BASIC ACCOUNTING

Ph.D. Associate Professor Ovidiu MEGAN

About me:
2000: Teaching Assistant at West University from Timisoara (now
Associate Professor)
2006: Ph. D in International Accounting
2008: Head of Department for Research and Project Management
2012: Dean of FEAA
2016: Vice-Rector of WUT
CONTACT:
- Office P06
- Email: ovidiu.megan@e-uvt.ro

What about YOU?

Where are you from?
Why did you chose English line Finance and Banking?
What do you know about accounting?
What are your expectation regarding our classes?
What do you want to do after the graduation of your business studies?

Bibliography:
Needles, Powers, Crosson Principles of Accounting 10th Edition
(International Student Version)
Weygandt, Kimmel, Kieso - Accounting principles 9th Edition
(International Student Version), Wiley
Epstein, Myers Small Business Accounting
Jeffrey Slater - College Accounting, Prentice Hall
Peres & Co. Basic Accounting (Romanian version), Mirton

Final evaluation:
Make a presentation of an accounting item (examples: longterm assets, Liabilities s.o.)
Make accounting records for some economic transations
(examples: sales, purchase, pay debts, pay taxes, collect
receivables from suppliers s.o.)
50% is represented by the Seminar Mark (Accounting Project
and Test)

Class Suggestions

Read the bibliography before class (PPT presentation)

Ask questions during class
Do a little bit each day regarding accounting
Accounting can be fun!

CLASS 2
An Introduction to the Role of
Accounting in the Business World

After studying this chapter, you should be

able to:

Explain what accounting is

Identify users and uses of accounting
Explain the meaning of principal accounting
elements

What accounting is?

Accounting is the language of business
Accounting is a standard set of rules for measuring a firms financial
performance
Accounting is the system for keeping the records [books] of all the money
you collect and all the money that you spend
Accounting is a system that measures the activities of a company in
financial terms.

Why Is Accounting Important?

 Making Corporate Decisions

to by a new company in other region

Making Investment Decisions

to invest in a new equipment

Who Uses Accounting?

Who Uses Accounting?

Investors
The providers of risk capital and their advisers are concerned with the risk inherent in, and
return provided by, their investments.
They need information to help them determine whether they should buy, hold or sell.
Shareholders are also interested in information which enables them to assess the ability of
the enterprise to pay dividends.

The management
The management of an enterprise has the primary responsibility for the preparation and
presentation of the financial statements of the enterprise.
Management is also interested in the information contained in the financial statements
even though it has access to additional management and financial information that helps it carry
out its planning, decision-making and control responsibilities.
Management has the ability to determine the form and content of such additional
information in order to meet its own needs.

Who Uses Accounting?

Employees
Employees and their representative groups are interested in information about:
- the stability and profitability of their employers
- the ability of the enterprise to provide remuneration, retirement benefits and
employment opportunities.

Lenders
Lenders are interested in information that enables them to determine whether
their loans, and the interest attaching to them, will be paid when due

Suppliers and other trade creditors

Suppliers and other creditors are interested in information that enables them to
determine whether amounts owing to them will be paid when due.
Trade creditors are likely to be interested in an enterprise over a shorter period
than lenders unless they are dependent upon the continuation of the enterprise as a
major customer.

Who Uses Accounting?

Customers
Customers have an interest in information about the continuance of an
enterprise, especially when they have a long-term involvement with, or are
dependent on, the enterprise.

Governments and their agencies

Governments and their agencies are interested in the allocation of
resources and, therefore, the activities of enterprises. They also require
information in order to regulate the activities of enterprises, determine
taxation policies and as the basis for national income and similar statistics.

Public
Enterprises affect members of the public in a variety of ways. For example,
enterprises may make a substantial contribution to the local economy in
many ways including the number of people they employ and their patronage
of local suppliers.

