Financial Accounting Class Material 2022-23

International accounting
Year 2022/2023
1
Syllabus
课程英文名
课程名称国际会计学 International Accounting
称
总学分 3 总学时 36
二、课程简介 Course Description

This course aims to build understanding of the basic accounting principles, transactions, and operations.
This Accounting course will help students to develop their skills in the accounting field.
本课程旨在建立对基本会计原理、交易和操作的理解。这个会计课程将帮助学生发展他们在会计领域的技能。学生们
将在指定的主题下分组工作。
三、课程教学目标 Course Teaching Objective

After learning, students are enabled to:
1. Understand the connection between financial accounting and the communication of information.
2. Identify and explain the meaning of standard accounting terms.
3. Explain the importance of learning to understand financial accounting.
4. Explain how accounting transactions affect the accounting equation, income statement, statement of
owner’s equity, and balance sheet.
5. Prepare a trial balance and subsidiary ledger reports and explain their interrelationships and role in the
accounting system.
学习本课程后，学生们将会：
1. 了解财务会计与信息沟通的关系。
2. 识别并解释标准会计术语的含义。
3. 解释学习理解财务会计的重要性。
4. 解释会计交易如何影响会计等式、损益表、所有者权益表和资产负债表。
5. 准备试算表和明细账报告，解释它们在会计系统中的相互关系和作用。
课程教学目标矩阵图 Curriculum teaching objective matrix
知识 Knowledge 能力 Ability
设计开发
自主研究运用工具项目管理
掌握问题分析 Design
认识理解Un- Indepen- Le- 团队协作 Project
Mas- Problem and
Know derstand dent verage Teamwork Manage-
tery Analysis Develop-
Research, Tools ment
ment
素质 Quality
创新创业
社会责任感环境保护和可持续发展 Creativity
职业规范沟通交流终身学习国际视野
Sense of So- Environmental protection and En-
Occupa- Communi- Lifelong International
cial Responsi- and sustainable develop- trepre-
tion Code cation Learning Vision
bility ment neurial
Passion
注：请在对应指标点打√ ps:point √
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四、课程教学设计 Design of Optimized Course Teaching
This course consists of 6 parts:
1. Introduction to financial accounting
2. Current transactions
3. Inventories transactions and End-of-period adjustments
4. Financial statements (Income statement, statement of owner’s equity, balance sheet and Statement
of cash flows)
5. First analysis
6. Introduction to multi-capital accounting
五、课程考核方式 Course Examining Mode

20%: Continuous assessment 1(30 minutes)
20%: Continuous assessment 2 (30 minutes)
60%: Exam (2 hours) 书面测评
六、课程教学资源 References
Accounting for Non-Accounting Students Tenth Edition John R. Dyson and Ellie Franklin Pearson
Class material booklet
七、课程教学进度安排 Schedule of Course Teaching
实践环节 Practice
讲授环节Teaching link
Link
周学时实验、习题、讨论
周次主要教学内容（章节讲/知识单元）
Teaching 等
Weeks Main Teaching Content 信息技术辅助手段 Tech-
hours Experiments,
nology Methods
exercises,
discussions
Introduction to accounting
Lecture and digital case
13 6 First opening balance sheet exercises
study
New loan
Purchases and suppliers'payments (con-
14 6 tinued) exercises
study
Sales and customers'payments
Staff costs
15 6 Loan repayment exercises
study
Depreciation and amortization
Depreciation and amortization (contin-
ued) exercises
16 6 Sale of fixed asset continous
study
VAT return assessment 1
Other Year-end adjustments
Other Year-end adjustments
17 6 Corporate tax and net profit exercises
study
Preparation of financial statements.
exercises
First analysis Lecture and digital case
18 6 continous
Introduction to multi-capital accounting study
assessment 2
Work to do
➢ Bring your class material with you (chart of accounts, Surfing case & case studies)
➢ Laptop computer
➢ Calculator
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Introduction
1. Definition of Accounting
The company is at the heart of a process of exchange between different economic actors and acts on
different markets. Since antiquity, economic actors have tried to translate monetary and physical flows.
Initially, single-entry accounting was used to maintain inventories and record expenses and revenues.
Nowadays, double-entry bookkeeping is used to translate the flows between the company and the various
stakeholders of the company and to present the economic and financial situation of an organization
(company, association, cooperative, etc.) in a standardized framework.
Accounting is an information system that provides numerical information to report on the management and
financial situation of an organization to third parties.
A distinction is made between financial accounting and cost / managerial accounting.
The economy of a company is based on exchanges, flows, physical or monetary, with stakeholders.
Stakeholders are all the actors, participating in the economic life of the organization, "individual or group
having an interest in the decisions or activities of an organization" (definition of ISO 26000 standard). They are
customers, suppliers, bankers but also inhabitants close to an industrial facility.
Organization and its main stakeholders
Economic exchanges take place between the company and its stakeholders. For example, the company
buys a machine from a supplier, or takes out a loan from a bank.
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Example 1 Firm A buys a machine (CU 40,000).
Inflow : 40,000
Supplier X
Firm A
Outflow : 40,000
Example 2 Firm B takes out a loan (CU 35,000).
Inflow : 35,000
Bank X
Firm B
Outflow : debt 35,000
CU stands for currency unit such as dollar, pound…
Each exchange involves at least two flows:

- Example 1: receipt of a machine against cash out.
- Example 2: cash in against a repayment obligation.
When the company receives something from a third party in exchange, it gives or owes something else of the
same amount to the latter.
Accounting reflects this reciprocal exchange, which is called "double-entry accounting".
2. Accounting principles and organization of accounting

Accounting records all the operations of the company which are expressed in monetary value. It thus makes
it possible to present the situation of the company: what it owns, what it owes, its income or products, its
expenses or charges, the profit (or loss) made.
Accounts and financial statements of smaller entities are done in accordance with the Accounting guideline
of their country called Generally Accepted Accounting Principles (GAAP) (for example UK GAAP, US
GAAP…).
Larger entities listed on a stock exchange prepare their accounts under the international accounting stand-
ards (IAS) and financial statements under International Financial Reporting Standards (IFRS). IFRS are used or
required by more than 116 nations. These standards are issued by an international regulatory body called the
International Accounting Standards Board (IASB).
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Finally, in each country, self-regulation is carried out by professionals: Professional firms (such as big four),
professional bodies (in UK, CIMA, ACCA and ICAEW) and Chartered accountants.
• Accounting principles
Accounting must respect several principles including:
Relevance Reliability Prudence Comparability
Relevance: the information directly relates to the facts which are evaluated or made understandable.
Reliability: you can depend on the information to make right decision. The information must:
• Show the real situation.
• Be neutral: objective, unbiased.
• Be complete: containing all significant information.
• Be correct: free from material error (do not contain any serious or substantial misstatements: the thresh-
old depends on the size of the company…)
• Be prudent
Comparability: must be comparable with the previous periods (consistent: same accountings methods and
policies from year to year) and with other companies. The information must also be consistent. This means
that the company uses the same accounting treatment for the same type of transactions (within the same
financial year and over years). However, the company may switch accounting methods if it is relevant and
more accurate.
• Process and accounting documents
It is generally held over a 12-month period known as an accounting period. The accounting year is the period
separating 2 balance sheets. Generally, the financial year lasts 1 year.
Each company creates its own chart of accounts.
From daily accounting entries to financial statements
Accounting is used to record the operations carried out by a company. Regardless of the accounting system
adopted by the entity, any recorded transaction must be supported by a supporting document, the
accounting document:
- a document from a third party (invoice, contract, deed)
- internal document (pay slip, internal memo)
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- summary document (cash register slip, daily sales book).
These documents are filed and archived on a faithful and durable support.
The bookkeeping process relies on an information system and produces documents.
• The journal which records the accounting transactions one by one in chronological order, each op-
eration results in an entry.
• The general ledger groups together all the accounts. It is a bookkeeping ledger in which accounting
data are posted from journals and aggregated by account of the chart of account. It is usually ar-
ranged by account categories.
• The trial balance is a worksheet that compiles the balance of the general ledger’s accounts. It con-
tains the name of each account and the amount of that nominal ledger balance, either debit or
credit balance.
• Financial statements: at the end of each accounting year, the company must close its annual ac-
counts and prepare documents summarizing its situation at a given time. These are mainly the Balance
Sheet (or statement of financial position) and the Income Statement (or profit and loss statement).
Depending on the accounting standards and the accounting process of the organization, some com-
panies also disclose “the statement of cash flows” and the “statement of retained earnings” or the
Statement of owner equity.
3. Double-entry and chart of accounts

