Universit degli studi di Pavia Facolt di Economia a.a. 2014-2015
Lesson 1 International Accounting Lelio Bigogno, Stefano Santucci 1
Slide 2 Introduction to the course 2 Lecturers presentation and CVs
Structure of the course ow to prepare the exam The contents of the
exam How to find out the tools for the preparation Basic
assumptions of the course Important notice: Friday the 3 rd of
October there wont be class!! Slide 3 PART 1 IAS/IFRS: a General
Overview 3 Slide 4 4 A basic question: IAS? IAS/IFRS? IFRS The
answer? 1. Some definitions 1. Some definitions Slide 5 5
International Accounting Standards (IASs) were issued by the IASC
(International Accounting Standards Committee) from 1973 to
2000.IASC The IASB (international Accounting Standards Board)
replaced the IASC in 2001. 1. Some definitions 1. Some definitions
Slide 6 6 Since then, the IASB has amended some IASs and has
proposed to amend others; has replaced some IASs with new
International Financial Reporting Standards (IFRSs); has adopted or
proposed certain new IFRSs on topics for which there was no
previous IAS. Slide 7 7 . IFRSs refers to the new numbered series
of pronouncements that the IASB is issuing, as distinct from the
International Accounting Standards (IASs) series issued by IASC.
Slide 8 8 .Broader definition IFRSs refers to the entire body of
IASB pronouncements, including standards and interpretations
approved by the IASB and IASs and SIC (Standing Interpretation
Commission) interpretations approved by the predecessor
International Accounting Standards Committee. Slide 9 9 In fact,
through committees, both the IASC and the IASB also have issued
Interpretations of Standards Interpretations of Standards Slide 10
10 Interpretations of IASs and IFRSs are developed by the IFRS
Interpretations Committee, whose name was changed from IFRIC
(International Financial Reporting Interpretations Committee) in
March 2010.IFRS Interpretations Committee Slide 11 11 The IFRS
Interpretations Committee replaced the former Standing
Interpretations Committee (SIC) in March 2002 Slide 12 12 The
Interpretations Committee's mission is "to interpret the
application of International Accounting Standards (IASs) and
International Financial Reporting Standards (IFRSs) and provide
timely guidance on financial reporting issues not specifically
addressed in IASs and IFRSs, in the context of the IASB Framework,
and undertake other tasks at the request of the IASB". Slide 13 2.
The advantage of International Accounting 13International
Accounting Lesson 1 GLOBALISATION INTERNATIONALISATION Markets
Efficiency Common Accounting Rules Slide 14 14International
Accounting Lesson 1 The goal of the IFRS Foundation and the IASB is
to develop, in the public interest, a single set of high-quality,
understandable, enforceable and globally accepted financial
reporting standards based upon clearly articulated principles.
Slide 15 15International Accounting Lesson 1 IAS/IFRS adoption is
considered as a quality improvement for financial information
produced. YES BUT, WHERE IS THE REAL IMPROVEMENT COMPARED TO
ITAGAAP? Slide 16 16International Accounting Lesson 1 IAS/IFRS
adoption is considered as a quality improvement, BUT some
discussions are still in place. Topics: 1)An extremely on-going
world (updating needs, uncertain rules); 2)An assets side approach
(fair value adoption problems); 3)A complex set of rules but at the
end of the day often less strict than local GAAP. Slide 17
17International Accounting Lesson 1 In July - August 2014 a set of
23 National Standards were issued after being updated. These
developments arise, on the one hand, from changes in legislation
and national accounting practices and, on the other hand, from the
evolution of doctrine and the international context. Some issues
are dealt with in a IFRS/IAS point of view (es: impairment of
assets, fair value) The aim was also to converge local gap to
IAS/IFRS where possible (in the light of who the actual users are
mainly small and medium-sized entities); Slide 18 3. IFRSs and
European Community Standards issued by IASB must go through due
process of endorsement before becoming law in EU. All the standards
and interpretations are adopted in the form of Regulation.
International Accounting Lesson 118 Slide 19 Endorsement process:
1. IASB issues a standard 2. EFRAG (European Financial Reporting
Advisory Group) holds consultations with interest groups 3. EFRAG
delivers its advice to the European Commission whether the standard
meets the criteria of endorsment. International Accounting Lesson
119 Slide 20 4. SARG ( Standards Advice Review Group) issues its
opinion whether EFRAGS endorsement advice is well - balanced and
objective. 5. Based on the advice of EFRAG and the opinion of SARG,
the Commission prepares a draft endorsement Regulation. 6. ARC
(Accounting Regulatory Committee) votes on the Commission proposal.
