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ACCT6174 - Introduction to

Financial Accounting
Overview 1
ACCOUNTING IN ACTION
Objectives
1. What is Accounting?
2. The Building Blocks of Accounting
3. The Basic Accounting Equation
4. Using the Accounting Equation
5. Financial Statements
6. The Account
7. Steps in the Recording Process
8. The Recording Process Illustrated
9. The Trial Balance
What is Accounting?
Accounting consist of three activities:
1. identifies,

2. records, and

3. communicates
User of Accounting
Information

• Internal Users: External Users:


- Management -Suppliers
- Finance Division -Customers
- HR Division
-Creditors
-Government
- Marketing Division
-Investors
- Employee
Building Blocks of
Accounting
Measurement Pricipals

• Cost Principle (historical cost principle) dictates


that companies record assets at their cost.

• Fair Value Principle states that assets and


liabilities should be reported at fair value (the
price received to sell an asset or settle a
liability).
Building Blocks of
Accounting
Assumptions

• Monetary Unit means that accounting records only


transaction data that can be expressed in money
terms.

• Economic Entity requires that activities of the entity


be kept separate and distinct from the activities of its
owner and all other economic entities.
Forms of Business
Ownership
There are 3 forms of business:
1. Proprietorship
2. Partnership
3. Corporation
Basic Accounting
Equation

Assets Liabilities Equity

Assets : Resources a business owns that will


provide future service or benefit
Liabilities : Claims and obligations against
assets
Equity : Residual of assets and liabilities
Financial Statements
Companies prepare financial statements
which consist of:
1. Statement of Profit of Loss
2. Statement of Retained Earnings
3. Statement of Financial Positions
4. Statement of Cash Flow
The Account
Account is to record the increases and decreases in a
specific asset, liability, equity, revenue, or expense
item.
Debit on “Left”, Credit on “Right”

Debits must Equal Credits


ADJUSTING ENTRIES
Objectives
• Time period assumption.
• Explain the accrual basis of accounting.
• Explain the reasons for adjusting entries.
• Identify the major types of adjusting entries.
• Prepare adjusting entries for deferrals.
• Prepare adjusting entries for accruals.
Time Period Assumption
Accountant divide business period into
artificial time period
• Monthly
• Quarterly
• Semi Annual
• Annually
Accrual Basis
• In accrual basis, transactions recorded in the
periods in which the events occur
• For revenue : recognized when the services are
performed, rather than when cash is received.
• For expense : recognized when incurred, rather
than when paid.
• Accrual basis in accordance with IFRS
Cash Basis
• In cash basis, transactions recorded in the
periods in which cash is affected
• Revenues recognized when cash is received.
• Expenses recognized when cash is paid
Revenues and Expenses
Revenue recognized in the accounting period in
which the performance obligation is satisfied.

Match expenses with revenues in the period when


the company makes efforts to generate those
revenues.
Adjusting Entries
• The purpose is to ensure that the revenue and expense are
accordance to revenue and expense recognition principles.

• Trial balance may not contain up-to-date and complete data,


therefore need to be adjusted.

• Required every time a company prepares financial


statements.

• Will include one income statement account and one


statement of financial position account in the adjusting
entries.
Adjusted Trial Balance
• All adjusting entries are journalized and posted.

• Adjusted trial balance is to prove the equality of debit


balances and credit balances in the ledger.

• The basis for the preparation of financial statements.


COMPLETING THE ACCOUNTING
CYCLE
Objectives
• Prepare a worksheet.
• Explain the process of closing the books.
• Prepare a post-closing trial balance.
• Identify the steps in the accounting cycle.
• Prepare correcting entries.
• Identify the classification on statement of
financial position.
Worksheet
• Is a multiple-column form used in the
adjustment process and in preparing
financial statements.
• Multiple steps in preparing
• Not a permanent accounting record
• Using worksheet is an optional
Worksheet
Steps in preparing a worksheet:
1. Prepare a Trial Balance
2. Prepare the adjustment column from the
adjusting entries
3. Enter adjusted balances in the adjusted trial
balance column
Worksheet
4. Enter adjusted trial balance amounts to
appropriate financial statements column
(either income statement or statement of
financial position column)
5. Total the statements column, compute the
net income or loss, and complete the
worksheet
Worksheet
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 1,500 1,000 1,000
Prepaid Insurance 600 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Revenue 1,200 400 800 800
Share Capital-Ordinary 10,000 10,000 10,000
Dividends 500 500 500
Service Revenue 10,000 400 10,600 10,600
200
Salaries and Wages Exp. 4,000 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense 1,500 1,500 1,500
Insurance Expense 50 50 50
Accumulated Depreciation 40 40 40
Depreciation Expense 40 40 40
Accounts Receivable 200 200 200
Interest Expense 50 50 50
Interest Payable 50 50 50
Salaries and Wages Payable 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income 2,860 2,860
Totals 10,600 10,600 22,450 22,450

