4. Setting up T-Accounts for the Campus Bookstore

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Del curso dictado por IESE Business School

Accounting: Principles of Financial Accounting

761 calificaciones

IESE Business School

Accounting: Principles of Financial Accounting

761 calificaciones

Curso 1 de 5 en SpecializationFoundations of Management

Financial Accounting is often called the language of business; it is the language that managers use to communicate the firm's financial and economic information to external parties such as shareholders and creditors. Nobody working in business can afford financial illiteracy. Whether you run your own business, work as a manager or are just starting your career, you want to understand financial information and be able to interact with accountants, controllers, and financial managers. You want to talk business! This course will provide you with the accounting language's essentials. Upon completion, you should be able to read and interpret financial statements for business diagnosis and decision-making. More importantly, you will possess the conceptual base to keep learning more sophisticated accounting and finance on your own. Do not forget that, as with any other language, becoming proficient with accounting requires constant practice.

De la lección

Week 3: The Cash Flow Statement

Now that you have a good grasp of the balance sheet and income statement, I'll help you master how to recognize the transactions we went over in week two. I'll also introduce a third financial report - the cash flow statement - and discuss liquidity. Course objectives: To understand the difference between liquidity and profitability, become familiar with T-accounts and gain insight into the purpose of the cash flow report.

1. Introduction to Week 32:10

2. Recap of Week 23:15

3. T-Accounts and Journal Entries5:45

4. Setting up T-Accounts for the Campus Bookstore3:06

5. Sales, Cost of Goods Sold, Collections from Customers and Payment to Suppliers7:05

6. Other Operating Costs4:10

7. Transactions with Non-Current Assets8:09

8. Bank Loans and Interest4:03

9. Taxes, Closing Entries and Payments of Dividends5:44

10. Preparing the Balance Sheet3:54

11. Preparing the Income Statement4:30

12. Introducing the Cash Flow Statement I7:29

13. Introducing the Cash Flow Statement II4:03

14. Recap of Week 3 and Conclusions3:12

Conoce a los instructores

Marc Badia
Assistant Professor
Accounting and Control

[MUSIC]

Okay, the first thing we need to do is to set up all the T-accounts

to start recording the transactions for the new year.

The way we set up the T-accounts is taking them

from the balance sheet from the previous year.

So what we're going to do is take the ending balances of the previous year.

And actually, the balance sheet as of December 31st,

year x1 is going to be the same as the balance sheet as of January 1st, year x2.

Because nothing has happened in between.

Now we take these balances.

These are going to be the beginning balances for the T-account.

So we're going to present all these accounts in the T-shaped form.

As you see here, I have sort of organized the T-accounts into assets, and

liabilities, and owner's equity.

So that we have a little bit of order.

From now on we're going to use these T-accounts to record each one of

the transactions.

Note that on the asset side of the T-accounts have a debit balance, except

for a couple of accounts that you see here which are accumulated amortization and

accumulated depreciation.

And this is why they are called contra assets.

Because they always show with a negative balance with a credit balance

even though they are on the asset side.

The reason is that they are subtracting from the value, the original cost

of the furniture and equipment in this case, in the case of depreciation.

And from the cost, the original cost,

the purchase cost of software in the case of accumulated amortization.

If we add all these balances on the asset side, we are going to get the same number

that we will get if we add all the credit balances on the liabilities and

owner's equity side.

This basic accounting equality always has to hold

after each transaction that we record, if we add all the debit and

credit balances on the asset side, we should get the same number that we get if

we add all the credit balances on the owner's equity on liability side.

Okay, let's start with the first transaction.

So you've seen this before, we are going to purchase books on credit for

a total value of 150,000 euros.

How would you account for this?

Well, first thing we receive the books, we own the books now because suppliers have

delivered the books to the store, and therefore we're going to debit inventory.

Because we want to increase an asset account, so

we debit the asset account inventory.

Second, we are not paying for this inventory so cash is not effected,

not changed.

But instead we have a new source of capital.

Suppliers are financing us, so we need to recognize an increasing accounts payable

by crediting accounts payable.

After this transaction, liquidity has not changed, profitability has not changed.

So we just have one asset that increases, but we have financed this asset with

an obligation with a source of capital from suppliers that we need to return.

Therefore we are not richer or poorer.

Okay, in the next video clip, we are going to continue with more transactions.

[MUSIC]

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