• Double-entry accounting
Each accounting transaction affects at least 2 accounts. When the company receives something (e.g.
money or a promise of money) from a third party in exchange it gives or owes something else of the same
amount to the third party.
All items received are debited to an account and all items given or due are credited to an account.
Each company creates its own charter of accounts. N French regulations, there is a standardized framework
and all companies have to use the same one (except banks, insurance companies…)
Here is the accounting analysis of these 2 transactions:
the company buys £1,000 worth of goods. it has been granted a 30-day payment term.
Inventory 1,000 Debit
Supplier
Firm A
Accounts payable 1,000 Credit
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the company sells goods to a customer worth £2,000 and has given the customer 30 days to pay.
Accounts receivable 2,000 Debit
Firm A Customer
Sales 2,000 Credit
By convention, the debit entries are on the left of the journal, the credit entries on the right.
• The account
The number of operations carried out by a company is very high. To be able to monitor the extent of each
category of business operations at all times and without prior research, the movements (increases and
decreases) of each item are recorded in a table called an ACCOUNT. To facilitate the classification of all
open accounts and thus make it easier to search, each account is identified by a number and a heading or
title.
Being a table, it can take various forms (T-account, separate column account, twin column account).
There are four main categories of accounts: asset and liability accounts (balance sheet accounts) and
nominal accounts (expenses and income). Each family of accounts has a particular way of operating, as
summarised in the following table:
Debit Assets accounts Credit Debit Liabilities accounts Credit
BALANCE SHEET + - - +
ACCOUNTS
Debit Expense Credit Debit Income Credit
MANAGEMENT + - - +
ACCOUNTS
The asset and expense accounts increase on the debit side and decrease on the credit side. The operation
is reversed for liabilities and income accounts.
• Terminology
Debiting an account: This is a debit entry to this account (on the left): destination of a flow.
Credit an account: This is the crediting of a transaction to this account (on the right): origin of a flow.
Balance of an account:
This is the difference between the total of the amounts entered on the debit side and the total of the amounts
entered on the credit side.
This balance may be:

- debtor: if the total of the flows entered on the debit side is greater than that entered on the credit side.
- creditor: if the total of the flows entered on the credit side is greater than that entered on the debit side.
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Open an account: this means taking the balance from the previous period and entering it on the side where
the total was highest.
Closing entries: a closing entry is a journal entry that is made at the end of an accounting period to transfer
balances from a temporary account to a permanent account. It is also used to transfer expenses and
revenues to an income summary account to recognize the net profit at the end of the year.
Nominal and real accounts: a nominal account starts the next accounting year with a zero balance, while a
real account starts with the ending balance from the prior period.
4. Income statement (or Profit and Loss statement)

The income statement is is a calculation of what profit or loss you might have made over a period time. It is
also called the Profit and Loss Account or Profit and loss statement.
Example of UK presentation:
Year
Sales (+) (1)
Cost of goods sold (-) (2)
Gross profit (1) – (2) = (3)
Operating costs / expenses: (4)
Distribution costs (-)
Administrative costs (-)
Other operating income (- other operating costs) (+)
Operating profit (5) = (3)-(4)
Financial income and expenses (6):
Interest income (+)
Interest expense (-)
Income on ordinary activities before taxes (7) = (5) + (6)
Income tax or tax on profit on ordinary activities (-)
Net profit on ordinary activities
+/- nonrecurring items (gains & losses)
income tax on extraordinary items (-)
Net profit
Earnings per share of common stock*
(*): net income divided by number of shares
In the US, the presentation is similar, but some vocabulary is different: cost in the UK is expense in the US,
operating profit is called operating income in US, net profit is called net income.
Revenues and gains

Income = revenues + gains.
Revenues are generated by the operating current transactions related to the business of the company. Gains
and losses come from nonoperating transactions such as sale of fixed assets.
Costs and expenses

Costs are also called expense. In US, only “expense” is used.
An expense is the cost of operations that a company incurs to generate revenue.
Cost of goods sold are the costs directly associated with making or acquiring products. Cost of goods sold
includes material costs, direct labour, and overhead costs and excludes operating costs such distribution,
administrative, advertising or R&D costs.
Cost of goods sold = Opening inventory + Purchases – Closing inventory
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Gross profit
Gross profit is also called gross margin. Gross profit = sales – cost of goods sold
Operating costs
Costs are often detailed in a note (staff costs…)
Non-recurring items
Non-recurring items are still used. They are unusual and one-time expense, such as restructuring costs, gains
or losses on noncurrent assets, asset impairment, abnormal legal costs…
5. Statement of changes in equity or retained earnings

The statement of changes in equity (big companies) or the statement of retained earnings (small com-
panies) shows how much of a dividend is paid to shareholders out of the profit for the period and any
other contributions to or from shareholders.
Statement of changes in equity Share capital Retained earnings

Opening balance
Issue of new shares +
Profit for the year after tax +
Dividends or Withdrawal -
Closing balance =
Statement of retained earnings Year

Opening retained earnings
Profit for the year after tax +
Dividends or Withdrawal -
Closing retained earnings =
6. Balance sheet or statement of financial position

The balance sheet is a summary of what you own and control, and what you are owed at the end of the
period.
Balance sheets’ presentation is adapted to the business of the company. It can be presented as a table, but
it is more often presented as a list. There are several ways to present the balance sheet in UK and US GAAP
and several ways of calling and ordering the different sections. We will use UK most common presentation.
Terminology from FRS 102 (Financial Reporting Standards) differs from the one of UK company law, you can
find both. Balance sheets may be more or less detailed.
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Example of UK presentation
End of Year
Non-current (or Fixed assets) (1)
Intangible assets
Property, plant, and equipment*
(Less accumulated depreciation)
Investments**
Current assets (2)
Inventory
Trade receivables
Prepayments
Other receivables
Cash at bank and in hand
Creditors: amounts falling due within one year (3)
Trade payables
Payroll liabilities
Loans payable
Other current liabilities
Creditors: amounts falling due after more than one year (4)
Long-term loans***
Other long-term debts
Net assets = (1) + (2) – (3) – (4)
Capital and reserves

Share capital
Share premium
Retained earnings
Other reserves
*: or tangible assets
**: long-term investments in the shares of other companies.
***: only portion of long-term bank loans which are due for payment in more than 12 months from the
year-end date.
Terminology company law vs FRS 102:
Inventory = stocks
Receivables = debtors
Property, plant, equipment = tangible assets
Fixed assets + Capital and

The accounting equation is: current assets reserves
Assets = Liabilities + Equity
Creditors ≤ 1 year
+ creditors > 1year
Or
Assets – Liabilities = Equity => Net assets = Equity
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Example of US presentation:
End of Year
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable
Net of allowance for doubtful accounts
Inventory
Prepaid expenses
Other current assets
Non-current assets:
Property, plant, equipment
(Less accumulated depreciation)
Intangible assets (net)
Investments*
Other long-term assets
Total assets
Liabilities and owners’ equity
Current liabilities:
Short-term notes
Accounts payable
Short-term loans
Salaries and wages payable
Income tax payable
Long term liabilities:
Long-term borrowings
Other long-term liabilities
Equity capital or owner’s equity

Common stock or share capital
Retained earnings
Other reserves
The accounting equation is:

Total assets = Total liabilities + owner’s equity
Assets
An asset is something that may generate cash flow, reduce expenses or improve sales, regardless of whether
it is manufacturing equipment or a patent. They are resources that can provide future economic benefit for
the company.
a) A fixed asset or non-current asset is an item which will be used for more than a year, which acquisi-
tion will result in future economic benefits and which unit value is greater than the capitalization
threshold (in the UK and the US, the threshold is defined by the company).
Some fixed assets are depreciated (tangible assets) or amortized (intangible assets) because they
have a limited useful economic life.
b) Inventories
If the item is supposed to be used within the year for the activity of the business, transformed or not,
then resold, it is classified as an inventory purchase (inventory accounts). These purchases are not
considered as expenses.
There are different kinds of inventories:

