Introduction to Accounting

 Accounting is necessary for:

 Identification
 Measuring
 Communicating

...economic information (money,

transactions, financial events) which
enables the users of the information
to make good evaluation and make
decisions
Introduction to Accounting
 Information Map
 Where we were
 Where we are now
 Where we want to go
 Instead of kilometers, it is measured in
 Money (Denars in Macedonia)
 Percent (growth, decline, coefficient, ratio)
Exact Accounting Information
 Provides correct financial statements for the
external users
 Banks
 Investors
 Others

 Good reporting for internal use

 Owners
 Managers
What do Accountants Do?
 Recording
 Classifying
 Explaining
 Reporting and evaluation about:
 What are our sales
 What are our expenses
 How much cash we have at the moment
 How much we owe
 How much we are owed
Managerial Accounting
 Generally used for decision making
inside the company Assist the
management in
 Decision making
 Planning

 Control

 No standards are used

Decisions in Managerial
Accounting
 Whether to purchase a product or not
 Which raw material to use
 Which process to use
 Whether to purchase or sell equipment
 Whether to add or eliminate a product line
 Whether to select products for additional
promotion
 Selecting distribution channels
 Leasing or purchase
Financial Accounting
 Generally it is used for:
 Calculating and reporting:
 Value of the company itself
 Value of the profit and taxes

 The calculations are made according to

certain standards
Differences Between Managerial and
Financial Accounting
 Managerial Accounting:
 Focuses on the internal needs of management –
decision making
 Points out the expectations for the future
 Does not have strict rules set by the authorities
 Flexible calculations
 Less focus on accuracy
 It can be combined and improvised depending on
the need
 It is not mandatory
Five Basic Elements of Financial
Statements
1. Assets
2. Liabilities
3. Capital
4. Revenues
5. Expenses
Each one of these elements contains
several items
1. Assets
 Cash
 Accounts Receivable
 Inventory
 Land
 Buildings
 Equipment
2. Liabilities
 Accounts Payable
 Tax Liabilities
 Salary Liabilities
 Liabilities for Short-Term Loans
 Liabilities for Securities
 Long-Term Liabilities
3. Capital
 Own Capital
 Common Stocks
 Priority Stocks
 Additional Capital
 Dividends
 Retained Earnings
4. Revenues
 Sales
 Interest
 Rent
5. Expenses
 Cost of Goods Sold
 Costs for using capacities (production
costs)
 Marketing, sales, and administrative
costs
 Insurance costs
Basic Accounting Equation
Assets (6) =
Liabilities (4) + Capital (2)

Liabilities =
Short-term and Long-term Debt (4)

Capital =
Owner’s Share (2)

6=4+2
Total Accounting Equation
 The sum of the revenues increases the
owners’ capital
 The sum of the expenses decrease the
owner’s capital
Assets =
Liabilities + Owner’s Capital
+Revenues - Expenses
Example 1:

 Each of the following transactions should be

recorded using appropriate columns in the
accounting equation
 Bob started a new business and opened up an account where he
put 5.000 €
 He rented office space and paid the rent for the first month
which amounted to 200 €
 He purchased equipment with cash which amounted to 300 €
 Provided services for a client and received 500 €
 Provided services that had 600 € value, which were invoiced to
the client
 Supplied inventory in the amount of 150 € for which he was
approved differed payment
 Example 1 (solution):
Assets = Liabilities + Owner’s Capital + Revenues - Expenses
1 5,000 5,000
2 -200 - 200
4,800 = 5,000 - 200
3 + 300
- 300
4,800 = 5,000 - 200
4 + 500 + 500
5,300 = 5,000 + 500 - 200
5 + 600 + 600
5,900 = 5,000 + 1,100 - 200
6 + 150 = 150
6,050 = 150 + 5,000 + 1,100 - 200
Net Income

 The net income means revenues which

are higher than the expenses
 Net Income = Revenues - Expenses
Example 2:

 Tom’s company achieved revenue of 10.000 €

 Expenses
 Rent 400 €
 Purchase of raw materials 100 €
 Salaries 6.000 €
 Пресметка на нето добивка
 Sales +10.000 €
 Expenses -(400 € + 100 € + 6.000 €)
 Total net income +3,500 €
Retained Earnings
 Earnings which are retained to be used
for the operations of the company
 The amount left after all dividends are
paid out
Example 3:

 The TOTO company started working on January 2, 2002. During the course
of the year, it made revenues in the amount of 50.000 € and expenses in
the amount of 43.000 €. At the end of the period, the company paid
dividends to its shareholders in the amount of 1.000 €. The Statement of
Retained Earnings of the company was as follows:

