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Accounting with Barca
This document provides an overview of key accounting concepts like debits and credits, balance sheets, income statements, and cash flow statements. It includes examples of trial balances, income statements, cash flow statements, and balance sheets for a sample company called Barca. Worked examples are provided to illustrate calculating cost of goods sold.
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Accounting with Barca
- 1. The story of debits& credits with BARCA 1
- 2. The double entryaccountingTOREMEMBER Asset accounts D Increase Decrease Liability accounts Decrease Increase Charges Revenus P & L Account
- 3. The concept ofa balance sheetExercise1 What I HAVE What I OWE
- 4. Exercise1 What I HAVEWhat I OWE House Car Furniture Equipment Savings “Petty” Cash Mortgage Car loan Equipment loan Invoices Overdraft The concept of a balance sheet
- 5. Exercise1 What I HAVEWhat I OWE House 100 Car 10 Furniture 30 Equipment 20 Savings 10 Petty Cash 5 Adding up 175 Mortgage 65 Car loan 5 Equipment loan 10 Invoices 5 Overdraft 10 Adding up 95 The concept of a balance sheet
- 6. Exercise1 What I HAVEWhat I OWE House 100 Car 10 Furniture 30 Equipment 20 Savings 10 Petty Cash 5 Total 175 Net worth 80 Mortgage 65 Car loan 5 Equipment loan 10 Invoices 5 Overdraft 10 Total 175 The concept of a balance sheet
- 7. Exercise1 The conceptof a balance sheet Assets =Liabilities +Net Worth (Equity) What about income and expenses?
- 8. Revenues (Income) 1000 -Mortgage loan repayment 300 - Car expenses 50 - Heating, electricity,… 100 - Various expenses 100 - Taxes and Soc. Sec. 400 Revenuesandexpenses Net income / Savings 50 Where did the money go?
- 9. The charges tothe P & L Net Result TheP&LAccount Other operational income Gross margin Added Value Gross ops profit Profit before taxes Goods & services Personnel -expense Other ops expenses Amortisa tion EBIT Financial expenses Taxes Result of Operations Financial Income & exceptional Gross Profit Other income
- 10. P & LN-1 EURO N Turnover (1) Purchased goods - Inventory = Cost of goods sold (2) Gross margin (3)=(1)-(2) + Other business related income = Income from operations (4) - Goods and services (5) = Added Value (6)=(4)-(5) - Personnel expense - Other operational expenses = Gross operating income + Financial revenues + Exceptional results = Gross total revenue (EBITDA) - Amort., provisions, depreciations = EBIT - Financial expenses - Taxes = NET PROFIT ExceptionalExceptional OperationsOperations InvestmentsInvestments FinancingFinancing Key elements of a P & LTheP&LAccount
- 11. ASSETS LIABILITIES BALANCE SHEET INCOMEstatement CHARGES REVENUES
- 12. The balance sheetof a bank ASSETS LIABILITIES Differentbalancesheets What the bank HAS What the bank OWES
- 13. Example : The openingbalance sheet of a company Assets Liabilities Short term asset Net worth The methodology of double entry accounting Doubleentry
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- 16. Double entry accounting Cash Net Worth ASSETSLIABILITIES Doubleentry
- 17. Double entry accounting Incomestatement (P&L account) Doubleentry
- 18. The double entryaccountingTOREMEMBER Asset accounts D Increase Decrease Liability accounts Decrease Increase Charges Revenus P & L Account
- 19. Whathappened? What happened? EURO Date 01/01/N-1 31/12/N-1 01/01/N 31/12/N ASSETS Fixed Inventory Receivable Cash 399 1.516 890 975 10,6% 40,1 % 23,5 % 25,8 % 397 1.364 1.136 561 11,48 % 39,44 % 32,82 % 16,16 % TOTAL ASSETS 3.780 100 % 3,458 100 % LIABILITIES Net Worth LT Debt Suppliers Bank debt 592 660 2.528 0 15,7 % 17,5 % 66,9 % 0 % 673 441 2,166 178 19,43 % 12,75 % 62,63 % 5,19 % TOTAL LIABILITIES 3.780 100 % 3,458 100 %
