11 July Accounting

Accounting
Afterschoool – developing change makers

CENTRE FOR SOCIAL
ENTREPRENEURSHIP
PGPSE PROGRAMME – OPEN FOR ALL
FREE FOR ALL
www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Accounting
Dr. T.K. Jain.
AFTERSCHOOOL
Centre for social entrepreneurship
Bikaner
M: 9414430763
tkjainbkn@yahoo.co.in
www.afterschool.tk
www.afterschoool.tk

Investing and
Financing
Decisions and
the Balance Sheet
Chapter 2

Understanding the Business
To understand amounts appearing
on a company’s balance sheet we
need to answer these questions:
What
How do How do
business
specific companies
activities cause
activities keep track of
changes in
affect each balance sheet
the balance
balance? amounts?
sheet?

Learning Objectives
Define the objective of financial reporting, the
elements of the balance sheet, and the related
key accounting assumptions and principles.

The Conceptual Framework
Objective of Financial Reporting
To provide useful economic information to external users
for decision making and for assessing future cash flows.
Qualitative Characteristics Elements of Statements

Relevancy Asset
Reliability Liability
Comparability Stockholders’ Equity
Consistency Revenue
Expense
Gain
www.afterschoool.tk Loss
AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS
Objective of Financial Reporting
To provide useful economic information to external users
Primary Characteristics
Qualitative Characteristics Elements of Statements
•Relevancy: predictive value,
Relevancy feedback value,Asset
and timeliness.
Reliability •Reliability: verifiability,
Liability
representational faithfulness,
Comparability Stockholders’ Equity
and
Consistency neutrality. Revenue
Expense
Secondary Characteristics
•Comparability:Gain across
www.afterschoool.tk companies.
AFTERSCHOOOL Loss
MATERIAL FOR PGPSE PARTICIPANTS
Asset: economic resource with
probable future Objective
benefit. of Financial Reporting
Liability:
To provideprobable future economic
useful sacrifices of information to external users
economic resources.
Stockholders’ Equity: financing
provided by owners and operations.
Revenue: increase
Qualitative in assets or
Characteristics Elements of Statements
settlement of liabilities from ongoing
operations. Relevancy Asset
Expense: decrease in assets or
Reliability Liability
increase in liabilities from ongoing
operations.Comparable Stockholders’ Equity
Gain: increase in assets or settlement
Consistent Revenue
of liabilities from peripheral
activities. Expense
Loss: decrease in assets or Gain
increase in liabilities from peripheral
www.afterschoool.tk
activities. Loss
AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS
Assumptions
Separate entity: Activities of the business are
separate from activities of owners.
Continuity: The entity will not go out of
business in the near future.
Unit-of-measure: Accounting measurements
will be in the national monetary unit ($).
Principle
Historical cost: Cash equivalent cost given up
is the basis for initial recording of
elements.
Learning Objectives
Identify what constitutes a business transaction
and recognize common balance sheet account
titles used in business.

Nature of Business Transactions
External events:
events exchanges of assets
and liabilities between the business
and one or more other parties.
Borrow cash
from the bank

Nature of Business Transactions
Internal events:
events not an exchange between
the business and other parties, but have
a direct effect on the accounting entity.
Loss due to
fire damage.

Accounts
An organized format used by companies
to accumulate the dollar effects of
transactions.
Cash Inventory
Notes
Equipment Payable

The Balance Sheet
Typical Account Titles
Assets Liabilities
Cash Accounts Payable
Short-Term Investment Accrued Expenses
Accounts Receivable Notes Payable
Notes Receivable Taxes Payable
Inventory (to be sold) Unearned Revenue
Supplies Bonds Payable
Prepaid Expenses
Long-Term Investments Stockholders’ Equity
Equipment Contributed Capital
Buildings Retained Earnings
Land
Intangibles
Typical Account
The Income Titles
Statement
Revenues Expenses
Sales Revenue Cost of Goods Sold
Fee Revenue Wages Expense
Interest Revenue Rent Expense
Rent Revenue Interest Expense
Depreciation Expense
Advertising Expense
Insurance Expense
Repair Expense
Income Tax Expense

