ACCOUNTING AND

FINANCE FOR
MANAGERS
Prof. Dr. Mustafa Kemal Yilmaz
mustafa.yilmaz@ihu.edu.tr
Assist. Prof. Dr. Omar Kachkar
Omar.kachkar@ihu.edu.tr

Spring Semester Accounting and Auditing Organization

Monday, 18 February 2019 AAOI for Islamic Financial Institutions
FI
 LECTURE TWO:
FUNDAMENTALS OF ACCOUNTING

LECTURE CONTENTS
1. The accounting cycle
2. Bookkeeping and the accounting cycle
3. Some concepts in bookkeeping (Single-double entry system)
4. Some concepts in bookkeeping (Cash vs accrual bookkeeping)
5. Golden Rule of Double Entry System
6. Understanding debit and credit
7. Accounting Cycle (the journal, the ledger and the trial balalnce)
8. financial statements?
9. Balance sheet and the accounting equation
10. Types of financial statements.
11. Components of financial statements
12. Preparation of financial statements
 Book-Keeping and the accounting Cycle

Bookkeeping is the recording, on a day-to-day basis, of the financial

transactions and information pertaining to a business. It ensures that records of
the individual financial transactions are correct, up-to-date and comprehensive.
Accuracy is therefore vital to the process.
 Some concept in Bookkeeping
The Accrual vs Cash Basis of Accounting

In order to properly implement bookkeeping, companies need to first choose which basis
of accounting they will follow. Companies can choose between two basic accounting
methods: the cash basis of accounting or the accrual basis of accounting. The difference
between these types of accounting is based on when you, the company, actually record
the sale (money inflow) or purchase (money outflow) in the books.
 Bookkeeping
Single vs Double Entry System
 Bookkeeping
Single vs Double Entry System
 Golden Rule of Double Entry System

Traditionally, the two effects of an accounting entry are known as Debit (Dr)
and Credit (Cr). Accounting system is based on the principal that for every
Debit entry, there will always be an equal Credit entry. This is known as the
Duality Principal.
Debit entries are ones that account for the following effects:
•Increase in assets
•Increase in expense
•Decrease in liability
•Decrease in equity
•Decrease in income
Credit entries are ones that account for the following effects:
•Decrease in assets
•Decrease in expense
•Increase in liability
•Increase in equity
•Increase in income
Golden Rule of Accounting
Understanding Debit and Credit….Cont.
 Quiz on Golden Rule of Accounting

1. Purchases 2. Cash 3. Drawings 4. Outstanding salary

5. Building 6. Rent 7. Account Payable 8. Discount received

9. Bank 10. Capital 11. Bank loan 12. Sales

Quiz on Golden Rule of Accounting

S Question Solution
1 Purchases Nominal Account
2 Cash Real Account
3 Drawings Personal Account
4 Outstanding salary Personal Account
5 Building Real Account
6 Rent Nominal Account
7 Account Payable Personal Account
8 Discount received Nominal Account
9 Bank Real Account
10 Capital Personal Account
11 Bank loan Personal Account
12 Sales Nominal Account
Example on the double entry
 T-Accounts

To assist in visualizing the effect of recording a debit or credit amount and the resulting balances of
general ledger accounts, it is helpful to draw a T account as below:

f the account will appear at the top of each "T".

 Example on double entry

If a company pays its rent of $2,000 for the current month,

the transaction could be depicted with the following T-accounts:
 Bookkeeping Technology

Bookkeeping and Debitoor

Say goodbye to tedious books and ledgers. With a cloud-based accounting system like Debitoor, it’s
easy to record income, expenses, and use automatic bank reconciliation to make sure your credits
equal your debits.

15 Best Accounting Software Systems For Your Business

https://financesonline.com/15-best-accounting-software-systems-business/

However
An entire transaction (both the debit amount and the credit amount) was omitted.
An entire transaction was entered twice.
An incorrect amount was entered both as a debit and as a credit.
An incorrect account was debited.
An incorrect account was credited.
The General Journal

A book of original entry that

requires that both the account
being debited and the account
being credited be listed along with
the respective amounts. Because
of accounting software and special
journals there are relatively few
entries made into the general
journal.
The General Ledger

A general ledger represents the

record-keeping system for a
company's financial data with debit
and credit account records validated
by a trial balance. The general ledger
provides a record of each financial
transaction that takes place during
the life of an operating company. The
general ledger holds account
information that is needed to prepare
the company's financial statements,
and transaction data is segregated
by type into accounts for assets,
liabilities, owners' equity, revenues
and expenses.
A trial balance is a
bookkeeping worksheet in
which the balances of
all ledgers are compiled into
debit and credit account
column totals that are
equal.
 Definition of Financial Statements

