INTRODUCTORY ACCOUNTING

1. INTRODUCTORY ACCOUNTING UNIT 2: Creating Accounts TouchText • Accounts, Sub-Accounts and Lists • Standard Financial Statement Accounts • Financial Position and Performance • The Statement of Cash Flows Problems and Exercises Next

2. What is an Account? An Account is simply a category in which like accounting items are placed. Dictionary Entity Cash Sales Bank Loans • Collect • Organize • Report • Analyze Supplies Taxes Land Back Next

3. Account Types Every account is one of five (5) types. Revenues Income from sales, etc. Dictionary Liabilities Debts the business owes Assets Things of value that the business owns Expenses Costs of running the business Owners’ Equity Owners’ net investment in the business Take Notes Back Next

4. Creating Accounts (Internal) The first task in starting a business accounting system is to create the accounts. Dictionary • Some standard accounts that all businesses use (e.g. cash, owners’ capital, etc.) • Many accounts created to suit the particular business. • Once created, accounts cannot be changed (though additional accounts can be added later, as needed). Take Notes Back Next

5. Account Numbers (internal) It is convenient to give accounts numbers as well as names. There is no one “right way” to assign numbers to accounts, but there are some good rules. Dictionary Example Assets: 1,000 – 1,999 Liabilities: 2,000 – 2,999 Equity: 3,000 – 3,999 Revenues: 4,000 – 4,999 Expenses: 5,000 – 5,999 • Group account numbers by account type. • Within account type, group account numbers by similarity, or some other logical sequencing or grouping. • Leave spaces between the account numbers, in case you later want to add an account there. Example 5110 Telephone Expense 5115 Internet Expense 5120 Cable TV Expense Take Notes Back Next

6. Sub-Accounts and Lists Example (sub-accounts) 5100 Communications 5110 Telephone Expense 5115 Internet Expense 5120 Cable TV Expense Sub-Accounts (accounts within other accounts) can be created to better organize the system. Dictionary Example (lists) 1200 Inventories Bottled Water (litre) Coca Cola (12 oz. can) Orange Juice (Mallee, ½ litre box) Lists are itemized names within a single account. These are not numbered. Take Notes Back Next

7. The Chart of Accounts The Chart of Accounts is simply a list of all the business’s accounts, numerically ordered. There are no money amounts on the Chart of Accounts. Example Chart of Accounts 1100 Cash 1115 Investments …. …. …. 2450 Bank Loans …. …. …. Dictionary Take Notes Back Next

8. Financial Statements Internally, management has access to real-time measures of financial position and performance. Externally, Periodically, business have to produce various Financial Statements. Dictionary • Balance Sheet: Assets = Liabilities + Owners’ Equity • Income Statement: Revenues – Expenses = Profits • Statement of Cash Flows: Explains Δ Cash • Statement of Retained Earnings: Profits – Dividends = Δ Retained Earnings Take Notes Back Next

9. Financial Statements (External) Because financial statements (F/S) are a final product designed for viewing and analyzing … Dictionary • Many of the business’s (sub-)accounts are often consolidated into relatively “standard” reporting accounts. • Account numbers do not appear. Materiality Balance Sheet (F/S) Assets … Other Current Assets $200 Balance Sheet (internal) Other Current Assets 1460 Supplies $120 1470 Pre-Paid Expenses $80 Take Notes Back Next

10. Standard Asset Accounts • Cash and Cash Equivalents: Money in the bank; Petty cash. • (Trade) Accounts Receivable: Sales to customers who haven’t yet paid. • Inventories: Items held for sale. • Securities: Financial investments. • Associates: Ownership between 20% and 49% in other businesses. • Property, Plant & Equipment (PP&E): Buildings, equipment, etc. • Land Dictionary Assets can be both financial and physical. Take Notes Back Next

11. Standard Liability Accounts • (Trade) Accounts Payable: money owed to suppliers for items already purchased. • Short-Term Loans: borrowed money due within one year. • Current Portion of Long-Term Debt: Originally a long-term loan, which is now due within one year. • Long-Term Loans: Borrowed money due to be repaid more than one year from now. • Debentures: Unsecured bonds issued by the business. Dictionary Liabilities – also known as “Debt” are only financial. Take Notes Back Next

12. Standard Equity Accounts: Non-Corporations i.e. Proprietorships and Partnerships • Sole Proprietorship: One person; business an extension of person. • Partnership: Two or more persons; business an extension of partners. Dictionary Proprietorship Share Capital Business Partnership Owner’s Draw In this class, in simple examples, we often use this form of equity accounting. Take Notes Back Next

13. Standard Equity Accounts: Corporations • Corporations are … • Separate legal entities • Ownership designation by shares of stock. • Owners private wealth protected by limited liability. Dictionary Stockholders Common Stock (Share Capital) Corporation Dividends • Issued and Paid Up (at Par) • Share Premium (above Par) Take Notes Back Next

14. Corporate Structure Ownership Board of Directors Stockholders Vote/Elect to Represent Them Dictionary CEO vs. President * Led by Chairman of the Board Corporation CFO vs. Controller Executives Chief Executive Officer (CEO) President (also known as Chief Operating Officer (COO)) Chief Financial Officer (CFO), Vice Presidents (VPs), Etc. Controller, Treasurer Take Notes Back Next