International While
Perspective
U.S. companies follow
GAAP to prepare their
financial statements, other
countries have significant
variations from the
accounting and reporting
rules of GAAP.
Some countries use different

account titles than those used
by U.S. companies.
Learning Objectives
Apply transaction analysis to simple business
transactions in terms of the accounting model:
Assets = Liabilities + Stockholders’ Equity

Principles of Transaction
Analysis
 Every transaction affects at least two
accounts (duality of effects).
 The accounting equation must remain in
balance after each transaction.
A = L + SE
(Assets) (Liabilities) (Stockholders’
Equity)
Duality of Effects
Most
transactions with
external parties
involve an
exchange where
the business
entity gives up
something but
receives
Balancing the Accounting
Equation
 Accounts and effects
• Identify the accounts affected and classify them by
type of account (A, L, SE).
• Determine the direction of the effect (increase or
decrease) on each account.
 Balancing
• Verify that the accounting equation (A = L + SE)

remains in balance.

Balancing the Accounting
Equation
Let’s see how we keep the
accounting equation in
balance for Papa John’s.
All amounts we use are expressed in

thousands of dollars.

Papa John’s issues $2,000 of additional
common stock to new investors for cash.
Identify & Classify the Accounts

1. Cash (asset).
2. Contributed Capital (equity).
Determine the Direction of the Effect

1. Cash increases.
2. Contributed Capital increases.

Notes Notes Contributed Retained

Cash Investments Equip. Receivable Payable Capital Earnings
(a) 2,000 2,000
Effect 2,000 = 2,000
A = L + SE
The company borrows $6,000 from the local
bank, signing a three-year note.

1. Cash (asset).
2. Notes Payable (liability).

1. Cash increases.
2. Notes Payable increases.

bank, signing a three-year note.

(a) 2,000 2,000
(b) 6,000 6,000
Effect 8,000 = 8,000
A = L + SE
Papa John’s purchases $10,000 of new equipment,
paying $2,000 in cash and signing a two-year note
payable for the rest.

1. Equipment (asset).
2. Cash (asset).
3. Notes Payable (liability).

1. Equipment increases.
2. Cash decreases.
3. Notes Payable increases.


(a) 2,000 2,000
(b) 6,000 6,000
(c) (2,000) 10,000 8,000
Effect 16,000 = 16,000
A = L + SE
Papa John’s lends $3,000 to new
franchisees who sign five-year notes
agreeing to repay the loan.
1. Cash (asset).
2. Notes Receivable (asset).

1. Cash decreases.
2. Notes Receivable increases.

Papa John’s lends $3,000 to new
franchisees who sign five-year notes
agreeing to repay the loan.
(a) 2,000 2,000
(b) 6,000 6,000
(c) (2,000) 10,000 8,000
(d) (3,000) 3,000
Effect 16,000 = 16,000
A = L + SE
Papa John’s purchases $1,000 of stock in
other companies as an investment.

1. Cash (asset).
2. Investments (asset).

1. Cash decreases.
2. Investments increase.

Papa John’s purchases $1,000 of stock in
other companies as an investment.

(a) 2,000 2,000
(b) 6,000 6,000
(c) (2,000) 10,000 8,000
(d) (3,000) 3,000
(e) (1,000) 1,000
Effect 16,000 = 16,000
A = L + SE
Papa John’s board of directors declares and
pays $3,000 in dividends to shareholders.

1. Cash (asset).
2. Retained Earnings (equity).

1. Cash decreases.
2. Retained Earnings decreases.

Papa John’s board of directors declares and
pays $3,000 in dividends to shareholders.

(a) 2,000 2,000
(b) 6,000 6,000
(c) (2,000) 10,000 8,000
(d) (3,000) 3,000
(e) (1,000) 1,000
(f) (3,000) (3,000)
Effect 13,000 = 13,000
A = L + SE
Learning Objectives
Determine the impact of using two basic tools,
journal entries and T-accounts.