Statement of Retained Earnings

Retained earnings on January 2, 2002 = 0 €
Plus: Net Income (50.000 € - 43.000 €) 7.000 €
Minus: Dividends 1,000 €

Retained earnings on December 31, 2002 6,000 €

Example 4:

 During the course of 2003, the TOTO company made revenues in the
amount of 60.000 € and expenses in the amount of 44.000 €. It paid
dividends which amounted to 1.500 €. The Statement of Retained Earnings
is as follows:

Statement of Retained Earnings

Retained Earnings, January 1, 2003 6.000 €
Plus: Net Income (60.000 €– 44.000 €) 16.000 €
22.000 €
Minus: Dividends 1.500 €
Retained Earnings on December 31, 2003 20.500 €

Note: The beginning balance of the retained earnings for 2003 is the same as
the ending balance of retained earnings in 2002.
Financial Statements
 Provide information about the company
 Are based on accounting records
Pros of the Financial Statements
 To have a correct picture for the company and its operations
 To use the past experience in order to predict for the future Да
се оцени активноста на претпријатието (вашиот успех)
 To evaluate the activities of the company (to avoid mistakes)
 To see the warning signs for financial problems
 To see the achievements (of the company in comparison to the
others)
 To attract investments
 To secure loans
Key Financial Statements
 Income Statement
 Statement of Retained Earnings
 Balance Sheet
 Cash Flow Statement
 Balance Sheet:
Assets = Liabilities + Owner’s Capital

Income Statement:
Revenues – Expenses = Net Profit (Loss)
Income Statement

THE INCOME STATEMENT is a statement

that shows how successful the
company’s operations are during the
course of a certain period.
Income Statement: Example
Company АА
INCOME STATEMENT
December 31, 2003

Sales 392.500
Cost of Goods Sold
Salaries for production workers 110.000
Material costs 150.000
Other direct costs 10.000
Total Cost of Goods Sold 270.000
Gross Income 122.500
Operating Expenses
Sales and marketing expenses 52.000
General and administrative expenses 34.000
Depreciation
Total operating expenses 86.000
Net operating income 36.500
Other revenues (expenses)
Other revenues
Other expenses
Interest expenses
Total other revenues (expenses)
Income Before Taxes
Income Tax
Net Income (Loss) 36.500
Rules for Every Income
Statement
Revenues– Expenses = Income or Loss

8– 3 = 5
 Important elements of the income
statement are :
 Revenues and
 Expenses
Два основни елементи кои ги
содржи Билансо на Успех
 Revenues
 Sales from the main activity
 Revenues from other activities such as:
 Sales of assets
 Investments
 Other
 Expenses
 Expenses from the main activity
 Expenses from other activities
 Interest
 Expenses from sales of assets
 Other expenses
Sales/ Revenues

Exchange of products and services for

cash

INVENTORY  CASH

INVENTORY  RECEIVABLES  CASH

Cost of Goods Sold
 How much does it cost to purchase/
produce the sold products
 Cost of goods sold – trade companies

Amount that the trade company paid to

the producer for the goods that it sells
Price of Goods Sold
 In production
 Price of raw materials, including transportation
expenses
 Labour of workers who transform the raw
materials into final products
 Electricity, water, rent and other costs in the
factory
Gross Income
Gross Income =
Sales – Cost of Goods Sold

 Are the products sold at a higher price than

their cost price (expenses for the goods sold
by product unit)?
 The cost price can be calculated for each
product line (product or service) for the
needs of the management
Operating Expenses
 Sales and marketing expenses
 Salaries of sales agents, bonuses, fees
 Travel and sponsorship expenses
 Advertising expenses
 General and administrative expenses
 Rent
 Utilities
 Salariesof the personnel and manager
 Supplies
 Depreciation of the office equipment
Net Operating Income
Gross Income – Operating Expenses =
Net Operating Income

 Are the products sold at a price higher than:

 Expenses for production or purchase of goods
sold +
 Sales and marketing expenses +
 General expenses of the management and
administration
Other Revenues and Expenses
 Interest and investment revenues
 Interest expenses
 Different revenues/ expenses
 Unusual revenues
Net Income (Loss) can be seen in
the Balance Sheet

Undistributed Income – Accumulated Income

(part of the owner’s capital)
Source Documents for Preparing the
Income Statement

 Sales Invoices
 Salary Documents
 Utility Invoices
 Block Paragons
 Cash Receipt
 Bank Report
Balance Sheet

THE BALANCE SHEET is a picture of the

financial position of the company at a given
day of the year
Balance Sheet: Example
Company "ТТ"
BALANCE SHEET
December 31, 2003

