Accounting_Training_for_IT_v2.1

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Smart Accounting training for IT people in 60 minutes

by

Jim Pang

October 2011

@All rights reserved; Contact Jim Pang on +61-488-280280 if training required

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Agenda

• Quiz • Basic money matters • Balance Sheet (the myth) • The definitions • Sample accounts • The big rules • Basic accounting transactions – 14 types • Year end roll over• Financial statement• How much ? How good ?

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Goals

• Understand AP, FA, AR, ERP, Payroll, Bank accounting• Know exactly what accounts to use, what to Dr or Cr• Minimise / optimise your tax return (refund)• Read Westpac financial statement• Predict stock price of a company• How much you should pay to acquire a company (such as

Westpac !!)• Get a better job with higher pay (potentially!!)

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Quiz

Q1. Transfer $100 from Bank account A to Bank account B, what is the jounal entry ?

A) Bank A –> Dr $100; Bank B –> Cr $100B) Bank A –> Cr $100; Bank B –> Dr $100

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Quiz

Q1. Transfer $100 from Bank account A to Bank account B, what is the jounal entry ?

A) Bank A –> Dr $100; Bank B –> Cr $100B) Bank A –> Cr $100; Bank B –> Dr $100

Answer = B)

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Quiz

Q2. Pay employee wages $1000, what is the jounral entry ?

A) Wages Receivable -> Dr $1000; Cash -> Cr $1000B) Wages Payables -> Cr $1000; Cash -> Dr $1000C) Tax Deduction -> Cr $1000; Cash -> Dr $1000D) Salary Expense -> Dr 1000; Cash -> Cr $1000

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Quiz

Q2. Pay employee wages $1000, what is the jounral entry ?

A) Wages Receivable -> Dr $1000; Cash -> Cr $1000B) Wages Payables -> Cr $1000; Cash -> Dr $1000C) Tax Deduction -> Cr $1000; Cash -> Dr $1000D) Salary Expense -> Dr 1000; Cash -> Cr $1000

Answer = D)

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Quiz

Q3. Owned a machine with purchase cost of $10000, asset life is 10 yrs, what is the journal entry for second year depreciation ?

A) Asset Cost -> Cr $2000; Net Book Value -> Dr $2000B) Asset Cost -> Cr $1000; Net Book Value -> Cr $1000C) Tax Deduction -> Dr 1000; Asset Cost -> Cr 1000D) Tax Deduction -> Cr 1000; Asset Cost -> Dr 1000E) Accumulated Depreciation -> Cr 1000; Expense -> Dr 1000F) Accumulated Depreciation -> Cr 2000; Expense -> Dr 2000

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Quiz

Q3. Owned a machine with purchase cost of $10000, asset life is 10 yrs, what is the journal entry for second year depreciation ?

A) Asset Cost -> Cr $2000; Net Book Value -> Dr $2000B) Asset Cost -> Cr $1000; Net Book Value -> Cr $1000C) Tax Deduction -> Dr 1000; Asset Cost -> Cr 1000D) Tax Deduction -> Cr 1000; Asset Cost -> Dr 1000E) Accumulated Depreciation -> Cr 1000; Expense -> Dr 1000F) Accumulated Depreciation -> Cr 2000; Expense -> Dr 2000

Answer = E)

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Quiz

Q4. Sold and delivered a TV set of $5000 and received $5000 cash from customer; What is the journal entry ?

A) Cash -> Cr $5000 ; Inventory -> Dr $5000B) Cash -> Dr $5000 ; Inventory -> Cr $5000C) Revenue -> Cr $5000 ; Inventory -> Dr $5000 ; Cash -> Dr 5000D) Cash -> Cr $5000 ; Revenue -> Dr $5000 ; Inventory -> Cr $5000E) None of the above

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Quiz

Q4. Sold and delivered a TV set of $5000 and received $5000 cash from customer; What is the journal entry ?

A) Cash -> Cr $5000 ; Inventory -> Dr $5000B) Cash -> Dr $5000 ; Inventory -> Cr $5000C) Revenue -> Cr $5000 ; Inventory -> Dr $5000 ; Cash -> Dr 5000D) Cash -> Cr $5000 ; Revenue -> Dr $5000 ; Inventory -> Cr $5000E) None of the above

Answer = E)

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Quiz

Q5. Company A financial statement shows a retained earning of $3M; Liability = $0; Company B financials statement shows a retained earning of $3.5M; Liability = $0.5M; Which company you will pay higer price to acquire ?