TheDuring
Accounting
the period:
Cycle
Close revenues, gains,
Analyze transactions. expenses and losses
Record journal entries in the general journal. to retained earnings.
Post amounts to the general ledger.
Prepare a complete
End of the period: set of financial statements.
Adjust revenues and expenses Disseminate statements
and related balance sheet accounts. to users.

How Do Companies Keep Track
of Account Balances?
Journal entries
T-accounts

Direction of Transaction Effects
A T-account is a tool used to
represent an account.
Account Name
Left Right

Direction
The left side ofof
the Transaction Effects
The right side of the
T-account is always the T-account is always the
debit side. credit side.
Account Name
Left Right
Debit Credit

The Debit-Credit Framework
Debits and credits affect the Balance Sheet
Model as follows:
A = L + SE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase

The Debit-Credit Framework
A = L + SE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase
Remember that Stockholders’ Equity includes Contributed

Capital and Retained Earnings.
Analytical Tool: The Journal
Entry
A typical journal looks like this:
GENERAL JOURNAL
Posted
Date Account Titles and Explanation Ref. Debit Credit

Entry
A journal entry might look like this:
GENERAL JOURNAL
Posted
Jan. 1 Cash 20,000
Contributed Capital 20,000

Entry Debits are written first.
Provide a reference
date for each transaction.
GENERAL JOURNAL
Posted
Jan. 1 Cash 20,000
Total debits must equal

Credits are indented and total credits.
written after debits.

Analytical Tool: The T-Account
After journal entries are prepared, the
accountant posts (transfers) the dollar
amounts to each account affected by the
transaction.
GENERAL JOURNAL
Ledger
Posted
Date Account Titles and Explanation Ref.
Jan. 1 Cash
Debit
20,000
Credit
Post

Transaction Analysis Illustrated
Let’s prepare some

journal entries for
Papa John’s and
post them to the
ledger.

(a)
Cash Contributed Capital

Beg. Bal. 6,000 1,000 Beg. Bal.
(a) 2,000 2,000 (a)
8,000 3,000
bank, signing a one-year note.
(b)
Cash Notes Payable

Beg. Bal. 6,000 146,000 Beg. Bal.
(a) 2,000 6,000 (b)
(b) 6,000
14,000 152,000
(c)
Let’s see how to post this entry . . .

Equipment
Beg. Bal. 246,000
(c) 10,000
256,000
Cash Notes Payable

Beg. Bal. 6,000 146,000 Beg. Bal.
(a) 2,000 2,000 (c) 6,000 (b)
(b) 6,000 8,000 (c)
12,000 160,000
Balance Sheet Preparation
It is possible to
prepare a balance
sheet at any point in
time from the
balances in the
accounts.

This is the asset section of Papa John’s
balance sheet.
Papa John's International, Inc. and Subsidiaries
Consolidated Balance Sheet
(dollars in thousands)
January 31, December 28,
2004 2003
ASSETS
Current assets
Cash $ 9,000 $ 7,000
Accounts receivable 20,000 20,000
Supplies 17,000 17,000
Prepaid expenses 11,000 11,000
Other current assets 7,000 7,000
Total current assets 64,000 62,000
Long-term investments 9,000 8,000
Property, and equipment (net of
accumulated depreciation of $149,000) 214,000 204,000
Long-term notes receivable 14,000 11,000
Intangibles 49,000 49,000
Other assets 13,000 13,000
Total assets $ 363,000 $ 347,000

This is the liability and stockholders’ equity
section of Papa John’s balance sheet.
Papa John's International, Inc. and Subsidiaries
Consolidated Balance Sheet
(dollars in thousands)
January 31, December 28,
2004 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 28,000 $ 28,000
Dividends payable 3,000 -
Accrued expenses payable 53,000 53,000
Total current liabilities 84,000 81,000
Unearned franchise fees 6,000 6,000

Long-term notes payable 75,000 61,000
Other long-term liabilities 40,000 40,000
Total liabilities 205,000 188,000
Stockholders' equity
Contributed capital 3,000 1,000
Retained earnings 155,000 158,000
Total stockholders' equity 158,000 159,000
Total liabilities and stockholders' equity $ 363,000 $ 347,000
Learning Objectives
Prepare and analyze a simple balance sheet
using the financial leverage ratio.

