Pre-MBA Accounting Primer Template

Accounting equation, debits and credits, accruals, adjusting entries, three statements and links, full worked company, IFRS 18 from 2027, self-test

MBA・ビジネススクールフルIASB Conceptual Framework (2018); IFRS 18 (2024, effective 2027); IAS 7; IFRS 15pre accounting primer math更新 2026/10/28

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使い方: Use it before a first-year financial accounting course to learn double entry and how the three statements link. Work the Northfield Trail Rentals example by hand first, then Worked example B and Exercise C. The main pitfall is confusing profit with cash or treating deposits as revenue.

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Pre-MBA Accounting Primer: [Your name and start date]

A primer in financial accounting for admitted and prospective MBA students, especially those with no business or finance degree. It takes you from the accounting equation through debits and credits, accrual accounting and adjusting entries to the three financial statements and how they link, and then through one complete worked example: a small fictional business whose journal, trial balance, income statement, balance sheet and cash flow statement are all computed and all balance. It ends with the presentation changes IFRS 18 brings from 2027, a half-solved example, an exercise, common mistakes and a self-test with an answer key. The aim is that you can read a set of statements and follow a first-year financial accounting course from the first session. Source basis: the IASB Conceptual Framework for Financial Reporting (2018), IFRS 18 Presentation and Disclosure in Financial Statements (issued April 2024), IAS 7 Statement of Cash Flows and IFRS 15 Revenue from Contracts with Customers, explained in original words; standard numbers and concept names only. Replace every [bracketed] value and every row marked Example when you reuse the worksheets. This is a learning aid, not accounting or tax advice.

Document control

Field	Value
Learner	[Your name]
Programme and start date	[School A, full-time MBA, YYYY-MM-DD]
Prior accounting background	[None / one undergraduate course / professional]
Accounting framework studied	IFRS Accounting Standards, with US GAAP differences noted
Started	YYYY-MM-DD
Completed	YYYY-MM-DD
Reviewed by	[Mentor, second-year student or study partner]
Version	[0.1]

Why accounting comes first

Accounting is the language every other MBA core course speaks. Corporate finance starts from cash flows that are derived from accounting statements; valuation uses margins, working capital and capital expenditure; strategy cases compare profitability across rivals; marketing and operations decisions are judged by their effect on contribution and inventory. A first-year financial accounting course usually moves fast: the equation and the statements in the first week, revenue recognition, inventory, long-lived assets, leases, debt, equity and the cash flow statement in the following weeks, then ratio analysis and earnings quality. Students who already handle the basics in this primer can spend that time on judgement, which is where cases and exams are won.

Financial accounting reports to outsiders (investors, lenders) under a standard set of rules: IFRS Accounting Standards in most of the world, US GAAP in the United States. Managerial accounting (costing, budgeting, performance measurement for insiders) is a separate core course, previewed in mba/mba-cvp-breakeven-card and mba/mba-relevant-costs-card.

The accounting equation

The balance sheet rests on one identity:

\text{Assets} = \text{Liabilities} + \text{Equity}

Term	Meaning in plain words	Examples
Asset	A present economic resource the entity controls as a result of past events (Conceptual Framework 2018)	Cash, receivables, inventory, equipment, prepaid expenses
Liability	A present obligation to transfer an economic resource as a result of past events	Payables, accrued wages, loans, deferred revenue, tax payable
Equity	The residual interest in the assets after deducting all liabilities	Share capital, retained earnings
Income	Increases in assets or decreases in liabilities that increase equity, other than contributions from owners	Revenue
Expenses	Decreases in assets or increases in liabilities that decrease equity, other than distributions to owners	Cost of sales, wages, depreciation, interest, tax

Equity grows in only two ways (owners put money in, or the business earns profit) and shrinks in two ways (losses, or distributions such as dividends). That gives the expanded equation, which explains why the income statement and the balance sheet must agree:

\text{Assets} = \text{Liabilities} + \text{Share capital} + \text{Opening retained earnings} + \text{Income} - \text{Expenses} - \text{Dividends}

Each transaction affects at least two items. Buying inventory for cash swaps one asset for another; buying it on credit raises an asset and a liability together; paying wages lowers cash and lowers equity through an expense. The equation never breaks, which is the logic behind double entry.