Financial statements are written records that convey the business activities and the
financial performance of a company. Financial statements include the balance sheet,
income statement, and cash flow statement. Financial statements are often audited
by government agencies, accountants, firms, etc. to ensure accuracy and for tax,
financing, or investing purposes.
 Accounting equation

The accounting recording system is based on the simple, notion that all
economic resources acquired by an entity must be funded from somewhere.
Entities do not simply acquire resources out of thin air: resources must be
provided by someone (usually the owner) in the first instance. Later, other
people such as creditors or banks may put up money to provide further
resources for the company.
The relationship between resources and the funds provided to acquire these
resources is expressed in accounting like this:

Assets = Owners’ equity + Liabilities or

Assets – Liabilities = Owners’ equity
 Components of the Balance sheet
Assets
Current Assets, Fixed Assets, and Other Assets.
Current (or Liquid) Assets: This is cash and assets that will likely turn into cash during the current
business year. It’s what you generally use to pay operating costs.
Cash: The total amount of money on hand (your most liquid asset).
Accounts Receivable: The amount that your customers owe you after buying your goods or services.
Less: Reserve for Bad Debts: This is the total amount you expect to write off when customers
default (generally calculated based on bad debts during previous reporting periods).
Inventory: If you sell products, you will likely have inventory. This line item represents the total
amount that you have on hand at that particular time. If this number is growing faster than your
revenue, you may not be managing your inventory efficiently.
Prepaid Expenses: Expenses you have paid in advance, such as a year’s worth of insurance.
Securities: Securities include money-market accounts and other investments that you plan to sell
within the year.
Notes Receivable: This is the amount owed for goods or services that isn’t paid on a regulaAssets
 Components of the Balance sheet…Cont

Liabilities
Current and long-term liabilities.
Current Liabilities: These are amounts due to be paid within a year, such as accounts payable (amounts you owe
suppliers and employees), sales and payroll taxes, income taxes, and amounts due on short-term business loans,
such as a line of credit.
Long-Term Liabilities: These are amounts due over a period longer than a year, such as long-term loans, leases or
mortgages, deferred taxes, and future employee benefits.
Total Liabilities: This is the total value of all the company’s debts. A healthy business will usually show a number
here that is less than its total assets.
Owner’s Equity
Also known as Capital or Net Worth, this amount represents what would be left for the owner(s) if all the company
assets were sold and total liabilities were paid. A company with positive equity means that business owners have
the option of acquiring capital by selling part of their business through equity, stocks and/or dividends.
In a sole proprietorship, this is called the “Owner’s Equity”; in a corporation, this is called “Stockholder’s Equity,”
and it can include common stock, preferred stock, paid-in capital, retained earnings, etc.
 What are assets?

• Assets are things that are resources owned by a company

and which have future economic value that can be
measured and can be expressed in dollars. Examples
include cash, investments, accounts receivable, inventory,
supplies, land, buildings, equipment, and vehicles.
Common types of assets include: current, non-current,
physical, intangible, operating, and non-
operating. Correctly identifying and classifying the types
of assets is critical to the survival of a company,
specifically its solvency and associated risks.
• The IFRS Framework defines an asset as follows: “An asset
is a resource controlled by the enterprise as a result of
past events and from which future economic benefits are
expected to flow to the enterprise.”
 Current and fixed assets

1. Current Assets 2. Fixed or Non-Current Assets

Current assets are assets that can be easily Non-current assets are assets that cannot
converted into cash and cash equivalents be easily and readily converted into cash
(typically within a year). Current assets are and cash equivalents. Non-current assets
also termed liquid assets and examples of are also termed fixed assets, long-term
such are: assets, or hard assets. Examples of non-
1. Cash current or fixed assets include:
2. Cash equivalents (short-term 1. Land
investments securities with high credit 2. Building
quality and highly liquid.) 3. Machinery
3. Short-term fixed deposits 4. Equipment
4. Stock 5. Patents
5. Marketable securities (debts, bonds, 6. Trademarks
shares sold or redeemed within a year)
 Tangible and intangible assets

1. Tangible Assets 2. Intangible Assets

Tangible assets are assets that have a Intangible assets are assets that do not
physical existence (we can touch, feel, and have a physical existence. Examples of
see). Examples of tangible assets include: intangible assets include:
1. Land 1. Goodwill
2. Building 2. Patents
3. Machinery 3. Brand
4. Equipment 4. Copyrights
5. Cash 5. Trademarks
6. Office supplies 6. Permits
7. Stock 7. Corporate intellectual property
8. Marketable securities
 Operating and non-Operating assets

1. Operating Assets 2. Non-Operating Assets:

Operating assets are assets that are Non-operating assets are assets that are
required in the daily operation of a not required for daily business operations
business. In other words, operating assets but can still generate revenue. Examples of
are used to generate revenue. Examples of non-operating assets include:
operating assets include: 1. Short-term investments
1. Cash 2. Marketable securities
2. Stock 3. Vacant land
3. Building 4. Interest income from a fixed deposit
4. Machinery
5. Equipment
6. Patents
7. Copyrights
8. Goodwill
 What are liabilities?

