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I	Introduction
1	What is a firm
2	History of firms
3	History of accounting
II	Example of a small firm
4	A workshop making toys (1)
5	A workshop making toys (2)
6	Production of large quantities of information
7	First principles taught by the example
8	Most of the main concepts of accounting are in the toy example
III	From single-entry to double-entry accounting
9	Why single-entry accounting, like in our checkbook, is insufficient
10	A page to record debtors, a page to record creditors: the emergence of double-entry accounting
11	The basic concept of transaction: the "atom" of activity of a firm
12	Posting transactions into accounts (1): general principles, the apparent paradox of "value coming in is a debit"
13	Posting transactions into accounts (2): posting simple transactions, traditional vs real time inventory control
IV	A complete accounting cycle up to the Trial balance
14	The yearly accounting cycle: journal → accounts → Trial Balance → adjustments → Income Statement & Balance Sheet
15	Posting a complete cycle of journal entries (1)
16	Posting a complete cycle of journal entries (2)
17	Balance of each account and Trial Balance (TB)
18	Revenue accounts and Capital accounts in the TB
V	Adjustments to the Trial balance
19	Why the TB needs to be adjusted to compute the Income Statement (IS)
20	Adjustment for inventory
21	Adjustment for amortization
22	Provisions for bad or doubtful clients
23	Prepayments and accruals
VI	The Income Statement and the Balance Sheet
24	From adjusted Trial balance to Income Statement (IS)
25	From adjusted Trial balance to Balance Sheet (BS)
26	IS and BS: a higher view
VII	General principles of accounting and miscellaneous topics
27	General rules and guidelines of double-entry accounting
28	Stock valuation: FIFO, LIFO and other methods
29	Impact of a series of transactions on the IS and BS: a complete exercise
30	Alternate way to compute the COGS
VIII	Money
31	Money (1): what is money?
32	Money (2): how to get rich?
IX	Accounting over several years
33	Difference between the first accounting year and the following years
34	From one BS to the next, and the IS in between
35	Income tax and dividends
36	Accounting documents over several years
X	A deeper look at the Balance Sheet
37	Big measures in a balance sheet: equity, debt, capital employed, fixed assets, current assets, working capital
38	The notion of liquidity
39	The list of assets is fundamentally heterogeneous
XI	Cash flow statement
40	Cash flow statement (1): what is cash?
41	Cash flow statement (2): reconciling cash evolution with the main accounting measures
XII	Ratios
42	Return on Capital Employed (ROCE)
43	Other ratios
44	Stock management

 

 

Let's look once again at a Trial balance at the end of an accounting year.

Even though, in reality, an accounting cycle would have thousands of transactions, and hundreds of accounts would appear in the TB, the 15 common accounts plus 6 adjustments accounts of the TB below are sufficient to illustrate the ideas we want to explain.

The accounts shown is blue correspond to the adjustments we have already studied:

• adjustments for stocks
• for amortization
• and for bad or doubtful clients

Now we turn to the last two types of adjustment we shall learn in this course:

• prepayments
• and accruals

 

 

Prepayments: suppose that in the 1500€ of Shop expenses, recorded during the year by the accounting process and which appear in the TB above (because we received invoices and treated them), a part really concerns consumptions which we shall make next year.

Suppose 1000€ are the actual consumptions of this year, and 500€ will be consumed only next year (for instance if we buy at the end of October fuel for 3 months).

 

 

Since one of the objectives of accounting is to compute as precisely as possible the charges to be put against the sales in the Income Statement, in order to know exactly the net profit or loss of the year, the charge of 1500€ which appears in the IS below is not correct.

A part of it is a charge of next year.

 

 

Accounting mechanics of the adjustment. If the prepayment is 500€, whether we paid it in cash or not, we will make the following double-entry:

we credit the Shop expenses account, with the effect of reducing its balance to 1000€

and we debit a new account called "Prepayments account" which belongs to the Capital accounts (I could have added "BS" next to its name to stress this point). That is, it will be an account recording an asset in the firm (even if it is a short lived asset)

 

 

The Trial balance changes then. The Shop expenses (of the year) decrease to 1000€, and a new account "Prepayments" appeared with 500€ in debit.

 

The IS has evolved too:

 

 

Accruals: conversely, suppose that during the accounting cycle we purchased and consumed some things for which we haven't received an invoice from the supplier yet. Then this consumption is not in the accounting system (because the accounting system works only with formal documents – invoices, bills and such like –, from clients and suppliers, accompanying the recording of transactions).

But we know that it should be counted as a charge of the year.

Suppose it is an amount of 100€ of, say, shop expenses again.

Then we shall make an adjustment for this.

 

 

Posting accruals. We debit the shop expenses account, and we credit a new account "Accruals" which will belong to the Capital accounts. It will record money we owe a supplier, and we haven't paid yet (not even with an IOU).

 

 

The final TB and IS, with all the adjustments, are now these:

If you found this lesson helpful, thanks to click on the button "G+1" at the top of the page.

We are finished with the study of the various adjustments to be made to the Trial balance in order to have an exact view and record of the consumptions of the accounting cycle.

The next step is to compute the IS (well, it's already quite advanced...). More precisely we shall see a bit of technique to "extract" the IS from the adjusted TB.

And then we shall see how we reach the Balance Sheet, which is a snapshot, at the end of the year, of what the firm owns and what the firm owes.

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