Debits and credits

Double-entry bookkeeping, described in print by Luca Pacioli in 1494, records each transaction as at least one debit and at least one credit of equal total. "Debit" and "credit" are positions (left and right of an account), not good or bad news.

Account type	Increase with	Decrease with	Normal balance
Assets	Debit	Credit	Debit
Expenses	Debit	Credit	Debit
Dividends (distributions)	Debit	Credit	Debit
Liabilities	Credit	Debit	Credit
Equity (share capital, retained earnings)	Credit	Debit	Credit
Income (revenue)	Credit	Debit	Credit

A common memory aid is "DEAD CLIC": Debits increase Expenses, Assets and Dividends; Credits increase Liabilities, Income and Capital. Expenses carry debit balances because they reduce equity, which is a credit-balance account.

Three tools follow from the table:

The journal: each transaction in date order, debits listed first, credits indented or second, with a short description.
The ledger (T-accounts): one account per item, debits on the left, credits on the right, so you can read the balance at any time.
The trial balance: a list of every account balance. Total debits must equal total credits. A balanced trial balance proves the arithmetic of double entry, not that the entries are right: posting a sale to the wrong revenue account, or omitting a transaction entirely, still balances.

Accrual accounting and adjusting entries

Under accrual accounting, income is recognised when it is earned and expenses when they are incurred, whatever the timing of cash. IFRS 15 frames revenue recognition in five steps: identify the contract, identify the performance obligations, determine the transaction price, allocate it to the obligations, and recognise revenue when (or as) each obligation is satisfied. Expenses follow the resources used: inventory becomes cost of sales when the goods are sold, equipment becomes depreciation over its useful life, insurance becomes an expense month by month.

At the end of each period, adjusting entries align the records with that principle. There are four families:

Family	Cash moves	Recognition	Adjusting entry at period end	Example
Prepaid expense (deferral)	Before	Expense later	Dr Expense, Cr Prepaid asset	Insurance paid for 12 months
Deferred revenue (deferral)	Before	Revenue later	Dr Deferred revenue, Cr Revenue	Customer deposits for future rentals
Accrued expense (accrual)	After	Expense now	Dr Expense, Cr Accrued liability	Wages earned but unpaid, interest owed
Accrued revenue (accrual)	After	Revenue now	Dr Receivable, Cr Revenue	Service delivered, invoice not yet sent

Depreciation is a fifth routine adjustment: the cost of a long-lived asset less its residual value, spread over its useful life. Straight-line depreciation is

D = \frac{C - R}{n}

Symbol	Meaning
$D$	Depreciation per year
$C$	Cost of the asset
$R$	Residual (salvage) value at the end of its useful life
$n$	Useful life in years

Depreciation is credited to accumulated depreciation, a contra-asset account, so the balance sheet shows the original cost and the amount used up separately. In Excel, =SLN(cost, salvage, life) gives the same figure.

The three statements and how they link

Statement	Question it answers	Time frame	Bottom line
Income statement (statement of profit or loss)	How much profit did the business earn?	A period	Net income (profit for the period)
Balance sheet (statement of financial position)	What does it own and owe, and what belongs to the owners?	A point in time	Assets equal liabilities plus equity
Cash flow statement	Where did cash come from and where did it go?	A period	Net change in cash
Statement of changes in equity	How did each equity component move?	A period	Closing equity

The links:

Net income to retained earnings. Closing retained earnings equal opening retained earnings plus net income less dividends.
Net income (or operating profit) to the cash flow statement. The indirect method starts from profit and adjusts for non-cash items (depreciation) and for changes in working capital (receivables, inventory, payables, accruals).
Balance sheet changes to the cash flow statement. Every change in a balance sheet line other than cash appears somewhere in the cash flow statement (or is non-cash and disclosed separately).
Cash flow statement to the balance sheet. Opening cash plus the net change in cash equals the cash line on the closing balance sheet.

Cash flows are classified as operating (the main revenue-producing activities), investing (acquisition and disposal of long-term assets) and financing (changes in equity and borrowings), following IAS 7. Under the IAS 7 text in force until 2026, interest and dividends paid or received may be classified in more than one way; the IFRS 18 amendments remove most of those choices from 2027 (see the IFRS 18 section below).