Defined by the IFRS Framework: “A liability is a

present obligation of the enterprise arising from
past events, the settlement of which is expected
to result in an outflow from the enterprise of
resources embodying economic benefits.”

There are three types of liabilities: current, non-

current, and contingent liabilities.
 Types of Liabilities

Labilities

Current non-current Contingent

Liabilities Liabilities liabilities
 Current liabilities

• Current liabilities, also known as short-term liabilities, are debts or obligations that need to be repaid
within a year. Current liabilities should be closely watched by management to make sure that the
company possesses enough liquidity from current assets to guarantee that the debts or obligations
can be repaid.
• Examples of current liabilities:
1. Accounts payable (short debts obligations)
2. Interest payable
3. Income taxes payable
4. Bills payable
5. Bank account overdrafts
6. Short-term loans
 Non-current liabilities

• Non-current liabilities, also known as long-term liabilities, are debts or obligations that are due in
over a year’s time. Long-term liabilities are an important source of a company’s long-term financing.
Companies take on long-term debt to acquire immediate capital to fund the purchase of capital
assets or invest in new capital projects.
• Long-term liabilities are crucial in determining a company’s long-term solvency. If companies are
unable to repay their long-term liabilities as they become due, then the company will face a
solvency crisis.
List of non-current liabilities:
1. Bonds payable
2. Long-term notes payable
3. Deferred tax liabilities
4. Mortgage payable
5. Capital lease
 Contingent Liabilities

• Contingent Liabilities are liabilities that may occur depending on the outcome of a future event. Therefore,
contingent liabilities are potential liabilities. For example, when a company is facing a lawsuit of $100,000, the
company would face a liability if the lawsuit proves successful. However, if the lawsuit is not successful, the
company would not face a liability. In accounting standards, a contingent liability is only recorded if the
liability is probable and the amount can be reasonably estimated.

• List of contingent liabilities:

• Lawsuits

• Product warranties
 Owner Equity

• Owner’s Equity is defined as the proportion of the total value of a company’s

assets that can be claimed by its the owners (sole proprietorship
or partnership) and by its shareholders (if it is a corporation). It is calculated by
deducting all liabilities from the total value of an asset (Equity = Assets –
Liabilities).
Owner’s equity
 Owner’s equity
#1 Common Stock
Common stock represents the owners’ or shareholder’s investment in the business as a capital contribution. This
account represents the shares that entitle the share owners to vote and their residual claim on the company’s
assets. The value of common stock is equal to the par value of the shares times the number of shares
outstanding. For example, 1 million shares with $1 of par value would result in $1 million of common share capital on
the balance sheet.

#2 Preferred Stock
Preferred stock is quite similar to common stock. The preferred stock is a type of share that often has no voting rights,
but is guaranteed a cumulative dividend. If the dividend is not paid in one year, then it will accumulate until paid off.
Example: A preferred share of a company is entitled to $5 cumulative dividends in a year. The company has declared a
dividend this year but has not paid dividends for the past two years. The shareholder will receive $15 ($5/year x 3
years) in dividends this year.

#3 Contributed Surplus
Contributed Surplus represents any amount paid over the par value paid by investors for stocks purchases that have a
par value. This account also holds different types of gains and losses resulting in the sale of shares, or other complex
financial instruments.
Example: The company issues 100,000 $1 par value shares for $10 per share. $100,000 (100,000 shares x $1/share)
goes to common stock, and the excess $900,000 (100,000 shares x ($10-$1)) goes to Contributed Surplus.
 Owner’s equity…Cont

#4 Additional Paid-In Capital

Additional Paid-In Capital is another term for contributed surplus, the same as is described above.

#5 Retained Earnings
Retained Earnings is the portion of net income that is not paid out as dividends to shareholders but retained for
reinvesting or to pay off future obligations.

#6 Other Comprehensive Income

Other comprehensive income is excluded from net income on the income statement and consists of income that
has not been realized yet. For example, unrealized gains or losses on securities that have not yet been sold
would be reflected in other comprehensive income. Once the securities are sold the gain/loss will then move into
net income on the income statement.

