Finance for non-Finance folks (Part 1 of 4)

1. Prof. Parag Tikekar
Whatsapp/ Cell: +97150- 5785927
E-mail: ParagTikekar@yahoo.com
Finance for Strategic Managers

2. About Parag Tikekar
 BE Electronics & Communication from DIT, India.
 MBA Finance & Marketing from IIM, India.
 Keynote Speaker on Segmentation at SMI Branch Banking
Conferences at London – June ‘07, ‘08, ‘09; Uniglobal
Conference Barcelona – Oct ‘08; EFMA Conference Paris –
June ‘09; Coreventus Conference KL – Sep ‘10.
 Sharia’ah Certified; Project Management; Credit Policy; Cash
Management; Omega Credit Skills Program & Trade Finance;
Quality Team Building; Customer Care – In-house courses.
 CRM Conferences at USA – NW University, Chicago – Oct ’99;
Florida – Jan ‘01 & Dallas – June ‘02.
 Gulf Marketing Review Conference on Increasing Marketing
Effectiveness at Bahrain – Oct ‘01.

3. Agenda- Day 1
 Introduction
 Book Keeping
 Accounting
 Single Entry
 Double Entry
 Cash Method
 Accrual Method
 Trial Balance
 Debits & Credits
 Activities

4. Interpreting Business Accounts

5. Introduction
 Every business organisation is required to collect data on
all its financial transactions & report this on a regular basis
in the form of company accounts.
 The ability to interpret the contents of company accounts is
essential for financial managers, investors & other
stakeholders.
 In this module, we look at the process of book keeping &
how it is used to gather information for the preparation of
formal accounts.
 The overview provided will allow you to see how each
individual transaction is recorded & how, in turn, each 1
influences the overall financial picture provided by the
accounts.

6. Introduction (continued…)
 The preparation of the 3 key financial statements is
described in detail & a number of examples are
suggested for study.
 The interpretation of these statements is explained,
mainly through the use of a range of ratios which
indicate the effectiveness of the financial
management of the business & its stability.
 With reference to these statements, the effects that
budgets have on operations are described, along with
the topics of depreciation & the importance of working
capital management.
 The final section of the module discusses the
importance of a set of globally adopted accounting
standards, without which it would be almost
impossible to make useful comparisons between
companies operating in different countries or markets.

7. Book Keeping
 The fundamental element of all accounting is bookkeeping.
 This is the essential starting point for all financial
accounting & is the painstaking & often tedious recording
of all the financial activities & transactions of an
organisation on a day-by-day basis.
 Once accurate records have been kept of these activities
of a business, it is possible to draw related transactions
together to provide an overall picture of various aspects of
the business & present these at regular intervals as the
summary financial statements.
 These provide management with the relevant information
to enable decisions about the future direction of the
business to be made.
 Accounting, therefore, takes over from book keeping as it
refers to the design of the systems used to measure the
financial effects of economic activity.

8. Accounting
 The presentation of financial statements forms part of the process of
financial reporting, in which financial values & performance measures
are presented for both financial managers & non-accountants in a clear
& concise manner.
 There are 2 types of accounts – financial accounts & management
accounts.
 Financial accounts are concerned with reporting the results & financial
position of a business, whilst
 Management accounts are used for planning & controlling the resources
of a business in order to maximise future profitability.
 A key role of accountants is to design a system with sufficient internal
controls to make it possible to detect immediately any of the following
damaging situations:
 Theft
 Fraud
 Embezzlement
 Dishonest operation

9. Accounting (continued…)
 The financial statements are generally sufficiently detailed to enable
effective decision making but there will be occasions where further detail
is necessary.
 Accountants will, in such a case, provide a more detailed breakdown of
the transactions that have taken place under a particular heading.
 Examples might include purchases made for a particular department,
sales receipts for a specified short period of time, or valuations of
named assets.

10. Activity

11. Activity
 Find out how the task of bookkeeping is
organised within your own organisation, or 1
with which you are familiar.
 Prepare a brief outline of the processes used,
detailing the key books of entry used. Include
a diagram to show the accounting structure
within the organisation.

12. Book Keeping

13. Accounting (continued…)
 The financial statements are generally sufficiently detailed to
enable effective decision making but there will be occasions
where further detail is necessary.
 Accountants will, in such a case, provide a more detailed
breakdown of the transactions that have taken place under a
particular heading.
 Examples might include purchases made for a particular
department, sales receipts for a specified short period of time,
or valuations of named assets.

