Download MBA Accounting Notes guides and more Study Guides, Projects, Research Business Accounting in PDF only on Docsity!
UNTIT 1:
Evolution of accounting
1.
Accounting Concepts and Principles:
The Entity Concept - An organization is a separate entity from the owner(s) of the organization.
The Reliability (Objectivity) Principle -
Accounting records and statements should be based on the most reliable data available so that they will be as accurate and useful as possible.
The Cost Principle - Acquired assets and services should be recorded at their actual cost not at what they are believed to be worth.
The Going-Concern Concept
The assumption that the business will continue operating for the foreseeable future.
The Stable-Monetary Unit Concept - Accounting transaction are recorded in the monetary unit used in the country where the business is located.
Why study Accounting
The primary purpose of accounting is to provide information that is useful for decision making purposes. From the very short, we emphasize that accounting is not an end, but rather it id the mean of end. The final product of accounting information is the decision that is ultimately enhanced by the use of accounting information weather that decision are made by owner, management, creditor, government regulatory bodies, labor unions, or the many other groups that have an interest in the financial performance of an enterprise.
Accounting Information System
Information user
1. Investors. 2. Creditors. 3. Managers. 4. Owners. 5. Customers 6. Employers. 7. Regulatory. SEC, IRS, EPA.
Cost and Revenue Determination
1. Job costing. 2. Process costing. 3. Activity based costing. 4. Sales.
Assets and liabilities
1. Plant and equipment. 2. Loan and equity. 3. Receivable, payable and cash.
Cash flows
1. From operation. 2. From finance. 3. From investing.
Decision supporting
1. Cost /volume/ profit analysis. 2. Performance evaluation. 3. Incremental analysis. 4. Budgeting. 5. Capital allocation. 6. Earnings per share. 7. Ratio analysis
1.5 Manual and computerized based accounting
Statement of Owner’s Equity - a summary of the changes that occurred in the company’s owner’s equity during a specific period of time.
Statement of Owner’s Equity Format:
Capital, Jan 1 2000 $xx,xxx Add: Investments by owner $x,xxx Net Income for the period x,xxx x,xxx Subtotal $xx,xxx Deduct: Withdrawals by owner $x,xxx Net Loss for the period x,xxx x,xxx Capital, Dec 31 2000 $xx,xxx
Balance Sheet - a summary of a company’s assets, liabilities, and owner’s equity on a specific date.
Balance Sheet Format:
Assets Liabilities Cash $xx,xxx Accounts Payable $xx,xxx Accounts Receivable x,xxx Notes Payable x,xxx Supplies x,xxx Total Liabilities $xx,xxx Owner’s Equity Capital $xx,xxx Total Liabilities and Total Assets $xx,xxx Owner’s Equity $xx,xxx
Characteristics of financial statements
1. Balance sheet
Assets liabilities Cash notes payable Notes payable accounts payable Debtors creditors Land, building etc capital Fixed assets
2. Income statement
Revenue Less all expenses
Net profit
3. Cash flow statement
Cash from operating activities Cash from inverting activities Cash from financing activities
1.
Constraints on relevant or reliable information
Users of accounting system
1. Investors 2. Creditors 3. Managers 4. Owners 5. Customers 6. Employees 7. Regulatory agencies 8. Trade associations 9. General public 10. Labor union 11. Government agencies 12. Suppliers. 1. Major fields of accounting 1. Financial accounting 2. Management accounting 3. Cost accounting 4. Tax accounting 5. Operational accounting 6. Advance accounting
2.4 Recording Transactions in the Journal
Recording transactions in a journal is similar to how they are recorded in the T-accounts
Posting from the journal to the ledger:
Posting - the transferring of amounts from the journal to the ledger accounts Step 1: Enter the date from the journal entry into the date column of the ledger account Step 2: Enter the journal page number in the journal reference column of the ledger account Step 3: Transfer the amount for the first account in the entry to its ledger account as it is in the journal. Debits in journal are recorded as debits in the ledger and the same for credits Step 4: Update the account balance. If there is no beginning balance, then just transfer the amount to the appropriate balance column (Dr & Dr, Cr & Cr). If there is a beginning balance, then add or subtract the
amount from the current balance and enter the new balance. If the transaction amount and the current balance are both in the same columns (Dr & Dr, or Cr & Cr), then add the amounts together for the new balance and enter the result in the same column. If the transaction amount and the current balance are in different columns, then subtract the amounts and enter the result in the column that has the larger amount. Step 5: Enter the ledger account number in the journal’s Post Ref. column. Repeat these steps until all amounts have been posted to the ledger accounts.
