Appunti financial accounting
Financial management accounting
Psw for the e – learning platform: FMA-2016.
Accounting in our GIOCA programme. Cultural organisations might be profit or not for profit.
Profit is the difference between revenues and expenses that result from activity and entity during the
period. NPOs mean that revenues must be reinvested due to differences in the aim of organisation.
Profit organisations have an investment for the capital. The profit organisation must remunerate the
capital. This is very simplified the ultimate scope of profit organisations.
The production of tables is not the mean of the organisation but it is the mean for the organisation.
The capital put in the investment is used to reinvest the productive factor and those good and
services are sold in a free market. The sum of the prices contribute to create revenues.
The difference between revenue and expenses will be used to cover initial expenditures.
In a NPO organisation is not established to make money and invest capital but indeed you collect
interest and social aims. From a juridical point of view there is not an “owner” but the mission is to
serve public interest as a whole. You must produce good and services. Also, economic process Is
different. Revenues from different sources: associate membership, public grants, donations
voulounteers contributions. You might look for public funds etc.
This revenues are used to cover goods and services thus public aim is the interest. The final scope is
not having profit and remunerate the capital. In both cases is important to have enough resources.
What di Pos and NPOs have in common?
- Operate with limited resources
- Must use resources in an effective and efficient way to pursue its aims and survive in the
- Effectiveness: results equal aims
- Efficiency: max results – minimum resources
- Need to adequately plan, manage and control the use of resources
- Need to be accountable: transparency and responsibility on the revenues collected.
Develop accounting tools. In recent years the need to be accountable is highly increased. Every
organisation shall use accounting principles.
This is why Is important to know how tools are developed and how to use advantages to have
economic and financial organisations might tell.
What is accounting?
Accounting is the process of identifying, measuring, communicating economic and financial
information about an entity for decisions and informed judgements.
It’s an useful tool to elaborate this in documents to help people to make decisions. Who is the
people interested in accounting information? Stakeholders, investors, government, the advisory
board, consumers… table.
There are different typologies of accounting, we mentioned two different accounting typologies:
financial and management accounting with different professional roles. Some will perform financial
accounting others managerial accounting.
Financial accounting Is mainly addressed to external users. Indeed it is used by managers but the
manager has much more information about the company rather then those wrote in the report.
Financial statements are a group of documents with specifical information. The past activity of the
entity is not future oriented. Budgets are based also on previous years but budget is not included in
financial accounting. The aim is to communicate financial position, cash flows for a specific time
period. To prepare the financial statement we use a bookkeeping and accounting procedures, used
to register economic transactions and to register the effect of each transaction into each transaction.
It’s done by financial accountant. It has specific format and standards.
Financial accounting has a macro focus and it can be done frequently but usually is done yearly for
the fiscal year. Financial accounting reports are reviewed by a third party the auditors: they issue an
opinion if they’re correctly done or not.
Internal auditing is used for many retail companies. We need to have an internal audit to the single
companies. It’s done by internal auditors that can be also external.
Managerial accounting requires internal users: it address managers to take decisions. We use
economic and financial information to evaluate cost and benefits to direct the activity and
controlling it while the activity is done. It’s future – oriented because it helps in decision making.
In the case of control you control to inform judgement and decisions for the future. The main tool is
the budget and preparation of the budget. Managerial accounting has specific professions
(managerial accountants with specific certification to perform this work).
Since it has an internal orientation it is not compulsory and has not a standard format.
Also there is a governmental and not for profit accounting. For government we have the same
accounting functions with similar but not the same procedures. Over – governmental organisations.
The basic concepts and functions are the same. To understand also accounting.
We will focus on financial accounting. Financial accounting is the process that starting from
transactions to register and identifying transactions culminate into financial statements.
Accounting is not an exact science, not a mechanical procedure! It’s not mechanical. There might
be different ways to account. Thus, the picture can be very confuse due to different criteria used.
Each country developed different accounting principles (i.e. Accounting Bodies in US).
At international level the need to compare financial statements has emerged. The body is é charged
of promoting harmonisation between countries around the world.
Financial accounting is the process that starts with connections coordinating preparation of financial
statements. Transactions are economic interchanges. What does it means? Something of value has
given in exchange to something with the same value.