14. Single entry system
 A basic, informal approach to bookkeeping where only a single
entry is made for each financial transaction.
 It is usually used to deal with daily summaries of cash receipts &
monthly records of cash receipts & disbursements.
 An example of a single entry system is seen when using a
current account: Here 1 entry is made for each deposit or
payment. Receipts are entered as deposits & are a source of
revenue, whilst cheques or other withdrawals are categorised as
expense.
 In a manual system, a worksheet is produced showing the
incomes as 1 category & the outgoings as the other, the
difference between the 2 being classified as the balance.
 For a business, the emphasis is placed on determining profit or
loss.
 The system gets its name from the fact that each transaction is
only recorded once, as revenue or expense.
 It does not provide a business with all the financial information it
requires for effective reporting.

15. Double entry system
 This has become the standard system for businesses
when recording financial transactions.
 As all transactions involve the exchange of 1 thing for
another, the use of debits & credits forms the essence of
the system.
 The system is self-balancing, as the sum of the debits
must be equal to the sum of the credits.
 A credit for 1 party will result in a debit for the other party
as there is an exchange of ‘items’.
 The sale of a car by a dealer to a Customer, for example,
is represented as a loss of an asset by the dealer but a
gain of an asset by the Customer, whereas, in terms of
money, the Customer has a debit but the dealer has a
credit.
 This, the transfer of an asset, is recorded in 2 places for
each party involved.

16. Accounting methods
 An important consideration for a business in its
early stages is what type of accounting method it
chooses to use to monitor revenues & expenses.
 This represents a set of rules by which the details
of when & how incomes & expenses are
recorded.
 There are 2 accepted methods used:
1. Cash method
2. Accrual method

17. Cash method
 Recognises revenues in the period of time that
the cash is received, &
 Expenses in the period of time that the payments
were made.
 Thus, the flow of cash is followed exactly.
 Anything that is billed but not paid for is not
normally recorded; only on completion of the
transaction is an entry made.
 Whilst this is useful for very simple cash
transactions, it is not thought to conform with
GAAP.

18. Accrual method
 Records income in the period earned, & records
expenses & capital expenditure in the period incurred.
 It, therefore, is able to match income with expenses in
the correct period.
 This is achieved by recording income as earned when
the product or service is passed on to the Customer.
 Similarly, expenses are recorded as incurred as soon
as the product or service is supplied to the Customer.
 Whilst it is still necessary to differentiate between
amounts billed that are paid & those that are not, this
method allows for a more accurate view of the
financial position of the business to be determined.

19. Definitions
 Profit – the amount by which the income of the
business is greater than the outgoings. (If this is
below zero, we talk of loss rather than profit)
 Accounts – these are summary records of the
transactions of the business
 Asset – something valuable that the business either
owns or uses
 Liability – something owned by someone other than
the business

20. Trial balance
 There is a need for regular checking of the accuracy
of the entries to prove that they are in ‘balance’.
 To ensure this is the case, a document called a trial
balance is used.
 This attempts to confirm that the sum of the credit
balance accounts equals the sum of the debit balance
accounts.
 If this is not the case, the nominal ledger & all journals
will need to be investigated to determine where the
error lies.
 Once this is balanced the role of the bookkeeper is
complete & the ‘books’ are passed on to the
company’s accountants who then prepare the
financial statements for the relevant period.

21. Trial balance (continued…)
 The development of well-proven bookkeeping
computer software has meant that the complexity of
the process has been significantly reduced & so it has
become less of a specialist role.
 The preparation of the trial balance can also be
carried out automatically.
 For example, for each credit sale entry, the following
tasks are instantly undertaken by the software:
1. Sales invoice is prepared
2. The Sales account in the nominal ledger is credited
3. The Accounts Receivable account in the nominal
ledger is debited
4. The Customer account in the subsidiary ledger is
updated
5. The Inventory account is updated

22. Accounts books
 Sales day book – lists invoices sent out to Customers
each day & identifies all credit sales
 Cash book – records all cash amounts paid in & out of
the bank account
 Petty cash book – lists small amounts of cash used
on the premises for occasional small purchases &
receipts
 Sales return day book – lists credit notes sent to
Customers
 Purchases return day book – lists credit notes
received from suppliers
 Journal – used to record any double entries made
which do not arise from the other books (e.g. when
errors are made & need correction)