Worked example A (fully solved): Northfield Trail Rentals, year 1

Situation (Example, fictional). Northfield Outdoor Co. sets up Northfield Trail Rentals as a separate company that rents and sells trail gear. Its first financial year runs 1 January to 31 December. Amounts are in USD thousands. The tax rate is 25%, payable after year end.

Ref	Transaction during the year
J01	Owners invest 200 in cash in exchange for shares
J02	The company borrows 100 from a bank at 6% a year; interest is paid once a year, the first payment due next January
J03	It buys rental equipment for 120 in cash (useful life 5 years, no residual value)
J04	On 1 October it pays 12 for 12 months of insurance
J05	It buys inventory for resale for 300 on credit
J06	It pays suppliers 250
J07	It sells goods for 500: 380 in cash and 120 on credit; the goods sold had cost 260
J08	Customers pay 90 of the receivables
J09	Customers pay 20 of deposits for rentals to be delivered later
J10	It pays wages of 90
J11	It pays other operating expenses of 40
J12	It pays a dividend of 10

Year-end information. Depreciation for a full year. Insurance used for 3 of the 12 months. Wages of 5 earned in December, paid in January. Interest for the year owed but unpaid. Rentals worth 8 delivered out of the deposits.

Journal

Ref	Account debited	Dr	Account credited	Cr
J01	Cash	200	Share capital	200
J02	Cash	100	Bank loan	100
J03	Equipment	120	Cash	120
J04	Prepaid insurance	12	Cash	12
J05	Inventory	300	Accounts payable	300
J06	Accounts payable	250	Cash	250
J07a	Cash 380, Accounts receivable 120	500	Revenue	500
J07b	Cost of goods sold	260	Inventory	260
J08	Cash	90	Accounts receivable	90
J09	Cash	20	Deferred revenue	20
J10	Wages expense	90	Cash	90
J11	Other operating expenses	40	Cash	40
J12	Dividends	10	Cash	10
A01	Depreciation expense ( $120/5$ )	24	Accumulated depreciation	24
A02	Insurance expense ( $12 \times 3/12$ )	3	Prepaid insurance	3
A03	Wages expense	5	Accrued wages	5
A04	Interest expense ( $100 \times 6\%$ )	6	Interest payable	6
A05	Deferred revenue	8	Revenue	8
A06	Income tax expense ( $25\% \times 80$ )	20	Income tax payable	20

The unadjusted trial balance (after J01 to J12) totals 870 on each side. After the adjusting entries A01 to A05 it totals 905, and after the tax entry A06 it totals 925 on each side.

Adjusted trial balance

Account	Debit	Credit
Cash	268
Accounts receivable	30
Inventory	40
Prepaid insurance	9
Equipment	120
Accumulated depreciation		24
Accounts payable		50
Accrued wages		5
Interest payable		6
Deferred revenue		12
Income tax payable		20
Bank loan		100
Share capital		200
Dividends	10
Revenue		508
Cost of goods sold	260
Wages expense	95
Insurance expense	3
Other operating expenses	40
Depreciation expense	24
Interest expense	6
Income tax expense	20
Total	925	925

Cash of 268 is the sum of every cash line: $200+100-120-12-250+380+90+20-90-40-10=268$ .

Income statement for year 1

Line	Amount	Note
Revenue	508	500 sales plus 8 rentals earned from deposits
Cost of goods sold	(260)
Gross profit	248	Gross margin 48.8%
Wages	(95)	90 paid plus 5 accrued
Insurance	(3)	3 of 12 months
Other operating expenses	(40)
Depreciation	(24)
Operating profit	86	Operating margin 16.9%
Interest expense	(6)
Profit before tax	80
Income tax expense	(20)	25%
Net income	60	Net margin 11.8%

Balance sheet at 31 December, year 1

Assets	Amount	Liabilities and equity	Amount
Cash	268	Accounts payable	50
Accounts receivable	30	Accrued wages	5
Inventory	40	Interest payable	6
Prepaid insurance	9	Deferred revenue	12
Current assets	347	Income tax payable	20
Equipment at cost	120	Current liabilities	93
Accumulated depreciation	(24)	Bank loan (non-current)	100
Equipment, net	96	Total liabilities	193
		Share capital	200
		Retained earnings ( $0+60-10$ )	50
		Total equity	250
Total assets	443	Total liabilities and equity	443