Transactions occurr every day and they’re summarised in accounts. Accounts are folders used to
organise similar transactions. Not every transaction affect cash and they’re reported in the cash
folder. Every account affects inventory and it’s recorded in a folder which has an account name. At
the end of the period you will have balance of the account every income will give the total balance
for the cash account. This balance will be used to prepare financial statements.
Financial statements: balance sheets (financial positions of the company), cash flow (inflows and
outflows of cash),, income statement (earnings or profits during the period – profit and losses
statement), statement of changes in owners’ equity (investment and distribution to owners).
These are the four financial statement included in the financial report that includes also several
explanatory notes where management and accountants describe numbers included in financial
Looking to a real financial statements you will see that the four financial statements are brief
whereas the explanatory notes can be very very long.
The overall document is the annual financial report which includes four financial statements and
The balance sheet summarises the financial position of an organisation at one point in time (end of
fiscal period, usually December 31 ). It includes:
- Assets: resources of the company. Resources controlled by the company as a result of past
events from which future economic benefits are expected to flow to the entity.
- Liabilities: obligations to other entities. Resources not owned by entity but owned by
others. For instance loans, debts (both short term and long term).
- Owners’ equity. Owners’ rights on the resources. The residual interest in the assets of the
entity after deducing all its liabilities (A – L -> OE).
ASSETS are made of:
- Account receivable (amount due to customers)
- Merchandise inventory (the cost of merchandise acquired to be sold)
- Plant and equipment (the cost of equipment and plant used in business like the cost of the
building the shops)
- Accumulated depreciation: the portion of cost of equipment that is estimated to been used
up. Depreciation means spread the cost of the asset during its whole life. Decreases the
value of the assets in the years.
- Current assets are those assets that are likely to be converted into cash or used to benefit
within one year (cash, account receivable, merchandise)
LIABILITIES are made of:
- short – term debt (amounts borrowed that will be repaid within one year of the balance sheet
date: all the debts that the company has to re – pay)
- Accounts payable (amounts due to suppliers to purchase. Debts due to suppliers to material
- Other accrued liabilities (amounts owned to other creditors i.e. Wages not paid the current
month but the next)
- Long term debts (amounts borrowed from banks not paid within one year from the balance
sheet date). Why underlining dates? We want to understand current assets – current
- Current liabilities are those liabilities that are likely to be paid within one year (short term
debt, accounts payable, accrued liabilities).
The balance sheet is always in balance. Tot assets equal total liabilities and owners’ equity.
Whatever transaction will affect the balance sheet but keep the balance sheet in balance.
ASSETS LIABILITIES + OES
ASSETS – LIABILITIES + OES
NET ASSETS + EQUITY
The time – line model is used to see how financial statements equal at the end of the year. The
balance sheet at the end of one period is the valance sheet at the beginning of the period.
The income statement.
The income statement shows the incomes (profit or losses) for the period under consideration. Here
the difference with Balance sheet which refers to a point in time. Income is referred to a period like
earnings produced during one year. Define the time period to which income statement refers to. It
would be very different considering the different period.
This is like a movie on the operation of activity while the balance sheet takes a picture. How is
profit and loss composed? Define it as all revenues produced in a period minus all the expenses
(gain and losses).
Revenues result from the entity operating activity. I.e. What company earns from the sale of
merchandise that constitute the positive part of income statement. Expenses are costs incurred in
generating revenues. The difference between these two is called income.
Before understanding the real statement we must understand that activities are three:
1. Operating activities: the core activity of the entity. For instance we are a publishing house
thus our core activity will be publishing books. Revenues come from the revenues of the
book. Company might need a building or equipment to print the books.
2. Financing activities: invest money to generate a positive inflow: they generate interest
expenses and interest income
3. Investing activities: can generate gain and losses.
Depending on these activities we distinguish different kind of costs:
- Operating costs: are related to the core activity of the entity. Are necessary to operate and
they differentiate into:
a. Manufacturing costs: are those cost who actually manufacture the product. Usually they
are raw materials, direct labour, manufacturing overhead (indirect costs necessary to
manufac. the product like the salary of the supervisor)
b. Non – manufacturing costs: cost of acquiring the product (like in the retail companies)
these costs are product costs directly assigned to a single unit of product. And product
costs in the financial statement is called “cost of good sold” in the income statement and
“Inventory” in the balance sheet. Other are selling, general and administrative expenses.