#7 Treasury Stock (contra-equity account)

Treasury stock is a contra-equity account and represents the amount of common stock that the company has
purchased back from the investors. This is reflected in the books as a deduction from total equity.
 Components of the Balance sheet
Assets
Current Assets, Fixed Assets, and Other Assets.
Current (or Liquid) Assets: This is cash and assets that will likely turn into cash during the current
business year. It’s what you generally use to pay operating costs.
Cash: The total amount of money on hand (your most liquid asset).
Accounts Receivable: The amount that your customers owe you after buying your goods or services.
Less: Reserve for Bad Debts: This is the total amount you expect to write off when customers
default (generally calculated based on bad debts during previous reporting periods).
Inventory: If you sell products, you will likely have inventory. This line item represents the total
amount that you have on hand at that particular time. If this number is growing faster than your
revenue, you may not be managing your inventory efficiently.
Prepaid Expenses: Expenses you have paid in advance, such as a year’s worth of insurance.
Securities: Securities include money-market accounts and other investments that you plan to sell
within the year.
Notes Receivable: This is the amount owed for goods or services that isn’t paid on a regulaAssets
 Components of the Balance sheet…Cont

Liabilities
Current and long-term liabilities.
Current Liabilities: These are amounts due to be paid within a year, such as accounts payable (amounts you owe
suppliers and employees), sales and payroll taxes, income taxes, and amounts due on short-term business loans,
such as a line of credit.
Long-Term Liabilities: These are amounts due over a period longer than a year, such as long-term loans, leases or
mortgages, deferred taxes, and future employee benefits.
Total Liabilities: This is the total value of all the company’s debts. A healthy business will usually show a number
here that is less than its total assets.
Owner’s Equity
Also known as Capital or Net Worth, this amount represents what would be left for the owner(s) if all the company
assets were sold and total liabilities were paid. A company with positive equity means that business owners have
the option of acquiring capital by selling part of their business through equity, stocks and/or dividends.
In a sole proprietorship, this is called the “Owner’s Equity”; in a corporation, this is called “Stockholder’s Equity,”
and it can include common stock, preferred stock, paid-in capital, retained earnings, etc.
Balance sheet Items order
Example on Balance Sheet
 Exercise on Balance Sheet

Balance Sheet
October 31
Cash 2,000
Accounts payable $ 7,500
Accounts receivable 13,000
Office supplies 4,250
Office equipment 28,000
Shandi, Capital (shares)* 75,750
Land 36,000
Exercise on Balance Sheet
Income statement

An income statement is one of the

three important financial
statements used for reporting a
company's financial
performance over a specific
accounting period, with the other
two key statements being
the balance sheet and the
statement of cash flows. Also
known as the profit and loss
statement or the statement of
revenue and expense, the income
statement primarily focuses on
company’s revenues and expenses
during a particular period.
Income statement

An income statement is one of the

three important financial
statements used for reporting a
company's financial
performance over a specific
accounting period, with the other
two key statements being
the balance sheet and the
statement of cash flows. Also
known as the profit and loss
statement or the statement of
revenue and expense, the income
statement primarily focuses on
company’s revenues and expenses
during a particular period.
 Exercise Income statement

BUSINESS CONSULTENG COMPANY.

Income Statement For the Year Ended December 31, 2015
Salaries expense $ 42,500
Supplies expense 1,950
Rent expense 6,000
Insurance expense 950
Consulting revenue earned $ 82,500
Advertising expense 250
Depreciation expense - equipment 900
Interest expense 450 53,000
Income statement
Statement of Cash Flow
Statement of Cash Flow
A Cash Flow Statement (also called the Statement of
Cash Flows) shows how much cash is generated and
used during a given time period. It is one of the main
financial statements analysts use in building a three
statement model. The main categories found in a cash
flow statement are the (1) operating activities, (2)
investing activities, and (3) financing activities of a
company and are organized respectively. The total cash
provided from or used by each of the three activities is
summed to arrive at the total change in cash for the
period, which is then added to the opening cash balance
to arrive at the cash flow statement’s bottom line,
the closing cash balance.
Exercise on Statement of Cash Flow
BEST ANSWERS
Statement of Cash Flows
For Month Ended October 31

Purchase of office equipment (28,000)

Net cash used by investing activities (28,000)
Cash paid for rent (2,550)
Cash received from customers $ 2,000
Owner’s cash investments 38,000
Net cash provided by financing activities 34,640
Cash paid for miscellaneous expenses (680)
Cash paid to employee (2,750)
Owner’s cash withdrawals (3,360)
Cash paid for telephone expenses (660)
Net cash used by operating activities ( 4,640)
Balance sheet and the accounting equation
CONCLUSION
&
KEY
TAKEAWAYS