Accounting Complete accounting cycle

Accounting Presentation Group members

The Accounting Information of System The Personnel, procedures, devices, and records used

by an organization to develop accounting information and communicate that information to decision makers

Accounting

information

The accounting

process

Decision makers

Economic activities

Actions (decisions)

Accounting “links” decision

makers with economic

activities and with the results of

their decisions.

Types of Accounting Information Financial

Providing information about the financial resources, obligations, and activities of an economic entity that is intended for use primarily by external decision makers – investors and creditors.

Managerial

Providing information that is intended primarily for use by internal management in decision making required to run the business.

return of investment The repayment to an investor of the amount originally invested in another enterprise.

Summarize and

communicate information to

decision makers.

Classify similar

transactions into useful

reports.

Interpret and record business

transactions.

Basic Functions of an Accounting System

Information Users

InvestorsCreditors ManagersOwnersCustomersEmployeesRegulatory agencies -SEC -IRS -EPA

Decision SupportCVP analysis Performance evaluationIncremental analysisBudgetingCapital allocationEarnings per shareRatio analysis

Information System

Cost & Revenue Determination

Job costingProcess costingABCSales

Assets & Liabilities

Plant and equipmentLoans & equityReceivables, payables & cash

Cash FlowsFrom operationsFrom financingFrom investing

Tax Preparation of income tax returns and anticipating the tax effects

of business transactions and structuring them in such a way as to minimize the income tax burden.

Basic Accounting Principle Business Entity Concept The accountant keeps all of the business transactions of a

sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities.

Money Measurment Concept

Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded.

Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For example, dollars from a 1960 transaction are combined (or shown with) dollars from a 2009 transaction.

The Cost Concept The widely used principle of accounting for assets at their original cost to the current owner.

Going Concern An assumption by accountants that a business will operate in the foreseeable future unless specific evidence suggests that this is not a reasonable assumption.

Materiality Concept The significance of an item should be considered when it is reported. An item is considered significant when it would affect the decision of a reasonable individual.

Consistency Concept It means that the company uses the same accounting

principles or rules from year to year.

The Accrual Concept Businesses are required to record and report revenue at the time it is earned and realized by the business, not when the cash for the revenue is received by the business. This method is known as accrual basis accounting. The purpose of this principle is to actually show what work has been completed and not what is to be done in the future.

Time-period Concept implies that the economic activities of an enterprise can be divided into artificial time periods and can be genarted on time like yearly

Conservatism Concept Assets and revenue should be stated at their lowest values on the other side liabilites and expenses should be stated at their highest value.

Cash Base Accounting Transactions are recorded when cash is received or paid out

Disclosure Concept The accounting records of a business must be disclosed so that judgment about the financial status of a business can be easily made.  However, the disclosure of accounting and financial information should not cause the business to accrue unreasonable expenses or cause erroneous opinions.

Matching Concept This principle allows for real time analysis of the expenses and revenues. Using this principle will show just how well the business has done financially and how effective it was.  Somewhat like the Accrual Principle, expenses in this case can only be recorded and reported when revenue is to which such

expenses are related was earned.

Revenue Recognition Concept Requires companies to record when revenue is realized or realizable and earned, not when cash is received. This way of accounting is called accrual basis accounting

Introduction to Financial StatementsThe piece of information send to investors to analyze the

condition of business Balance Sheet Describes where the enterprise stands at a specific date. Income Statement Describes results of company`s operations ( income and

expenses and as a result profit n loss ) for a particular period of time.

Cash flow statement Describes how cash position of a company changed over a

particular period of time.

Balance Sheet

The balance sheet reports the assets, liabilities, and shareholder equity of the company. It is constructed using the following information:

Balances of all asset accounts such cash, accounts receivable, etc.

Balances of all liability accounts such as accounts payable, notes, etc.