Accounting is an information system that:

Identifies
Records
Communicates the economic events of an organization to
interested users

Object of accounting:
providing information about the status and size of material and
financial resources owned or controlled by economic entities

providing information about the performances (financial results) of

economic entities
providing information about entity relationships to owners and
third parties (creditors)

Object of accounting:
Accounting provides companies financial situation at period
end in some form generally accepted Balance Sheet
Accounting equation which reflects the situation of an
organizational stays always in balance:
BALANCE SHEET

Material and
financial resources
Material and
financial resources

Assets

Funding sources

Funding
sources

Liabilities

Equity

Object of accounting:
Assets

Material and financial resources = cash, buildings, lands, that belong to

company

Funding sources = own funding sources (from shareholders) +

attracted funding sources outside the company (from banks, suppliers)

Equity

Liabilities

BALANCE SHEET
ASSETS

EQUITY (own funding resources)

LIABILITIES (attracted funding resources)

Assets:
Assets
- are economic resources owned by a company

There are 2 categories of assets:

Long-term assets
Curent assets

Long-term assets:
Long-term assets:
- are to be held for many years (more than 1 year) and are not
intended to be disposed of in the near future

There are 3 categories of long-term assets:

Intangible assets
Fix assets
Longterm investments

Intangible assets:
Caracteristics:
- lack physical substance and usually are very hard to evaluate
- include patents, copyrights, franchises, trademarks, trade names

Fix assets:
Caracteristics:
- are those assets that have a physical substance and can be
touched
- includes asset like land, buildings, machinery, furniture

Long-term investments:
Caracteristics:
- are amounts of money invested on long-term
- includes bonds, common stock (shares), or long-term notes

Curent assets:
Caracteristics:
- are represented by cash and other assets expected to be
converted to cash, sold, or consumed either in a year or in the
operating cycle

Items:
Inventories trading these assets is a normal business of a company
Receivables total amount of uncollectable accounts from costumers
Short-term investments include securities bought and held for sale in the
near future to generate income on short-term price differences
Cash and cash equivalents it is the most liquid assets, which includes
currency

Inventories:
Caracteristics:
- is a list for goods and materials, or those goods and materials
themselves, held available in stock by a business
Items:
Raw materials - materials and components scheduled for use in making a
product
Work in progress - materials and components that have begun their
transformation to finished goods.
Finished goods - goods ready for sale to customers.
Goods for resale - Good purchased for resale by a company

Resume: ASSETS
LONG TERM ASSETS (> 1 year)
- Intangible assets
- Fix assets
- Long-term investments

CURRENT ASSETS (< 1 year)

- Inventories
- Receivables
- Short-term investments
-Cash and cash equivalents

Exemples: ASSETS

- SAP software
- position of the shop in the city centre
- the land owned by company
- stock bought for long time
- wood (for a company who produce furniture)
- furniture (???)
- shares bought for short time
- the building where the company produce goods
- the motor vehicles
- cash in bank
- money to receive from costumers

Equity and Liabilities

What equity is?

also called:
shareholder's equity or
net worth or
book value

represent ownership interest in a corporation in the form of common stock or

preferred stock
the amount of the funds contributed by the owners (the stockholders) plus the
retained earnings (or losses)
represent the difference between total assets and total liabilities

What equity is?

Include:
- Share Capital
- Profit/loss for the year
- Legal reserves
- Retained earnings

What share capital is?

Def:
- The portion of a company's equity that has been obtained (or will be obtained) by
trading stock to a shareholder for cash or an equivalent item of capital value
*** The amount of share capital a company has can change over time because each time
a business sells new shares to the public in exchange for cash, the amount of share
capital will increase
- Total amount of cash and other assets paid in to the corporation by stockholders in
exchange for capital stock.
Share capital = Number of common shares * Book value/share

Ownership Rights of Stockholders

A Stock Certificate

Issuance of Stock
A corporation can issue common stock:
- directly to investors or
- indirectly through an investment banking firm
(brokerage house).
Direct issue is typical in closely held companies.
Indirect issue is customary for a publicly held corporation.
*In an indirect issue, the investment banking firm may agree to underwrite the
entire stock issue

What profit is?

Def:
- The positive gain from an investment or business operation after
subtracting for all expenses
- The difference between revenue and expenses
Gross profit = Net sales Cost of goods sold
Net profit = Profit After Tax

*** Note that the words earnings, profit and income are used as substitutes

What loss is?

Def:
- The company's expenses exceed its revenues
Net Loss = Expenses Revenue

***

Note that the words loss and net loss are used as substitutes

What reserve is?

Def:
- legal reserve fund from profit
- many legislations require creation of the fund as a
percentage of profits (in Romania 5% from gross profit
but no more then 20% of share capital)

What retained earning is?