15. Publically Listed Corporations (PLCs) If corporations meet various requirements (that they be big enough, profitable, well documented, etc.), then they can choose to become “public”. This means that there stock shares can be bought on sold on the (secondary) stock market. Dictionary S.E.T. The Stock Exchange of Thailand (SET) requires that all listed corporations produce annual reports (with financial statements) in both Thai and English. In this class, all real-world examples will come from businesses listed on the SET. Take Notes Back Next

16. Standard Equity Accounts Stockholders’ initial investments (at par, plus) • Proprietorships & Partnerships • Capital, Owner • Draws, Owner • Retained Earnings • Corporations • Common Shares – Issued and Paid Up • Paid-In-Excess (Premium) on Ordinary Shares • Retained Earnings • Non-Controlling Interest (Minorities) Dictionary Retained Earnings are accumulated profits kept in the business for re-investment, rather than distributed as dividends. Equity value in subsidiaries which are not owned by this corporation Take Notes Back Next

17. Financial Position: The Balance Sheet Every Asset, Liability and Owners’ Equity account has a balance that accumulates over time, and that can be measured ata single point in time. Together, they comprise the business’s financial position. These accounts are presented together on the same financial statement – the Balance Sheet. It is called this because Assets have to balance (i.e. equal) Liabilities and Owners’ Equity. Dictionary Liabilities + Owners’ Equity Assets = * This is known as the “Basic Accounting Identity”. Take Notes Back Next

18. The Balance Sheet: Structure Dictionary “Current Liabilities”: Payable within one year. “Current Assets”: Convertible into cash within one year. Most Liquid “Non-Current Liabilities” also known as “Long-Term Liabilities”. “Non-Current Assets” also known as “Fixed Assets”. “Total Liabilities” are also called simply “Debt”. Take Notes Back Next

19. The Balance Sheet With Standard Accounts Dictionary * An actual balance sheet would have the $$$ balances for each account, with the left-side total equaling the right-side total. Take Notes Back Next

20. Real Balance Sheet Example: CPN 2011 Dictionary Take Notes Back Next

21. Real Balance Sheet Example: CPN 2011 Dictionary Take Notes Back Next

22. Real Balance Sheet Example: CPN 2011 Dictionary Take Notes Back Next

23. Standard Revenue and Expense Accounts • Revenues • Sales (to Customers) • Expenses • Cost of Goods Sold (COGS): All costs specifically assigned to the sales of goods & services. • Sales, General & Administrative Expenses (S,G&A): Expenses that cannot be specifically assigned to the sales of goods & services, except… • Interest Expense: Interest on borrowed money paid to banks and other creditors. • Tax Expense: Taxes paid to government Dictionary Take Notes Back Next

24. Standard Income Statement Format Dictionary Paid to Banks Paid to Gov’t. Received by Owners Take Notes Back Next

25. Comprehensive Income • Other comprehensive items are “one-off” items outside of management control. • e.g. Gains/losses on investments; Translation gains/losses on foreign holdings; Losses from natural disasters, etc. • These items shouldn’t be integrated with normal operating income, but also shouldn’t be hidden on the balance sheet! Dictionary Take Notes Back Next

26. Real Income Statement Example: CPN 2011 Dictionary COGS Note FX translation gain/loss. SG&A Interest Tax Take Notes Back Next

27. The Cash Flow Statement: Cash and Net Income Hey, where did my money go? The Statement of Cash Flows reconciles changes in the Cash balance (Balance Sheet) with that year’s Net Income (Income Statement). Dictionary Cash Down $30 Profit + $100 * Cash Flow Statements are derived from the Income Statement and Balance Sheet. Cash Flow Statements are quite complicated, and are the last topic of this course. Take Notes Back Next

28. Presenting Financial Statements (In Class) To avoid confusion, only as much information on financial statements will be presented as needed. Dictionary Robinsons 2011 (actual) Robinsons 2011 (in class) Income Sales & Service 11,951 Other 1,050 Total Income 13,001 Take Notes Back

29. The Cash Flow Statement: General Structure Adjustments + Non-Cash Expenses - Non-Cash Revenues Dictionary Changes Asset Cash Asset Cash Liability Cash Liability Cash Take Notes Back Next

30. End of Unit 2 Questions and Problems: Compare Central with Makro and 7-11 Compare the revenue accounts of Central (“CPN”) with Siam Makro (“MAKRO”) and with 7-11 (“CSR”). Dictionary List each company’s revenue accounts. What word(s) do they use for these accounts? (e.g. “Sales”, “Income”, “Revenue”, etc.) For each company, which is their main (i.e. biggest) revenue account? Why don’t all three companies have the same revenue accounts? And what does this say about the their business? Why does 7-11 (“CSR”) have some revenue accounts below some expense accounts, but the other two companies do not? Take Notes Back Next

31. End of Unit 2 Questions and Problems: Compare Central with Makro and 7-11 Central (“CPN”) Dictionary Take Notes Back End

32. End of Unit 2 Questions and Problems: Compare Central with Makro and 7-11 Siam Makro (MAKRO”) Dictionary Take Notes Back Next

33. End of Unit 2 Questions and Problems: Compare Central with Makro and 7-11 7-11 CP.All (“CSR”) Dictionary Take Notes Back End