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Gisela Salim

on 17 November 2014

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Transcript of ACCOUNTING

Plenary 1
Financial Statements
Provide Info about...
Financial Position
Changes in financial position
Income Statement
How well did we perform over the year?
Reports revenues and expenses
Net income (or loss)
Balance Sheet
Stockholders' Equity
Economic resources owned by the business as a result of past transactions
Debts or obligations of the business that result from past transactions

Amount of financing provided by owners of the business and operations.
Property, Plant Equipment
From creditors
From Stockholders
 Expected to be converted to
cash, sold or consumed in the
next 12 months or within the
business’ operating cycle
 Include
 Cash
 Short-term investments
 Receivables (or debtors)
 Inventory
 Prepaid expenses

Non Current
Will be held longer than one
 Include
 Property, plant and equipment
 Land
 Buildings
 Computers
 Equipment
 Intangibles
 Long-term investments

Types of assets
 Obligations or debts payable in
the one year or within the
business’s operating cycle
 Include
 Accounts payable
 Taxes payable
 Short-term notes payable
 Salaries/wages payable
Debts payable more than one
year from balance sheet date
 Include
 Long-term notes payable
 Bonds payable
Types of liabilities
Paid in Capital
 Sometimes labeled Share Capital or simply, Capital

Retained earnings
Types of SE
Earnings of the entity
Dividends pay out
Statement of Changes in Equity
What is our financial postion?
Why did our equity change during the year?
Statement of Cash Flow
How much cash did we generate and spend?
Transactions and T-Accounts
Events that have a financial impact on the company and can be measured reliably
Record of all the changes in a particular asset, liabilities and shareholders equity statement
Assets Account
Accounts and notes receivables (what is owed to the company)
Inventory (goods held for sale)
Pre paid Expenses
Property, Plant Equipment
Liabilities Account
Accounts payable (company's debt)
Notes Receivable (contract with interest)
Accrued liabilities (a liability for n expense that has not yet been paid by the company)
Shareholders Equity Accounts
Share Capital (owners investment)
Retained Earnings (income-losses)
Dividends (to shareholders)
Double Entry Accounting
Business transactions include two parts
 Giving
 Receiving
Accounting based on a double-entry system
Each transaction affects at least two accounts
Decisions often are made without a
complete accounting system
 T-Accounts allow managers to
analyze transactions quickly
 Every business transaction involves
both a debit and a credit.
 The total debits and credits for
every business transaction must be
equal. This is the cornerstone of
the double entry accounting

The Principles of Accrual Account
The Two Basis of Accounting
Accrual Accounting
 Records impact of transactions
when they occur
 Required by IAS1 –
Presentation of Financial
 Records:
 Revenue when earned
 Expenses when incurred
 Used by virtually all businesses
Cash Basis
 Records transactions only if
cash is involved
 Cash receipts
 Cash payments
 Ignores underlying economic
 Used by very small operation
Recognize when....
 Risks and rewards of ownership are transferred to the buyer.
 The amount of the revenue can be measured.
 Collection is reasonably assured.
 In case of goods: Mostly recognise revenue when the goods are delivered
 In case of services: Recognize revenue when service is performed

Matching principle
Resources consumed to earn revenues in an accounting period should be
recorded in that period, regardless of when cash is paid
Management and cost accounting
Differences to financial accounting
Regulations (not regulated)
Range and detail of information (more)
Reporting interval (frequently)
Time period (can look at any time period)
Major Purposes of Accounting Systems
Formulating overall strategies and long-range plans
Resource allocation decision such as product and customer emphasis and pricing
Cost planning and cost control of operations and activities
Performance measurement and evaluation of people
Meeting external regulatory and legal reporting requirement
Planning and Control
: choosing goals, predicting results under various way of achieving this goal, deciding how to attain the desired goal
implementing the plan and deciding on performance evaluation
Management by exception: concentrating in areas that do not operate as expected
Variance: difference between expected and actual results
Tracking growth
Searching for alternative means of operating
Changing methods for making decisions
Making predictions
Changing operations
Changing reward system
Management accountants 3 important functions
Score keeping:
accumulate data+report reliable results to management
Attention Directing
: make visible opportunities and problems
Problem Solving
: comparative analysis to identify the best way to accomplish organization goals
Accounting systems and management control
Costs, benefits and Context
Management accounting means encompassing the effects of costs, benefits and context
themes in the design of management accounting systems
Customer Focus
Invest sufficient resources in customer satisfaction and still make profit

Value-chain and supply-change analysis
functions that add usefulness:
Design of products, services and processes
Customer service