Def:
- retained earnings refers to the portion of net income which is
retained by the corporation from one year to the next year
- retained earnings is the part of the company profit which is
not distributed to its owners

Liabilities
Def:
- an obligation of an entity, arising from past transactions
or events, the settlement of which may result in the
transfer or use of assets (cash)
Categories:
- Current liabilities
- Long-term liabilities

Current Liabilities
Def:
- liabilities which are reasonably expected to be liquidated (paid) within a year
Categories:
- Accounts payable - are ordinarily debts to suppliers (goods, services)
- Accrued liabilities - are obligations for goods and services provided to a company for which
invoices have not yet been received
- Unearned Revenues (advances from customers) are a company receives cash before a
service is received (airline sells a ticket for future flights)
- Short - term borrowings (notes) money received (something) from somebody (banks or other
creditors) temporarily, expecting to return it

Long-term Liabilities
Def:
- Obligations that are expected to be paid after one year

Include:
-

Bonds - a bond is like a loan: the issuer is the debtor, the holder is the creditor, and the
coupon is the interest
Leasing liabilities - a process by which a firm can obtain the use of a certain fixed assets for
which it must pay a series of periodic payments
Long - term borrowings (notes) - money received from somebody (banks or other creditors)
for more than 1 year, expecting to return it

*** Long-term notes may be secured by a mortgage that pledges title to specific assets as
security for a loan

Accounting principles

The mains principles operating in accounting area:

- Double posting principle
- Double entry principle

Double posting principle

All accounting elements are presented from 2 points of view:
- one who show the economic materiality (assets)
- other who show the provenience (equity and liabilities)
The tool used to apply the double posting principle is the BALANCE SHEET
Balance sheets are usually presented with two sections balancing (Assets vs.
Equity and Liabilities)

BALANCE SHEET
Assets

Equity
Liabilities

Balance sheet
-A balance sheet is often described as a instant-picture of a
company's financial condition
-A standard company balance sheet has three parts:
- assets,
- liabilities and
- ownership equity

Balance sheet
BALANCE SHEET

Long-term assets
Intangible assets

Share capital

patents, trademarks, and goodwill

Legal Reserve

Fixed assets
Property, plant and equipment
Longterm investments

Profit (loss) for the year

bonds, common stock, or long-term

notes

Current assets
Assets Inventory
Raw materials, Finished goods,
Goods for resale

Equity

Retained earnings

Longterm liabilities
Long-term Borrowings

Leasing liabilities

Receivables
Trade receivables and other
receivables

Short-term investments
Derivative financial instruments
Cash and cash
equivalents

Current liabilities
Trade and other payables

Tax liabilities
Short-term borrowings
Unearned Revenues

Liabilities

Balance sheet
Pharmaceutical Factory:
zinc for preparing medicine
aspirin pill
chemical preparing technology
aspirin patent
buildings for production
contributions from shareholders
cash
bank borrowings
trademarks
money to collect from costumers
money to pay to suppliers
cash in banks
taxes to pay
profit of the year past
loss

40.000
50.000
100.000
70.000
80.000
100.000
10.000
200.000
30.000
50.000
50.000
20.000
50.000
70.000
20.000

Please fill the balance sheet!!!

BALANCE SHEET

Long-term assets
Intangible assets
patents, trademarks, and goodwill

Fixed assets
Property, plant and equipment
Longterm investments

Equity
Share capital
Legal Reserve
Profit (loss) for the year

bonds, common stock, or long-term

notes

Retained earnings

Current assets
Inventory

Longterm liabilities

Raw materials, Finished goods,

Goods for resale

Long-term Borrowings

Leasing liabilities

Receivables
Trade receivables and other
receivables

Short-term investments
Derivative financial instruments
Cash and cash
equivalents

Current liabilities
Trade and other payables

Tax liabilities
Short-term borrowings
Unearned Revenues

Current year: Profit or loss?

Pharmaceutical Factory:
Magnesium for preparing medicine
Strepsils pill
contributions from shareholders
stocks from intergroup companies
bank borrowings
money to collect from costumers
Technical equipments
Strepsils patent
Production Hall
money to pay to suppliers
cash in banks
taxes to pay
profit of the year past

100.000
250.000
300.000
50.000
300.000
150.000
200.000
100.000
100.000
250.000
50.000
50.000
100.000