23. Debits & Credits
 The basic concept of double entry bookkeeping is that
every transaction has 2 related entries: a debit & a credit
made to the relevant accounts.
 At 1st, these concepts can be a little misleading as they are
different to the simple ideas that we have all become used
to with our own bank accounts.
 If the bank credits your account with £100, we understand
this to mean that the account balance has increased and
that we are richer.
 However, in bookkeeping, a £100 credit on the bank
account of the business means a reduction as a cash flow
of £100 has taken place.
 The reason for this potential confusion is that each entity in
a transaction considers debits and credits from their
opposing perspectives.
 Thus, the bank crediting your account with £100 is
effectively crediting its own account & views the credit as a
reduction in its balance in the same way that an outflow to

24. Debits & Credits (continued…)
 Each account is drawn up in such a way that a
vertical line divides it into 2 sides.
 All debits appear on the LHS of the line, while all
credits are placed on the RHS.
 Every entry to the LH column of 1 account will
have a corresponding entry made in the RH
column of another account.
 The convention is to use a T-account.

25. Debits & Credits (continued…)
 A credit will increase the following accounts: Liabilities
& Income
 …but will decrease: Assets
 A debit will increase the following accounts: Assets &
Expenses
 …but will decrease: Liabilities
 Note that:
 Expenses are always debits
 Revenues are always credits
 When cash is received, the cash account is debited
 When cash is paid out, the cash account is credited

26. Activity

27. Activity
 Consider the following transactions of a SME. For each
transaction, complete the table showing which accounts
should be debited & credited.
 Purchase of stock on credit
 Creditors increase
 Purchases expense increases
 Purchase of computer
 Own a computer
 Cash at bank decreases
 Payment received from debtor
 Debtors decrease
 Cash at bank increases
 Purchase of production machine
 Own a production machine
 Cash at bank decreases

28. Activity / Feedback
 Purchase of stock on credit
 Creditors increase
 Purchases expense increases
 credit creditors account (increase in liability)
 debit purchases account (item of expense)
 Purchase of computer
 Own a computer
 Cash at bank decreases
 debit fixed assets account (increase in asset)
 credit cash at bank account (decrease in asset)

29. Activity / Feedback
(continued…)
 Payment received from debtor
 Debtors decrease
 Cash at bank increases
 credit debtors account (decrease in asset)
 debit cash at bank account (increase in asset)
 Purchase of production machine
 Own a production machine
 Cash at bank decreases
 debit fixed assets account (increase in asset)
 credit cash at bank account (decrease in asset)

30. Trial balance (summary)
 A listing of all the nominal accounts, showing the balance in
each.
 A summary is used in the balance sheet.
 By comparing the value of the TB at the start of the month or
year with previous months or years, it is possible to produce the
P&L account & the cash flow statement.
 The TB is simply a listing of all the ledger balances on a given
day.
 It contains all the closing balances from the individual ledger
accounts.
 If correctly done then total debits will equal total credits.
 For every debit, there must be an equal & corresponding credit.
 Providing that the double entry process has been accurately
carried out, the total of all the debits will equal the total of all
credits & the trial balance will balance.
 The TB is a list of balances which is used to check accuracy of
the double entry book-keeping.

31. Activity

32. Activity
 Prepare a trial balance using the following transaction information
(figures in £) :
 Buildings 52,000
 Machinery 10,750
 Office equipment 8,500
 Vehicles 9,550
 Bank 1,565
 Cash 50
 Debtors 6,585
 Creditors 5,685
 Bank Loan 32,500
 Capital 31,600
 Drawings 10,550
 Purchases 32,500
 Sales 78,600
 Wages 6,850
 Rent 3,564
 Insurance 2,654
 Advertising 5,218

33. Activity / Feedback
Assets: £
 Buildings 52,000
 Machinery 10,750
 Office equipment 8,500
 Vehicles 9,550
 Drawings 10,550
 Debtors 6,585
 Bank 1,565
 Cash 50
 Purchases 32,500
 Wages 6,850
 Rent 3,564
 Insurance 2,654
 Advertising 5,218
TOTAL 150,336

34. Activity / Feedback
(continued…)
Liabilities: £
 Creditors 5,685
 Bank Loan 32,500
 Capital 31,600
 Sales 78,600
TOTAL 148,385

35. Activity

36. Activity
 Paul has set up a new pet shop business. He placed £5,000 of his own money
into a business account & then the following transactions occurred during the 1st
month.
 Assuming all stock purchased during the period was sold & there was no closing
stock, use the information provided to record appropriate ledger entries.
 Use accounts for cash, debtors, creditors, purchases, shop fittings, sales,
loan, rent, bank interest, other expenses, capital & drawings.

37. Activity / Feedback

38. Any questions?

39. Thank you!