Financial Reporting – Introduction to Book keeping

Describe the basic accounting information system (system of collecting, storing and processing information) :
- Collects and processes transaction data (of an actual binding transaction)
- Disseminates financial information to interested parties
- Varies widely from business to business.
Nature of business (SAP Intangible assets and licenses v/s Steel Industry Capital intensive)
Type of transactions (SAP service income v/s Steel product sales)
Size of business (Group of companies’ v/s single organization)
Volume of data to be handled
Informational demands (Small companies exempt from filling long form accounts vs Big companies have much tighter restriction for reporting)

Accounting event – an event brings change to account balances it

is then classified as a transaction and recorded in the books.
The transaction involves a monitory exchange of good and
services and is recorded in the journal in chronological order. The
Journal entry has a one or more debits and credits of the altered
account (asset, income etc). Once the accounts are tabulated in
the T format (Debit T Credit) the recorded entries from the journal
are posted into the ledger of the said account. Accounts can be
Real like asset positions or liabilities that are permanent or open
for longer than 12 months. Accounts can also be Nominal that are
deemed temporary and have to be closed out before completion
of a financial cycle (incomes, expenses). A Trial balance with
balances from the ledgers of all accounts is prepared where debits
= credits. Adjusting entries help bridge the gap between
performance execution and cash (accrued revenue, unearned
revenue, accrued expenses, prepaid expenses and depreciation).
After the trial balance is adjusted and reflects the correct position
this is posted into financial statements.
Liabilities Assets

Increase
DEBIT

Decrease
Equity
CREDIT
Liabilities Assets

Increase Increase
CREDIT DEBIT

Equity
Liabilities Assets

Increase
CREDIT

Decrease
DEBIT

Equity
Liabilities Assets

Increase
CREDIT

Equity

Decrease
DEBIT
Liabilities Assets

Increase
DEBIT

Equity

= Profit
Increase
CREDIT Income (CREDIT)

Expenses (DEBIT)
Liabilities Assets

Decrease
CREDIT

Equity

= Loss
Decrease
DEBIT Income (CREDIT)

Expenses (DEBIT)
Golden rules (an alternative way of remembering how to post entries)
1. Debit what comes IN credit what goes OUT (remember this rule with respect to assets for ease)

2. Debit all EXPENSES AND LOSSES, Credit all INCOMES AND GAINS

Logic of the rule:

Debit what comes IN credit what goes OUT
• Applicable for all REAL accounts
• We classify IN as a positive effect and OUT as a negative effect
Debit all increase in assets Credit all decrease in assets
Assets coming into the business (positive effect) Assets going out of the business (negative effect)
Debit all decrease in liabilities Credit all increase in liabilities
Liabilities being paid off (positive effect) Liabilities increasing (negative effect)
Securities – a financial instrument that can be traded
Accumulated Depreciation – cumulative depreciation of an asset up to a single point in time
Accumulated amortization - cumulative amortization expenses that have been charged against an intangible asset
Allowance to reduce inventory – write-off of a portion of inventory that no longer has value
Share Capital – par value of all equity securities including common and preferred stock sold to shareholders
Share Premium – value received for shares over and above the par value
Current Liabilities – liabilities of a business that are expected to be settled in cash within the fiscal year or operating cycle of a company
whichever is longer
Provision – this is recorded as a liability first (Provision) and when it occurs and is paid off the money is expensed (Bad debt expenses) in
the current account
Amortization v/s Impairment – Amortization is used to reflect the reduction in value of an intangible asset, impairment occurs when the
intangible asset is deemed less valuable than is stated on the balance sheet after amortization
Loss due to decline in inventory – when “net realizable value” of the inventory is less than its cost
What are Adjusting entries?
Journal entries that we post at the END of each accounting period to align our books with the accrual accounting basis.

Revenue is recognized when it is earned, expenses are

recognized when they are incurred – IRRESPECTIVE OF
Think of deferrals as PREPAYMENTS
CASH

three parts
seller gives good
seller provides bill
buyer pays cash

Insurance, Rent (student), Supplies (moving Insurance 2018 2019 2020

from inventory to production)

- If cash came in before the performance

- Sellers pov – Unearned Revenue
Rent (studentenwerk), Airline tickets
- Buyers pov – Prepaid Expense
Cash Goods

- If performance came in before the cash 2018 2019 2020

Substance of the transaction happened in the past,
- Sellers pov – Accrued Revenue
since goods were exchanged but the natural
- Buyers pov – Accrued Expense account trigger in this transaction happens in the If a company does not make an adjustment for these
future where the invoice is charged to you. deferrals,
Goods Bill the asset and liability are overstated, and
the related expense and revenue are understated
2018 2019 2020
Question 1:

 On 1st October, company A invests 25,000 EUR cash in securities.

A. Debit Credit
Cash 25,000 EUR Securities 25,000 EUR

Debit Credit
B.
Securities 25,000 EUR Cash 25,000 EUR
2. In January, company A purchases office equipment costing 125,000 EUR by signing a 3-month, 8 % p.a., 125,000 EUR
notes payable.
Debit Credit
Equipment 125,000 EUR Current Liabilities 125,000 EUR

3. The redemption and the interest of notes payable (no. 2) will be paid.

* 8%*(3/12)*125,000 = 2,500 (8% per Year for a period of three months)

Debit Credit
Current Liability 125,000 EUR Cash 127,500 EUR
Interest Expense (-) 2,500 EUR

4. Company A sells a car that has been used in the accounting department to another company.
a) The selling price is 5,000 EUR, the book value of the car is 4,500 EUR.

Debit Credit
Cash 5,000 Equipment 4,500
Other Income (+) 500
 b) The selling price is 4,200 EUR, the book value of the car is 4,500 EUR.