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- Raw materials: materials which are used in the production or manufacturing of goods
- Merchandises: goods that are bought and sold
- Finished goods: products that have been created or manufactured by the company
and which are ready to be sold.
- Work-in-progress: partially completed goods that are still in the production process.
Current asset: Current assets represent all the assets of a company that are expected to be sold, consumed,
used, or exhausted through standard business operations with one year.
Liabilities:
Something the company owes.
Creditors: amounts falling due within one year or Current liabilities: Short-term financial obligations, due by
the company, within one year (accounts payable, loans that must be repaid within 12 months)
Creditors: amounts falling due after one year or Non-current (long-term) liabilities: all the long-term loans and
other debt obtained by the company (loans that do not have to be repaid for a least 12 months)
Capital and reserves:

Difference between total assets and total liabilities in the balance sheet. It represents the equity interest of
the shareholders or associates in a company.
7. Statement of cash flows

In the UK (FRS102 standards), most companies must release a statement of cash flows, which are part of
financial statements, even for standalone statements. Small entities are not required to prepare this
statement.
This statement is a summary of what cash you received and what cash you have paid in that period. It enables
to reconcile the movement in cash and cash equivalents year on year.
These flows are organised by:

➢ Cash flows from operating activities
➢ Cash flows from investing activities
➢ Cash flows from financing activities
Cash flows from operating activities can be presented using the direct or indirect method.
The illustrative statement below uses the indirect one which is the most commonly method applied in the UK.
Statement of cash flows in CU (currency unit) Year

Cash flows from operating activities:
Operating profit for the financial year
Adjustments for:
Depreciation of property, plant, and equipment (PPE)
Amortisation of intangible assets
Profit on disposal of PPE
Decrease/increase in trade or other receivables
Decrease/increase in inventories
Increase/decrease in trade payables
Cash from operations
Income taxes paid
Net cash from operating activities
Cash flows from investing activities:
Proceeds from sale of equipment
Purchases of PPE
Purchases of intangible assets
Interest received*
Net cash from investing activities
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Cash flows from financing activities:
Interest paid*
Issue of ordinary share capital
Purchase of non-controlling interest
Repayment of borrowings
Dividends paid**
Total cash from financing activities
Net increase/decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
*can be included in operating, investing or financing activities
**can be included in operating or financing activities
Source: FS-03-FRS-102-Statement of cash flows
8. First opening balance sheet
• Definitions
When the company is incorporated, the company's share capital is determined from contributions made by
shareholders. Then, it does not change except for an exceptional event.
Share capital = Ʃ contributed assets - Ʃ contributed debt
2. Journal’s entries
Date Accounts Debit Credit
Fixed assets X
Inventory X
Cash X
Share capital X
Accounts payable X
Articles of association / Statutes
On the day of incorporation, the company may receive from shareholders, items that will be used for more
than a year (fixed assets, inventory, and cash). The 3 sums are recorded on the debit side (left side).
In exchange, the company gives / owes money or rights to shareholders (share capital) and to suppliers
(accounts payable / creditors accounts). The sums are recorded on the credit side (right side).
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• Impact of this operation on the balance sheet (or statement of financial position)
First opening balance sheet (UK)
Amounts
Fixed assets (1)
Intangible assets
Property, plant, and equipment*
Investments**
Current assets (2) Assets provided by the shareholders or the
Inventory associates
Trade receivables
Prepayments
Other receivables
Cash at bank and in hand Cash provided by the shareholders
Trade payables
Loans payable
Other current liabilities Liabilities transferred by the shareholders
Creditors: amounts falling due after more than one year (4) or associates to the company
Long-term loans***
Other long-term debts
Net assets = (1) + (2) – (3) – (4)
Share capital Share capital
*: or tangible assets
**: long-term investments in the shares of other companies.
***: only portion of long-term bank loans which are due for payment in more than 12 months from the
year-end date.
Fixed assets + Trade Share capital

current assets payables
Net assets = Equity
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CURRENT TRANSACTIONS
9. Loan
• New loan
When a company takes out a loan from a bank, it will receive the loan amount in its bank account. The
company does not pay any interest at the contraction of the loan.
Cash X
Loans (> 1 year) or Loans payable (<1 year) X
Loan agreement, bank statement
The company receives cash (debit the cash account). In return, the company owes a debt to the bank
(credit the Loan account).
Impacts of this transaction on the balance sheet and the income statement
Balance sheet Amounts

Current assets
Cash at bank and in hand (+)
Creditors: amount falling due within one year
Loans payable (<1 year) (+)
Creditors: amount falling due after more than one
year
Loans (>1 year) (+)
Net assets
If the company must repay within a year, credit the Loans payable (current liabilities) account. If the deadline
is over a year, credit the Loans account (long-term liabilities). The short part of a long-term loan must be
recorded in the current liabilities (creditors: amount falling due within one year).
Income statement
No impact
The accounting equation is: Current or non-

Cash at bank
current liabilities
Net assets = Equity

• Definitions
When a company takes out a loan from a bank, it will immediately receive the amount of the loan in its bank
account. Then, on the due date (monthly, half-yearly, annually), it will pay a periodic payment (annuity for
example) consisting of the repayment of the loan (also called repayment of principal part) and the payment
of interest:
The principal is the amount of debt, exclusive of interest, remaining on a loan. At the beginning of the loan, it
is the amount borrowed by the company from the bank.
Repayment of the principal part depends on the loan agreement:
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o repayment of the total capital at the end of the loan (bullet repayment),
o constant repayments of the principal (or straight-line method)
o repayment in flat payment: all cash payments-annuities (principal part + interest) are equal.
Instalment: one of the portions, usually equal, into which a debt is divided for payment at specified intervals
over a fixed period.
Loan repayment for the accounting period: depending on the loan agreement (straight-line method, bullet
payment…)
Calculation of interest:
Loan interest = principal at beginning of the period x corresponding interest rate
When a loan is repaid monthly, the equivalent monthly interest rate is calculated from the annual rate:
• For a loan of length strictly less than one year: monthly rate = annual interest rate /12
• For a loan of one year or more than one year: equivalent monthly rate = (1+ annual rate)^(1/12) -1
• Note: If the term is less than one month, the number of days is prorated on the basis of a year of 360
days
• Principal at beginning of the period = amount borrowed – loan repayments (without interest)
Cash payment = loan repayment (principal repayment) + loan interest
• Journal entries for loan instalment

../../N Loans payable X
Interest expenses X
Cash at bank X
Bank statement
The company reduces its debt towards the credit institution by the amount of the loan repayment (Loans
payable on the debit side) and it reduces its profit because of the interests paid (Interest expenses on the
debit side).
In return, the company gives money to the bank (loan repayment / principal + interest). The cash at bank
account is credited (amount = loan repayment + interest).
Instalment = principal repayment + interest
• Impact of operations on the balance sheet and income statement

- Repayment of the loan
Balance sheet Year
Fixed assets (1) :
Current assets (2)
Cash at bank and in hand Instalment (-)
Creditors: amounts falling due within one year(3)
Loans payable Instalment (-)
Net assets = (1) + (2) – (3) – (4)
Interest
Retained earnings
expense (-)
Income statement Year

Gross profit (1) – (2) = (3)
Operating profit (5) = 3()-(4)
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Interest income (+)
Interest expense (-) Interest paid
Income on ordinary activities before taxes (7) = (5) –(6)
Net profit

Retained
Cash at bank Loans payable
earnings
Net assets = Equity
10. Purchases and suppliers’ payments

• Definitions
Difference between fixed asset’s purchase, inventory purchase and operating expense:
a) A fixed asset is an item which will be used for more than a year, which acquisition will result in future
economic benefits and which unit value is greater than the capitalization threshold (in the UK and
the US, the threshold is defined by the company; it is equal to €500 in French GAAP). Some fixed as-
sets are depreciated (tangible assets) or amortized (intangible assets) because they have a limited
useful economic life.
b) If the item is supposed to be used within the year for the activity of the business, transformed or not,
then resold, it is classified as an inventory purchase (inventory accounts). These purchases are not
considered as expenses.
There are various kind of purchases classified as inventory purchases:

• raw materials and other supplies: intended to be transformed or assembled to manufacture fin-
ished products. They are classified in raw materials inventories.
• Goods or merchandises: purchased and resold as is (sometimes reconditioned).
The amount of the inventory’s purchase should include all costs necessary for getting the inventory
(transportation cost for example if you pay a company to deliver the stock of goods).
Companies selling tangible products will recognize the cost of inventory purchases only when they sell the
product, using the “cost of goods sold” account (see sales’ session).
c) Some purchases are directly recorded as operating expenses: utilities expense as receipt of electric-
ity or water bill, telecommunication expense…
Purchases are subject to a VAT (value added tax) called “input VAT”, tax which is recoverable.
• Journal entries for purchases
Recording a purchase of fixed assets in the journal

Fixed assets Cost of acquisition excl. VAT
Input VAT VAT
Accounts payable Cost of acquisition incl. VAT
Purchase invoice
In case of a credit purchase transaction, the company receives a fixed asset from the supplier (increase of
the relevant fixed asset account on the debit side) and gets a receivable from the State because this
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transaction is subject to VAT. The company will then ask the tax authorities for a refund of the Input VAT
(increase of input VAT account on the debit side).
In return, the company owes money to the supplier (increase of Accounts or Trades payable on the credit
side).
The cost of acquisition of a fixed asset includes in most accounting standards all cost attributed to the
acquisition of the fixed assets.
IAS 16 for example specifies that the cost of acquisition is the “amount of cash or cash equivalent paid or the
fair value of the other consideration given, to acquire an asset at the time of its acquisition of construction… “
(IAS 16)
In the paragraph 17 of IAS 16 there are the examples of what expenses are considered to be directly
attributable and therefore, can be capitalized (or included in the cost of an asset):
• Costs of employee benefits (IAS 19 Employee benefits) arising directly from the construction or
the acquisition of the item of PPE,
• Costs of site preparation,
• Initial delivery and handling costs,
• Installation and assembly costs,
• Costs of testing whether the asset is functioning properly, after deducting the net proceeds
from selling any items produced while bringing the asset to that location and condition, and
• Professional fees.
As opposed to that, the paragraph 19 of IAS 16 lists examples of costs that are not costs of an item of PPE and
therefore, cannot be capitalized:
• Costs of opening a new facility
• Costs of introducing a new product or service
• Costs of conducting a business in a new location or with a new class of customer, and
• Administration and other general overhead costs.
Recording a purchase of raw materials or goods in the journal

Inventory Price excl. VAT
Input VAT VAT
Accounts payable Price incl. VAT
Purchase invoice
In case of a credit purchase transaction, the company receives from the supplier a raw material or
merchandise (debit) and gets a receivable from the State because this transaction is subject to VAT. The
company will then ask the tax authorities for a refund of the Input VAT (increase of input VAT account on the
debit side).
In return, the company owes money to the supplier (increase of Accounts or Trades payable on the credit
side).
Recording a purchase of other goods and services in the journal

Expenses Price excl. VAT
Input VAT VAT
Purchase invoice
In case of a credit purchase transaction, the company receives a commodity or a service from the supplier
(increase of the relevant expense account on the debit side) and a claim on the State because this
transaction is subject to VAT. The company will then ask the tax authorities for a refund of the Input VAT (debit
to Input VAT account).
In return, the company owes money to the supplier (Accounts or trades payable on the credit side).
19
• Journal entries of supplier payments
When a company purchases something, the accounts payable (or trade payables) is credited. Now the
company settles its debts.
Cash at bank Price incl. VAT
Bank statement
During this transaction, the company cancels its debt to the supplier (accounts payable on the debit side).
In return, it gives money to the supplier (cash at bank account on the credit side).
When the company buys something for cash (or in cash), the entries of the supplier payment is recorded the
same day as the purchase.
• Impact of purchases on the balance sheet and the income statement
Impact of a fixed asset purchase for cash on the balance sheet and income statement
Balance sheet Year

Fixed assets
Intangible fixed assets, Property, plant, and equipment or Investments Cost of acquisition excluding VAT (+)
Current assets
Other receivables VAT (+)
Cash at bank and in hand Cost of acquisition + VAT (-)
Income statement
No impact.

Fixed assets +
current assets
Net assets = Equity
Impact of a fixed asset purchase on credit on the balance sheet and the income statement
Balance sheet Year

Fixed assets
Intangible fixed assets, Property, plant, and equipment or Investments Cost of acquisition excl. VAT (+)
Current assets
Creditors: amounts falling due within one year

Trades payable Cost of acquisition + VAT (+)
Income statement
No impact
Fixed assets +
The accounting equation is: Current liabilities
current assets
Net assets = Equity

20
Impact of a cash purchase of raw materials or merchandise on the balance sheet and income statement
Balance sheet Year

Fixed assets
Current assets
Inventory Cost of acquisition excl. VAT (+)
Income statement
No impact.

current assets
Net assets = Equity
Impact of a credit purchase of raw materials, merchandises (goods) on the balance sheet and the income
statement
Balance sheet
Balance sheet Year
Fixed assets
Current assets
Inventory Cost of acquisition excl. VAT (+)
Trades payable Cost of acquisition + VAT (+)
Income statement
No impact
The accounting equation is: current assets Trade payables
Net assets = Equity
Impact of a purchase of goods and services for cash on the balance sheet and income statement
Balance sheet Year

Fixed assets
Current assets

Operating expenses Price excl. VAT (+)
21
Current assets Retained earnings
Net assets = Equity
Impact of a credit purchase of goods and services on the balance sheet and the income statement
Balance sheet Year

Fixed assets
Current assets
Trades payable Price incl. VAT (+)

Operating expenses Price excl. VAT (+)

Current assets Current liabilities Retained earnings
Net assets = Equity
Impact of supplier payments on the balance sheet and the income statement
Balance sheet Year

Fixed assets
Current assets
Cash at bank and in hand Price incl. VAT (-)
Creditors / amounts due within one year or current liabilities (3)
Trades payable Price incl. VAT (-)
Income statement
No impact

Current assets Current liabilities
payables
Net assets = Equity
11. Sales and customers’ payments

• Definitions
There are two kinds of sales:

• Current activity: merchandises, finished products, services.
• Non-current activity: fixed assets. The sale of fixed assets is also called a disposal. There is another
dedicated chapter for this kind of sale.
All sales are subject to a VAT called Output VAT.
22
• Journal entries for current sales
a. Recording current sale in the journal

Trade receivables Incl. VAT selling price
Sales Excl. VAT
Output VAT VAT
Sale invoice XXX
During this transaction, the company gets receivable from a customer (accounts receivable on debit).
In return, it gives merchandises, products, or services to the customer (Sales on credit) and has a debt to-
wards the State (Output VAT on credit).
Cost of goods sold COGS

Inventory (finished goods or merchandise inventory) COGS
At the same time, the inventory of merchandises or finished product is regularized. Thus, the gross margin is
calculated:
Gross margin or gross profit = Sales – cost of goods sold.