A) Company A B) Company B C) Same price D) Not sure

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Quiz

Q5. Company A financial statement shows a retained earning of $3M; Liability = $0; Company B financials statement shows a retained earning of $3.5M; Liability = $0.5M; Which company you will pay higer price to acquire ?

A) Company A B) Company B C) Same price D) Not sure

Answer = D)

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Basic money mattersAssumptionIncome Tax Rate = 10% flatAccrual Accounting MethodFinancial year from 1st July to 30th June

Year 1Between 1st July 2008 and 30th June 2009You didn't work; But have $50,000 cash at home hiding in the kitchenHow much income tax you pay on 30th June 2009 ?

Year 2Between 1st July 2009 and 30th June 2010Used the $50,000 to buy a fortune cookie maker, Machine life is 10 yrs.Purchased cookie ingredients for $5000,Produced 50,000 units of cookie which worth $25,000.How much income tax you pay on 30th June 2010 ?

Year 3Due to illness, cookies went bad, sold the cookie maker for $45,000And received Cash $45,000 on 29th June 2011.How much income tax you pay on 30th June 2011 ?

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Basic money matters …/cont

You don’t pay tax if you are not making money (profit) !!

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Balance sheet formula (mythbuster)

Basic formulaAssets = Liabilities + Owner’s Equity

BetterAssets = Liabilities + (Shareholder's fund + previous years retained earnings + current year retaining earnings)

Even betterAssets = Liabilities + (Shareholder's fund + previous years retained earnings + current year revenue – cost of sales –

expense)

Even more betterCurrent Assets + (Capital/Fixed Assets Cost – Accumulated Depreciation)

= Liabilities + (Shareholder's fund + previous years retained earnings + current year revenue – cost of sales – expense)

Note : •Gross margin = revenue – cost of sales•Net profit = revenue – cost of sales – expense•Current year income tax = net profit * income tax rate

Accrual Accounting (not cash base accounting)Revenue must be assigned to the accounting period in which the goods were sold or ther service performedExpenses must be assigned to the accounting period in which they were used to produce revenue

Profit & Loss Statement

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Sample accounts

Assets = Liabilities + Shareholder's fund

+ Previous years retained earnings

+ ( Revenue - COS - Expense )

Cash PayablesOrdinary shares

Retained earning

Product Cost of goods sold Rent

Bank acct A Expense Accrual Service Package costs SalaryBank acct B Deferred Revenue Loyalty Manufacturing costs Sales CommissionReceivables Support staff salary StationaryInventory Customer Deposit ** Interest income ** TravelBill of Material (BOM) Interest expense ** MealsGoodwill Short term investment (1yr)Long term investment (> 1yr) Prepaid ExpenseMachinery CostMachinery Acc Deprn (-ve)Household Impr CostRevenue AccrualMortgage **Credit Card ** Note : ** used in financial institutionBranch Clearing **

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The big rules


+ Previous years

retained earnings


15 = 2 + 1 + 3 + ( 20 ‐ 8 ‐ 3 )14 = 1 + 1 + 3 + ( 20 ‐ 8 ‐ 3 )15 = 1 + 1 + 3 + ( 21 ‐ 8 ‐ 3 )14 = 1 + 1 + 3 + ( 21 ‐ 8 ‐ 4 )

Dr Cr Cr Cr Cr Dr Dr

Cr Dr Dr Dr Dr Cr Cr

Trial Balance Total $ Dr balance = Total $ Cr balanceKeep it this way Total $ Dr journal lines = Total $ Cr journal lines

Journal posting will accumulate journal amounts to account balances

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Basic accounting transactions

Type 1 - General purchase expenditure (payables)


+ Previous years

retained earnings

+ ( evenu - COS - Expense )

Purchase stationarya) If paid by cash Cash : Cr Stationary : Dr

b) If paid by supplier invoiceWhen invoice received Payables : Cr Stationary : Dr

