CDA COLLEGE ACC101: INTRODUCTION TO ACCOUNTING Lecture 2 Lecture 2 Lecturer: Kleanthis Zisimos

Chapter Review In Today’s Lecture we Construct the form of final Accounts ( Balance- sheet and Profit & Loss ) Construct the form of final Accounts ( Balance- sheet and Profit & Loss ) Classify the assets, liabilities and capital Classify the assets, liabilities and capital Analyze and compare the capital and revenue expenditure Analyze and compare the capital and revenue expenditure

Main Financial Statements The main financial statements are 1) the Balance Sheet and 2) the Profit and Loss account. The main financial statements are 1) the Balance Sheet and 2) the Profit and Loss account. The balance sheet is a list of all the assets owned by a business and all the liabilities owed by a business as at a particular date The balance sheet is a list of all the assets owned by a business and all the liabilities owed by a business as at a particular date A Profit and Loss Account is a record of income generated and expenditure incurred over a given period. The profit and loss account shows by the end of the year if a company has profit (more income than expenditure) or loss A Profit and Loss Account is a record of income generated and expenditure incurred over a given period. The profit and loss account shows by the end of the year if a company has profit (more income than expenditure) or loss

Vertical form of Balance Sheet Fixed Assets X Fixed Assets X Current Assets X Current Assets X Short Term Liabilities (X) Short Term Liabilities (X) Long Term Liabilities (X) Long Term Liabilities (X) Y Capital Y Capital Y

Vertical form of Trading, Profit a Loss Account Sales Sales Less cost of sales Gross Profit Gross Profit Add Additional Income Less Selling and Distribution Expenses Less Administration expenses Less Finance expenses Net Profit Net Profit

Profit a Loss Account Gross Profit is the difference between the value of sales and cost of goods sold Gross Profit is the difference between the value of sales and cost of goods sold COGS= Purchases + Carriage inwards+ opening stock –closing stock COGS= Purchases + Carriage inwards+ opening stock –closing stock Gross Profit= Sales - COGS Gross Profit= Sales - COGS Income from other sources may include profits on sale of fixed asset and interest received Income from other sources may include profits on sale of fixed asset and interest received Net Profit=Gross Profit less expenes Net Profit=Gross Profit less expenes

Profit a Loss Account Selling and Distribution Expenses include Selling and Distribution Expenses include 1. Marketing and advertising cost 2. Bad debts 3. Discounts allowed Administration expenses include Administration expenses include 1. Salaries 2. Rent 3. Insurance 4. Stationary Finance expenses include Finance expenses include 1. Bank interest 2. Bank charges

Assets Assets in the balance sheet are divided into two groups Assets in the balance sheet are divided into two groups 1. Fixed Assets a) Tangible Fixed Assets a) Tangible Fixed Assets b) Intangible Fixed Assets b) Intangible Fixed Assets c) Investments c) Investments 2. Current Assets

Fixed Assets A Fixed Asset is an asset acquired for continuing use (more than one year ) within the business. If it is acquired for sale to a customer then is NOT a fixed asset A Fixed Asset is an asset acquired for continuing use (more than one year ) within the business. If it is acquired for sale to a customer then is NOT a fixed asset Tangible Fixed Asset is a physical asset like machine, furniture, land Tangible Fixed Asset is a physical asset like machine, furniture, land Intangible Fixed asset in an asset which does not have physical existence like Goodwill Intangible Fixed asset in an asset which does not have physical existence like Goodwill Investment are shares bought from another company Investment are shares bought from another company

Current Assets Current assets are either Current assets are either 1. Cash and Cash in Bank 2. Items owned by the business with the intention of turning them into cash within one year like the Debtors, Stock and prepayments

Liabilities Liabilities are divided into Liabilities are divided into 1. Long Term Liabilities. They are debts payable after one year like a 20 years loan 2. Short Term Liabilities. They are debts payable within one year like bank overdraft, trade creditors, taxation payable

