BA — Basic Accounting

Follow both sides of the accounting equation

For each event, identify the reporting entity, the accounts affected and the direction of change before choosing debits and credits. Owner funding increases equity; borrowing increases liabilities. Neither is trading revenue. Exchanging cash for equipment changes the composition of assets without creating an immediate profit. A credit sale and the related cost of goods sold are separate entries. Reconcile the resulting balances rather than relying on a balanced journal alone.

Profit, collections and obligations belong to different questions

Accrual reporting records income and expenses in the relevant period under the applicable recognition requirements. Cash reporting follows receipts and payments. A credit sale may increase profit before collection, while a customer advance may increase cash before revenue is earned. An unpaid expense can reduce profit without a current payment. In a lending review, inspect the underlying contracts and ageing evidence; a timing difference is not automatically an error or evidence of fraud.

Assume a new business receives BDT 500,000 owner capital and BDT 300,000 loan proceeds, then buys equipment for BDT 200,000 cash. Show assets, liabilities, equity and the effect on profit.

Cash starts at BDT 800,000 and falls to BDT 600,000. Equipment is BDT 200,000, so assets remain BDT 800,000. Liabilities are BDT 300,000 and equity BDT 500,000: 800,000 = 300,000 + 500,000. These financing and asset-purchase events create no trading profit. Depreciation, borrowing costs and other later expenses would need separate recognition.

Assume revenue of BDT 120,000 is earned, BDT 40,000 collected, expenses of BDT 70,000 incurred and BDT 50,000 paid. Opening receivables and payables are zero. Ignore all other events. Find profit, cash movement, closing receivables and expense payables.

Accrual profit is BDT 50,000 (120,000 - 70,000). Cash decreases by BDT 10,000 (40,000 - 50,000). Receivables are BDT 80,000 and expense payables BDT 20,000. The BDT 60,000 difference between profit and cash movement is the receivable increase less the payable increase. Profit alone does not show when cash will be available.

Build period-end adjustments from the service period

A payment covering future periods is initially an asset to the extent the benefit remains unconsumed. Recognise the consumed portion as expense using the relevant service period. Conversely, an expense incurred but not paid creates an accrual. Keep the original payment entry separate from the period-end adjustment, document the calculation and reconcile opening balance plus additions less consumption to the closing asset or liability. Do not credit cash again merely because an adjustment is recorded.

A balanced trial balance is a starting check

Equal debit and credit totals show arithmetic balance, not complete or correct reporting. An omitted transaction, a balanced entry posted to the wrong accounts, or an incorrect amount on both sides may remain undetected. Depreciation allocates depreciable cost over useful life under the stated method; accumulated depreciation is not a cash reserve. Compare journals with source evidence, reconcile control accounts and review unusual balances before interpreting the statements.

A business pays BDT 120,000 on 1 October for twelve months of insurance and records a prepaid asset. Assume equal monthly consumption. What adjustment and closing prepaid balance are needed on 31 December?

Three months have been consumed. Monthly expense is BDT 10,000; debit insurance expense BDT 30,000 and credit prepaid insurance BDT 30,000. The closing prepaid asset is BDT 90,000. The adjustment does not make another cash payment. The allocation assumes the policy benefit is consumed evenly over the stated period.

Equipment costs BDT 500,000, has a BDT 50,000 residual value and a five-year useful life. Assume a full year of straight-line depreciation and no impairment. Calculate annual depreciation and first-year carrying amount. Does that carrying amount establish market value?

Annual depreciation is (500,000 - 50,000)/5 = BDT 90,000. First-year carrying amount is BDT 410,000. Debit depreciation expense and credit accumulated depreciation BDT 90,000. Carrying amount is an accounting balance under these assumptions, not a verified resale price; useful life, residual value and impairment need their applicable review.

State the ratio definition and assess asset quality

Current ratio includes all current assets in its numerator. A common quick-ratio definition includes cash, short-term investments and eligible receivables, excluding inventory and prepayments. State which definition you use and keep numerator and denominator dates consistent. A receivable included in the calculation may still be overdue or disputed. Compare ageing, recoverability, concentration and post-reporting collections instead of treating a ratio threshold as an automatic credit approval.

Translate turnover into a cash conversion cycle

Inventory days plus receivable days less payable days gives a conventional cash conversion cycle. Define the day count, averaging method and denominator: inventory and payable turnover commonly use cost or purchases, while receivables commonly use credit sales. A longer cycle can absorb cash even when reported sales and profit rise. Seasonality and a closing-balance snapshot can distort the result. Do not multiply unlike accounting bases into a precise financing requirement without reconciling the underlying cash flows.

Current assets are BDT 1,200,000, including inventory BDT 400,000 and prepaid expenses BDT 100,000. Current liabilities are BDT 600,000. Assume the remaining assets qualify for the stated quick-ratio numerator. Calculate both ratios.

Current ratio = 1,200,000/600,000 = 2.00. Quick assets = 1,200,000 - 400,000 - 100,000 = BDT 700,000; quick ratio = 700,000/600,000 = 1.1667, approximately 1.17. This is not an approval threshold. Receivable quality, liability timing, restrictions on cash and operating cash flows still matter.

Inventory days are 60, receivable days 45 and payable days 30. Find the cash conversion cycle. What happens if receivable days rise to 60 while the other days remain unchanged?

Original cycle = 60 + 45 - 30 = 75 days. Revised cycle = 60 + 60 - 30 = 90 days, a 15-day increase. Cash is tied up longer under these assumptions. Investigate credit terms, disputes and subsequent collections before deciding that additional borrowing is the appropriate response. The day-count result alone is not a currency financing amount.

Reconcile operating profit to operating cash in clear steps

For a simplified indirect reconciliation, start with the specified profit figure, add relevant non-cash expenses and adjust operating working-capital movements with the correct signs. An increase in operating receivables or inventory normally absorbs cash; an increase in operating payables normally releases cash relative to recorded expense. Separate asset acquisitions, loan principal and owner funding from the operating bridge. Actual tax, interest, non-cash transactions and reporting-standard classifications require separate treatment.

Distinguish a cash-flow classification from a business judgement

Equipment acquisition, borrowing proceeds and principal repayment answer different questions from operating receipts and payments. Reconcile opening cash plus the net movement in each category to closing cash and explain material differences. A positive closing balance funded by new debt does not prove that operations generated cash. A non-cash asset acquisition must not be presented as a cash outflow merely to make the statement balance. Apply the relevant reporting framework to actual classification questions.

Assume profit BDT 300,000, depreciation expense BDT 50,000, operating receivables increase BDT 80,000, inventory increases BDT 30,000 and operating payables increase BDT 20,000. Ignore tax, interest and all other adjustments. Calculate operating cash flow.

Operating cash flow = 300,000 + 50,000 - 80,000 - 30,000 + 20,000 = BDT 260,000. The BDT 40,000 shortfall against profit comes from the stated net adjustments. Depreciation is added back because it reduced profit without a cash payment in this period; the receivable and inventory increases absorb cash.

Continue with operating cash flow BDT 260,000. Assume equipment purchased for cash BDT 150,000, loan proceeds BDT 200,000, principal repaid BDT 60,000 and opening cash BDT 40,000. Ignore other flows. Reconcile closing cash.

Investing cash flow is negative BDT 150,000. Financing cash flow is BDT 140,000 (200,000 - 60,000). Net cash increase = 260,000 - 150,000 + 140,000 = BDT 250,000. Closing cash = 40,000 + 250,000 = BDT 290,000. Show borrowing separately from operating performance; none of the assumed loan proceeds is sales revenue.