Notes for lecture 1

Important notes:
 Asset: If you pay for something that will provide economic benefits over
future periods (whether it's a service or a product), you initially record it as an
asset. This could be prepaid expenses (like insurance), equipment (like
computers), or inventory.
 Expense: If you pay for something and its economic benefit is used up
immediately or within the current accounting period, you record it as an
expense. This could be utilities, rent, or office supplies that are consumed
quickly.

 Liability (Unearned Revenue): If you receive money for a service or product

that will be delivered over future periods, you initially record this as a liability
(unearned revenue).
 Revenue: If you have provided the service or delivered the product within the
current accounting period, you record it as revenue.

At the end of the accounting period, you need to make adjusting entries for both
prepaid expenses (assets) and unearned revenue (liabilities) to accurately report the
financial position and performance of the business.

The primary purpose of adjusting entries is to align the revenues and expenses to the
"accrual basis" of accounting, which is a key principle requiring that revenues and
expenses be recorded in the period they are earned or incurred, regardless of when
cash transactions occur.

What about current assets/liabilities?

Current Assets: These are assets that are expected to be converted into cash, sold,
or consumed within one year or within the normal operating cycle of the business,
whichever is longer. Current assets include inventory, accounts receivable, and
prepaid expenses.
 Inventory: When you purchase inventory, it's recorded as a current asset. It
becomes an expense (specifically, Cost of Goods Sold) only when the
inventory is sold.
 Prepaid Expenses: These are payments made for expenses that will benefit
the current or a very short subsequent period (usually within one year). They
are recorded as assets initially and then expensed over the period they
benefit.
Revenues and expenses are part of the equity section of the accounting
equation because they ultimately affect the owner's equity in the business.
Specifically, revenues increase equity, while expenses decrease equity.

Revenue Accounts:

 Influenced when a company earns income from its normal business

operations.
 Recorded when a sale is made, even if cash hasn’t been received (accrual
accounting).
 Increases equity (since revenue increases net income, which is part of equity).

Expense Accounts:

 Influenced when a company incurs a cost as part of its normal business

operations.
 Recorded when an expense is incurred, not necessarily when cash is paid
(accrual accounting).
 Decreases equity (since expenses decrease net income, which is part of
equity).

Slide 10:

Labor Unions: A labor union is an organization of workers formed to protect

and advance their rights and interests. Unions often negotiate with employers
over wages, benefits, working conditions, and other aspects of employment.

Slide 12:
hindsight ‫ادراك متأخر‬
Insight ‫تبصر وتمعن‬
Foresight ‫بصيرة وحكمة‬

Fair value: the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date.
"Value in use": the present value of the future cash flows that an asset is
expected to generate over its remaining useful life.

Replacement costs: the cost that would be incurred to replace an existing

asset with a similar one at its current condition and functionality, as of the
measurement date.

Difference between Fair value and replacement cost: Fair value assumes a
hypothetical sale or transfer in the market, including profit margins and
transaction costs. In contrast, replacement cost focuses on the cost of
acquiring a similar asset without necessarily considering its ability to be sold or
the price it could fetch in the market.

 Fair Value: It's the price that an asset could be sold for in the market. Think of
it as the "selling price" of the asset, as determined by what others are willing
to pay for it in a current transaction.
 Replacement Cost: This is the cost to buy a new asset that is similar to the
existing one. It's like asking, "How much would it cost to replace this asset
today?" It doesn't consider what you could sell the existing asset for, just what
it would cost to replace it.

So, in essence, fair value is about the selling price in the market, while replacement
cost is about the buying price of a similar new asset.

Why companies use replacement cost?

Impairment Testing: In some cases, replacement cost can inform impairment
testing by providing a basis for comparison with the asset's carrying value.

Tax Purposes: Some tax jurisdictions allow for deductions based on the
depreciation of the replacement cost of assets, which can be more
advantageous than using historical cost.

Insurance Purposes: Companies use replacement cost to determine the

appropriate insurance coverage for their assets. This ensures that in the case
of loss or damage, the insurance payout will be sufficient to replace the asset.

Slide 19:
Relevance and faithful representation are two fundamental qualitative
characteristics that make financial information useful to users, as outlined in
the conceptual framework of accounting standards like IFRS (International
Financial Reporting Standards) and GAAP (Generally Accepted Accounting
Principles).

 A proprietorship is a business owned and operated by a single individual. It's

the simplest and most common form of business entity.

 A partnership is a business owned by two or more people who agree to share

the profits and losses of the business.

 A corporation is a legal entity that is separate and distinct from its owners
(shareholders).

