Pre-MBA Accounting Primer Template

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

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:

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:

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.

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:

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

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

The links:

1. Net income to retained earnings. Closing retained earnings equal opening retained earnings plus net income less dividends.
2. 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).
3. 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).
4. 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.

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

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

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

Balance sheet at 31 December, year 1

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

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

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.

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.

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

Common mistakes and misconceptions

1. "Debit means increase." It means left. Debits increase assets and expenses and decrease liabilities, equity and income.
2. Treating cash received as revenue. Deposits for future rentals are a liability (deferred revenue) until the service is delivered.
3. 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.
4. Forgetting accruals at year end. Unpaid wages, interest and utilities are expenses of the period in which they were incurred.
5. Including dividends in expenses. Dividends are distributions of equity; they reduce retained earnings, not profit.
6. 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.
7. 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.
8. Believing a balanced trial balance proves the books are right. It proves arithmetic only; omitted or misposted entries still balance.
9. Confusing profit with cash. Exercise C shows a profitable business with zero operating cash flow.
10. 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

1. Write the journal entry for buying inventory of 45 on credit and state its effect on the accounting equation.
2. Which accounts have normal debit balances: accounts payable, prepaid rent, revenue, dividends, accumulated depreciation, cost of goods sold?
3. 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?
4. Equipment costs 90, residual value 10, life 8 years. What is annual straight-line depreciation and the Excel formula?
5. Net income is 40, depreciation 15, receivables rose by 10, inventory fell by 5, payables rose by 4. What is cash flow from operations?
6. Opening retained earnings 120, net income 35, dividends 12. What are closing retained earnings?
7. In Worked example A, why is the bank loan's interest of 6 an expense even though no interest was paid?
8. Name the two subtotals IFRS 18 requires in the statement of profit or loss, and the year it becomes effective.
9. Under IFRS 18 and the amended IAS 7, where does a manufacturing company classify interest paid in the cash flow statement?
10. A company pays a supplier 30 that it owed. What happens to assets, liabilities, equity and profit?

My notes and next steps

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.

(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.

1. 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.
2. 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.
3. 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.
4. 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.

1. Dr Inventory 45, Cr Accounts payable 45. Assets rise by 45 and liabilities rise by 45; equity is unchanged.
2. Prepaid rent, dividends and cost of goods sold. Accounts payable, revenue and accumulated depreciation (a contra-asset) carry credit balances.
3. Revenue of 1 in December ($12/12$); deferred revenue of 11 at 31 December.
4. $(90-10)/8=10$ a year; =SLN(90,10,8).
5. $40+15-10+5+4=54$.
6. $120+35-12=143$.
7. 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.
8. Operating profit, and profit before financing and income taxes; annual periods beginning on or after 1 January 2027.
9. In financing activities (for an entity without a specified main business of providing finance or investing).
10. Assets (cash) fall by 30 and liabilities (payables) fall by 30; equity and profit are unchanged.

Revision history

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.