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Accounting Presentation

Group members

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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

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Accounting

information

The

accounting

process

Decision

makers

Economic

activities

Actions

(decisions)

Accounting

links decision

makers witheconomic

activities and

with the results of

their decisions.

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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.

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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.

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Summarize

and

communicate

information todecision

makers.

Classify

similar

transactions

into usefulreports.

Interpret

and record

business

transactions.

Basic Functions of an Accounting

System

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Information

Users

Investors

CreditorsManagers

Owners

Customers

Employees

Regulatory

agencies-SEC

-IRS

-EPA

Decision Support

CVP analysis

Performance

evaluationIncremental

analysis

Budgeting

Capital

allocation

Earnings pershare

Ratio analysis

Information System

Cost & RevenueDetermination

Job costing

Process costing

ABC

Sales

Assets &

Liabilities

Plant and

equipment

Loans & equityReceivables,

payables & cash

Cash Flows

From operations

From financing

From investing

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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.

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Basic Accounting Principle

Business Entity ConceptThe accountant keeps all of the business transactions of asole proprietorship separate from the business owner'spersonaltransactions. For legalpurposes, a soleproprietorship and its owner are considered to be oneentity, but for accounting purposes they are considered tobe two separate entities.

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Money Measurment ConceptEconomic activity is measured in U.S. dollars,and only transactions that can be expressed inU.S. dollars are recorded.

Because of this basic accounting principle, it isassumed that the dollar's purchasing power hasnot changed over time. As a result accountants

ignore the effect of inflation on recordedamounts. For example, dollars from a 1960transaction are combined (or shown with) dollarsfrom a 2009 transaction.

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The Cost ConceptThe widely used principle of accounting for assetsat their original cost to the current owner.

Going ConcernAn assumption by accountants that a businesswill operate in the foreseeable future unlessspecific evidence suggests that this is not a

reasonable assumption.

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Materiality ConceptThe significance of an item should be considered when it isreported. An item is considered significant when it wouldaffect the decision of a reasonable individual.

Consistency Concept

It means that the company uses the same accounting

principles or rules from year to year.

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The Accrual ConceptBusinesses are required to record and reportrevenue at the time it is earned and realized by

the business, not when the cash for the revenueis received by the business. This method isknown as accrual basis accounting. The purposeof this principle is to actually show what work hasbeen completed and not what is to be done in the

future.

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Time-period Conceptimplies that the economic activities of an enterprise can bedivided into artificial time periods and can be genarted ontime like yearly

Conservatism ConceptAssets and revenue should be stated at their lowest valueson the other side liabilites and expenses should be stated attheir highest value.

Cash Base AccountingTransactions are recorded when cash is receivedor paid out

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Disclosure ConceptThe 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 ConceptThis 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.

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Revenue Recognition ConceptRequires 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

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Introduction to Financial Statements

The piece of information send to investors to analyze thecondition of business

Balance Sheet

Describes where the enterprise stands at a specific date.

Income StatementDescribes results of company`s operations ( income andexpenses 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 aparticular period of time.

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Balance Sheet

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

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

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

Capital stock balance

Retained earnings, obtained from the statementof retained earnings

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Assets $$

Current Assets

Cash On Hand $ 300

Cash in Bank $ 2,200Accounts Receivable $ 1,600

Merchandise Inventory $ 5,500

Prepaid Expenses

Rent $ 1,200

Total Current Assets $10,800

Fixed assets

Equipment and Fixtures(less Depreciation)

$ 1,200

Total Assets $12,000

B

alance Sh

eet Format

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Liabilities $$

Current Liabilities

Accounts Payable $ 1,100

Notes Payable, Bank $ 2,200

Accrued Payroll Expenses $ 500

Total Current Liabilities $ 3,800

Long-term liabilities $

Notes Payable, 1998 $ 5,500

Total Liabilities $ 9,300

Net Worth* $ 2,700

Total Liabilities and Net Worth $12,000

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Income Statement

The income statement reports revenues,expenses, and the resulting net income. Itis prepared by transferring the following

ledger account balances, taking intoaccount any adjusting entries that havebeen or will be made:

Revenue

Expenses

Capital gains or losses

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Income Statement Format

OperatingNet Revenue

Sale of goods, merchandise, or servicesLess Discounts and Allowances

ExpensesCost of Goods Sold

General and Administrative ExpensesSelling Expenses

Non-OperatingOther Revenues or gains

Sources other than primary business activities

Other Expenses or LossesSources other than the primary business activities

Irregular ItemsDiscontinued Operations

Extraordinary itemsChanges in Accounting Principle

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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. xxxxxxCash payments for interest xxxxxx Cash payments for income taxes xxxxxx xxxxxxxx

Net cash flow from operatingactivities: xxxxxx

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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 theending balance. Additions come from owner

investments and income; subtractions from owner

withdrawals and losses.