ASSETS Denars LIABILITIES AND EQUITY Denars

Fixed assets Owner’s capital 65.000
Land and buildings 100.000 Accumulated income 36.500
Equipment 50.000 Total capital 101.500
Vehicles 12.000
Office equipment 3.000 Liabilities
Minus: accumulated depreciation 16.500 Long-term debt 40.000
Total net fixed assets 148.500 Current expenses
Current assets Bank loans 20.000
Accounts receivable 25.000 Current part of long-term 20.000
debt
Inventory 15.000 Accounts payable 12.000
Cash 5.000 Total current liabilities 52.000
Total current assets 45.000 Total liabilities 92.000
TOTAL ASSETS 193.500 TOTAL LIABILITIES AND 193.500
EQUITY
Rues for Every Balance Sheet
ASSETS: Liabilities & Equity:
Owner’s capital +
Assets Liabilities

6=4+2
Balance Sheet

6=4+2
Balance Sheet

 Three elements that make up the

Balance Sheet
 Assets
 Liabilities
 Equity
Assets

 Assets are items that have value and

that are owned and used by the
company
In the Balance Sheet, the assets are classified as
 Long-term or
 Current
Assets
 Fixed Assets/ Long-Term Assets
 Assets that are used for the functioning of the
company (long-term working conditions)
 It is not expected that these assets can be
converted into cash in the course of one year or
one operating cycle
 Current Assets
 Cash or other assets that can be converted to
cash or used in a period not longer than one year
Long Term/ Fixed Assets

 Land and Buildings

 Locationof the company
 Warehouses
 Administrative facilities
Long Term/ Fixed Assets
 Equipment
 It is used for production of products that are
intended for sales
 It is used for increasing the value of the inventory
 It is used in the offices
 Vehicles
 They are used for transport of goods За
зголемување на вредноста на залихите
 За испорака на производ или услуга
Current Assets
 Inventory
 Purchased goods which are intended for sales
 Raw materials
 Current production
 Finished products
 Active Time Differentiations
 Advanced Rent Payment
 Advanced Invoice Payment (Electric power)
 Advanced payment of deposits for raw materials
Current Assets
 Accounts Receivable
 Amounts that the client owe to the company and that
should be paid in cash
 Cash
Liabilities

 Liabilities are amounts that the

company owes
 Liabilities in the Balance Sheet can be:
 Long-term
 Current (short-term)
Liabilities

 Long-Term Liabilities
 Amounts that the company owes, and
mature for longer than one year.
 Current Liabilities
 Amounts that the company should pay in
the course of one year
Current Liabilities

 Accounts Payable
 Amounts that the company should pay to
its suppliers
Documents that Provide Information
for the Balance Sheet
 Information for company transactions
 Incoming Cash Receipts
 Outgoing Cash Receipts
 Contracts
 Sales/ Purchase Invoices
 Bank Reports
 Debt Documents
The Principle of Balance
 There should always be two parts of
the transaction
 Both parts should be equal
 Both sides of the Balance Sheet should
be equal
Balance Sheet: Example

Person АБ wants to open a printing

company. On August 1, 2004 he
invests 50.000€ in the company.

Where will this transaction be recorded?

Anser

 Cash
 Private capital/ equity
Answer
Company ТТ-AB
BALANCE SHEET

Assets Euros Liabilities and Equity Euro

Long-term assets Owner’s capital 50.000
Land and buildings Accumulated retained earnings
Equipment Total owner’s capital 50.000
Vehicles
Office equipment Liabilities
Accumulated depreciation Long-term debt
Net Fixed Assets Short-term liabilities
Current assets Bank loans
Inventory Current repayment of long-term debt
Accounts payable Accounts payable
Cash 50.000 Total current liabilities
Total current assets 50.000 Total liabilities
TOTAL ASSETS 50.000 TOTAL LIABILITIES AND EQUITY 50.000
Problem 1: Company ТТ-АB
On August 16, 2004 the company TT-AB
purchased printing equipment at a
price of 15.000 €. The same day, at
delivery of the equipment, the company
paid in cash.
 Where will this transaction be recorded?
 Will there be increase or decrease?
Problem 1: Company ТТ-АB
 Equipment – Increase
 Cash - Decrease
Problem 1: Company ТТ-АB
Company ТТ-АB
BALANCE SHEET
August 16, 2004

Assets Euro Equity Euro

Fixed Assets Owner’s capital 50.000
Land and buildings Accumulated retained earnings
Equipment 15.000 Total owner’s capital 50.000
Vehicles
Office equipment Liabilities
Accumulated depreciation Long-term debt
Total fixed assets 15.000 Current liabilities
Current assets Bank loans
Inventory Current payment of long-term debt
Accounts receivable Accounts payable
Cash 35.000 Total current liabilities
Total current assets 35.000 Total liabilities
TOTAL ASSETS 50.000 TOTAL LIABILITIES AND 50.000
EQUITY
Problem 2: Company ТТ-АB
On August 20, the company ТТ-АB
purchased printing materials in the
amount of 5.000 €. Within 30 days, it
should pay for the purchased material.
 Where will this transaction be recorded?
 Will there be increase or decrease?
Problem 2: Company ТТ-АB
 Inventory – Increase
 Liabilities - Increase
Problem 2: CompanyТТ-АB
Company ТТ-АB
BALANCE SHEET
August 31, 2004