For the retail store the cost of electricity for the shop, administration and so on, are not
manufacturing costs but still operating costs. These costs are not assigned to the single
unit of the product and are called period costs.
- Non operating costs: are not related to the core activity of the entity:
a. Gain & losses for investing activities: a company owns a building and decide to sell it. If
the price is lower in the balance sheet the company will have a loss on the sail of the
building. If the price is higher the company will show a gain on the sale of the building.
They are not revenues and expenses because they come from operating activities.
b. Interest revenues and expenses from financial activities: the cost of borrowing money. If
the business borrows money it will pay an interest. This is an expense to finance the
activity. It’s a way to finance it.
c. These two are period costs too.
In the income statement we find these categories. This is a typical income statement. It includes
The income statement starts with net sales: the revenues from operating activities. The total amount
of revenues produced during the year. Then we must subtract the categories of costs like the cost of
good sold that is the cost of manufacturing the product sold (in a retailing company is the cost of
acquiring the product). The difference between these two is the gross profit (gross because we have
to subtract other things). Gross profit represent sellers’ max amount of buffer. Is a first measure of
profitability in an organisation. Substracting to gross profit the selling and gain and losses expenses
we have another margin: the income from operations. The result is one of the most important
measures of the firm activities: income from operations represent general operating expenses of the
entity (wages, advertising etc.).
After the income from operation we find “interest expense”: revenues and expenses from non –
operating activities and gain and losses coming from non operating activities. Here we can have
positive values in case of financial revenues or gains from investing activities.
Then we obtain income before taxes: the income after all costs, expenses and losses have been
Income before taxes is substracted to taxes and at the end the result is net income.
Time line model applied to income statement. Any transaction that affects the income statement will
also affect the balance sheet. Not vice versa. Not every transaction can affect the profit.
Net income is the link between the balance sheet at the beginning and at the end of the year through
Statement of changes in Owner’s Equity
OE is part of the Balance sheet. The statement gives information on the changes in OE during the
year. So also OE is about a period not just a movement. Two macro categories compose OE:
- Paid in capital: the amount invested in the entity by the owners at the beginning but also in
the following years. We can have different categories of organisations (corporations,
associations ...). In any case, the owners of a corporation are called Stockholders because
they receive back a share of stock. When a stock is issued, it’s assigned to this stock a par
value, an arbitrary value that has no relationship with the price of the stock. The company
wants to rise 100.000$ for starting the business and decides to issue 100 shares of stock.
Each stock should be sold at 10$ that is the price of the stock. Every investor will pay 10$
but the company assignes a par value that is an arbitrary value. This is the par value. The
difference between par value and price of the stock is the additional paid in capital.
- Retained earnings is the cumulative net income of the entity that has been retained for
being used in the business. During the year the profit produces income that can be
distributed to owners through dividends or can be retained from company to be re –
distributed. Retained earnings is the result of net income minus dividends.
Let’s see in details: in the paid in capital part we have the beginning balance (0$). Then common
stock and par value. 10$ x 10.000$ is 100.000$ (in the statement).. The additional paid in capital is
Retained earnings is composed by net income minus dividends.
OE and time line model: the net income of the income statement is again included into OE
statement. This section is the link between balance sheet and income statement is made
Statement of changes in cash flows.
Identifies sources and uses of cash during the year for a period of time. We will have a beginning
balance plus all the cash inflows during the year minus all the cash outflows during the year that
equal the cash ending balance.
Some transaction affect cash but not income and vice versa.
Financial statements are prepared on accrual basis. What does this mean? The accrual principle says
that revenues are recorded when they’re earned at the moment.
Financial accounting is based on accrual accounting. Accrual accounting recognises:
A. Revenues recognised when revenue is earned
B. Expenses are recognise when the work (product or service) actually contributes to the
Expenses are matched with revenues.
Cash accounting recognises:
A. Revenues when they are received.
B. Expenses when they are paid.
Expenses are matched with revenues so if revenues are recorded in June then also expenses are
recorded in June.