Capital stock balance Retained earnings, obtained from the statement

of retained earnings

$12,000Total Assets

$ 1,200 Equipment and Fixtures (less Depreciation)

Fixed assets

$10,800Total Current Assets

$ 1,200 Rent

Prepaid Expenses

$ 5,500 Merchandise Inventory

$ 1,600 Accounts Receivable

$ 2,200 Cash in Bank

$ 300 Cash On Hand

Current Assets

$$Assets

Balance Sheet Format

$12,000Total Liabilities and Net Worth

$ 2,700Net Worth*

$ 9,300Total Liabilities

$ 5,500 Notes Payable, 1998

$Long-term liabilities

$ 3,800Total Current Liabilities

$ 500 Accrued Payroll Expenses

$ 2,200 Notes Payable, Bank

$ 1,100 Accounts Payable

Current Liabilities

$$Liabilities

Income Statement

The income statement reports revenues, expenses, and the resulting net income. It is prepared by transferring the following ledger account balances, taking into account any adjusting entries that have been or will be made:

Revenue Expenses Capital gains or losses

Income Statement FormatOperating

Net Revenue Sale of goods, merchandise, or services Less Discounts and Allowances

Expenses Cost of Goods Sold

General and Administrative Expenses Selling Expenses

Non-Operating Other Revenues or gains

Sources other than primary business activities Other Expenses or Losses

Sources other than the primary business activities Irregular Items

Discontinued Operations Extraordinary items

Changes in Accounting Principle

Cash Flow Statement

The cash flow statement explains the reasons for changes in the cash balance, showing sources and uses of cash in the operating, financing, and investing activities of the firm. Because the cash flow statement is a cash-basis report, it cannot be derived directly from the ledger account balances of an accrual accounting system. Rather, it is derived by converting the accrual information to a cash-basis using one of the following two methods:

Direct method: cash flow information is derived by directly subtracting cash disbursements from cash receipts.

Indirect method: cash flow information is derived by adding or subtracting non-cash items from net income.

Cash Flow Statement Format

Cash flows from operating activities: Cash received from customers xxxxxxxx Deduct: Cash payments for merchandise: xxxxxx Cash payments for Op. Exp. xxxxxx Cash payments for interest xxxxxx Cash payments for income taxes xxxxxx xxxxxxxx Net cash flow from operating activities: xxxxxx

Statement of Owner's Equity The Statement of Owner's Equity shows the change in

owner's equity during a given time period. It lists the owner equity balance at the beginning of the period, additions and subtractions to the balance, and the ending balance. Additions come from owner investments and income; subtractions from owner withdrawals and losses.

Format

$12,000.0Joe Smith, capital, June 30, 2008

2,000.00Withdrawals during the month

14,000.00

3,000.00Net income

1,000.00Investment during the month

$10,000.0Joe Smith, capital, June 1, 2008

Your Company NameStatement of Owner's Equity

For Month Ended June 30, 2008

Double Entry System Accounting information is based on the double entry

system. An account is an arrangement of transactions affecting a

given asset, liability or other element. Under this system, the two-sided effect of a transaction is

recorded in the appropriate accounts. The recording is done by means of a “debit-credit”

convention (set of rules) applying to all accounts.

Types of Accounts Assets Expense Darwing Revenue Capital Liability

The system records the two-sided effect of transactions Transaction Two-sided effect

Bought furniture for cash Decrease in one asset

Increase in another asset

Took a loan in cash Increase in an asset

Increase in a liability

The Account And the Debit Credit Convention

Asset

Expense

Debit

Debit

Revenue

Liability Equity

Credit Credit

Credit

Normal balance in account

Balance Increases Debit entries in an asset

account Debit entries in an expense

account Credit entries in a liability

account Credit entries in Equity

account Credit entries in a revenue

account

Balance Decreases Credit entries in an asset

account Credit entries in an expense

account Debit entries in a liability

account Debit entries in Equity

account Debit entries in a revenue

account

The Accounting Equation Assets = Liabilities + Owners’ Equity It is relatively easy to understand the formula and how it

works. The worth of a business's liabilities is the total amount of money or resources the business paid out in order to acquire its assets. The worth of a business's assets is the total amount of money or products in possession of the business owner. The accounting equation is represented: worth of assets - worth of liabilities = total equity. The equation must be in balance after every recorded transaction in the system.

For an example of the accounting equation let us consider ABC Cellular Phones. Last month the following transactions took place:

the owner invested $3,000 into his business paid $500 for his bills for the month received $1,000 from customer for purchases. The equation would look like this: assets ($3,000 + $1,000) - liabilities ($500) = $3,500 total

equity.

