit and loss statement.
It is also a moment when you may need to pay
taxes.
Source: Investopedia
 Closing steps
1. Set a final DDL for your members to give you all
reimbursements for ending fiscal year.
2. Send reminders to all members, companies, and
partners who owe you money.
3. Create all invoices and all receipts which should be
created for this year.
4. Accrue any revenue or costs that cannot be billed
5. Recalculation of exchange rate.
6. Do inventory of all accounts and correct the
mistakes in accounting if it is need.
7. Calculate income taxes in case you need to pay
them.
8. Complete the financial statements, review them
and correct all errors.
9. Release the financial statements.
 Deadlines to
compile information
Contact all the departments from the LC to
ensure that all expenses and revenues are
supported with documentation such as invoices
for companies, receipts for small expenses, etc.
Therefore, set a date with your LC to receive all
this information.

This is in order to ensure completeness and

accuracy of accounting and without fulfilling
these principles your accounting might be
without legal power.

*Remember to keep your documents at least five years!

 Documents
Remember to keep all the invoices and receipts. All
transactions must be justified with this kind of papers.
Even the small expenses must be supported with a paper.

Remember: in an invoice must appear your data and data

from the person or company who receives, moreover it
must be clear for which service/good is the invoice.

Reviewing all the invoices and receipts will allow you to

ensure that the accounts are correct and there isn’t
mistakes. Therefore your accounts will be ready to
receive audits.
 Accrual Accounts
Use accrual accounts in those operations where you
expect to collect money in the future (or to pay it). For
example, when you will get paid by opening a TN but it
will occur next year. Accrual accounting recognizes those
events even if the cash transaction has occur.

Debit Credit
Accrual account outgoing GV Outgoing GV
Accrual account VAT VAT (if it is need)

And once you get paid next year, just change the accounts.

Debit Credit
Bank Accrual account
outgoing GV
Accrual account VAT
 Exchange rate
In case you have cash in a currency different than from
your country or during the year you have paid or received
in a different currency, remember to take it into account
in your calculations. For example, all entities that don’t
use the euro will need to calculate the exchange rate at
the moment of paying the AI Fee.

For future contracts and payments that involve different

currencies, remember to set in the contract at which
exchange rate will be the conversion. For example: I set a
contract with a company that the payment will be in
dollars instead of euros, at x exchange rate. At the
moment of payment, I will pay at x exchange rate, instead
of the current one.
 Closing entries
At the end of the fiscal year, you use closing entries to
shift the entire balance in every temporary account
into retained earnings, which is a permanent account.
The net amount of the balances shifted constitutes the
gain or loss that the company earned during the period.

Once the year-end processing has been completed, all

of the temporary accounts have been emptied and
therefore "closed" for the current fiscal year. You then
set a flag in the accounting software to close down the
old fiscal year, which means that no one can enter
transactions during that time period. You also set
another flag to open the next fiscal year, at which point
you open the same temporary accounts, now with zero
balances, and use them to begin accumulating
transactional information for the next fiscal year.
In order to generate financial statements (Profit and
loss statement and balance sheet, you need to do
“closing operations”, which transfer your ending
balances to these accounts.
In many accounting system this is done automatically
when you close the fiscal year.
 Evaluation of
accounts receivables
Unfortunately, it can happen that a company or a
member owes us money from a long period of time
and the risk of not receiving the money is high.

The end of the fiscal year can be a good moment

when you can look back and see if there is any money
that must be received or paid, and evaluate how
likely are this situations to happen.

It can be created a matrix with the probability of

getting paid (or probability of paying) and the amount
of money, for example.
 Profit and Loss statement: presents information of the

Creation of the financial results of an organization's activities over a period

of time.
It communicates how much revenue was generated during

financial statements the period and what costs it incurred to be able to do so.
Important is that it is consistent with revenue and expenses
(cost of sales, sales, general and administrative expenses
other operating expenses) are recognized when it happened
independent of cash movements (so not money in the bank).

Balance Sheet: Also called statement of financial position or

statement of financial condition discloses what an entity
owns and owes at a specific point in time. Equity (or what
shareholders’ are entitled to (Assets minus liabilities).

Annual Report: an annual publication that describe the

operations and financial conditions of the LC or entity. The
front part of the report often contains an impressive
combination of graphics, photos and an accompanying
narrative, all of which chronicle the LC or entity's activities
over the past year. The back part of the report contains
detailed financial and operational information. Each entity
will have a template for this.

Once all this financial statements are created, don’t forget to

review them!
 Release of the
financial statements

Once you have finished and corrected the financial

statements, it’s time to release them. But be careful! The
annual report is a document that anyone can see and often
can be sent to companies to evaluate if there are going to
cooperate with us.

The financial statements are formal report, so you should

have writing guidelines to ensure the proper
communication of the information. Moreover, it is a work
that must be done within all the LC/MC, as they are going
to explain information from different areas, such as
marketing, operations or business development. Usually in
the report you compare the reality with the budget.
 #ProudFinancier

are you ready?

To prove how you mastered the fine art of
accounting? Review the PPT one more time, take
your notes, and take the Accounting Quiz!