- 20. EURO 01/01/N-1 31/12/N-1 01/01/N 31/12/N Turnover (1) Purchased goods -Inventory = Cost of goods sold (2) Gross margin (3)=(1)-(2) 14.104 12.639 422 12.217 1.887 13,38 % 14.690 12.573 -141 12.714 1.976 13,45 % + Other business related income = Income from operations (4) 343 2.230 2,43 % 15,81 % 521 2.497 3,55 % 17,00 % - Goods and services (5) = Added Value (6)=(4)-(5) 809 1.421 5,74 % 10,08 % 1.000 1.497 6,81 % 10,19 % - Personnel expense - Other operational expenses = Gross operating income 942 23 456 6,68 % 0,16 % 3,23 % 975 26 496 6,64 % 0,18 % 3,38 % + Financial revenues + Exceptional results = Gross total revenue 16 74 546 0,11 % 0,52 % 3,87 % 4 -10 490 0,03 % 0,07 % 3,34 % - Amort (161)., provisions, depr. = EBIT 185 361 1,31 % 2,56 % 212 278 1,44 % 1,89 % - Financial expenses - Taxes 23 156 0,16 % 1,11 % 30 111 0,20 % 0,76 % = NET PROFIT 182 1,29 % 137 0,93 % Financialflows The income statement
- 21. Barca BARCA TrialBalance Cash Capital Equipment Supplier Equipment Sales Stock Supplier Stock Customers Fees Operations Cost of goods sold Depreciation Income Taxes Due to Tax Aut. Dividends Due to Shareholders
- 22. Barca BARCA TrialBalance Cash Capital Equipment Supplier Equipment Sales 50,000 156,000 25,000 77,000 48,000 22,000 2,000 Trial balance = 339,600 206,000 174,000 32,000 50,000 25,000 25,000 25,0006,250 18,750 Stock Supplier Stock Customers Fees Operations Cost of goods sold Depreciation Income Taxes Due to Tax Aut. Dividends Due to Shareholders 240,000 95,000 80,000 95,00077,000 156,000240,000 48,000 22,000 80,000 6,250 27,600 27,600 6,000 4,000 15,000 18,000 84,000
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- 25. Barca P & Laccount (Income statement) Revenue Cost of materials Salaries Other operating cost EBITDA Depreciation Op. income EBIT Tax Net income before div.
- 26. Barca P & Laccount (Income statement) – rounded figures Revenue 240,000 Cost of materials -80,000 (95-15) Salaries -48,000 Other operating cost -22,000 EBITDA 90,000 Depreciation -6,250 (25% 25) Op. income EBIT 83,750 Tax -27,600 (33% EBIT) Net income before div. 56,150 Net income after div. 50,150
- 27. Barca Cash flow Payments fromclients Cost of goods sold Salaries Other op. expenses Cash flow from ops Cash flow for investments Available cash flow disponibleCapital increase Dividends Cash flow from financing Cash flow
- 28. Barca Cash flow Payments fromclients 156,000 (65%240) Purchase goods -77,000 (95-18) Salaries -48,000 Other op. expenses -22,000 Cash flow from ops 9,000 Cash flow for investments -25,000 Available cash flow disponible -16,000 Capital injection 50,000 Dividends -2,000 Cash flow from financing 48,000 Cash flow 32,000
- 29. Barca Balance Fixed assets Inventory Receivables Cash Total assets Capital Ret.Earn. Net worth Tax due Payables Div. due Liabilities N.W. & Liabilities towards third parties
- 30. Barca Balance (rounded figures) Fixed assets 18,750 Inventory 15,000 Receivables 84,000 Cash 32,000 Total assets 149,750 Capital 50,000 Ret. Earn. 50,150 Net worth 100,150 Tax due 27,600 Payables 18,000 Div. due 4,000 Liabilities 49,600 N.W. & Liabilities towards third parties 149,750
- 31. Cost of goodssold Beginning inventory 4,000 Plus Purchases 7,400 Equals : Good available for sale 11,400 Less : Ending inventory 2,000 Cost of goods sold 9.400 Ending inventory Beginning inventory Available For sale 11,400 Pur- Chases 7,400 Cost of goods Sold 9,400 4,000 2,000
Editor's Notes
- #4 The following slides are an illustration of what was stated in relation to the EVALUATION OF ASSETS and the impact on the NET WORTH
- #10 This is quite a remarkable slide It shows the P & L statement in a different manner Look at all this hard work and what is finally left over after taxes FOR OUR DEALER LESS THAN 1% OF HIS TURNOVER IS LEFT FOR HIM Now we should really company to what is left over with his initial investment The return on investment for our car dealer is about 12 to 15 %, in other words it is still worth being a car dealer Below 7% he better puts his money to fruition somewhere else and enjoy himself rather than working as hard as he is doing