The equity represents the resources invested by the owner. The equity represents the resources invested by the owner. It is equal to the total assets minus the liabilities. It is equal to the total assets minus the liabilities. The equity of the owner is a debt for the company The equity of the owner is a debt for the company The owner’s equity in a business comes from two sources: 1)Investment by the owner and 2) Earnings from profitable operation of the business. The owner’s equity in a business comes from two sources: 1)Investment by the owner and 2) Earnings from profitable operation of the business. Capital or equity

Accrual Basis Amounts in the financial statements are not prepared on a cash basis but on an accrual basis Amounts in the financial statements are not prepared on a cash basis but on an accrual basis The accrual concept states that a sale or purchase is dealt with in the year in which it is made, even if cash changes hands in a later year. The accrual concept states that a sale or purchase is dealt with in the year in which it is made, even if cash changes hands in a later year. Discussion Example Discussion Example

Capital and Revenue expenditure In order to be able to put the items correctly either to the Balance Sheet or to the Profit & Loss Account you need to be familiar with an important distinction, the distinction between capital and revenue expenditure. In order to be able to put the items correctly either to the Balance Sheet or to the Profit & Loss Account you need to be familiar with an important distinction, the distinction between capital and revenue expenditure. Capital expenditure is expenditure which results in the acquisition of fixed assets, or an improvement in their earning capacity and they appear in the Balance Sheet. Capital expenditure is expenditure which results in the acquisition of fixed assets, or an improvement in their earning capacity and they appear in the Balance Sheet.

Capital and Revenue expenditure Revenue expenditure is expenditure which is incurred for the purpose of the trade of the business. This includes expenditure classified as selling and distribution expenses, administration expenses, finance charges and maintenance of fixed assets Revenue expenditure is expenditure which is incurred for the purpose of the trade of the business. This includes expenditure classified as selling and distribution expenses, administration expenses, finance charges and maintenance of fixed assets Revenue expenditure is charged to the profit and loss account Revenue expenditure is charged to the profit and loss account

Capital and Revenue expenditure Example. A business purchases a building for € 30,000. It then adds an extension to the building at a cost of € 10,000. The building needs repairs for a few broken windows. These maintenance jobs cost €900. Example. A business purchases a building for € 30,000. It then adds an extension to the building at a cost of € 10,000. The building needs repairs for a few broken windows. These maintenance jobs cost €900. Solution. The original purchase € 30,000 and the cost of the extension € 10,000 are capital expenditures, because they are incurred to acquire and then improve a fixed asset. The other costs of £900 are revenue expenditure, because these merely maintain the building. Solution. The original purchase € 30,000 and the cost of the extension € 10,000 are capital expenditures, because they are incurred to acquire and then improve a fixed asset. The other costs of £900 are revenue expenditure, because these merely maintain the building.

Capital income and revenue income Capital income is the proceeds from the sale of non-trading assets (ie proceeds from the sale of fixed assets like a car) Capital income is the proceeds from the sale of non-trading assets (ie proceeds from the sale of fixed assets like a car) The profits (or losses) from the sale of fixed assets are included in the profit and loss account The profits (or losses) from the sale of fixed assets are included in the profit and loss account Revenue income is the proceeds from a) the sale of trading assets and b) Interest and dividends received from investments Revenue income is the proceeds from a) the sale of trading assets and b) Interest and dividends received from investments Revenue income is included in the profit and loss account Revenue income is included in the profit and loss account

Capital income and revenue income State whether each items can be classified as capital or revenue expenditure or income State whether each items can be classified as capital or revenue expenditure or income 1. Purchase of Machinery 2. Computer repairs 3. Cost of installations of a new machinery 4. Sale of toys in a toy manufacturing company 5. A business sells a car at the end of 2010 for 5000 euro which was bought 6000 euro in January 2010 in January 2010