Basics of accounting (master)

Session 7

November 29, 2005

Topics of the day (outline) : Review of general accounting and cost accounting (for examination)

• The difficulties in understanding a balance sheet (for instance, why when F purchases G, F equity is not affected) come from forgetting the origin of the BS. One must go back to debit and credit for each transaction, and understand the impact of any elementary transaction on the BS (we can even compute an IS for every transaction)
• More explanations on debit and credit
  • debit an account that receives value
  • credit an account that gives value
  • the exception of the sales account : it's some sort of a trick to compute an IS and a profit
    • we debit normally the account that receives the payment
    • but we credit the sales account, although you may say that the sales account gives nothing
  • similarly with the charges of the IS
    • we credit whatever account pays for the charges (cash, bank, creditor, stocks)
    • but we debit a charge account ; there again, it's a trick to compute an IS and a profit
  • the combination of sales (credit) and charges (debit) produces a profit (credit) [or a loss (debit)] that belongs to the shareholders, since it is a increase in the assets that does not come from external creditors.
• These exceptions concern only sales and consumptions.
• Concerning assets that enter or leave the firm, the rules are more obvious.
• Exercises
  • The logic of general accounting :
    • journal
    • posting
    • accounts
    • TB
    • adjustments
    • IS & BS
  • The rules to remember
• Every transaction including a consumption can be analysed into an IS to understand its impact on the BS

Break time

• Cost accounting
  • details
  • budget
  • accounts for three product lines
  • price structure and psychology of markets

• Other reviews
• Treasury stocks
• The mechanism of issuing bonds, and other debt
• Convertibles, etc.
• Value creation