International Accounting Lesson 120 Slide 21 7. The European
Parliament and the Council of the European Union have 3 months to
oppose the adoption of the draft Regulation by the Commission 8. In
case of favorable opinion or the 3 months elapsed without
opposition, the Commission adopts the draft Regulation. 9. The
adopted Regulation is published in the Official Journal and enters
into force on the day laid down in the Regulation itself.
International Accounting Lesson 121 Slide 22 4. International
Accounting Standards around the world See exhibit International
Accounting Lesson 122 Slide 23 PART II Basic Accounting: S ome
technical vocabulary PART II Basic Accounting: Some technical
vocabulary 1. Sources records and book of prime entry 2. Ledger
accounts and double entry 3. Examples International Accounting
Lesson 123 Slide 24 1. Sources records and book of prime entry
International Accounting Lesson 124 Sources Documents are the
source of all information recorded by a business. Documents which
are used to record the business transactions in the books of
account include: quotation, sales order, purchase order, goods
received note, goods despatched note, statement, credit note, debit
note, remittance advice, receipt, invoices. Slide 25 International
Accounting Lesson 125 Invoices: relate to a sales order or a
purchase order Credit note: relates to returned goods or refunds
when a customer has been overcharged (regarded as a negative
invoice) Other documents: debit notes: might be issued to adjust an
invoice already issued goods received notes: record a receipt of
goods (most commonly in a warehouse) Slide 26 International
Accounting Lesson 126 Books of prime entry The details of source
documents need to be recorded; the records are recorded in books of
prime entry,which are: Sales day book Purchase day book Sales
returns day book Journal Cash book Petty cash book Slide 27
International Accounting Lesson 127 Sales day book: for credit
sales Purchase day book: for credit purchases Sales returns day
book: for credit notes raised Purchase returns day book: for credit
notes received from suppliers Journal: for transaction which are
not recorded in any of the other books of prime entry Slide 28
International Accounting Lesson 128 Cash book: for cash receipts
and payments It records all transaction that go through the bank
account. Reconciliation of bank statement and cash book Petty cash
book: for small payments. A petty cash system is usually subject to
strict controls Payments are made in respect of authorised claims
All claims are supported by evidence Slide 29 International
Accounting Lesson 129 2. Ledger accounts and double entry Why do we
need ledger account ? Ledger accounts summarise all the individual
transaction listed in the books of prime entry. Record of
transaction, assets and liabilities: in chronological order built
up in cumulative totals The method used to summarize records is
ledger accounting and double entry Slide 30 The nominal ledger
30International Accounting Lesson 1 Nominal ledger is an accounting
record which summarises the financial affairs of a business The
nominal ledger contains detail of: assets liabilities capital
income and expenditure and profit and loss Slide 31 The accounting
equation 31International Accounting Lesson 1 The accounting
equation emphasises the equality between assets and liabilities (
including capital as liability) Accounting equation is:
ASSETS=CAPITAL + LIABILITIES Slide 32 The accounting equation
32International Accounting Lesson 1 Liabilities are trade accounts
payable; A payable is a person to whom a business owes money Trade
account payable are debts arising from the purchase of
material,components or goods for resale Assets are trade accounts
receivable Slide 33 The accounting equation 33International
Accounting Lesson 1 Drawings are amount of money taken out of a
business by its owner Slide 34 The accounting equation
34International Accounting Lesson 1 Matching convention revenue
earned is matched with the expenses incurred in earning it. Slide
35 Double entry bookkeeping 35International Accounting Lesson 1
Double entry bookkeeping: each transaction has an equal but
opposite effect. Every accounting event must be entered in ledger
accounts both as a debit and as an equal but opposite credit.
Weekly or monthly, totals are transferred from books of prime entry
into the nominal ledger. Every transaction has two effects (dual
effect) Slide 36 Double entry bookkeeping 36International
Accounting Lesson 1 A debt entry will increase an asset decrease a
liability increase an expense A credit entry will decrease an asset
increase a liability increase income Slide 37 Double entry
bookkeeping 37International Accounting Lesson 1 Every financial
transaction gives rise to two accounting entries (a debit and a
credit) Debit entries in the nominal ledger is therefore always
equal at any time to the total value of credit entries. Every
transaction is recorded twice every debit is balanced by a credit
Slide 38 Double entry bookkeeping 38International Accounting Lesson
1 A cash payment is a credit entry in the cash account The asset is
decreasing. Cash may be paid out to pay an expense or to purchase
an asset. The matching debit entry is therefore made in the
appropriate expense or asset account Slide 39 Double entry
bookkeeping 39International Accounting Lesson 1 A cash receipt is a
debit entry in a cash account. The asset is increasing. Cash might
be received by a retailer who makes a cash sale. The credit entry
would be made in the sales account Slide 40 The rules of double
entry bookeeping 40International Accounting Lesson 1 In terms of
'T' accounts: ASSET LIABILITY CAPITAL DEBIT $ CREDIT $ DEBIT $
CREDIT $ DEBIT $ CREDIT $ Increase Decrease Decrease Increase
Decrease Increase For income and expenses, think about profit.