Change in Balance Sheet
Amounts
Stockholders'
Assets = Liabilities + Equtiy
End of January 2004 $ 363,000 $ 205,000 $ 158,000
End of 2003 347,000 188,000 159,000
Change $ 16,000.00 $ 17,000.00 $ (1,000.00)

Key Ratio
Financial
Analysis
Average Total Assets
Leverage =
Average Stockholders’ Equity
Ratio
(Beginning Balance + Ending Balance) ÷ 2
The 2004 financial leverage ratio for Papa John’s was:

($363,000 + $347,000) ÷ 2
= 2.24
($158,000 + $159,000) ÷ 2
The ratio tells us how well management is using debt to

increase assets the company employs to earn income.
Learning Objectives
Identify investing and financing transactions
and demonstrate how they are reported
on the statement of cash flows.

Statement of Cash Flows
Operating activities
(Covered in the next chapter.)
Investing Activities
Purchasing long-term assets and investments for cash –
Selling long-term assets and investments for cash +
Lending cash to others –
Receiving principal payments on loans made to others +
Financing Activities
Borrowing cash from banks +
Repaying the principal on borrowings from banks –
Issuing stock for cash +
Repurchasing stock with cash –
Paying cash dividends –

Statement of Cash Flows
Papa John's International, Inc.
Consolidated Statement of Cash Flows
For the Month Ended January 31, 2004
(in thousands)
Operating activities
(None in this chapter.)
Investing Activities
Purchased property and equipment $ (2,000)
Purchased investments (1,000)
Lent funds to franchisees (3,000)
Net cash used in investing activities (6,000)
Financing Activities
Issued common stock 2,000
Borrowed from banks 6,000
Net cash provided by financing activities 8,000
Net increase in cash 2,000
Cash at beginning of month 7,000
Cash at end of month $ 9,000

Have a nice future

ABO UT A FTERSCH OOO L
Afterschoool conducts three year integrated PGPSE (after
class 12th along with IAS / CA / CS) and 18 month PGPSE
(Post Graduate Programme in Social Entrepreneurship)
along with preparation for CS / CFP / CFA /CMA / FRM. This
course is also available online also. It also conducts
workshops on social entrepreneurship in schools and
colleges all over India – start social entrepreneurship club in
your institution today with the help from afterschoool and help
us in developing society.

Why such a programme?
 To promote people to take up entrepreneurship
and help develop the society
 To enable people to take up franchising and
other such options to start a business / social
development project
 To enable people to take up social
development as their mission
 To enable people to promote spirituality and
positive thinking in the world

Who are our supporters?
 Afterschoolians, our past beneficiaries,
entrepreneurs and social entrepreneurs
are supporting us.
 You can also support us – not
necessarily by money – but by being
promotor of our concept and our ideas.

About AFTERSCHOOOL PGPSE – the best
programme for developing great entrepreneurs
 Most flexible, adaptive but rigorous programme

 Available in distance learning mode
 Case study focused- latest cases
 Industry oriented practical curriculum
 Designed to make you entrepreneurs – not just
an employee
 Option to take up part time job – so earn while
you learn
 The only absolutely free course on internet
Workshops from
AFTERSCHOOOL
 IIF, Delhi
 CIPS, Jaipur
 ICSI Hyderabad Branch
 Gyan Vihar, Jaipur
 Apex Institute of Management, Jaipur
 Aravali Institute of Management, Jodhpur
 Xavier Institute of Management,
Bhubaneshwar
 Pacific Institute, Udaipur
 Engineering College, Hyderabad