Key Success Factor
Continuous improvement and benchmaking
An introduction to cost terms and purposes
Costs in general
: monetary amounts that must be paid to acquire goods or services
Cost Object
: Everything for which a separate measurement of cost is desired
A costing system typically accounts the stages:
Cost Accumulation
: classification such as materials, labours... Actual costs: historical costs
Cost Assignment
Tracing accumulated cost to cost objects
allocating accumulated costs to a cost object
Direct Cost and Indirect Cost
Cost Assignment
Direct costs
: can be traced in an economically feasible way
Indirect costs
: cant. (lighting of a tennis match)
Cost tracing
Cost allocation
Cost Objects
Direct or Indirect?
The materiality: higher cost are more traceable
Available information gathering technology
Design of operations
Cost Drivers and cost management
Cost reduction efforts focus on:
Value-added activities
Cost Management of the use of the
cost drivers
in those activities (making it less)
2 types of cost behavior pattern
Variable: changes
Fixed: remains
for an specific cost object and for a given time period
(become smaller on a per unit basis as the cost drivers increase)
to a specific cost object
timespan specified
total costs are linear
there is only one cost driver
Variations in th level of cost drivers are within a relevant range
Cost object: assembled car
tyres used
salary of supervisor
Power costs to the plant
annual lease cost at sandero plant line
Unit costs
=total manufacturing costs/#units manufactured
: recorded as assets
recorded as expenses
Each company
Service sector companies: do not have stock or tangible products.
Merchandising sector: tangible products that have been supplied and will be sold.
Manufacturing sectors: manufacturing converted products

have stock
jOB COSTING vs Process costing systems
Job costing:

costs assigned to a distinct unit, badge or lot
job: resources expended to give a custom-made product
Process Costing
masses of identical or similar units of a product or service
Identify the job that is the chosen cost object
Identify the direct costs for the job
Identify the indirect costs
Select allocation base to allocate each indirect cost to the job
Develop the rate-per-unit used to allocaye indirect costs
Assign the cost to the cost objects (direct+indirect costs)
Job Costing in manufacturing
job cost record,
materials requisition record,
labor time record
Budgeted Indirect Costs and End of Period Adjustments
Advantage: can be assigned to individual jobs
Disadvatage: inaccurate (underallocated or overallocated)
Approaches of disposing underallocation:
Adjusted allocation rate approach
Proration Rate approach
Method 1
Method 2
Method 3
Financial accounting
Accrual Accounting
Accrual accounting vs cash basis accounting
records impact of transactions and events on entity's assets and liabilities in the period when they occurred
records only cash transactions: cash receipts are revenues and cash payments are expenses
required by financial reporting standards
The Time Period Concept
Ensures that accounting information is reported at regular intervals
The Revenue Recognition Principle
recognize when you earn
after transferring risks and rewards of ownership to buyers
no more management or control over goods sold
the amount of revenue can be measured reliably
the costs incurred of the transaction can be measured
it is likely that the economic benefits flow to the entity
The Matching Concept
Relationship between expenses and revenues
Identify reduction in equity (increases in Lia or decreases in assets)
Measure this expenses or substract expenses from revenue to compute profit or loss
updating the accounts: the adjusting process
Categories of adjusting entries
Prepaid Expenses
Expense paid in advance. Asset for the owner
Example: prepaid rent and supplies
Deprecation of PPE
the passage of time reduces usefulness of PPE. Its use is an expense
Accumulated Deprecation Account
sum of all deprecations and expense from using the asset.It is a
contra asset account
(has a companion account and its normal balance is opposite of the companion account
Carrying Amount
Cost of PPE-accumulated deprecation
: the business paid or received cash in advance
Some assets become expenses. Example: prepaid rent, prepaid insurance...
When customers pay a company has the liability (unearned revenue or deferred income) to deliver. Decreases liability and increases the revenue
: the cost of an item of PPE to expense over the asset's useful life
: record before paying or receiving. Example: salary expense, income tax expense, interest receivable
Preparing the financial statement
Distribution of accounts
Income statement: revenue and expense accounts
The statement of changes in equity: changes in various components in equity
Balance Sheet: assets, liabilities and SE.
Order of financial statement
The income statement reports net income or loss (revenues-expenses). It affects SE so its transfered to retained earnings
The SE reflects increase in retained earnings from the income statement and records the payment of dividends
Which accounts need to be closed?
The closing process applies only to temporary accounts. Involves transferring the revenue , expense and dividends balance to Retained Eranings.
Temporary accounts:
income, expenses, dividends
Permanent accounts
: assets, liabilities, SE

Debit each
amount for the amount of its
credit balance
. edit retained earning for the sum of revenues.
Credit each
expense account
for the amount of its
debit balanc
e. Debit retained earnings for the sum of the expenses
the dividends account
for the amount of its
debit balance.
This entry plces the dividends amount in the debit side of retained earnings
Conceptual framework and financial statements
Types of business
: one personally liable owner.
: Two or more owners. General partners are personally liable, limited partners are not.
: owned by shareholders that are not personally liable.
Accounting Standards
Each developed country has its own version of accounting standards
International Accounting Standards Board and International Financial Reporting Standards (IFRS)
Economies are in different pathways of IFRS convergence.
The Conceptual Framework
: to provide financial information to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.
Financial Information:
economic resources, claims and changes in them
Qualitative characteristics:

: relevance and faithful representation
: comparability, verifiability, timeliness and understandability
Constraints and assumptions
Cost Constraint
(of accounting)
Accrual Accounting Assumption
Going Concern Assumption
(continue to operate)
assets, liabilities, equities (share capital and retained earnings), income (revenue and gains) and expenses (ordinary and losses)
Qualitative Characteristics
capable of making a difference in decision making. Has
predictive and confirmatory
value. Influenced by
(if omitted or erroneously declared, it would make a difference).
Faithful Representation
: must represent
economic phenomena
in words and numbers. Should be
(include all necessary information descriptions and explanations),
l (no bias) and
free from errors.