Cash flow statement for year 1 (indirect method, starting from net income)

Line	Amount
Net income	60
Add back depreciation	24
Increase in accounts receivable	(30)
Increase in inventory	(40)
Increase in prepaid insurance	(9)
Increase in accounts payable	50
Increase in accrued wages	5
Increase in interest payable	6
Increase in deferred revenue	12
Increase in income tax payable	20
Cash flow from operating activities	98
Purchase of equipment	(120)
Cash flow from investing activities	(120)
Shares issued	200
Bank loan received	100
Dividend paid	(10)
Cash flow from financing activities	290
Net change in cash	268
Opening cash	0
Closing cash (equals the balance sheet)	268

The direct method gives the same operating figure from the cash lines themselves: receipts from customers $380+90+20=490$ , less payments to suppliers 250, wages 90 and other expenses including insurance $40+12=52$ , gives 98.

Link checks

Check	Calculation	Result
Balance sheet balances	$443 = 193 + 250$	Pass
Retained earnings roll forward	$0 + 60 - 10 = 50$	Pass
Cash flow ties to balance sheet	$0 + 98 - 120 + 290 = 268$	Pass
Equipment roll forward	$0 + 120 - 24 = 96$	Pass
Trial balance	Debits 925, credits 925	Pass

The working-capital lines in the cash flow statement show why profit and cash differ: profit was 60, but customers still owe 30, unsold inventory tied up 40, and insurance was prepaid; on the other side, suppliers, staff, the bank, customers with deposits and the tax authority are financing 93 of current liabilities.

The "Payables and accruals" bar combines the increases in accounts payable 50, accrued wages 5, interest payable 6, deferred revenue 12 and income tax payable 20, a total of 93. The bars add up: $60+24-30-40-9+93=98$ .

What changes with IFRS 18 from 2027

As of October 2026, IFRS 18 Presentation and Disclosure in Financial Statements, issued by the IASB in April 2024, replaces IAS 1 for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted and comparative information restated (check the standard at ifrs.org before you rely on the details). It changes presentation, not recognition or measurement: the amounts in Worked example A stay the same, but the income statement is organised differently. US GAAP is not affected.

The main changes for a reader:

Categories in the statement of profit or loss. Income and expenses are classified into operating, investing and financing categories (plus income taxes and discontinued operations). For a company whose main business is not investing or lending, the operating category is effectively the default for items that do not belong elsewhere.
Two required subtotals: operating profit, and profit before financing and income taxes.
Management-defined performance measures (subtotals of income and expenses that management uses in public communication, such as an "adjusted operating profit") are disclosed in one note with a reconciliation to the closest IFRS subtotal.
Aggregation and disaggregation principles for grouping items in the statements and notes, including guidance on expenses presented by nature or by function.
Consequential amendments to IAS 7: the indirect method starts from operating profit; for most companies (those without a specified main business of investing or providing finance) interest paid is classified as financing and interest and dividends received as investing, removing the earlier choices.

Applied to Worked example A, the IFRS 18 layout reads: operating category (revenue 508 down to operating profit 86); investing category (none); profit before financing and income taxes 86; financing category (interest expense 6); profit before tax 80; income tax 20; profit 60. Under the amended IAS 7, the operating section starts from operating profit 86, adds depreciation 24 and the same working-capital changes as above excluding interest payable and income tax payable (whose expenses sit below operating profit and were not yet paid): $86+24-30-40-9+50+5+12=98$ . The total is unchanged; only the starting point and the classification of interest and tax cash flows move.

For the transition work a company does, see finance/ifrs-18-transition-plan; for statement analysis under the new subtotals, mba/mba-three-statements-card and mba/mba-ratio-analysis-card.

Worked example B (half solved): year-end adjustments

Situation (Example). Another Northfield unit closes its books on 31 December. Before adjustments, its profit before tax is 140 (USD thousands). Five items need adjusting.