Gross margin = Sales x margin rate
Cost of goods sold = Sales - Gross profit or gross margin = Sales *(1-margin rate)
Cost of goods sold (COGS) = Opening inventory + Purchases – Closing inventory

For retailers companies (companies selling the products they purchase to manufacturers), cost of goods sold
is the cost of merchandises sold. In manufacturing companies, this represents the cost of finished goods: raw
material + direct labour and other manufacturing costs (factory overhead).
• Impact of the sales on the balance sheet and the income statement
a. Impact of a sale for cash on the balance sheet and the income statement
Balance sheet Year

Fixed assets
Current assets (2)
Inventory COGS (-)
Cash at bank and in hand Selling price incl. VAT (+)
Other current liabilities VAT (+)
Net assets = (1) + (2) – (3) – (4)
Retained earnings (income summary account) Gross profit (+)

Sales Selling price excl. VAT (+)
Cost of goods sold COGS (-)
= Gross profit
23
Net assets = Equity
b. Impact of a sale on credit on the balance sheet and the income statement
Balance sheet Year

Fixed assets
Current assets (2)
Inventory COGS (-)
Trade receivables Selling price inc. VAT (+)
Other current liabilities VAT (+)
Net assets = (1) + (2) – (3) – (4) Gross profit
Retained earnings (income summary account) Gross profit (+)

Sales Selling price excl. VAT (+)
Cost of goods sold Cost of goods sold (-)
= Gross profit

Net assets = Equity
• Customers’ payments - journal entries
When a company sells on credit, the receivable account is debited. Now, the customer or the buyer of the
noncurrent asset pays:

Cash at Bank Selling price incl. VAT
Accounts receivable / trade receivables Selling price incl. VAT
During this transaction, the company receives money from a customer or a debtor (cash at bank on debit).
In return, it cancels the debt the customer owes to the company (Debtors / accounts receivable credit).
The payment’s entries for non-current assets’ disposal or customer’s sales are similar.
24
• Impact of the customer payments on the balance sheet and the income statement
Balance sheet Year

Fixed assets
Current assets (2)
Trade receivables Selling price inc. VAT (-)
Cash at bank and in hand Selling price inc. VAT (+)
Net assets = (1) + (2) – (3) – (4)
Income statement
No impact

Current assets
Net assets = Equity
• Inventory valuation
Purchases are valued at cost of purchase (raw materials, goods) or at production cost (finished goods).
The stock issuances and the remaining stock are generally valued using the weighted average cost
method or the first-in, first- out method.
The weighted average cost method (WAC)

The value of inventory is valued at the weighted average at each inward stock or at the end of the period.
WAC = (beginning inventory + purchases) in value / (beginning inventory + purchases) in quantity
First-in, first-out method (FIFO)

The stock is valued by distinguishing between the value of each inward stock.
At each outward movement, stock will be drawn from the oldest stock.
12. Staff costs – personnel expenses

• Definitions
The company negotiates a gross wage (or gross salary) with an employee. Elements other than salary
(allowances, bonuses...) will not be studied in this course.
The employee must pay to the social organizations the employee's contributions (social security taxes, pension
contributions, unemployment insurance…). For the sake of simplicity, the company will make the payment of
these employee contributions (employee’s payroll tax deductions, deducted from the gross wage).
Consequently, it will only pay the net wage (or net pay) to the employee.
The company must also pay employer social security contributions to the same social organizations.
In the UK, the compulsory contributions are called NICs national insurance contributions and are collected by
the HMRC: Her majesty’s revenue and customs. There also may be some voluntary contributions to private
health care or other insurance.
The employee therefore costs the company:
Employee cost for the company = Gross wage + employer payroll tax
25
Net pay = Gross wage – employee’s payroll tax deductions
• Journal entries
1) Recording of pay statement / payslips

../../Y Salaries expense Gross wage
Wages payable Net wage
Payroll taxes payable Employee’s payroll tax deductions
Payroll
The company receives a service from the employee (Salaries expense on the debit side).
In exchange, it owes money to him (Wages payable on the credit side) and to the HMRC or other social
security organisations in behalf of the employee (Payroll taxes payable on the credit side).
2) Recording of employer's contribution

../../Y Payroll taxes expense Employer payroll tax
Payroll taxes payable Employer payroll tax
Payroll
The company receives services from social security organizations (Employer taxes expenses debit).
In exchange, it owes them money (Taxes payable credit).
3) Payments’ recording
- Payments to the staff

../../Y Wages payable Net wage
Cash at bank Net wage
Bank statement
When the net salary is paid, the company cancels its debt to the employee (Wages payable debit).
In exchange, the company gives the employee money (Cash at bank credit).
- Payment to the HRMC (social organisations)

../../Y Payroll taxes and social charges payable Total payroll taxes
Cash at bank Total payroll taxes
Bank statement
Upon payment of employee and employer social security contributions, the company cancels its debt to
social organizations (Payroll taxes payable on the debit side).
In exchange, the company gives them money (Cash at bank on the credit side).
• Impact of staff costs on the balance sheet and income statement
Balance sheet Year

Fixed (1) :
Current assets (2)
Payroll liabilities Total cost of staff
Net assets = (1) + (2) – (3) – (4)
Retained earnings (income summary account) - (Total cost of staff)
Total cost of staff = Gross wage + employer’s contributions

In UK income statement presentation, staff costs are classified by type of costs:
• Direct labour costs are transferred to production costs (for an industrial company),
• Administrative labour costs are transferred to administrative costs…
26
• Costs of salers are transferred to distribution costs
The costs are transferred via specific accounts in the general ledger, at the end of the year to prepare the
income statement.

Gross profit
Operating costs / expenses: - (Total cost of staff)
Production costs (-) X
Distribution costs (-) X
Administrative costs (-) X
Other operating income (- other operating costs) (+) X
Operating profit
Financial income and expenses:
Income on ordinary activities before taxes
Net profit

Current liabilities Retained earnings
Net assets = Equity
13. VAT return
• Definition
The Value Added Tax is a tax calculated on the difference between sales and purchases. It is charged to the
final consumer. This implies that it does not represent a burden for companies (however it is not neutral on
cash flow).
• Process
Throughout the VAT period (quarter in the UK, month in France), payables and receivables to the State are
recorded when sales (output VAT), and purchases of goods and services and acquisitions of fixed assets (Input
VAT) are recorded.
At the end of the VAT period (quarter in the UK, month in France), the net debt or receivable is calculated.
VAT payable (+) or VAT reclaimable (-)

=
Output VAT
- Input VAT
In the UK, VAT return is usually done every quarter (three months). The payment is done to the HMRC (Her
Majesty’s Revenue and Customs’). The deadline for submitting the return and paying HMRC are usually the
same – 1 calendar month and 7 days after the end of an account period (May 7 th for the first quarter). If the
company has charged its customers less VAT than it has paid on its purchases, HMRC will repay the difference.
Repayments are usually made within 30 days of HMRC getting the VAT return.
To record the VAT payable or reclaimable, the company may have one account (VAT control account) or
two accounts (VAT payable and VAT reclaimable). VAT payable is recorded on the credit side and VAT
reclaimable is recorded on the debit side.
27
• Journal entries
1st case: VAT payable

VAT return at the end of each VAT period (quarter in the UK, monthly in France)
Date Account D C
Amount of output VAT
../../Y Output VAT recorded during the quarter
Amount of input VAT
Input VAT recorded during the quarter
VAT control account VAT payable
VAT return
At the end of each period, VAT is regularized by canceling the accounts for output VAT (debit) and input VAT
(credit). Then there is the VAT payable, which is a debt to the State (on the credit side).
Payment of VAT payable one month and 7 days after the end of the quarter in the UK (around the 20th of the
following month in France)
Date Account D C
../../Y VAT control account VAT payable
Cash at bank VAT payable
Bank statement
Upon payment of the VAT payable, the company cancels its debt to the State (VAT control account or VAT
payable on debit).
In exchange, the company gives money to the State (Cash at bank on credit).
Second case: VAT reclaimable

Date Account D C
Amount of output VAT
../../Y Output VAT recorded during the quarter
VAT control account VAT reclaimable
Amount of input VAT
Input VAT recorded during the quarter
VAT return
At the end of each period, VAT is regularized by canceling the accounts for output VAT (debit), input VAT
(credit).
Then, the VAT reclaimable is recorded as a claim on the State (debit).
No payment will be done by the company. In the UK, the HMRC will make a repayment to the company
within 30 days after the company made its VAT return online.
Repayment of VAT reclaimable by HMRC one month after the reception of the VAT return
Date Account D C
../../Y Cash at bank VAT reclaimable
VAT control account VAT reclaimable
Bank statement
In France, the State does not repay the VAT reclaimable. It is refunded only under specific conditions. The VAT
reclaimable is carried over next period.
28
• Impacts of VAT on the balance sheet and income statement
There is no impact on income statement.
Balance sheet before VAT adjustment at the end of each period

Balance sheet Year
Non-current assets or fixed assets (1):
Current assets (2)
Other receivables Input VAT
Other current liabilities Output VAT
Creditors: amounts falling due after one year (4)
Net assets = (1) + (2) – (3) – (4)
Balance sheet after VAT adjustment at the end of each period

Balance sheet Year
Fixed assets (1):
Current assets (2)
Other current liabilities VAT payable
Net assets = (1) + (2) – (3) – (4)