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Format

Your Company NameStatement ofOwner's Equity

For Month Ended June 30, 2008

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

Investment during the month 1,000.00

Net income 3,000.00

14,000.00

Withdrawals during the month 2,000.00

Joe Smith, capital, June 30, 2008$12,000.

0

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Double Entry System

Accounting information is based on the double entry

system.

An accountis an arrangement of transactions affecting a

given asset, liability or other element.

Under this system, the two-sided effectof 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.

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Types of Accounts

Assets

Expense

Darwing

Revenue

Capital

Liability

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The system records the two-sided

effect of transactions

Transaction Two-sided effect

Bought furniture for cash Decrease in oneasset

Increase in anotherasset

Took a loan in cash Increase in an asset

Increase in a liability

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The Account And the Debit Credit

Convention

Asset

Expense

Debit

Debit

Revenue

Liability Equity

Credit Credit

Credit

Normal balance in account

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Balance Increases

Debit entries in an assetaccount

Debit entries in an expenseaccount

Credit entries in a liabilityaccount

Credit entries in Equityaccount

Credit entries in a revenueaccount

Balance Decreases

Credit entries in an asset

account

Credit entries in an expense

account

Debit entries in a liability

account

Debit entries in Equityaccount

Debit entries in a revenue

account

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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.

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For an example of the accounting equation let usconsider ABC Cellular Phones. Last month thefollowing 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 totalequity.

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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

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Begin End

Accounting year

Originatingjournalentries

Post to

Ledger

Unadjusted

TrialBalance

AdjustingJournal

Entries

FinancialStatements

ClosingEntriesStart over

7

6

5

42

8

AdjustedTrial

Balance

3

Post-ClosingTrial (optional)

9

Accounting Cycle

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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, thetransaction is analyzed and entries are made in the

general journal.

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Format of a General Journal EntryDate Accounts Debit Credit

mm/dd account to be debited xxxx.xx

account to be credited xxxx.xx

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Compound Journal Entries

Date Accounts Debit Credit

mm/dd account to be debited 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:

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DateAccount Names &Explanation

Debit Credit

9/1 Cash 7500

Capital 7500

Owner contributes$7500 in cashto capitalize thebusiness.

9/8 Bike Parts 2500

Accounts Payable 2500

Purchased $2500 inbike partson account, payablein 30 days.

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9/17 Cash 400

Accounts Receivable 700

Revenue 1100

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

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Ledger

The entire group of

accounts is kept togetherin an accounting record

called a ledger.

Cash

Accounts

Payable

CapitalStock

Accounts are individual

records showing increases

and decreases.

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The Use of Accounts

Increases are recorded

on one sid

e of theT-account, and

decreases are

recorded on the other

side.

Left

or

Debit

Side

Right

or

Credit

Side

Title ofAccount

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Posting Journal Entries to the Ledger

Accounts

GENERAL JOURNAL

Date Account Titles and Explanatio Debit Credit

2003ay 1 Cash 8,000

Capital Stock 8,000

Owners invest cash in the business.General Ledger

Cash

Date Debit Credit Balance

2003

May 1 8,000 8,000

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Ledger Cash Account

General Ledger

Cash

Date Debit Credit Balance2003

May 1 8,000 8,000

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Trial Balance

The trial balance is the process of totalling the debitsand 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.

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Account Title Debits Credits

Cash 6825

Accounts Receivable 275

Parts Inventory 2225

Accounts Payable 2000

Capital 7500

Revenue 1100

Expenses 1275

10600 10600

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Adjusting Journal Entries

Adjustingentriesareneeded for: * recognizingrevenue

for the period * matchingexpenseswith revenues they

helped generate.

Adjusting entries are required every timefinancial

statements are prepared.

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Adjusting Entries: RecognizingRevenue

Adjusting

Unearned Revenue

Recording

Accrued Revenue

Revenues receivedin cash

andrecorded as liabilities

Revenues earnedbut not yetrecordedin books

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Adjusting Unearned Revenue

On 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 800Unearned Rent Revenue 800

Adjusting Entry:Dec 31, 2003 Unearned Revenue 400

Rent Revenue 400

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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 interest

rate is 12% per year. Lender receives a note.

Date Account Dr Cr

Dec 01, 2003 Note Receivable 8,000

Cash 8,000

AdjustingEntry:Dec 31, 2003 Interest Receivable 80

Interest Revenue 80

(Accrue one months interest)

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

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AdjustingPrepayments for

Expenses

Recording

Accrued Expense

Prepayments made

in cashand

recorded as assets

Expense incurred

but not yetrecordedin books

Adjusting Entries Matching Expenses

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Adjusting PrePaymentsOn Dec 1, 2003, Mr. Tenant pays $800 asadvance payment toward rent. The rental termbegins on December 1, 2003, with monthly rentalof $400.