#	Fact	Adjusting entry	Effect on profit before tax
1	Insurance of 24 for 12 months paid on 1 March, debited to prepaid insurance	Dr Insurance expense 20, Cr Prepaid insurance 20 ( $24 \times 10/12$ ); 4 stays prepaid	-20
2	Delivery van bought 1 July for 60, life 4 years, residual value 4, straight-line	Dr Depreciation expense 7, Cr Accumulated depreciation 7 ( $(60-4)/4 \times 6/12$ )	-7
3	Bank loan of 80 at 7.5% taken on 1 May; interest paid annually in arrears	Dr [ ], Cr [ ] [ ]	[ ]
4	Customer deposits of 15 received in November and credited to deferred revenue; services worth 9 delivered by 31 December	Dr [ ], Cr [ ] [ ]	[ ]
5	December electricity of 1.2 invoiced in January	Dr [ ], Cr [ ] [ ]	[ ]
	Total effect		[ ]
	Adjusted profit before tax		[ ]

Then answer: (a) which of the five adjustments change cash this year, and (b) what is the Excel formula for item 2?

Exercise C (unsolved): a one-year kiosk

Situation (Example). A Northfield kiosk opens on 1 January (USD thousands). Owners invest 50 in cash for shares. The kiosk buys inventory of 70 for cash and sells goods for 90 in cash; the goods sold cost 54. It pays rent of 12 for the year. Staff earn wages of 10, of which 8 are paid during the year and 2 in January. Income tax is 25% of profit before tax, payable next year. No dividends, no fixed assets.

Prepare the income statement.
Prepare the closing balance sheet and show that it balances.
Prepare the cash flow statement (indirect method from net income) and reconcile it to closing cash.
The kiosk is profitable. Explain in two sentences why its cash flow from operations is what it is.

Common mistakes and misconceptions

"Debit means increase." It means left. Debits increase assets and expenses and decrease liabilities, equity and income.
Treating cash received as revenue. Deposits for future rentals are a liability (deferred revenue) until the service is delivered.
Expensing the whole purchase of equipment. A long-lived asset is capitalised and depreciated; only the portion used up in the period is an expense.
Forgetting accruals at year end. Unpaid wages, interest and utilities are expenses of the period in which they were incurred.
Including dividends in expenses. Dividends are distributions of equity; they reduce retained earnings, not profit.
Wrong sign on working capital. An increase in an asset (receivables, inventory) reduces operating cash flow; an increase in a liability (payables, accruals) increases it.
Adding back the wrong non-cash items. Depreciation is added back because it reduced profit without using cash; capital expenditure is an investing outflow, not part of the add-back.
Believing a balanced trial balance proves the books are right. It proves arithmetic only; omitted or misposted entries still balance.
Confusing profit with cash. Exercise C shows a profitable business with zero operating cash flow.
Assuming IFRS 18 changes the numbers. It changes presentation, subtotals and disclosures; recognition and measurement, and profit for the year, stay the same.

Self-test

Write the journal entry for buying inventory of 45 on credit and state its effect on the accounting equation.
Which accounts have normal debit balances: accounts payable, prepaid rent, revenue, dividends, accumulated depreciation, cost of goods sold?
A customer pays 12 in December for a 12-month subscription starting 1 December. How much revenue is recognised in December, and what is the liability at 31 December?
Equipment costs 90, residual value 10, life 8 years. What is annual straight-line depreciation and the Excel formula?
Net income is 40, depreciation 15, receivables rose by 10, inventory fell by 5, payables rose by 4. What is cash flow from operations?
Opening retained earnings 120, net income 35, dividends 12. What are closing retained earnings?
In Worked example A, why is the bank loan's interest of 6 an expense even though no interest was paid?
Name the two subtotals IFRS 18 requires in the statement of profit or loss, and the year it becomes effective.
Under IFRS 18 and the amended IAS 7, where does a manufacturing company classify interest paid in the cash flow statement?
A company pays a supplier 30 that it owed. What happens to assets, liabilities, equity and profit?