- #11 As you can see the Income statement also called the Profit & Loss Account is structured in 4 parts to show income and charges as a result of Operations Exceptional items (for instance head quarters have been sold) The results (positive or negative) of the investments made by the company The financial cost and taxes The purpose to structure a P & L that way is to make comparison possible and show if the money is coming from operations or anything else As you can see the P & L has its own vocabulary Turnover – cost of goods sold = GROS MARGIN GROS MARGIN + OTHER BUSINESS RELATED INCOME = INCOME FROM OPERATIONS INCOME FROM OPERATIONS – GOODS AND SERVICES = ADDED VALUE ADDED VALUE – PERSONNEL EXPENSE & OTHER OPERATIONAL EXPENSES = GROS OPERATION INCOME GROS OPERATING INCOME +/- EXCEPTIONAL ITEMS = EBITDA (Earnings before interest and taxes and before depreciation and amortisation) EBITDA – AMORTISATION & DEPRECIATIONS & PROVISIONS = EBIT (Earnings before interest and taxes) EBIT – INTEREST AND TAXES = NET PROFIT You have to get used to both the terminology and the lay-out
- #13 Participants should be in a position to put on paper the basics of a balance sheet of a bank I WOULD SUGGEST ANOTHER EXERCISE HERE ON DEBITS AND CREDITS THEY FOLLOW THE SAME CONVENTION AS EARLIER BUT A BANKER THINKS DIFFERENTLY THAN HIS CUSTOMER DUE TO THE FACT THAT WHAT REPRESENTS AN ASSET FOR A CUSTOMER IS A LIABILITY FOR A BANK When a person puts money in his or her account that person increases his or her assets held at the bank That same transaction for the bank means that the indebtedness from the bank towards the customer increases The bank will consider that the money of the customer is a liability When a liability account increases we talk about a CREDIT Therefore the banker will say to the customer that the account has been credited When a bank pays by means of the account a telephone bill, this means that the LIABILITY TOWARDS THE CUSTOMER DERCREASES this means a DEBIT The bank does not think differently than the customer it is just that what the customer puts on his balance sheet as an asset is put on the banker’s balance sheet as a liability and the other way around When a customer borrows money from the bank this borrowed money is a liability for the customer and an asset for the bank! When a bank extends a loan this means an asset account that is increased thus a DEBIT and for instance a CREDIT to the treasury account The key accounts of the balance sheet of a bank are shown on the next slide Their source is the CSSF and the figures are aggregated figures for the Luxembourg banking system Source www.cssf.lu
- #15 THIS IS THE WAY IT IS DONE WHEN A ASSET ITEM INCREASES IT MEANS A DEBIT Say you get a 500 bill that you have to put into your « petty cash » (cash on hand – it is always an asset item in opposition to treasury which is a broader concept and can be either positive or negative) – this would mean an accounting entry which would start as DEBIT PETTY CASH 500 CREDIT…..500 What you HAVE is an ASSET and when it INCREASES we talk about a DEBIT
- #16 What we OWE is a LIABILITY and when it INCREASES we talk about a CREDIT Debits and credits are conventions and allow for the double entry concept and for the balance of a balance sheet Example : My telephone bill of 150 comes in – this means that I have A LIABILITY which INCREASES this means that the accounting entry will be DEBIT ……150 CREDIT ELECTRICITY SUPPLIER 150 We will see later what we credit and debit and how As stated there is often a confusion due to the bank terminology whereby the bank considers that your asset is its liability So when YOUR MONEY IN YOUR BANK ACCOUNT INCREASES IT MEANS AN INCREASE OF THE LIABILITY OF THE BANK TOWARDS YOURSELF AND THEREFORE THE BANK TALKS ABOUT THE FACT THAT YOUR EXTRA MONEY MEANS FOR THEM A CREDIT TO YOUR ACCOUNT HELD WITH THEM But let us forget about banks for now and think like an entrepreneur or a private citizen Summary When an asset account increases the convention is that we DEBIT Wen a liability account increases the convention is that we CREDIT IN fact, the only thing you need to remember is the first sentence and the fact it is the opposite for the liability accounts It is therefore essential to know if an account is a asset or liability account We have general agreed standards for that like in Belgium we habe a Belgian Accounting Plan or a GAAP general accepted accounting practice and each account has a specific number For instance the 1… accounts are for equity and reserves,; the 6 ….. Accounts are for charges and the 7….. For revenues and so on The balance sheet of the EIB is based on the IFRS schedule or the International Financial Reporting Standards Those standards gain universal acceptance and even the USA is leaning towards the use of these standards It is not an academic issue as the companies quoted on various stock exchanges have to publish their balance sheet according to different schedules which represent quite an expense The need for a universal lay out and structure is quite obvious