Slide 25:
Ordinary shares: are a fundamental way for investors to participate in the
ownership and growth of a company, offering potential for dividends and
capital appreciation, but also carrying a higher level of risk compared to other
types of investments.
Preferred Shares: These shares often have preference over ordinary shares in
the distribution of dividends and upon liquidation. Preferred shareholders
typically receive a fixed dividend before any dividends are paid to ordinary
shareholders. However, they usually do not have voting rights.

Redeemable Shares: These are shares that the issuing company can buy back
at a future date. This can be at a fixed date or at the choice of the company.
Convertible Shares: These shares give the shareholder the option to convert
their preferred shares into a predetermined number of ordinary shares.

Each type of share has its own set of rights, privileges, and restrictions, and the
specific terms can vary greatly depending on the company's articles of
incorporation and the laws of the jurisdiction in which the company is
incorporated.

Revenues:
revenues are the total amounts of money a company earns from its normal
business operations, like selling goods or providing services. It's the income
generated before deducting any expenses. Revenues are recorded when they
are earned, not necessarily when cash is received.

Explaining the sentence in the slide: when a company earns revenue, it usually
sees an increase in assets (like cash or receivables). Since liabilities don't
increase simultaneously, this increase in assets leads to an increase in the
company's equity. Therefore, revenues result in an increase in equity because
they increase assets without increasing liabilities. This is because equity is
calculated as the difference between a company's assets and its liabilities.

The term "gross" indicates that it's the total income without any deductions.

Slide 30:
The steps in the accounting cycle:

1. Analyze Business Transactions: Review the transactions to determine their

impact on the financial position of the business.
2. Journalize: Record transactions in the journal as debits and credits. This is the
process of creating journal entries for each transaction.
3. Post: Transfer the debits and credits from journal entries to the corresponding
accounts in the ledger. This step is known as posting.
4. Trial Balance: Compile the balances of all ledger accounts to ensure that
debits equal credits. This is done to check the accuracy of the postings.
5. Adjusting Entries: Make necessary adjustments for revenues and expenses
that have been earned or incurred but not yet recorded. This is done to
adhere to the accrual basis of accounting.
6. Adjusted Trial Balance: Prepare a new trial balance after adjusting entries to
reflect the changes made.
7. Financial Statements: Use the adjusted trial balance to prepare the financial
statements, including the income statement, statement of retained earnings,
balance sheet, and statement of cash flows.
8. Closing Entries: Make entries at the end of the accounting period to transfer
the balances of temporary accounts (like revenues, expenses, and dividends)
to permanent accounts (like retained earnings).
9. Post-Closing Trial Balance: Finally, prepare a trial balance after the closing
entries to ensure the ledger is balanced and ready for the next accounting
period.

These steps are repeated each accounting period, providing a systematic method for
recording and analyzing financial information.

Closing Entries:
For example:
 1. What are Revenue Accounts? Revenue accounts are the accounts where a
business records its income from sales, services, or other primary business
activities. Throughout the accounting period, revenues are accumulated in
these accounts.
2. Why Close Revenue Accounts? At the end of an accounting period (like a
month, quarter, or year), you need to prepare the books for the next period.
Part of this preparation is to zero out the revenue accounts so that they can
start fresh and only reflect the revenue for the new period. You don't want
revenues from the previous period to mix with the new period's revenues.
3. The Mechanism of Closing Revenue Accounts:
 Credit the Revenue Accounts: To bring the revenue accounts to zero,
you make a credit entry in each revenue account. This effectively
cancels out the revenue balances because revenues normally have
credit balances.
 Debit the Income Summary: The counterpart to this entry is a debit in
an account called "Income Summary". The total revenue amount is
transferred to this account. The Income Summary account is a
temporary account used specifically for the closing process.

Here's an example: If your sales revenue account has a $10,000 credit balance at the
end of the period, you would make a closing entry by debiting Sales Revenue for
$10,000 and crediting Income Summary for $10,000. This entry removes the balance
from the Sales Revenue account and transfers it to the Income Summary account.

Slide 35:

Accounts payable: the amounts owed by a company to others (e.g. suppliers

of products and services) for goods or services that have been received but not
yet paid for (purchased goods or services on credit).

Accounts receivable: the amounts owed to a company by others (e.g.

customers) for goods or services that have been delivered or used, but not yet
paid for (sold goods or services on credit).

Slide 48:
Difference between income statement and comprehensive income
statement:
Under IFRS, OCI includes items such as unrealized gains and losses on revaluing
available-for-sale financial assets, foreign currency translation differences, and
gains and losses on hedging instruments in cash flow hedges, among others.
Why investments (equity) and dividends are not included in the income
statement?
The income statement focuses solely on the revenues earned and expenses
incurred from the company's core business operations within a specific
period, aiming to show the profitability of the business. Transactions between
the company and its shareholders are related to equity financing and
distribution of profits, not operational performance, and are thus handled
separately in the financial statements.