Profit retained in the business increases capital. Income increases
profit and expenses decrease profit. INCOME EXPENSE DEBIT $ CREDIT
$DEBIT $ CREDIT $ Decrease Increase Increase Decrease Slide 41
Credit transaction 41International Accounting Lesson 1 Not all
transaction are settled immediately in cash or by cheque. Its
possible: purchase goods or non-current on credit terms so that the
suppliers would be trade accounts payable until settlement was made
in cash grant credit terms to its customers who would be trade
accounts receivable of the business Slide 42 Examples of accounts
in the nominal ledger 42 E xamples of accounts in the nominal
ledger include the following: (a) Plant and machinery at cost (b)
Motor vehicles at cost (c) Plant and machinery, provision for
depreciation (d) Motor vehicles, provision for depreciation (e)
Proprietor's capital (f) Inventories raw materials (g) Inventories
finished goods (h) Total trade accounts receivable (i) Total trade
accounts payable International Accounting Lesson 1 Slide 43
Examples of accounts in the nominal ledger 43 ( j) Wages and
salaries (k) Rent and local taxes (l) Advertising expenses (m) Bank
charges (n) Motor expenses (o) Telephone expenses (p) Sales (q)
Total cash or bank overdraft International Accounting Lesson 1
Slide 44 Examples: the accounting equation 44 Mr XY starts a
business. The business begins by owning the cash that he has put
into it, $2,500. The business is a separate entity in accounting
terms and so it owes the money to Mr XY as capital. When Mr XY sets
up his business: Capital invested = $2,500 Cash = $2,500 Capital
invested is a form of liability, because it is an amount owed by
the business to its owner(s). Adapting this to the idea that assets
and liabilities are always equal amounts, we can state the
accounting equation as follows. As at 1 July 20X6: Assets = Capital
+ Liabilities $2,500 (cash) = $2,500 + $0 Mr XY purchases a market
stall from Mr K, who is retiring from his fruit and vegetables
business. The cost of the stall is $1,800. International Accounting
Lesson 1 Slide 45 Examples: the accounting equation 45 He also
purchases some flowers and potted plants from a trader in the
wholesale market, at a cost of $650. This leaves $50 in cash, after
paying for the stall and goods for resale, out of the original
$2,500. The assets and liabilities of the business have now
altered, and at 3 July before trading begins, the state of his
business is as follows. Assets = Capital +Liabilities Stall 1,800 =
$2,500 +$0 Flower and plants 650 Cash 50 2,500 The stall and the
flowers and plants are physical items, but they must be given a
money value. This money value is usually what they cost the
business (called historical cost in accounting terms).