- #17 The first accounting entry for a new company would be (not taking into account expenses, notary cost) DEBIT PETTY CASH or BANK ACCOUNT100 CREDIT EQUITY or DUE TO SHAREHOLDERS100 It balances and we have a debit and a credit You will notice that you always need the two (a debit AND a credit) and that it is ESSENTIAL to ask yourself if you deal with an ASSET ACCOUNT or a LIABILITY ACCOUNT which is increasing or decreasing Let us look at a few examples and after that we will have an exercise or two to get it into the fingers
- #18 This slide explains BEFORE the example and the exercise that it is a CONVENTION FOR THE REVENUE ACCOUNT OR ALSO CALLED THE PROFIT AND LOSS ACCOUNT TO DEBIT FOR A CHARGE CREDIT FOR A REVENUE Example – the payment of a telephone bill would be considered as a charge and would mean a DEBIT to the P&L Account Example – the payment by a customer you invoiced would be considered as an income and would mean a CREDIT to the P&L Account
- #21 Let us have a look at the statement first The turnover or total sales of the company jumped from 14.104 to 14.690 The gross margin is the difference between goods sold and the cost of goods sold (+/- the inventory level: a decrease in inventory equals an increase in cost of goods sold (convention) The cost of goods sold for N equals 12.573+141 or in total 12.714 (this way of calculating is conventional but confusing for the participants) The gross margin went from 1887 to 1976 or in percentage slightly better from 13.38% of T/O to 13.45% (improvements are always small steps!) Other operation income is all the income generated by the business but which is not core business: car rental for instance Added value is more an economic concept than an accounting concept: it is the difference between Income from operations less goods and services (electricity bill, water, software) As shown personnel expense is a different category because of the impact on the operations Added value less personnel expense less other (unusual operating expenses) provides the gross operating income PARTICIPANTS SHOULD RETAIN 496 THIS IS IN FACT WHAT THE COMPANY HAS MADE AND WHAT CAN BE USED TO REPAY FOR INSTANCE LONG TERM DEBT Subsequently we record the amortisation which recognises loss in value of the long term assets and decrease by same token the base upon which the company is going to pay taxes on company income! This brings us to the EBIT which is a MUCH USED benchmark for comparing companies between each other Indeed the taxation may be very different from one country to another and taking the net amount might provide a wrong picture on the efficiency and financing strategy of the company Participants will notice that so much effort and work only results into a NET PROFIT of less than 1% of T/O However, this figure should be compared with the investment done by the company rather than the T/O This would make us compare 137 versus the net worth or 673 which is about 20% which is much better than stocks and bonds From this picture it can also be noticed that with the money made other operating expenses, financial expenses, taxes have been paid and also dividends The latter can not be seen from the statement WE WOULD HAVE TO LOOK AT THE NOTES TO SEE THAT