Accounting Cycle Identify the transaction Analyze the transaction Record the transaction to a journal Record the transaction to the general ledger Perform a trial balance Prepare adjustments. Perform trial balance with adjustments. Prepare financial statements Close the accounts Post closing trial balance

Begin End

Accounting year

Originatingjournalentries

Post toLedger

UnadjustedTrial

Balance

AdjustingJournalEntries

FinancialStatements

ClosingEntriesStart over

7

6

5

42

8

AdjustedTrial

Balance

3

Post-Closing Trial (optional)

9

Accounting Cycle

General Journal After a transaction occurs and a source document is

generated, the transaction is analyzed and entries are made in the general journal. After a transaction occurs and a source document is generated, the transaction is analyzed and entries are made in the general journal.

Format of a General Journal Entry

Date Accounts Debit Credit

mm/dd account to be debited xxxx.xx

account to be credited xxxx.xx

Compound Journal Entries

Date Accounts Debit Credit

mm/dd account to be debited xxxx.xx

account to be credited xxxx.xx

account to be credited xxxx.xx

Sometimes, more than two accounts are affected by a transaction so more than two lines are required. Such a journal entry is know as a compound journal entry and takes the following format:

Date Account Names & Explanation Debit Credit

9/1 Cash 7500

Capital 7500

Owner contributes $7500 in cashto capitalize the business.

9/8 Bike Parts 2500

Accounts Payable 2500

Purchased $2500 in bike partson account, payable in 30 days.

9/17 Cash 400

Accounts Receivable 700

Revenue 1100

Repaired bikes for $1100; collected $400cash; billed customers for the balance.

Ledger

The entire group of accounts is kept together in an accounting record

called a ledger.

Cash

Accounts Payable

Capital Stock

Accounts are individual records showing increases

and decreases.

The Use of Accounts

Increases are recorded on one side of the

T-account, and decreases are

recorded on the other side.

Left or

Debit Side

Right or

Credit Side

Title of Account

Posting Journal Entries to the Ledger Accounts

GENERAL JOURNAL

Date Account Titles and ExplanationPRDebit Credit

2003May 1 Cash 8,000

Capital Stock 8,000Owners invest cash in the business.General Ledger

CashDate Debit Credit Balance2003

May 1 8,000 8,000

Ledger Cash Account

General LedgerCash

Date Debit Credit Balance2003

May 1 8,000 8,000

Trial Balance The trial balance is the process of totalling the debits

and credits in your chart of accounts, then making sure that the sum of all debits equals the sum of all credits -- that the two amounts balance.

10600

10600

 1275Expenses

1100 Revenue

7500 Capital

2000 Accounts Payable

 2225Parts Inventory

 275Accounts Receivable

 6825Cash

   Credits   DebitsAccount Title

Adjusting Journal Entries Adjusting entries are needed for: * recognizing revenue

for the period * matching expenses with revenues they

helped generate.

Adjusting entries are required every time financial statements are prepared.

Adjusting Entries: Recognizing Revenue

AdjustingUnearned Revenue

Recording Accrued Revenue

Revenues receivedin cash

andrecorded as liabilities

Revenues earnedbut not yet recordedin books

Adjusting Unearned RevenueOn Dec 1, 2003, Mr. Landlord receives $800 as advance payment toward rent. The rental term begins on December 1, 2003, with monthly rental of $400.

Date Account Dr Cr

Dec 01, 2003 Cash 800 Unearned Rent Revenue 800

Adjusting Entry:Dec 31, 2003 Unearned Revenue 400

Rent Revenue 400

Adjusting Accrued Revenue

On Dec 1, 2003, Mr. Lender makes a loan of $8,000 to Mr. Borrower. The loan term is 3 months. The interestrate is 12% per year. Lender receives a note.

Date Account Dr Cr

Dec 01, 2003 Note Receivable 8,000 Cash 8,000

Adjusting Entry:Dec 31, 2003 Interest Receivable 80

Interest Revenue 80 (Accrue one month’s interest)

* 8,000 * 12% * 1/12 = 80

AdjustingPrepayments for

Expenses

Recording Accrued Expense

Prepayments madein cash

andrecorded as assets

Expense incurredbut not yet recordedin books

Adjusting Entries Matching Expenses

Adjusting PrePaymentsOn Dec 1, 2003, Mr. Tenant pays $800 as advance payment toward rent. The rental term begins on December 1, 2003, with monthly rental of $400.

