This document provides an overview of basic accounting concepts and financial statements. It explains how accounting systems record business transactions in journals and ledgers, and how this information is used to generate key financial reports like income statements and balance sheets. An example is also given to illustrate how initial transactions are recorded and how the reports are generated for a sample company over time.

1. Financial Statements

2. Introduction
• Basic knowledge of accounting and financial
statements necessary for a chemical professional.
• This will help:
– Analyze a firm’s operations.
– Discover whether the firm is making a profit, and
– Whether the firm will continue making a profit
• Financial reports are important sources of data.
• A general knowledge of accounting helps an
engineer communicate with accountants,
financial personnel and managers.

3. Journal and Legder
• Accounting systems have as inputs business
transactions in the form of receipts and invoices.
• These events are entered chronologically in a
journal.
• These are then classified and posted in an
appropriate account in a ledger.
• Periodically – monthly or yearly – accounts are
closed and a summary is issued as an income
statement and a balance sheet.

4. An Accounting System

5. The Accounting Equation
• Accounting methods in use today had their origin in 14 th century Italy.
• A development was the double-entry bookkeeping system which states:
– Assets = Equities
• Assets: the economic resources a company owns and which are expected
to benefit future operations.
• Tangible assets:
– Equipment
– Buildings
– Furniture
• Intangible assets:
– Franchises
– Patents
– Trademarks

6. The Accounting Equation
• Equities: claims against the firm
– Liabilities
– Owner’s equity
• Assets = Liabilities + Owner’s equity
• Liabilities are outside claims against the assets of the firm:
– Accounts payable
– Borrowed funds
– Taxes owed
• These obligations require settlement in the future.
• The difference (assets – liabilities) is the amount belonging to
the firm’s owners, i.e., stockholders.

7. The Accounting Equation
• An increase in assets must be accompanied by one of the
following:
– Increase in liabilities (e.g. money borrowed to purchase equipment)
– Increase in stockholders’ equity
– Decrease in assets (perhaps money taken out of cash to purchase
equipment; total assets don’t change but change in distribution of
assets)
• Double Entry Bookkeeping – change in one part of the
equation accompanied by change in another place.

8. The Accounting Equation
• The left side of the account book page – debit
side.
• The right side of the account book page –
credit side.
• Nowadays data entered into computer using
software packages.
• Transactions recorded chronologically in a
journal.

9. Debit and Credit
• An increase (+) to an asset account is a debit.
• An increase (+) to a liability account is a
credit.
• Conversely, a decrease (-) to an asset account
is a credit.
• A decrease (-) to a liability account is a debit.

10. Example of a Journal

11. The Ledger
• Journal entries are transferred to a ledger, via a process called posting.
• Separate ledger accounts for each major type of transactions, e.g.,
– Asset account
– Liability account
– Revenue account
– Expense account
• Each debit entry to a ledger account is matched by a credit entry to
another account.
• One-to-one correspondence between journal entries and ledger entries –
hence the term double-entry bookkeeping.
• The ledger page (LP) is the cross-reference.

12. The Ledger
• Periodically the ledger sheets are closed and
balanced.
• Various reports made.
• A consolidated income statement can be
prepared from the ledger revenue and
expense account.
• From the asset and liability accounts, a
company’s balance sheet is prepared.

13. Example of a ledger

14. Journal and Ledger Example
• On January 1, 20XX, three people – Anderson,
Burns and Carter – agreed to start a business
to manufacture a specialty solvent, Nusolv.
• They named the company Nuchem, Inc.
• Their contributions to the venture were:
– Anderson: $5000 cash
– Burns: $5000 cash
– Carter: Basic process development info, a small
reactor, mixing vessels, some raw materials.

15. Journal and Ledger Example
• The three decided to distribute 1000 shares of stock
as follows:
– Anderson: 300 shares
– Burns: 300 shares
– Carter: 400 shares
• All these initial transactions are recorded in a general
ledger similar to one shown in next slide.
• Each transaction appears twice, once as credit and
once as debit.

16. Journal and Ledger Example

17. Journal and Ledger Example
• A ledger set up to record the transactions of
Jan 1, 20XX is shown in next slide.
• Note that initially Nuchem, Inc. required only
asset and liability accounts.
• However, as the firm grows, more accounts
are to be established to record business
transactions.

18. Journal and Ledger Example

19. Journal and Ledger Example
• Information from the general ledger and
ledger accounts was used to prepare a
consolidated balance sheet:

20. Journal and Ledger Example
• During the month of January, manufacturing began.
• New asset and liability accounts were created to
accommodate new types of transactions.
• Temporary revenue and expense accounts used to
classify changes.
• Expense accounts: legal expense (40), depreciation
expense (41), interest expense (42).
• Revenue account not needed in January because
there was no income.

22. Journal and Ledger Example
• The balance of revenue and expense accounts
is reduced to zero through an income
summary account at the end of the month.
• The ledger for the month of January is shown
in next slide.

25. Journal and Ledger Example
• A consolidated income statement is
developed from income and expense
accounts:
• Note that this statement reflects no income
and a loss of $1045 during the month.

26. Journal and Ledger Example
• The next slide shows the consolidated balance
sheet as of February 1, 20XX.
• Comparing this with the January 1, 20XX
balance sheet, we find that the stockholders’
equity decreased on the February statement.
• This reflects the $1045 loss during January.

27. Journal and Ledger Example

28. Journal and Ledger Example
• The same procedure can be followed month after
month.
• Each transaction will be entered in the general
journal and then posted to the appropriate ledger
account.
• At the end of each month, an income statement and
balance sheet may be prepared.
• In this manner, information for an annual report is
assembled.

29. Additional Points
• Today, transactions are entered into a computer program.
• Manual ledgers are no longer kept in modern business firms.
• These are the “traditional” methods of cost/ managerial
accounting.
• They help finance departments monitor operations and value
inventory.
• But focus is more on direct costs.
• New tools have come which also look into indirect expenses
of a production unit or of a service.
• This will give a better picture of the “real” expenses.