Date Account Dr Cr

Dec 01, 2003 Prepaid Rent 800

Cash 800

AdjustingEntry:

Dec 31, 2003 Rent Expense 400

Prepaid Rent 400

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Adjusting Accrued Expenses

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

Date Account Dr Cr

Dec 01, 2003 Cash 8,000

Note Payable 8,000

AdjustingEntry:

Dec 31, 2003 Interest Expense 80

Interest Payable 80

(Accrue one months interest)

*

8,000*

12%*

1/12 = 80

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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 of2)

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Account Dr Cr

Supplies Expense $1,400Supplies $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 of2)

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Mabel Company has the following information:

1/1/2003: Truck purchased, $21,500

Salvage 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 of2)

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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 5,000Acc Dep 5,000

Adjusting Entry

B

ook value=$11,500

2003 & 2004

Adjusting Entries Deprecaiton Expense

(2 of2)

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Adjusting Entries

Thornton Company pays its employees ona weekly basis, the week after the workweek.

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

The payment was made on January 3 ofthe following year.

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Adjusting Entries

Dec 31 (current year):

Dr Cr

Salaries Expense $3,400

Salaries Payable $3,400

January 03 (following year):

Salaries Payable $3,400Cash $3,400

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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

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Closing Entries

The following closing entries are made (assuming the

companyhad net income):

Income Summary Account $

Expense Accounts (Individually) $Revenue Accounts (Individually) $



Retained Earnings $

Retained Earnings Account $

Dividend Account $

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Dividends

Ret. Earnings

Revenue

Income Summary

Expense

4 3

21

Scheme of closing entries

Cl i i P i di

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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.

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Intell Company hasthe followingbalances on

December 31, 2003(see table).

The company uses aperiodic inventorysystem.

Inventory count onDecember 31, 2003was $62,000.

Purchases(gross)

$400,000

PurchaseReturns

$27,000

Freight In $12,000

Inventory(1/1/2003)

$46,000

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Account Dr Cr

Cost of Goods Sold (plug figure) $ 369,000Inventory (Ending balance) $ 62,000Purchases Returns $ 27,000

Purchases (Gross) $ 400,000Freight-in $ 12,000Inventory (Beginning balance) $ 46,000

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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

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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 thematching 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

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Causes of deprecation

There are two main causes of depreciation

Physical deteriorationPhysical deterioration of plant asset results from

use, as well as from exposure to sun , wind , and other climaticfactors. 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.

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ObsolescenceThe term obsolescence means the process of becoming

out of date or obsolete. An aeroplane , for example , maybecome obsolete even though it is in excellent physical

condition; it become obsolete because better plans of superiordesigns and performance have became available. The usefulnessof plant assets may also be reduced because the rapid growth ofa company renders such assets inadequate. Inadequacy of a plantasset may necessitate replacement with the larger unit eventhough the asset is in good physical condition. Obsolescence and

inadequacy are often closely associated ; both relate to theopportunity for economical and efficient use of an asset ratherthen to its physical condition.

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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 ofdeprecation 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 th

at th

e full cost of th

e building sh

ould besystematically allocated to expense during these years.

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The Concept ofDepreciation

The portion of an assets utility that is used up must be

expensed in the period used.

Cash

(credit)

FixedAsset

(debit)

On date

when initialpayment is

made . . .

The assetsusefulness is

partially

consumed

during the

period. At end of

period . . .

Accumulated

Depreciation

(credit)

Depreciation

Expense

(debit)

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Accumulated depreciation

Accumulated depreciation is a contra asset account

representing that portion of the assets cost that has

already been allocated to expense

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Methods of computing depreciation

There are several alternative methods of computing

depreciation

Straight line method

The simplest and most widely used method ofcomputing depreciation is straight line method. Under

this method equal portion of the assets cost is

recognized as depreciation expense in each period of

assets useful life.

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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 theestimated years of the useful life

Accelerated deprecation methods

The term accelerated depreciation means recognition ofrelatively large amounts of depreciation early years of

use and reduced amount in the later years.

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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 assets

depreciable account charged to depreciable expense

every year.

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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 accelerateddepreciation 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

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revenues

Increases in the enterprises assets as a result of profit-orientedactivities.

expenses

Past, present, or future reductions in cash required to generaterevenues.

financial statement A declaration of information believed to be true

communicated in monetary terms.

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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.

FixedAssets -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.

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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.

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