Date Account Dr Cr

Dec 01, 2003 Prepaid Rent 800 Cash 800

Adjusting Entry:Dec 31, 2003 Rent Expense 400

Prepaid Rent 400

Adjusting Accrued ExpensesOn Dec 1, 2003, Mr. Borrower takes a loan of $8,000 from Mr. Lender. The loan term is 3 months. The interest rate is 12% per year. Lender receives a note for the amount.

Date Account Dr Cr

Dec 01, 2003 Cash 8,000 Note Payable 8,000

Adjusting Entry:Dec 31, 2003 Interest Expense 80

Interest Payable 80 (Accrue one month’s interest)

*8,000 * 12% * 1/12 = 80

Amber Company bought supplies costing $5,600 on January 1, 2004. On January 31, supplies on hand were $4,200.

Record supplies expense for January, 2004.

Amber debits all purchases of supplies to theappropriate asset account.

Original entry: Supplies 5,600

Cash 5,600

Addjusting Entries Supplies (1 of 2)

Account Dr Cr

Supplies Expense $1,400 Supplies $1,400

Pur: $5,600End: ($4,200)

Expense: $1,400

$4,200

Supplies Supplies Expense

$5,600 $1,400 $1,400

Addjusting Entries Supplies Expense (2 of 2)

Mabel Company has the following information:

1/1/2003: Truck purchased, $21,500Salvage value end of four years, $1,500

Depreciation method: straight line

Show necessary accounts and adjusting journalentries for 2003 and 2004.

**($21,500 - $1,500)/4 = $5,000 per year

Addjusting Entries depreciation Expense (1 of 2)

2003

Dep Expense

Acc Deprecn

Truck

21,500

5,000

5,000

2004

Dep Expense

Acc Deprecn

Truck

21,500

10,000

5,000 Dep Exp 5,000 Acc Dep 5,000

Adjusting Entry

Book value=

$11,500

2003 & 2004

Adjusting Entries Deprecaiton Expense (2 of 2)

Adjusting Entries Thornton Company pays its employees on

a weekly basis, the week after the work week.

It owed $3,400 in salaries for the last work week in December.

The payment was made on January 3 of the following year.

Adjusting Entries Dec 31 (current year):

Dr CrSalaries Expense $3,400Salaries Payable $3,400

January 03 (following year):Salaries Payable $3,400Cash $3,400

Closing entries are made to close all nominal accounts (revenue and expense accounts) for the year.

Real (or Permanent) accounts (balance sheet accounts) are not closed.

Dividend account is closed to Retained Earnings account.

Closing Entries

Closing EntriesThe following closing entries are made (assuming the

company had net income):

Income Summary Account $Expense Accounts (Individually) $

Revenue Accounts (Individually) $Income Summary Account $

Income Summary Account $Retained Earnings $

Retained Earnings Account $Dividend Account $

Dividends

Ret. Earnings

Revenue

Income Summary

Expense

4 3

21

Scheme of closing entries

Closing Entries Preiodic Inventory system

In a periodic inventory system, closing entries are made to record cost of goods sold and ending inventory.

In a perpetual inventory system, such entries are not required.

Intell Company has the following balances on December 31, 2003 (see table).

The company uses a periodic inventory system.

Inventory count on December 31, 2003 was $62,000.

Purchases (gross)

$400,000

Purchase Returns

$27,000

Freight In $12,000

Inventory (1/1/2003)

$46,000

Account Dr Cr

Cost of Goods Sold (plug figure) $ 369,000Inventory (Ending balance) $ 62,000Purchases Returns $ 27,000 Purchases (Gross) $ 400,000 Freight-in $ 12,000 Inventory (Beginning balance) $ 46,000

Computation of Cost of Goods Sold (Periodic)

Beginning Inventory $46,000 Purchases $400,000 Purchase Returns 27,000 Net Purchases 373,000 Plus: Freight In 12,000 Cost of goods purchases 385,000 Cost of goods available 431,000 Less: Ending Inventory 62,000 Cost of Goods Sold $369,000

Depreciation Defination Depreciation is the allocation of the tangible plant

asset to expense in the periods in which services are received from the asset.