Revenues are recognised in the moment in which the legal ownership passes regardless the cash.
Expenses are recognised when the work actually contributes to revenues, independently form the
This is true only for the product costs, only with these costs revenues are matched with expenses.
Period costs and expenses are recognised when they incurr.
Net income is the first item in the statement and the we have the recoinciling items coming from
three different categories of activity. We are starting from income statement and we are adjusting
nut not the cash inflow/outflow but the income. Starting to net income you have to add the
depreciation because the equipment was bought many times ago. Every year we have to recognise
the expense for the year. This is an expense but not an outflow of cash you wil add an expense for
the equipment during the year. There are several transactions. We are adjusting net income and cash
flows. Those transactions refer to financing activities. In the cash flow statement we are
distinguishing for three major activities.
financial accounting starts with transactions and culminates in the preparation of financial report. In
the middle there are bookkeeping and accrual accounting. They can help in understanding
economical and financial information.
The horizontal model: A = L +PIC + REbeg + R – E
The same equation is expanded. Under the assets we have some accounts that compose the assets:
cash, accounts receivable and equipment. The same for liabilities and OE.
This is just an educational model. It’s not the real thing that they use in the real world. The balance
sheet equation should be in balance and this is true after each transaction. Every transaction need to
be recorded with a double entry. It must have a null effect in the balance equation: you find the
exercise in the last page of the workbook.
Bookkeepers have developed a bookkeeping system to facilitate the process of recording actions.
Two documents: one is the journal in which the effect of transactions Is recorded daily. Second,
these transactions are recorded and posted to individual accounts in the ledger. Accounts are used to
organise group transactions to facilitate financial statement.
The T – account is a tool used to represent an account that registers all decreases or increases in
account. We don’t know which side decrease or increase.
The left side is the debit side and the right side is the credit side: they don’t have nothing to do with
debits and credits as we know them. With the debit entry the amount is debited, to record a credit
entry an amount is credited. Usually assets increase on the left whereas liabilities and OE increase
on the right of the T account except for expenses (they have a minus sign!!).
The account balance is the difference between addictions and subtractions. Journal entry format:
Date, descriptions in which accounts are registered. In the journal debits are recorded first. The
transaction affects debits and credits in the same way. Look in the workbook for the exercise.
The adjustments or adjusting entries. They reflect the accrual accounting principle. We recognise
revenues at the point of sale and expenses as they occur (even in other periods).
There are some events that are not journalised daily. This means that we don’t have a real
transaction but we have to recognise revenues or expenses for that specific period. Those events
must be journalised even if they are not recorded daily.
- They can be not expedient: earning of wages by employees, consumption of supplies.
- Costs expire with passage of time. These are all long term investment when we acquire a
long term asset we will use this asset for several periods. At the end of every period we
recognise the expense for the period.
- Unrecorded items. These can be received in the following period.
All of these are not daily recorded thus we must make adjusting entries at the end of the period.
Two basic characteristics of adjusting entries:
1. They occur at the end of the accounting period
2. They always involve both the income statement and the balance sheet.
There are two categories of adjustments:
A. Accruals: transactions for which cash has not yet been received but the effect of it must be
recorded in the accounts in order to cover a matching of revenues and expenses. Cash will
occur in future periods. Accrual of expenses and accrual of revenues. We need to recognise
revenues or expenses that will inflow or outflow in future periods.
B. Reclassifications (deferrals). Transactions for which initial recording in terms of transactions
does not result in assigning revenues to the period in which they were earned. The cash
transaction has happened BEFORE the recognition.
1)Accrual of expenses
It is a not journalised expense related to the accounting period for which the company will pay in
future periods. This transaction is not journalised thus we don’t have a bill or agreement during the
+1 anno fa
I contenuti di questa pagina costituiscono rielaborazioni personali del Publisher Darcy12 di informazioni apprese con la frequenza delle lezioni di Financial and management accounting e studio autonomo di eventuali libri di riferimento in preparazione dell'esame finale o della tesi. Non devono intendersi come materiale ufficiale dell'università Bologna - Unibo o del prof Bonini Baraldi Sara.
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