My notes and next steps

Item	Note
Hardest concepts	[Deferred revenue, indirect cash flow signs]
Revisit on	[YYYY-MM-DD]
Questions for the first class	[ ]
Next step	[mba/pre-mba-finance-primer, then mba/mba-three-statements-card]

Sources and further reading

IFRS Foundation. Conceptual Framework for Financial Reporting (2018). IFRS Foundation, London. ifrs.org.
IFRS Foundation. IFRS 18 Presentation and Disclosure in Financial Statements (issued April 2024, effective for annual periods beginning on or after 1 January 2027), ifrs.org, page checked 2026-10-28.
IFRS Foundation. IAS 7 Statement of Cash Flows (as amended by IFRS 18) and IFRS 15 Revenue from Contracts with Customers (2014). ifrs.org.
Pacioli, L. (1494). Summa de arithmetica, geometria, proportioni et proportionalita. Venice. (The first printed description of double-entry bookkeeping.)
Open resource: OpenStax, Principles of Accounting, Volume 1: Financial Accounting (CC BY-NC-SA 4.0), openstax.org.
Further reading (by name only): Libby, Libby and Hodge, Financial Accounting; Kieso, Weygandt and Warfield, Intermediate Accounting: IFRS Edition; Penman, Financial Statement Analysis and Security Valuation.
Related templates: mba/mba-three-statements-card, mba/mba-cash-flow-statement-card, mba/mba-ratio-analysis-card, finance/ifrs-18-transition-plan.

Answer key

Worked example B.

#	Adjusting entry	Effect
3	Dr Interest expense 4, Cr Interest payable 4 ( $80 \times 7.5\% \times 8/12$ )	-4
4	Dr Deferred revenue 9, Cr Revenue 9; 6 stays deferred	+9
5	Dr Electricity expense 1.2, Cr Accrued expenses 1.2	-1.2
	Total effect $-20-7-4+9-1.2$	-23.2
	Adjusted profit before tax $140-23.2$	116.8

(a) None. Adjusting entries never involve cash; the cash moved earlier (insurance, van, deposits) or will move later (interest, electricity). (b) =SLN(60,4,4)*6/12 returns 7.

Exercise C.

Income statement: revenue 90, cost of goods sold (54), gross profit 36, rent (12), wages (10), profit before tax 14, income tax (3.5), net income 10.5.
Balance sheet: cash $50-70+90-12-8=50$ , inventory $70-54=16$ , total assets 66. Wages payable 2, income tax payable 3.5, total liabilities 5.5; share capital 50, retained earnings 10.5, total equity 60.5; liabilities and equity 66.
Cash flow: net income 10.5, increase in inventory (16), increase in wages payable 2, increase in tax payable 3.5, cash flow from operations 0.0; investing 0; financing 50 (shares issued); net change 50, equal to closing cash.
All of the profit and the unpaid wages and tax (10.5 plus 5.5, a total of 16) are tied up in the 16 of unsold inventory, so operations generated no net cash. Profit measures what was earned; cash depends on when inventory, customers and suppliers are paid.

Self-test.

Dr Inventory 45, Cr Accounts payable 45. Assets rise by 45 and liabilities rise by 45; equity is unchanged.
Prepaid rent, dividends and cost of goods sold. Accounts payable, revenue and accumulated depreciation (a contra-asset) carry credit balances.
Revenue of 1 in December ( $12/12$ ); deferred revenue of 11 at 31 December.
$(90-10)/8=10$ a year; =SLN(90,10,8).
$40+15-10+5+4=54$ .
$120+35-12=143$ .
Interest accrues with time: the company used the bank's money for the whole year, so the cost belongs to this year (accrual principle). It is recorded as interest payable until paid.
Operating profit, and profit before financing and income taxes; annual periods beginning on or after 1 January 2027.
In financing activities (for an entity without a specified main business of providing finance or investing).
Assets (cash) fall by 30 and liabilities (payables) fall by 30; equity and profit are unchanged.

Revision history

Version	Date	Author	Change summary
0.1	YYYY-MM-DD	[Your name]	First pass through the primer
0.2	YYYY-MM-DD	[Your name]	Example: Redid Exercise C, added notes on deferred revenue

Standard and licence note

Based on the IASB Conceptual Framework for Financial Reporting (2018), IFRS 18 (issued 2024, effective for periods beginning on or after 1 January 2027), IAS 7 and IFRS 15, referred to by concept names and standard numbers only, with all explanations, examples and exercises written in original wording. No standard text is reproduced; check the current official text at ifrs.org before relying on any detail. Every figure in the worked examples was computed independently in Python. Northfield Outdoor Co., Northfield Trail Rentals and all figures are fictional. This template is not affiliated with or endorsed by the IFRS Foundation or any business school, and it is a learning aid, not accounting or tax advice. Template licence: MIT.