Paid invoice on due date Cash : Cr Payables : Dr

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Basic accounting transactions …/cont

Type 2 - Purchase goods from wholesaler for resale


+ Previous years

retained earnings


Purchase goods

a) If paid by cash Inventory : Dr

Cash : Cr

b) If paid invoice on due date

When invoice received Inventory : Dr Payables : Cr


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Type 3 - Manufacturing


+ Previous years

retained earnings


Purchase material by cash Material : Dr

Cash : Cr

Produce goods from material Material : Cr Factory overhead : Cr

Finished goods inventory : Dr

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Type 4 - Sold goods to customer


+ Previous years

retained earnings


Goods delivered to customer Inventory : Cr COS : Dr

Invoice sent to customer Receivables : Dr Revenue : Cr

Customer paid invoice Receivables : Cr

Cash : Dr

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Type 5 - Software vendor (e.g. Oracle) sold a 3 years support contract to customer

Assets = Liabilities + Sh + Pr

+ ( Revenue - COS -

Invoice sent to customer Receivables : Dr Deferred revenue : Cr

Customer paid invoice Receivables : Cr

Cash : Dr

1st year revenue recognition 1/3 Deferred revenue : Dr 1/3 Revenue : Cr

1st year COS recognition Cash : Cr Support staff : Dr

2nd year revenue recognition 1/3 Deferred revenue : Dr 1/3 Revenue : Cr

2nd year COS recognition Cash : Cr Support staff : Dr

3rd year revenue recognition 1/3 Deferred revenue : Dr 1/3 Revenue : Cr

3rd year COS recognition Cash : Cr Support staff : Dr

Note : revenue/COS recognition can occur monthly if company accounting policy required

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Type 6 - Prepaid expense (e.g. purchase 3 years support contract from software vendor)



Purchase 3 years support contract

Received invoice from vendor Prepaid Expense : Dr Payables : Cr


1st year expense recognition 1/3 Prepaid Expense : Cr 1/3 Software support : Dr

2nd year expense recognition 1/3 Prepaid Expense : Cr 1/3 Software support : Dr

3rd year expense recognition 1/3 Prepaid Expense : Cr 1/3 Software support : Dr

Note : Expense recognition can occur monthly if company accounting policy required

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Type 7 - Fixed asset accounting


+ (Revenue-COS- Expense )

Purchase machine which has 3 years life

Received invoice from vendor Fixed assets : Dr Payables : Cr


1st year depreciation 1/3 Accumulated Depreciation : Cr 1/3 Depreciation : Dr

2nd year depreciation 1/3 Accumulated Depreciation : Cr 1/3 Depreciation : Dr

3rd year depreciation 1/3 Accumulated Depreciation : Cr 1/3 Depreciation : Dr

Note : Expense recognition can occur monthly if company accounting policy required

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Type 8 - Reclass journal (e.g. allocation, correction)


+ (Revenue- COS - Expense )

Reclass expense to COS Support staff : Dr Salary : Cr

Allocate expense to centres Expense (centre1) : Cr

Expense (centre2) : Dr

Expense (centre3) : Dr

Reclass expense to fixed asset Fixed Assets : DR Expense : Cr

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Basic accounting transactions …/contType 9 - Accrual journal (e.g. expense, revenue)



Accrue Expense

Service/Goods provided by supplier but not invoiced

Expense Accrual : Cr Expense : Dr

Reversal of accrual Expense Accrual : Dr Expense : Cr

Subsequently, invoice received from supplier

Payables : Cr Expense : Dr


Accrue Revenue

Service/Goods provided to customer but not invoiced

Revenue Accrual : Dr Revenue : Cr

Reversal of accrual Revenue Accrual : Cr Revenue : Dr

Subsequently, invoice sent to customer

Receivables : Dr Revenue : Cr

Customer paid invoice on due date

Receivables : Cr

Cash : Dr

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Type 10 - Shareholder investment

Assets = Liabilities + Shareholder's fund + Previous

years retai

+ ( evenu- COS - Expense )

Company issued/sold 1,000,000 @ $1 each

Cash : Dr Ordinary share @ $1 x 1M : Dr

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Basic accounting transactions …/cont Type 11 - Payroll journals

Assets = Liabilities + Shareholder's

+ Previous

years

+ ( ven - COS - Expense )