- #26 Say we put 100 on the table to start a NEW COMPANY without taking into account notary expenses and other expenses we would have 100 as an asset of the newly founded company and 100 as a liability towards the shareholders The asset total would be 100 and the liability total would be 100 In other words the asset of the company is 100% financed by the shareholders A share is a portion of the capital Say we would be 10 shareholders of the new company with an incorporated capital of 100 it would mean that each shareholder would hold 1/10 or 10 As soon as the company starts his life the assets and the liabilities will vary and the net worth (the difference between the assets and the liabilities) will move upwards or downwards
- #27 Say we put 100 on the table to start a NEW COMPANY without taking into account notary expenses and other expenses we would have 100 as an asset of the newly founded company and 100 as a liability towards the shareholders The asset total would be 100 and the liability total would be 100 In other words the asset of the company is 100% financed by the shareholders A share is a portion of the capital Say we would be 10 shareholders of the new company with an incorporated capital of 100 it would mean that each shareholder would hold 1/10 or 10 As soon as the company starts his life the assets and the liabilities will vary and the net worth (the difference between the assets and the liabilities) will move upwards or downwards
- #28 Say we put 100 on the table to start a NEW COMPANY without taking into account notary expenses and other expenses we would have 100 as an asset of the newly founded company and 100 as a liability towards the shareholders The asset total would be 100 and the liability total would be 100 In other words the asset of the company is 100% financed by the shareholders A share is a portion of the capital Say we would be 10 shareholders of the new company with an incorporated capital of 100 it would mean that each shareholder would hold 1/10 or 10 As soon as the company starts his life the assets and the liabilities will vary and the net worth (the difference between the assets and the liabilities) will move upwards or downwards
- #29 Say we put 100 on the table to start a NEW COMPANY without taking into account notary expenses and other expenses we would have 100 as an asset of the newly founded company and 100 as a liability towards the shareholders The asset total would be 100 and the liability total would be 100 In other words the asset of the company is 100% financed by the shareholders A share is a portion of the capital Say we would be 10 shareholders of the new company with an incorporated capital of 100 it would mean that each shareholder would hold 1/10 or 10 As soon as the company starts his life the assets and the liabilities will vary and the net worth (the difference between the assets and the liabilities) will move upwards or downwards
- #30 Say we put 100 on the table to start a NEW COMPANY without taking into account notary expenses and other expenses we would have 100 as an asset of the newly founded company and 100 as a liability towards the shareholders The asset total would be 100 and the liability total would be 100 In other words the asset of the company is 100% financed by the shareholders A share is a portion of the capital Say we would be 10 shareholders of the new company with an incorporated capital of 100 it would mean that each shareholder would hold 1/10 or 10 As soon as the company starts his life the assets and the liabilities will vary and the net worth (the difference between the assets and the liabilities) will move upwards or downwards
- #31 Say we put 100 on the table to start a NEW COMPANY without taking into account notary expenses and other expenses we would have 100 as an asset of the newly founded company and 100 as a liability towards the shareholders The asset total would be 100 and the liability total would be 100 In other words the asset of the company is 100% financed by the shareholders A share is a portion of the capital Say we would be 10 shareholders of the new company with an incorporated capital of 100 it would mean that each shareholder would hold 1/10 or 10 As soon as the company starts his life the assets and the liabilities will vary and the net worth (the difference between the assets and the liabilities) will move upwards or downwards