: must be presented early enough for decision makers
classified, characterized and presented clearly and concisely
The Income Statement shows a Company's financial performance
Reports revenues and expenses
Title: company name, Income Statement, period
Bottom line: net income or loss
The Statement of Changes in Equity shows a Company's Transactions with its owners
Profits belong to the owners
Net income (profit) increases total equity
The Balance Sheet shows a company's financial positions
Reports assets, liabilities and Shareholders Equity
Current: expected to be converted in cash in 12 months. Include cash, short term investment, receivables, inventory and prepaid expenses.
Long term: PPE, Intangible assets, long term investment and other long term assets
Current: accounts payables, taxes payable and other liabilities,
Shareholders Equity
Capital (paid in capital, share capital)
Retained Earnings
The Statement of Cash Flow shows a Company's Cash Receipts and Payments
Types of activities:

result in net income or loss.

: in non current assets
: from equity owners and borrowers
Recording Business transactions
any event with a financial impact on the business that can be measured reliably
occur before it is recorded
Keeping Track of Financial Statement Items
items of interest that sum up the assets, liabilities and shareholders equity
basic summary device of accounting
Money and any medium of exchange
Accounts Receivable
promise for future collection of cash
Notes receivable:
a note that promises to pay an amount (usually with interests)
(stocks and merchandise inventory) what you hope to sell
Prepaid Expenses
economic benefits payed in advance
Assets expected to to be used for more than one period for the purposes of production, administration, etc.
Accounts payable:
also called creditors or payables
Notes payables
opposite of note receivable
Accrued Liability:
for an expense you have not yet paid.
Examples: interest payable and salary payable
Share Capital
the owners investment in the corporation
Retained Earnings
cumulative net income - cumulative net losses and dividends
optional. Declared after profitable operations.
Indicates decrease in Retained Earnings
increase in equity from delivering goods or services to customers (revenue)
the cost of operating a business
Double Entry Accounting
Each transaction affects at least two accounts and the equation must remain unchanged
The T account
(equal for every transaction)
Increases and Decreases in the Accounts: The rules of Debit and Credit
Liabilities+ Shareholders equity
Shareholders Equity=Share capital + Retained Earnings
+Income - Expenses - Dividends
Expenses and dividends are negative and therefore....
Recording transactions
Chronological record of transactions
Specify each account and classify it by type
Determine wether each account is increased or decreased by the transaction
Record the transaction in the journal
Copying information from journal to ledger
A ledger is a grouping of all T accounts with their balances
Process costing system
Illustrating Process Costing
Unit cost= Total Cost/ Number of units
Main difference: extent of averaging
Most common cost categories: (according to the timing in which they are introduced) If they are added at different times separate categories are needed
direct materials
: added to the process at one time
conversion costs
: added to the process uniformly through time
Cases of process costing:
Zero opening and zero closing work in progress stocks (units are started and finished during the accounting period)
Zero opening work in progress stock but some closing work in progress stock (some units are started but not completed)
Some opening and some closing work in progress stocks.
Process with no opening or closing work in progress stocks
Unit costs can be averaged by dividing total costs in a period by total units in a period.
Each unit receives the same amount of direct materials and conversion costs.
Example: service sector organizations banks (homogenous product or service and no incomplete units at the end of accounting period)
Process Costing with no opening but a closing work in progress stock
The units that have not been yet completed at the end of the month must be calculated in a different way. Direct costs are processed normally because they are usually added at the beginning of the process. For the calculation of conversion costs, an estimate of the % of completeness is necessary.
Summarize the flow of physical units of output
Compute output in terms of equivalent units
Compute equivalent unit costs
Summarize total costs to account for.
Assign total costs to units completed and to units in closing work of progress.
The Production Cost Worksheet
Process Costing with Both Some Opening and Some Closing Work in Progress Stock
Use previous 5 steps to calculate the cost of unit completed and the costs of closing work in process.
In order to assign costs to these categories we use a stock flow method:
the weighted average method
First in, First out method
The Weighted Average Method
Calculates the equivalent-unit cost of the
work done to date
(regardless of the period on which it was done) and assigns this cost to equivalent units completed and transferred out of the process and to equivalent units in closing work in progress stocks.
First In First Out Methods (FIFO Process)
Assigns the costs of the previous period's equivalent units in opening work in progress stock to the firsts units completed and transferred out of the process and assigns the cost of equivalent units worked on during the current period first to complete beginning stock , then to start and complete new units and finally to units in closing work in progress stocks
Work done in on opening stock before the period is kept separate from work done in the current period
Full transcript