Assets Euro Equity Euro

Fixed assets Owner’s capital 50.000
Land and buildings Accumulated retained earnings
Equipment 15.000 Total owner’s capital 50.000
Vehicles
Office equipment Liabilities
Accumulated depreciation Long-term debt
Total net fixed assets 15.000 Current liabilities
Current assets Bank loans
Inventory 5.000 Current payment of long-term debt
Accounts receivable Accounts payable 5.000
Cash 35.000 Total current liabilities 5.000
Total current assets 40.000 Total liabilities 5.000
TOTAL ASSETS 55.000 TOTAL LIABILITIES AND 55.000
EQUITY
Cash Flow Statement
 Reveals information that cannot be seen in the
Balance Sheet or Income Statement.
 Reveals the cash position of the company
 More companies use accrual accounting
Cash Flow Statement
Cash Flow Statement
For year ending December 31, 2004
Cash flow from operations
Net income adjusted for: 160,000
Depreciation of tangible assets 14,000
Depreciation of intangible assets 3,000
Decreased inventory 1,000
Decrease of advance payments 5,000
Increase to the suppliers 9,000
Profit from sold equipment (8,000)
Increase of accounts receivables (4,000)
Net cash from operations 20,000

Net cash from operations 180,000

Cas flow from investing
Sales of fixed assets 10,000
Purchase (sales) of real estate (170,000)
Purchase of equipment (30,000)
Net cash flow from investing (190,000)
Cash flow from financing
Bank loans 100,000
Sales of shares 50,000
Payment of dividends in cash (6,000)
Net cash flow from financing 144,000
Net increase (decrease) of cash 134,000
Balance at the beginning of the year 28,000
Balance at the end of the year 162,000
Cash Flow Statement: Why is it
needed?
Net income is not equal to the cash

NET INCOME = REVENUES – EXPENSES

CASH = CASH

One of the basic reasons why small companies

fail is the lack of cash when it is needed
Net Income ≠ Cash
 The usual reasons
 Depreciation
 Accounting method
 Cash Method
 Accrual Method
Cash
 From customers
 From owners
 From creditors
The Company’s Cash Position is
Interesting to the
 Owners
 Banks
 Investors
 Creditors
 Suppliers
 Customers
 ?
Cash Flow Statement

 The Cash Flow Statement shows where

the cash comes from and where it goes
 Operating (business) activities
 Investing activities
 Financing activities
The Payment System in
Macedonia
 System for transfer of money
 CentralBank
 Local Banks
 Companies
Payment System in Macedonia
 MIPS
 Over 1 million MKD
 Urgent payments
 NBRM (National Bank) System
 Most expensive
 KIPS
 UP to 1 million MKD
 Clearing House System
 More Expensive
 Bank
 Same bank customers
 Cheapest
Payment Slip PP0 - cash
Payment Slip PP30 – B2B
Payment Slip PP50 – to the
Government Budget
Tax
 Tax
 Public revenues with which the state
functions are financed
 Authority: Public Revenue Office

 Income Tax = 15%

 Value Added Tax = 18%

Value Added Tax (VAT)
 Paid by the final user/ consumer
 The companies
Do not pay it
Provide a service – transfer of the tax
from final consumer to the
government
Get tax refund
VAT: Example
 If we assume that the VAT = 10% (for easier
calculations)
 The producer pays 1,10 € for raw materials and
the retailer and pays the government 0,10 €.
 The producer charges the retailer 1,32 €, а and
pays the government 0,02 € (0,12 € minus 0,10 €),
retaining the same profit of 0,20 € .
 The retailer charges the consumer 1,65, and pays
the government 0,03 € (0,15 € minus 0,12 €),
retaining the same profit of 0,30 €.
VAT: Example

Producer Retailer Consumer

Purchase price 1.1 1.32 1.65
VAT -(outgoing) 0.1 0.12 0.15
Sales price 1.32 1.65 0
Profit 0.2 0.3 0
VAT+ (incomming) 0.12 0.15 0
VAT Difference 0.02 0.03 -0.15
Value Added Tax (VAT)
 VAT Registration
 Annual turnover over 1.300.000,00 MKD
 Optional during company registration
 Optional at the beginning of the year
 January 1-15

 [Link]
Additional Accounting
Information
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Q&A