Flexible Specialisations:
 Spiritualising business and society
 Rural development and transformation
 HRD and Education, Social Development
 NGO and voluntary work
 Investment analysis,microfinance and inclusion
 Retail sector, BPO, KPO
 Accounting & Information system (with CA / CS /CMA)
 Hospital management and Health care
 Hospitality sector and culture and heritage
 Other sectors of high growth, high technology and social
relevance

Salient features:
 The only programme of its kind (in the whole world)
 No publicity and low profile course
 For those who want to achieve success in life – not just a
degree
 Indepth knowledge and expertise
 Professional approac: World class approach
 Strong intellectual and business capabilities
 Flexible – you may stay for a month and continue the rest of
the education by distance mode. / you may attend weekend
classes
 Scholarships for those from poor economic background
 Latest and constantly changing curriculum – keeping pace
with the time
 Placement for those who are interested
 Admissions open throughout the year
 Latest and most advanced technologies, books and study
material
Components
 Pedagogy curriculum and approach based on IIM Ahmedabad and ISB
Hyderabad (the founder is alumnus from IIMA & ISB Hyderabad)
 Meditation, spiritualisation, and self development
 Essential softwares for business
 Business plan, Research projects
 Participation in conferences / seminars
 Workshops on leadership, team building etc.
 Written submissions of research projects/articles / papers
 Interview of entrepreneurs, writing biographies of entrepreneurs
 Editing of journals / newsletters
 Consultancy / research projects
 Assignments, communication skill workshops
 Participation in conferences and seminars
 Group discussions, mock interviews, self development diaryng
 Mind Power Training & writing workshop (by Dr. T.K.Jain)

Pedagogy
 Case analysis,
 Articles from Harvard Business Review
 Quiz, seminars, workshops, games,
 Visits to entrepreneurs and industrial visits
 Presentations, Latest audio-visuals
 Group discussions and group projects
 Periodic self assessment
 Mentoring and counselling
 Study exchange programme (with institutions out of India)
 Rural development / Social welfare projects

Branches
 AFTERSCHOOOL will shortly open its
branches in important cities in India
including Delhi, Kota, Mumbai, Gurgaon
and other important cities.
Afterschooolians will be responsible for
managing and developing these
branches – and for promoting social
entrepreneurs.

Case Studies
 We want to write case studies on social
entrepreneurs, first generation
entrepreneurs, ethical entrepreneurs.
Please help us in this process. Help us
to be in touch with entrepreneurs, so that
we may develop entrepreneurs.

Basic values at afterschoool
 Share to learn more
 Interact to develop yourself
 Fear is your worst enemy
 Make mistakes to learn
 Study & discuss in a group
 Criticism is the healthy route to mutual support
and help
 Ask fundamental questions : why, when, how
& where?
 Embrace change – and compete with yourself
only
www.afterschoool.tk
social entrepreneurship for better
society

11 July Accounting

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Accounting

Afterschoool – developing change makers

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Qualitative Characteristics Elements of Statements

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

from the bank

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Some countries use different

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

• Verify that the accounting equation (A = L + SE)

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

All amounts we use are expressed in

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Identify & Classify the Accounts

Determine the Direction of the Effect

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Notes Notes Contributed Retained

Effect 2,000 = 2,000

Identify & Classify the Accounts

Determine the Direction of the Effect

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Notes Notes Contributed Retained

Effect 8,000 = 8,000

Identify & Classify the Accounts

Determine the Direction of the Effect

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Notes Notes Contributed Retained

Effect 16,000 = 16,000

Determine the Direction of the Effect

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Effect 16,000 = 16,000

Identify & Classify the Accounts

Determine the Direction of the Effect

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Notes Notes Contributed Retained

Effect 16,000 = 16,000

Identify & Classify the Accounts

Determine the Direction of the Effect

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Notes Notes Contributed Retained

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Remember that Stockholders’ Equity includes Contributed

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Total debits must equal

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Let’s prepare some

www.afterschoool.tk AFTERSCHOOOL MATERIAL FOR PGPSE PARTICIPANTS

Cash Contributed Capital

Cash Notes Payable

Let’s see how to post this entry . . .