Net assets = Equity
2nd case: VAT reclaimable

Balance sheet Year
Current assets (2)
Other receivables VAT reclaimable
Net assets = (1) + (2) – (3) – (4)

Net assets = Equity
29
Balance sheet after possible VAT payment (around 1 calendar month and 7 days after the end of the period)
Balance sheet Year
Current assets (2)
Cash at bank and in hand - amount of VAT payable
Creditors / amounts due within one year or current liabilities (3)
Creditors / amounts due after one year or long-term liabilities (4)
Net assets = (1) + (2) – (3) – (4)
Capital and reserves (or stockholder’s equity)

current assets Current liabilities
Net assets = Equity
2nd case: VAT reclaimable (repayment from the State one month after the reception of VAT return)
Balance sheet Year
Current assets (2)
Cash at bank and in hand + amount of VAT reclaimable
Net assets = (1) + (2) – (3) – (4)
30
current assets
Net assets = Equity
31
Year-end adjustments
14. Depreciation and amortization
Fixed assets enter and remain in the accounts at their original value (original cost). When they lose value
irreversibly (as in the case of a vehicle), a depreciation or an amortization is recorded.
• Definitions
Depreciation
A depreciation is a decrease in value of tangible assets incurred as a result of their usage in business activities.
The asset value is gradually reduced over the useful life of the asset.
Depreciation is also a method of allocating the cost of the use of the asset to the relevant accounting period.
Amortization
An amortization is a decrease in value of intangible assets incurred because of their usage in business
activities. The asset value is gradually reduced over the useful life of the asset.
Depreciation and amortization are non-cash transactions: the company does not pay money when it records
the depreciation or amortization.
Depreciable fixed assets

A depreciable fixed asset is an asset which use for the company is measurable and limited in time due to 3
elements:
- usage, physical wear, and tear
- technical developments / obsolescence (for example, depreciation of fixed assets can be caused by the
inability of assets to meet production needs)
- legal rules
Some assets cannot be depreciated: land is a non-depreciable fixed asset since its intrinsic value does not
change and because land does not have a finite useful life. Investments such as stocks and bonds are also
non-depreciable fixed assets.
Useful economic life

The useful economic life is the period of time over which the current owner intends to use the asset and over
which the company expects the fixed asset to provide economic value to the business.
Residual value (also called salvage value)

The residual value is the amount for which the asset can be sold at the end of its useful life (VAT excluded sale
price).
Start date of depreciation/amortization

The start date of depreciation is the date of entry into service of the asset. The first and the last year of
depreciation can be calculated on a prorata temporis basis.
Two depreciation methods are allowed in the UK: straight-line method and reducing balance depreciation.
Only the straight-line method will be studied in the introduction course.
Depreciation/Amortization Plan or schedule
Depreciation and amortization schedule
Accumulated
Accounting Total amount to be Depreciation
Depreciation rate2 depreciation Net book value5
year-end depreciated1 /Amortization3
/amortization4
80 00025% 20 000 20 000 60 000
1 Original cost of asset – Salvage value (residual value)
2 1 / useful economic life (ex:1/4, 1/3, 1/10…)
3 Total amount to be depreciated x depreciation or amortization rate x (number of days of use / 360)
4 Depreciation year 1 + Depreciation year 2 + …..
5 Original cost – accumulated depreciation or amortization
32
• Entry in the Journal
Date Account name D C

Accounting year- Depreciation
Amortization and depreciation expense
End /Amortization
Accumulated depreciation or Depreciation
amortization – Fixed asset XX /Amortization
Depreciation plan of fixed asset
The annual depreciation of the fixed asset is considered as:
- an expense which is recorded on the debit side, as a portion of the acquisition cost (remember acquisition
of fixed assets is not recorded as an expense in the income statement): Amortization and depreciation
expense on the debit side
- a decrease of the value of the asset in a “contra asset account”: accumulated depreciation on the credit
side.
Accumulated depreciation is the cumulative depreciation of an asset. Accumulated depreciation is a

“contra asset account”, meaning its usual balance is a credit that reduces the overall asset value.
For each specific depreciable fixed asset account there is an accumulated depreciation or amortization
account. Example: accumulated depreciation – vehicles and accumulated amortization – softwares
• Impact of depreciation/amortization on the balance sheet and income statement
Balance sheet Year

Fixed assets (1):
less accumulated depreciation -X
Current assets (2)
Creditors: amounts falling due after more than a year (4)
Retained earnings -X
Gross profit (1) – (2) = (3)
Administrative or distribution costs…*amortization and depreciation expenses -X
Net profit

Fixed assets Retained earnings
Net assets = Equity
* depending on the nature and use of the fixed asset. For example, it can be a production or distribution cost
as a part of the cost or manufacture’s production. It can also be an administrative cost if it is the depreciation
of the building of the head office.
33
15. Sale of fixed asset
• Definitions
The sales of fixed assets are also called disposals.

There are subject to a VAT called Output VAT.
• Journal entries
Fixed asset can be sold either before or at the end of its useful life. Depending on its net book value (carrying
amount) and its initial cost, the disposal results in a gain or a loss.
Before recording the disposal, the company must update the asset's book value by recording the partial-year
depreciation associated with the disposal year (Depreciation is studied in another summary sheet). The asset
must be depreciated until the day before the sale (example: sale on 14/01 = 13 days of use).
A gain or a loss will be recorded, depending on the result of the transaction:

Gain or loss = Selling price excl. VAT – carrying amount
A loss in on the debit side and a gain is recorded on the credit side.
Carrying amount = Net book value = Initial cost – accumulated depreciation/amortization of the fixed asset.
Recording sale of fixed asset in the journal

Account receivables Selling price
Incl. VAT
Accumulated depreciation* of this fixed asset Accumulated depreciation
Fixed asset account Original cost excl. VAT
Gain or loss on disposal** Loss excl. VAT Gain excl. VAT
Output VAT VAT on selling price
Sale invoice, bank statement
*amortization for intangible assets, depreciation for tangible asset
**: Also called “loss or gains on sale of fixed asset” (depending on the chart of accounts of the company).
The loss or gain is recorded in the gain or loss account depending if the result of the sale is a gain or an loss.
During this transaction, the company gives the fixed asset to the buyer.
The company must remove the assets from its accounting books.
It will write off the fixed asset by the following entries:
Credit the asset account: initial cost of the asset (excluding VAT)
Debit the accumulated depreciation / amortization of the asset’s account: accumulated depreciation or
amortization.
34
• Impacts of the sale on the balance sheet and the income statement.
Impacts of a cash sale of a fixed asset on the balance sheet and the income statement.
Balance sheet Year

Fixed assets (1) :
Intangible assets
Property, plant, and equipment* Initial cost of the asset (-)
(Less accumulated depreciation) Accumulated depreciation of the asset (-)
Current assets (2)
Cash at bank and in hand Selling price inc. VAT (+)
Other current liabilities VAT on selling price (+)
Net assets = (1) + (2) – (3) – (4)
Retained earnings (income summary account) Loss or gain excl. VAT (+ or -)
*: or intangible assets or investments, depending on the nature of the asset which is sold.