John's gross monthly salary = $1,000;12 days annual leave per year;Personal income tax = 10% flat;Working days in a month = 20;H d il l $50 January payrun

Cash : Cr900

Tax payable : Cr100

Salary : Dr

1000

Annual leave accrual : Cr

50

Annual leave: Dr50

February payrunCash : Cr

900Tax payable : Cr

100

Salary : Dr1000

Annual leave accrual : Cr

50

Annual leave: Dr50

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Type 11 - Payroll journals …/cont

Assets = Liabilities + Shareholder's

+ Previous

years

+ ( ven - COS - Expense )

In March, John has taken 3 days annual leave

March payrunCash : Cr

900Tax payable : Cr

100

Salary : Dr850

Annual leave accrual : Dr

100

Annual leave: Dr50

Company pax Tax officeCash : Cr

300Tax payable : Dr

300

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Type 12 - Banking : Customer deposit

Assets = Liabilities + Shareho

+ Previous years

+ ( ven - COS- Expense )

John deposited $300 into his deposit account

Cash : Dr300

Customer deposit : Cr300

Interest of $2 generated in the deposit account

Customer deposit : Cr

2

Interest expense : Dr2

John withdres $100 from his deposit account

Cash : Cr100

Customer deposit : Dr100

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Basic accounting transactions …/cont Type 13 - Banking : Customer mortgage (similar to credit card)

Assets = Liabilities + Shareho

+ Previous

years

+ ( Revenue - COS-xpen )

John took out $200,000 mortgage, paid $600 establishment fee Cash : Cr

200000

Customer mortgage : Dr200000

Cash : Dr600

Deferred revenue : Cr600

Bank recognises 1st year revenue from establishment fee which deferred over 5 years

1/5 Deferred revenue : Dr120

1/5 Fee revenue : Cr120

Interest charges of $1000 on mortgage

Customer mortgage : Dr1000

Interest income : Cr

1000

John paid $2000 on his mortgage Customer mortgage : Cr2000

Cash : Dr

2000

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Type 14 - Banking : use of clearing (or suspense) account

When customer performs two linked transactions, suspense account is usedAssets = Liabilities + Sh

areho

+ Previous

years

+ ( Revenue - COS-xpen )

John withdrew $5000 from his deposit account in a branch to pay his mortgage

Branch clearing : Cr5000

Customer deposit : Dr5000

Customer mortgage : Cr5000

Branch clearing : Dr5000

Note : Other example of the uses of clearing accounts areAP -> FA interface uses FA clearing accountsAP payment disbursement and AR payment receipt uses bank clearing account until bank reconciliation is done

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Year end closing – Retained earning account

Year end roll overCurrent Assets + (Capital/Fixed Assets Cost – Accumulated Depreciation)

= Liabilities + (Shareholder's fund + previous years retained earnings + current year revenue – cost of sales – expense)

Note : •Net profit = revenue – cost of sales – expense•Net profit starts with $0 at beginning of year •Current year income tax = net profit * income tax rate

1) All Profit & Loss Statement accounts will be reset to zero

2) Net of Profit & Loss Statement accounts will be accumulated in

previous year retained earning accounts

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Westpac FY2010 balance sheet(available at westpac.com.au – annual report)

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Westpac FY2010 income statement(available at westpac.com.au – annual report)

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How much ? How good ?

How much you will pay to buy Westpac ?Acquisition cost = net assets (worth) = total Assets – total liability = AUD 40,118,000,000

How much is the share price worth ?Net assets / number of shares = AUD 40,118,000,000 / 2,960,000,000 shares = AUD 13.55

Why do we pay more in buying shares in the exchange ? Westpac seems to have a good outlook in which investors think the net assets will increase

overtime

Will the share go up or down ? Price / Earning Ratio (P/E) = market price of a share / earning per share

= 21.7 / 6,346,000,000 / 2,960,000,000= 10.12

(market norm for banking industry is 10 to 20, so still room to grow in share price)

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What’s next ?

Next training will coverConsolidation / eliminationIntercompany accountingManagement accountingTax accountingDerivatives accountingInter-bank accountingTransfer pricing

Documents

Accounting_Training_for_IT_v2.1