Debit Credit
Cash 4,200 Equipment 4,500
Other Expenses (-) 300

5. On 14th February, company A purchases a supply of advertising materials on account from supplier T for 15,000 EUR.

Debit Credit
Inventory 15,000 Cash 15,000

6. The board of directors of company A pays a 320,000 EUR cash dividend to the shareholders.
Debit Credit
Current Liabilities 320,000 Cash 320,000

7. A current liability will be reclassified as a long-term bank loan, 169,000 EUR.

Debit Credit
Current Liabilities 169,000 Long term liabilities 169,000
8. The tax liability in the amount of 51,000 EUR is paid on 19th July in cash.

Debit Credit
Current Liability 51,000 Cash 51,000

9. The management of company A assumes that 2 % of its accounts receivable will be uncollectable. Accounts receivable
counts 430,000 EUR at year-end.

Debit Credit
Bad Debt Expense (-) 8,600 Allowance for doubtful debt 8,600

10. An incentive of 20,000 EUR will be paid to the employees of company A. Instead of cash every employee receives
preference shares (no par value).
Debit Credit
Salaries and Wages (-) 20,000 Share Capital 20,000

11. Company A pays employee salaries and wages in cash for 415,000 EUR.
Debit Credit
Salaries and Wages (-) 415,000 Cash 415,000
12. On 4th October, company A sells 25 washing machines to customer F at a price of 1,200 EUR each on account.

Debit Credit
Accounts Receivable 30,000 Sales Revenue (+) 30,000

13. Regarding No. 12, company A receives 20,000 EUR in cash five days later. The accepted payment terms are 3/10,
n/30. (3/10, n/30 (also 3/10 net 30) means that the customer can receive a 3% discount if they pay within 10 days (3/10) and the full payment is due 30 days after the date of the
invoice.) – here 20,000 is what was received after discount

* 20,000/97% (or 0.97) = 20,619

Debit Credit
Cash 20,000 Accounts Receivable 20,619
Sales Discount (-) 619

Debit Credit
Account Receivable 20,619 Sales Revenue (+) 20,619

14. The securities, which company A owns, pay 9,000 EUR interest.
Debit Credit
Cash 9,000 Interest Income (+) 9,000
15. Company A pays 45,000 EUR interest on its bank loan.

Debit Credit
Interest Expense 45,000 Cash 45,000

16. The PPE-Account need to be depreciated, 33,000 EUR.

Debit Credit
Depreciation Expense (-) 33,000 Accumulated Depreciation 33,000

17. Company A performs services for clients, for which 41,000 EUR was collected in cash and 59,000 EUR was billed to
the clients.
Debit Credit
Cash 41,000 Sales Revenue (+) 100,000
Accounts Receivable 59,000

18. An administrative assistant is hired by company A at salary of 3,500 EUR per month. The assistant works for 7 months
in 2018.
Debit Credit
Salaries and Wages (-) 24,500 Cash 24,500
19. A count of supplies indicated that 62,000 EUR of supplies had been used.

Debit Credit
Inventory Expense (-) 62,000 Inventory 62,000

20. In June, company A purchases 10 personal computers at 600 EUR each on account.

Debit Credit
Equipment 6,000 Current Liability 6,000

21. The personal computers (useful life 5 years, no residual value) need to be depreciated. The historical cost of the
personal computers is 10,000 EUR. (For the first year)
Debit Credit
Depreciation Expense (-) 2,000 Accumulated Depreciation OR PPE 2,000

22. On 18th December, company A issues 300,000 ordinary shares (no par value) for cash at 20 EUR per share.

Debit Credit
Cash 6,000,000 Share Capital 6,000,000
23. Company A issues 150,000 ordinary shares (15 EUR par value) for cash at 25 EUR per share on 22nd March.

Debit Credit
Cash 3,750,000 Share Capital 2,250,000
Share Premium 1,500,000
24. In August, bonds (4 years duration) have been issued for cash, 250,000 EUR.

Debit Credit
Cash 250,000 Long-term Liability 250,000

25. In September, the interest of 20,000 EUR due to the bonds (no. 24) is recorded.
Debit Credit
Interest Expense (-) 20,000 Current Liability 20,000

26. In October, the interest will be paid cash (no. 25).

Debit Credit
Current Liabilities 20,000 Cash 20,000
27. An impairment of 56,000 EUR is recognized that relates to an administrative building.

Debit Credit
Impairment loss (-) 56,000 PPE 56,000

28. Company A owns several intangibles. In 2018 amortization expenses of 120,000 EUR need to be recorded.

Debit Credit
Amortization Expense (-) 120,000 Accumulated Amortization OR Intangibles 120,000

29. On 31st December, the ending balance of raw materials consists of 500 kilos. The recognized costs were 1,500 EUR
per kilo. The actual NRV is 1,300.
Debit Credit
Loss due to decline in Inventory (-) 100,000 Inventory 100,000

30. On 12th March, company A should recognize a provision regarding a lawsuit in the amount of 25,000 EUR.

Debit Credit
Lawsuit Loss (-) 25,000 Provisions 25,000
31. a) Only 2 month later, company A is liable to pay 22,000 EUR to the other party due to the lawsuit (no. 30).

Debit Credit
Provision 22,000 Current Liability 22,000
Other Income (+) 3,000
b) Only 2 month later, company A is liable to pay 27,000 EUR to the other party due to the lawsuit (no. 30).

Debit Credit
Provision 25,000 Current Liability 27,000
Lawsuit loss (-) 2,000

32. Company A receives a 72,000 EUR cash advance from customer B for advertising services that are expected to be
completed in the next year.
Debit Credit
Cash 72,000 Current Liability 72,000