+/- nonrecurring items (gains & losses) Loss or gain excl. VAT (+ or -)
The accounting equation is: Fixed assets + Current Retained

current assets liabilities earnings
Net assets = Equity
Impacts of a credit sale of a fixed asset on the balance sheet and the income statement
Balance sheet Year

Fixed assets (1) :
Intangible assets
Property, plant, and equipment* Initial cost of the asset (-)
(Less accumulated depreciation) Accumulated depreciation of the asset (-)
Current assets (2)
Trade receivables Selling price inc. VAT (+)
Other current liabilities VAT on selling price (+)
Net assets = (1) + (2) – (3) – (4)
Retained earnings (income summary account) Loss or gain excl. VAT (+ or -)
*: or intangible assets or investments, depending on the nature of the asset which is sold.
-
Income statement
Year
+/- nonrecurring items (gains & losses) Loss or gain excl. VAT (+ or -)
35
The accounting equation is: Fixed assets + Current Retained
current assets liabilities earnings
Net assets = Equity
16. Impairment
• Definition
Impairment is a process used to take into account a permanent (or supposed to be) reduction in the value
of a company’s asset (fixed asset or current assent such as inventory) and to adjust the book value of the
asset, so as to reflect a decrease in the quality or market value of the asset (recoverable value).
• Process
At the end of each year, companies have to make impairment test.
Compare carrying amount (or net book value) with recoverable amount.
If the impairment test shows an excess of carrying amount over the recoverable amount, the impairment loss
must be recognized by adjusting the entry in the journal.
Impairment loss can be recognized on fixed assets but also on inventory and accounts receivable.
• Journal entries
Date Account D C
Carrying amount –
../../Y Impairment loss recoverable amount
Accumulated impairment loss –fixed assets Carrying amount –
or current asset recoverable amount
Impairment loss of….
Impairment loss is an expense which decreases the net profit (expense account), it is considered as an
operating expense. It is often classified in “other operating income and costs” section.
Accumulated impairment loss accounts are contra asset accounts, similar to accumulated depreciation or
amortization accounts. An entry on the credit side is used to decrease the net book value of the asset.
• Updating impairments
At the end of each accounting year, the company has to make impairment test and adjust the impairment
losses.
It is possible that an entity recognizes an impairment loss in respect of its inventory in one accounting period
(which will be recognized in profit or loss), but then the circumstances which caused the inventory to be
impaired no longer exists.
3 situations:
▪ First case:
▪ Required impairment > recorded impairment
▪ The company will have to enter a supplementary impairment loss to increase the accumu-
lated impairment
▪ 2 case
nd
▪ Required impairment < recorded impairment

▪ The company will have to enter a gain on revaluation to decrease the accumulated impair-
ment
▪ Third case
▪ There is no more impairment required.
36
▪ The company will have to record a gain on revaluation to cancel (balance) the accumulated
impairment.
Gains on revaluation are not allowed in US GAAP.
• Reversal of asset impairment entries
Date Account D C
Recoverable
Accumulated impairment loss –fixed assets or amount – carrying
../../Y current asset amount
Recoverable
amount – carrying
Gain on revaluation amount
Gain on revaluation of….
Be careful: gain on revaluation cannot be higher than accumulated impairment loss.

Please note that US GAAP do not allow restoration of previously recognized impairment losses! But in the UK,
this is possible.
Gain on revaluation is an income which increases the net profit (income account), it is considered as an
operating income. It is often classified in “other operating income and costs” section.
• Impacts of impairment on the balance sheet and income statement
Income statement:
▪ Impairment loss is classified in operating expenses.
▪ Gain on revaluation is classified in operating incomes (other operating income and ex-
penses).
Year
Gross profit (1) – (2) = (3)
Other operating income (- other operating costs) (+) Gain on revaluation (+)
Impairment loss (-)
Net profit
Balance sheet
▪ Value of assets in the balance sheet must include the impairments.
▪ Value in the balance sheets = gross value – accumulated impairment loss
▪ There is usually a note after the balance sheet with details of impairments.
Example
If value of inventory is £31,500 before impairment but an impairment loss is entered for £ 1,500, balance
sheet at the end of the accounting year will show Inventory £30,000.
37
Balance sheet Year
Current assets (2)
Inventory* 30,000

Net assets = (1) + (2) – (3) – (4)
* Note: £1,500 impairment loss on inventory (stock of surfboards damaged)
The accounting equation is: Fixed assets or Retained

current assets earnings
Net assets = Equity
17. Provisions
• Definition
A provision is a liability, i.e.an obligation towards a third party, existing at the end of the financial year, leading
to a probable outflow of resources to a third party, without any consideration for the company.
It is a probable debt, the timing and/or amount of which is not precisely fixed.
Provisions are recognised at the end of the year, in accordance with the principle of prudence and in order
to anticipate a probable risk or expense.
They are established to covered expected future losses / risks. For example: provision for warranties, bad
debts, tax obligation, pension obligations.
Like depreciation, provisions do not involve expenditure of cash, they are noncash expenses.
• Journal entry
Provision expense
Date Account Debit Credit
31/12/Y Warranties, pensions…. expense Estimated amount
Provisions for… Estimated amount
Provision linked to… …
Provision adjustment
Date Account Debit Credit
Estimated amount
31/12/Y+1 Provisions for…
of adjustment
Estimated amount
Provision adjustment
of adjustement
Adjustment of provision….
• Impacts on balance sheet and income statement
Provision adjustments and expense are classified in the income statement depending on their nature.
On balance sheet, provisions for doubtful debt are deducted from current assets. Other provisions are
included in “liabilities” part of the balance sheet.
38
The accounting equation is: current assets Retained earnings
Net assets = Equity
18. Corporation tax or tax on profit

• Corporation tax
Company has to complete a tax return to calculate its corporation tax (income tax) due to the State.
In the UK, the main corporation tax rate for company profits is currently 19%. At Summer Budget 2015, the
government announced legislation setting the Corporation Tax main at 18% for the year starting 1 April 2020.
A further reduction to 17% for the year starting 1 April 2020 was announced at Budget 2016.
At Budget 2020, the government announced that the Corporation Tax main rate (for all profits except ring
fence profits) for the years starting 1 April 2020 and 2021 would remain at 19%.
• Journal entries
If net profit is a loss (revenues and incomes lower than expenses), the company will pay no income tax (do
not record entry in accounting journal).
If net profit is a gain (revenues and incomes higher than expenses), the company enters the expense in the
“income tax expense” account.
Date Account D C
Corporation tax
DD/MM/YY Income tax expense amount
Corporation tax
Income tax payable amount
Tax return year Y
• Impacts of corporation tax on income statement and balance sheet
Income tax is separated between income tax on ordinary activities and income tax on extraordinary items.
If income on ordinary activities before taxes or nonrecurring items are a loss, one amount of income tax may
be a negative amount.

Gross profit (1) – (2) = (3)
Income tax or tax on profit on ordinary activities (-)
+/- nonrecurring items (gains & losses)
income tax on extraordinary items (-)
Net profit
39
Balance sheet
Income tax payable is classified in other current liabilities section. Income tax amount reduces the net profit
(classified in income summary account).
Balance sheet Year
Current assets (2)
Other current liabilities Income tax payable (+)
Net assets = (1) + (2) – (3) – (4)
Retained earnings income tax expense (-)
The accounting equation is: current liabilities Retained earnings
Net assets = Equity
• Payment of corporation tax

Date Account D C
DD/MM/YY Income tax payable Corporation tax amount
Cash at bank Corporation tax amount
Bank statement
• Impacts of the payment of corporation tax on balance sheet
Balance sheet Year

Current assets (2)
Cash at bank (-)
Other current liabilities Income tax payable (-)
Net assets = (1) + (2) – (3) – (4)
The accounting equation is: current assets current liabilities
Net assets = Equity
19. Net profit or net income

• Recording net profit at the end of accounting year
At the end of accounting year, all income statement accounts are balanced.
The result (total credit – total debit) is entered into the income summary account (temporary account) before
decision of shareholders (distribution of dividends or retained earnings).
40
At the beginning of accounting year, all income and expense accounts should start with zero opening bal-
ance.
• Journal entries
All incomes and expenses accounts are balanced. Net profit is recognised in a temporary account.
In case of a profit:
Date Account D C
31/12/YY Incomes, revenues accounts Total for each account
Expenses Total for each account
Income summary account (net profit) Profit
Recognition of net profit (profit)
In case of a loss:
Date Account D C
31/12/YY Incomes, revenues accounts Total for each account
Expenses Total for each account
Income summary account (net profit) Loss
Recognition of net profit (loss)
• Impacts on balance sheet
Income tax payable is classified in other current liabilities section. Income tax amount reduces the net profit.
Balance sheet Year

Current assets (2)
Net assets = (1) + (2) – (3) – (4)
Net profit Net profit (gain or loss)
A loss decreases the capital and reserves, a profit increases Capital and reserves.
20. Retained earnings

• Recording retained earnings after decision of shareholders
If net profit is positive, shareholders may decide to pay some dividends, depending on regulation of the
country and articles of association of the company.
• Journal entry
Date Account D C
DD/MM/YY Income summary account Net profit
Net profit –
Retained earnings dividends payable
Dividends payable Dividends payable
Decision of shareholders
41
• Impacts on balance sheet
Balance sheet Year