International Accounting Lesson 1 Slide 46 Examples: the accounting
equation 46 On 3 July Mr XY has a very successful day. He sells all
of his flowers and plants for $900 cash. Since he has sold goods
costing $650 to earn revenue of $900, we can say that he has earned
a profit of $250 on the day's trading. Profits belong to the owners
of a business. In this case, the $250 belongs to Mr XY. However, so
long as the business retains the profits and does not pay anything
out to its owners, the retained profits are accounted for as an
addition to the proprietor's capital. Assets = Capital +
Liabilities Stall 1,800 = Original investment $2,500 Flower and
plants 0 Retained profit Cash (50 + 900) 950 (900-650) 250 2750
2750 + 0 International Accounting Lesson 1 Slide 47 Examples: the
accounting equation 47 At the beginning and end of 3 July 20X6, Mr
XYs financial position was as follows. Net assets Capital (a)At the
beginning of the day: $(2,500 0) = $2,500 = $2,500 (b) At the end
of the day: $(2,750 0) = $2,750 = $2,750 There has been an increase
of $250 in net assets, which is the amount of profits earned during
the day. International Accounting Lesson 1 Slide 48 Examples: the
accounting equation 48 The next market day is on 10 July and Mr XY
purchases more flowers and plants for cash, at a cost of $740. He
is not feeling well, because of a heavy cold, and so she decides to
accept help for the day from his cousin Ethel. Ethel is to be paid
a wage of $40 at the end of the day. Trading on 10 July was again
very brisk, and Mr XY and Ethel sold all their goods for $1,100
cash. Mr XY paid Ethel her wage of $40 and drew out $200 for
himself. Required (a) State the accounting equation before trading
began on 10 July. (b) State the accounting equation at the end of
10 July, after paying Ethel: (i) but before drawings are made. (ii)
after drawings have been made. International Accounting Lesson 1
Slide 49 Examples: the accounting equation 49 (a)After the purchase
of the goods for $740. Assets = Capital + Liabilities Stall 1,800
Goods 740 Cash (770 740) 30 2,570 = $ 2,570 + $0 International
Accounting Lesson 1 Slide 50 Examples: the accounting equation 50
(b) On 10 July, all the goods are sold for $1,100 cash, and Ethel
is paid $40. The profit for the day is $320. $ $ Sales 1,100 Less
cost of goods sold 740 Ethel's wage 40 780 Profit 320 International
Accounting Lesson 1 Slide 51 Examples: the accounting equation 51
Assets = Capital + Liabilities Stall 1,800 At beginning of 10 July
2,570 Goods 0 Profits earned on 10 July 320 Cash (30+ 1,100 40)
1,090 2,890 2,890 + 0 International Accounting Lesson 1 Slide 52
Examples: the accounting equation 52 After Mr XY has withdrawn $200
in cash, retained profits will be only $(320 200) = $120. Assets =
Capital + Liabilities Stall 1,800 At beginning of 10 July 2,570
Goods 0 Profits earned on 10 July 120 Cash (1,090 -200) 890 2,690
2,690 + 0 International Accounting Lesson 1 Slide 53 Examples: the
rules of double entry bookeeping 53 In terms of 'T' accounts: ASSET
LIABILITY CAPITAL DEBIT $ CREDIT $ DEBIT $ CREDIT $ DEBIT $ CREDIT
$ Increase Decrease Decrease Increase Decrease Increase For income
and expenses, think about profit. Profit retained in the business
increases capital. Income increases profit and expenses decrease
profit. INCOME EXPENSE DEBIT $ CREDIT $DEBIT $ CREDIT $ Decrease
Increase Increase Decrease International Accounting Lesson 1 Slide
54 Examples: double entry for cash transaction 54 In the cash book
of a business, the following transactions have been recorded. (a) A
cash sale (ie a receipt) of $250 (b) Payment of a rent bill
totalling $150 (c) Buying some goods for cash at $100 (d) Buying
some shelves for cash at $200 How would these four transactions be
posted to the ledger accounts and to which ledger accounts should
they be posted? Don't forget that each transaction will be posted
twice, in accordance with the rule of double entry. International
Accounting Lesson 1 Slide 55 Examples: double entry for cash
transaction 55 (a) The two sides of the transaction are: (i) Cash
is received (debit entry in the cash at bank account). (ii) Sales
increase by $250 (credit entry in the sales account). CASH AT BANK
ACCOUNT SALES ACCOUNT Sales a/c 250 Cash a/c 250 (Note how the
entry in the cash at bank account is cross-referenced to the sales
account and vice-versa. This enables a person looking at one of the
accounts to trace where the other half of the double entry can be
found.) International Accounting Lesson 1 Slide 56 Examples: double
entry for cash transaction 56 (b) The two sides of the transaction
are: (i) Cash is paid (credit entry in the cash at bank account).
(ii) Rent expense increases by $150 (debit entry in the rent
account). CASH AT BANK ACCOUNT RENT ACCOUNT Rent a/c 150 Cash at
bank a/c 150 International Accounting Lesson 1 Slide 57 Examples:
double entry for cash transaction 57 (c) The two sides of the
transaction are: (i) Cash is paid (credit entry in the cash at bank
account). (ii) Purchases increases by $100 (debit entry in the
purchase account). CASH AT BANK ACCOUNT PURCHASES ACCOUNT
Purchases100 Cash at bank a/c 100 International Accounting Lesson 1
Slide 58 Examples: double entry for cash transaction 58 (d) The two
sides of the transaction are: (i) Cash is paid (credit entry in the
cash at bank account). (ii) Assets in this case, shelves increase
by $200 (debit entry in shelves account). CASH AT BANK ACCOUNT
SHELVES (ASSET) ACCOUNT Shelves a/c 200 Cash at bank a/c 200
International Accounting Lesson 1