Net Income Source: Financial Accounting IFRS


edition 2e, Weygandt, Kimmel,
Kieso
Financial Statements

Source: Financial Accounting IFRS


edition 2e, Weygandt, Kimmel,
Kieso
Financial Statements

Source: Financial Accounting IFRS


edition 2e, Weygandt, Kimmel,
Kieso
Financial Statements

Source: Financial Accounting IFRS


edition 2e, Weygandt, Kimmel,
Kieso
Summary of the
Accounting Cycle
1. Analyze business transactions
2. Journalize the transactions
3. Post to ledger
4. Prepare the trial balance
5. Journalize and post the adjusting entries
6. Prepare the adjusted trial balance
Summary of the
Accounting Cycle
7. Prepare the financial statements (income
statements, statement of retained earnings,
and statement of financial position)
8. Journalize the closing entries
9. Prepare a post closing trial balance
Correcting Entries
• If the error occurs, then entity should make
correct the errors by journalizing correcting
entries
• It is not an adjustment entries
• Correcting entries must be posted before
the closing entries
Classification in Statement of
Financial Position
Standard classification:

Assets:
•Intangible Assets Equity and Liabilities:
•Property, Plant and • Equity
Equipment • Non current liabilities
•Long-term Investment • Current liabilities
•Current Assets
ACCOUNTING FOR
MERCHANDISING OPERATIONS
Objectives
• Identify the differences between merchandising
and service companies.
• Explain the recording of purchases and sales
revenue under a perpetual inventory system.
• Explain the steps in the accounting cycle for a
merchandising company.
• Prepare an income statement for a
merchandising companies.
Merchandising Company
• Buy and sell merchandise
• Revenues called sales revenue or sales
• Expenses: Cost of Goods Sold (COGS) and
Operating Expenses
• COGS: the total cost of merchandise sold
during the period
Merchandising Company

Source: Financial Accounting IFRS


edition 2e, Weygandt, Kimmel,
Kieso
Merchandising Company
Income measurement for Merchandising
Company:
Sales revenue xxx
COGS (xxx)
Gross Profit xxx
Operating Expenses (xxx)
Net Income (Loss) xxx
Merchandising Company
While flow of costs are as following:
Beginning Inventory xxx
Cost of Goods Purchased xxx
Cost of Goods Available for Sale xxx
Cost of Goods Sold (xxx)
Ending Inventory xxx
Merchandising Company
While flow of costs are as following:
Beginning Inventory xxx
Cost of Goods Purchased xxx
Cost of Goods Available for Sale xxx
Cost of Goods Sold (xxx)
Ending Inventory xxx
Purchase of Merchandise
• Purchase inventory by cash or credit (on account)

• Purchase invoice as supporting document

The journal entry for purchase of merchandise:

Dr. Inventory

Cr. Cash or Account Payable


Purchase of Merchandise
• Purchase discounts: cash discount
• Credit term: state the amount of cash discount and
time period which it is offered
For example: 5/10, n/30 it means the buyer may take
5% of cash discount on the invoice price if the
payment is made within 10 days of the invoice date.
However, the invoice price is due in 30 days from the
invoice date.
INVENTORIES
Objectives
• Steps in determining inventory quantities.
• Apply the accounting for inventories and the inventory cost
flow methods.
• Explain the effects of the inventory cost flow assumptions.
• Explain the lower-of-cost-or-net realizable value basis.
• Indicate the effects of inventory errors on the financial
statements.
• Compute and interpret the inventory turnover ratio.
Classification of
Inventory
• The characteristics of inventory in
merchandising company:
a. Owned by the company
b. Ready to sale to customers

Merchandisers only have one inventory


classification: merchandise inventory
Classification of
Inventory
Classification of inventory in manufacturing
company:
1. Raw materials: goods that will be used in
production
2. Work in process: inventory that has been
placed into production but is not yet complete
3. Finished goods: completed manufactured
goods and ready to sale
Inventory Quantities
Inventory quantities can be determined by:
1. Physical inventory of goods on hand
counting, weighing, or measuring each kind of
inventory on hand.
2. The ownership of goods
There are several problems in determining the
ownership of goods
Inventory Quantities
Goods in Transit: legal title depends on the
terms of sale
• FOB shipping point: when the public carrier
accept the goods, then the ownership has
been passed to the customers/buyers
• FOB destination: until the goods reach the
destination, it is still the ownership of seller
Inventory Quantities
Consigned goods: consignee hold the goods
of consignor
• When consignor deliver goods to consignee,
consignor still hold the ownership of that
goods
• When the goods sold to buyer (third parties),
the ownership moves to buyer
Inventory Costing
Unit cost can be identify by the following
methods :
1. First-in, First out (FIFO)
2. Average to cost
3. Specific identification
Thank You