Current assets (2)
Dividends payable (+)
Net assets = (1) + (2) – (3) – (4)
Retained earnings Net profit – dividends payable
The accounting equation is: current liabilities Retained earnings
Net assets = Equity
42
Introduction to multi-capital accounting
21. Introduction to multi-capital accounting

Limits of financial accounting
Financial accounting is the key tool in many decisions: both internal (steering operations, choice of
investments, etc.) and external (loans, investments, takeovers, etc.).
Financial analysts, dividend payments and valuations are often based on the accounting aggregates of the
financial statements produced by financial accounting.
The purpose of financial accounting is to present a faithful representation of the company's assets, liabilities
and situation. It also has a predictive value on the future performance of the company.
However, many limitations are now mentioned on this vision, proposed by financial accounting:
- Failure to take into account all the value of the company: employees' skills, brand, synergies, etc. “Intangible
assets » are almost non-existent in companies' financial statements
- Failure to take into account the impact of companies on the planet and the people (over-valuation of
assets with a negative impact on the environment such as fossil fuels, no measurement of environmental and
human impacts, etc.)
What is multi-capital accounting?
Experiments have been conducted over the past 30 years to address the limitations of financial accounting.
In the 1990s, experiments to take into account "full costs" were conducted. This involved measuring
environmental damage and calculating the external costs associated with this damage, which were
integrated into the company's accounts.
The Sustainability Assessment Model (SAM) seeks to measure the company's sustainable development
performance by evaluating and monetising the impact of a project or company on the use of economic,
human beings and environmental resources over the life cycle of a project.
In recent years, several teams of researchers and practitioners have proposed

integrated or multi-capital accounting models, which take into account all
capitals, not just financial capital.
The methods are based on international references to take into account

human capital (International Labour Organisation, United Nations),
environmental capital (IPCC: Intergovernmental Panel on Climate Change),
Science Based Targets, Planetary Limits of the Stockholm Resilience Centre to
define the impacts of companies on the planet and humans.
Some models are presented as internal management tools for the company to
help it better understand its impact and move its business model towards a
more sustainable one, while other methods have a more normative vocation
with the aim of changing accounting standards and ultimately the production
of financial statements.
They produce balance sheets and income statements, either monetised or in physical units, which take into
account different capitals, the positive and negative impacts of the business or the costs of the business to
preserve these capitals, depending on the method.
• Several models are presented in the lectures (slides) and in the case studies (see also to go further):
• Comptabilité universelle® (“Universal accounting”)
• SeMA (Sense Making and Accountability)
• Thesaurus – Triple empreinte (“triple footprint)
• LIFTS (Limits and Foundations Towards Sustainability)
• CARE (Comprehensive Accounting in Respect of Ecology)
43
• E P&L (Environmental Profit&Loss account) by Kering
• Steps to implement multi-capital accounting
• Non-financial reporting
Accounting standards are not yet evolving to take into account the evolution of multi-capital accounting
and projects remain in experimental stages. However, legislation and standards are evolving in Europe and
worldwide with regard to non-financial reporting.
• Non-financial and integrated reporting models, combining financial performance indicators

and non-financial indicators, have been developed since the late 1990s: .
• GRI (Global Reporting Initiative : Established in 1997 in Boston, it provides universal and indus-
try-specific reporting standards to allow organizations to publicly report the the impacts of
their activities.
• NRE (Nouvelles Régulations Economiques) law of 2001 in France requires companies to report
on the social and environmental consequences of their activities and to include them in their
business report (rapport de gestion).
• The IIRC (International Integrated Reporting Council) was created in 2010 and proposes refer-
ence frameworks for integrated reporting.
• The Sustainable Accounting Standards Board (SASB) was established in 2011. It produces
standards to guide the disclosure of financially material sustainability information by compa-
nies. These standards are available for 77 industries.
• The European NFRD (Non-Financial Reporting Directive) 2014/95/EU, transposed into French
law in 2017, requires the disclosure of non-financial and diversity information by certain large
companies (depending on their legal form and some thresholds).
Organisations are being restructured and laws are changing rapidly in recent years:
• ISSB was created in 2021 by IFRS Foundation : International Sustainability Standards Board. It aims at
proposing standards for ESG reporting (Environnemental, Social et Gouvernance).
o Value Reporting Foundation is now consolidated into the IFRS Foundation (effective on
01/07/22)
o ISSB will monitor IIRC frameworks and SASB Standards.
• Europe is aiming for carbon neutrality by 2050, and is implementing a strategy of measures as part of
the Green New Deal.
44
o In terms of extra-financial reporting, the SFRD (Sustainable Financial Disclosure Regulation)
directive has modified the obligations to publish information on sustainability in the financial
services sector.
o A green taxonomy, which aims to classify activities according to sustainability criteria, is be-
ing progressively implemented from January 2022. It aims to redirect capital flows and makes
it mandatory to publish new indicators in the sustainability reporting (DPEF in France) from
2022.
o Non-financial reporting obligations will also evolve with the CSRD (Corporate Sustainability
Reporting Directive) which will eventually replace the NFRD. The thresholds for publication
and the information to be published are changing (from 2024).
Source : www.ifrs.org
The forms of extra-financial reporting have evolved considerably: in order to avoid "greenwashing", it is now
a matter of publishing only information that has meaning and impact, it refers to "materiality".
The ISSB advocates the implementation of a simple materiality analysis (financial materiality). This means
taking into account only the "Outside-in" approach, i.e. the information that concerns the impacts that the
economic, social and natural environment has on the company.
The European Union emphasises double materiality: in addition to the "Outside-In" approach, reporting must
also take into account the "Inside-Out" vision, which therefore integrates the company's impacts on the
economic, social and natural environment.
• To go further
Kering website – Presentation of EP&L
LIFTS Accounting Model
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International accounting

二、课程简介 Course Description

三、课程教学目标 Course Teaching Objective

课程教学目标矩阵图 Curriculum teaching objective matrix

五、课程考核方式 Course Examining Mode

七、课程教学进度安排 Schedule of Course Teaching

A distinction is made between financial accounting and cost / managerial accounting.

Organization and its main stakeholders

Example 2 Firm B takes out a loan (CU 35,000).

CU stands for currency unit such as dollar, pound…

Each exchange involves at least two flows:

Accounting reflects this reciprocal exchange, which is called "double-entry accounting".

2. Accounting principles and organization of accounting

Accounting must respect several principles including:

Relevance Reliability Prudence Comparability

• Process and accounting documents

Each company creates its own chart of accounts.

From daily accounting entries to financial statements

The bookkeeping process relies on an information system and produces documents.

3. Double-entry and chart of accounts

Here is the accounting analysis of these 2 transactions:

Inventory 1,000 Debit

Accounts payable 1,000 Credit

Accounts receivable 2,000 Debit

Debit Assets accounts Credit Debit Liabilities accounts Credit

Debit Expense Credit Debit Income Credit

This balance may be:

4. Income statement (or Profit and Loss statement)

Revenues and gains

Costs and expenses

Cost of goods sold = Opening inventory + Purchases – Closing inventory

5. Statement of changes in equity or retained earnings

Statement of changes in equity Share capital Retained earnings

Statement of retained earnings Year

6. Balance sheet or statement of financial position

Capital and reserves

Fixed assets + Capital and

Assets = Liabilities + Equity

Equity capital or owner’s equity

The accounting equation is:

There are different kinds of inventories:

Capital and reserves:

7. Statement of cash flows

These flows are organised by:

Statement of cash flows in CU (currency unit) Year

8. First opening balance sheet

Share capital = Ʃ contributed assets - Ʃ contributed debt

The accounting equation is:

Fixed assets + Trade Share capital

Assets = Liabilities + Equity

Net assets = Equity

Balance sheet Amounts

The accounting equation is: Current or non-

Assets = Liabilities + Equity

Net assets = Equity

Repayment of the principal part depends on the loan agreement:

Cash payment = loan repayment (principal repayment) + loan interest

• Journal entries for loan instalment

Date Accounts Debit Credit

• Impact of operations on the balance sheet and income statement

Income statement Year

The accounting equation is:

Assets = Liabilities + Equity