The basic purpose of depreciation is to achieve the matching principle. That is, to offset the revenue of an accounting period with the costs of the good and services being consumed in the effort to generate that revenue

Causes of deprecationThere are two main causes of depreciation

Physical deterioration Physical deterioration of plant asset results from

use, as well as from exposure to sun , wind , and other climatic factors. When the plant asset is carefully maintained, it is not uncommon for the owner to claim that the asset as good as new . Such statement are not literally true . Although a good policy may greatly lengthen the useful life of the machine , every machine eventually reaches the point at which it must be discarded in brief the making of repair does not lessen the need for recognition of depreciation.

Obsolescence The term obsolescence means the process of becoming

out of date or obsolete. An aeroplane , for example , may become obsolete even though it is in excellent physical condition; it become obsolete because better plans of superior designs and performance have became available. The usefulness of plant assets may also be reduced because the rapid growth of a company renders such assets inadequate. Inadequacy of a plant asset may necessitate replacement with the larger unit even though the asset is in good physical condition. Obsolescence and inadequacy are often closely associated ; both relate to the opportunity for economical and efficient use of an asset rather then to its physical condition.

Depreciation process Deprecation is a process of cost allocation , not a process of

valuation. Accounting records do not attempt to show the current market values of plant assets .the market value of a building ,for example , may increase during some accounting periods with in the building useful life the recognition of deprecation expense continuous, how ever, without regard to such temporary increase in market value. Accountants recognize that the building will render useful services only for a limited no of years , and that the full cost of the building should be systematically allocated to expense during these years.

The Concept of DepreciationThe portion of an asset’s utility that is used up must be

expensed in the period used.

Cash (credit)

Fixed Asset (debit)

On date when initial payment is made . . .

The asset’s usefulness is

partially consumed during the

period. At end of period . . .

Accumulated Depreciation

(credit)

Depreciation Expense (debit)

Accumulated depreciation Accumulated depreciation is a contra asset account

representing that portion of the assets cost that has already been allocated to expense

Methods of computing depreciationThere are several alternative methods of computing

depreciation Straight line method

The simplest and most widely used method of computing depreciation is straight line method. Under this method equal portion of the assets cost is recognized as depreciation expense in each period of asset’s useful life.

Unit-of-output method For certain kind of assets the more equitable

allocation of the cost can be obtain by dividing the cost by the estimated units of output rather then by the estimated years of the useful life

Accelerated deprecation methods The term accelerated depreciation means recognition of

relatively large amounts of depreciation early years of use and reduced amount in the later years.

Sum of years digits methods Another form of accelerated depreciation is the sum-

of-the-years-digits methods, sometimes called SYD. In this method, the depreciation rate is stated as a fraction, which get smaller every year. These “shrinking fractions” determine the percentage of the asset’s depreciable account charged to depreciable expense every year.

Fixed-percentage-of-declining-balance method The most widely used form of accelerated depreciation

is the fixed-percentage –of-declining-balance method. The method involves computing and accelerated depreciation rate which is a specified percentage of the straight-line depreciation rate. It is computed each year by applying this accelerated depreciation rate to the remaining book value

revenues Increases in the enterprise’s assets as a result of profit oriented ‑

activities.

expenses

Past, present, or future reductions in cash required to generate revenues.

financial statement A declaration of information believed to be true communicated in monetary terms.

Assets - Anything that a business owns that has monetary value.

current Assets - Cash and other assets readily converted into cash. Includes accounts receivable, inventory, and prepaid expenses.

Fixed Assets - Also called long-term assets with a relatively long life that are used in the production of goods and services, rather than being for resale.

Liabilities - Debts of the business. Current Liabilities - The debts of a company

which are due and payable within the next 12 months.

Long-Term Liabilities - Debts of a company due after a period of 12 months or longer.

Net Worth - The business owner's equity in a company as represented by the difference between assets and liabilities.

Owners' Equity - See Net Worth. Working Capital - Current Assets minus Current

Liabilities.