Ifsa Chapter2
Ifsa Chapter2
Ifsa Chapter2
ASSET ACCOUNTS
LIABILITY ACCOUNTS
Asset:
Loan Receivable
Liability:
Loan Payable
EQUITY ACCOUNTS
Capital (such as common stock)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
EXPENSE
Cost of goods sold
Gains
Investment income
(e.g., interest and
dividends)
Tax expense
Losses
Copyright 2013 CFA Institute
Beginning
Retained
Earnings +
Net
Income - Dividends
Contributed
Assets = Liabilities + Capital +
Beginning
Retained
Earnings +
REV -
Expenses - Dividends
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Ending
Retained
Earnings
Contributed
Assets = Liabilities + Capital +
Beginning
Retained
Earnings +
Net
Income - Dividends
Contributed
Assets = Liabilities + Capital +
Beginning
Retained
Earnings +
REV -
Expenses - Dividends
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EXAMPLE
ABC COMPANY
ABC Company, Inc.
(Beginning) Balance Sheet
As of 31 December 20X0
Assets
2,000
Liabilities
Contributed equity
Retained earnings
Owners equity
500
1,250
250
1,500
2,000
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250
Expense
Net income
50
200
250
200
0
450
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2,200
Liabilities
Contributed equity
Retained earnings
Owners equity
Total liabilities and equity
500
1,250
450
1,700
2,200
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Payable
2,000
250
250Revenue
50
50Expense
2,200
500
1,250
Retained
Earnings
Beginning balance
Subtotal
500
Contributed
Capital
1,250
250
450
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Payable
2,000
250
250 Revenue
50
50Expense
2,200
500
1,250
Retained
Earnings
Beginning balance
Subtotal
500
Contributed
Capital
1,250
250
450
20
Payable
2,000
250
250Revenue
50
50Expense
2,200
500
1,250
Retained
Earnings
Beginning balance
Subtotal
500
Contributed
Capital
1,250
250
450
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2,000
Subtotal
2,200
500
1,250
250
250
250Revenue
50
50Expense
500
1,250
450
Total = $2,200
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2,000
500
1,250
250
250
250
50
2,200
2,200
50
500
500
1,250
250
250
-50
1,250
200
450
250
0
50
0
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ACCRUALS
In the ABC example, the company received cash for all revenues when
they were earned and paid cash for all expenses when they were
incurred.
In practice, a company may
- Earn revenue before it receives cash or earn revenue after it
receives cash.
- Incur an expense before it pays cash or incur an expense after it
pays cash.
Accrual accounting requires that revenues be recorded in the period
they are earned and that expenses be recorded in the period they are
incurred, irrespective of when the related cash movement occurs.
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ACCRUALS: REVENUE
Cash Movement
prior to Accounting
Recognition
Cash Movement
in the Same Period as
Accounting Recognition
Cash Movement
after Accounting
Recognition
UNEARNED
(DEFERRED) REVENUE
Settled transaction no
accrual entry needed
UNBILLED
(ACCRUED) REVENUE
Originating entry:
Record cash receipt and
establish liability (e.g.,
unearned revenue)
Originating entry:
Record revenue and
establish an asset (e.g.,
unbilled revenue)
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ACCRUALS: EXPENSE
Cash Movement
prior to Accounting
Recognition
Cash Movement
in the Same Period as
Accounting Recognition
Cash Movement
after Accounting
Recognition
PREPAID EXPENSE
Settled transaction no
accrual entry needed
ACCRUED EXPENSES
Originating entry:
Establish a liability (such
as accrued expenses)
and record an expense
Adjusting entry:
Reduce the liability as
cash is paid
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FLOW OF INFORMATION IN AN
ACCOUNTING SYSTEM
Journal
Ledger
Trial
Balance
Financial
Statements
Financial Statements
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SUMMARY
Financial statements are constructed using elements: assets, liabilities, owners
equity, revenues, and expenses.
The basic accounting equation is reflected on the balance sheet
Assets = Liabilities + Owners equity
The accounting equation can be expanded to provide a combined
representation of the balance sheet and income statement.
Assets = Liabilities + Contributed Capital + Beginning Retained Earnings
+ Revenue Expenses Dividends
The basic structure of an accounting system mirrors the basic accounting
equation, which remains in balance as each transaction is recorded.
Accrual accounting requires that revenues be recorded in the period they are
earned and that expenses be recorded in the period they are incurred,
irrespective of when the related cash movement occurs.
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