Accounting

Table of contents

Introduction

• What is a firm?
• History of firms
• History of accounting
• Example of a small firm
• A workshop making wooden toys (1)
• A workshop making wooden toys (2)
• Production of large quantities of information
• First principles taught by the example
• Most of the main concepts of accounting are in the toy example

From single-entry to double-entry accounting

• Why single-entry accounting, like in the booklet of our checkbook, is insufficient
• A page to record debtors, a page to record creditors: the emergence of double-entry accounting
• The basic concept of transaction: the "atom" of activity of a firm
• Posting transactions into accounts (1): general principles, the apparent paradox of "value coming in is a debit"
• Posting transactions into accounts (2): posting simple transactions, traditional vs real time inventory control

A complete accounting cycle up to the Trial balance

• The yearly accounting cycle: journal -> accounts -> Trial Balance -> adjustments -> Income Statement & Balance Sheet
• Posting a complete cycle of journal entries (1)
• Posting a complete cycle of journal entries (2)
• The balance of each account and the Trial Balance (TB)
• Revenue accounts and Capital accounts in the TB

Adjustments to the Trial balance

• Why the TB needs to be adjusted to compute the Income Statement (IS)
• Adjustment for inventory
• Adjustment for amortization
• Provisions for bad or doubtful clients
• Prepayments and accruals
• The Income Statement and the Balance Sheet
• Extraction of the revenue accounts from the adjusted TB: the Income Statement (IS)
• Replacing in the adjusted TB all the revenue accounts with the bottom line of the IS: the Balance Sheet (BS)
• IS and BS: a higher view

General principles of accounting and miscellaneous topics

• General rules and guidelines of double-entry accounting
• Stock valuation: FIFO, LIFO and other methods
• Impact of a series of transactions on the IS and BS: a complete exercise
• Alternative way to compute the COGS: elimination of the Purchases account and of stock adjustments
• Money
• Money
• Accounting over several years
• Difference between the first accounting year, and the following years
• From one BS to the next, and the IS in between
• Accounting documents over several years
• A deeper look at the Balance Sheet
• The list of assets is fundamentally heterogeneous
• The big measures in a balance sheet: net worth, debts, capital employed, fixed assets, net fixed assets, working capital, current assets
• Investing versus leasing
• The notion of liquidity
• The value of a firm: assets minus debts, or something else?

Cash flow statement

• The "cash flow statement": reconciling the cash account evolution with the main accounting measures
• (sales, borrowings, client account, purchases, creditors, investments, etc.)
• Ratios
• Ratios and their evolution
• The Return on Capital Employed (ROCE)
• More advanced topics
• Accounting for manufacturing firms
• Make or buy decision
• Securitization
• Invisible liabilities
• Consolidation of a subsidiary company accounts
• Goodwill
• Retirement fund financed by the firm
• Book value and market value of shares of capital
• Introduction to cost accounting
• Yield management