Balancing the accounts
Chart of accounts
Chart of accounts - a list of all the accounts and their assigned account numbers in the ledger
Accounts are assigned numbers consisting of 2 or more digits. The number of digits used is dependent on how many accounts a company has in their ledger. A small company may use only 2 digits while a large corporation may use 5 digit account numbers.
The first digit is used to identify the main category in which the account falls under.
Concept of accrual and deferrals
Need for adjusting entries
The purpose of adjusting entries is to allocate revenue and expenses among accounting periods in accordance with the realization and matching principles. These end-of-period entries are necessary because revenue may be earned and expenses incurred in periods other than the one in which the related transactions are recorded.
The four basic types of adjusting entries are made to (1) convert assets to expenses, (2) convert liabilities to revenue, (3) accrue unpaid expenses, and (4) accrue unrecorded revenue. Often a transaction affects the revenue or expenses of two or more accounting periods. The related cash inflow or outflow does not always coincide with the period in which these revenue or expense items are recorded. Thus, the need for adjusting entries results from timing differences between the receipt or disbursement of cash and the recording of revenue or expenses.
2.10 to 2.
Adjusting Entries:
Adjusting entries can be divided into five categories:
(1) Deferred (Prepaid) Expenses
(2) Depreciation of assets
(3) Accrued Expenses
(4) Accrued Revenues
(5) Deferred (Unearned) Revenues
Questions to ask yourself when doing adjusting entries:
(1) What is the current balance?
(2) What should the balance be?
(3) How much is the adjustment?
Deferred (Prepaid) Expenses - includes miscellaneous assets that are paid for in advance and then expire or get used up in the near future. In the journal entry you would debit an expense account and credit the prepaid asset account. (Examples include Rent, Insurance, and Supplies)
Adjusting Journal entry:
? Expense $xxx the value of the asset Prepaid Asset $xxx that was used up
Depreciation of Plant Assets - the allocation of a plant asset's cost to an expense account as it is used over its useful life. In the journal entry you would debit an expense account and credit a contra-asset account.
Why use Accumulated Depreciation instead of just crediting the original asset account?
(1) If the original asset account was used then the original cost of the asset would not be reflected in any of the asset accounts. (2) The original cost is needed when assets are sold or disposed (3) The original cost of the asset must be reported on the income tax return of the company
Adjusting Journal entry:
Depreciation Expense, $xxx Accumulated Depreciation, $xxx
Accrued Expenses - Expenses that a business incurs before they pay them. In the journal entry you would debit an expense account and credit a liability account (Examples include Wages and Interest)
Adjusting Journal Entry:
? Expense $xxx for the amount ? Payable $xxx owed
Accrued Revenues - revenues that a business has earned but has not yet received payment for. In the journal entry you would debit an asset account and credit a revenue account. (Examples include Interest)
The Worksheet:
Determination of Net Income or Net Loss from the Worksheet:
If the company has a Net Income, then
(1) The Cr column total for the Income Statement must be more than the Dr column total.
(2) The Dr column total for the Balance Sheet must be more than the Cr column total.
If the company has a Net Loss, then
(1) The Dr column total for the Income Statement must be more than the Cr column total.
(2) The Cr column total for the Balance Sheet must be more than the Dr column total.
Completing the Worksheet:
Step 1: List the accounts and enter their balances from the general ledger into the appropriate trial balance column (Dr or Cr). Total both columns.
Step 2: Enter in the amounts for the adjustments. Each adjustment should contain at least one debit entry and at least one credit entry, just as if you were entering these adjustments in a journal. Total both columns.
Step 3: Carry the balances from the Trial Balance columns to the Adjusted Trial Balance if there is no adjustment for the account. If an account has an adjustment then either add or subtract the adjustment to get the adjusted balance for the account. Total both columns.
Tip on knowing when to add or subtract:
(1) If the amount in the Trial Balance column and the amount in the Adjustments column are both in the same columns (Dr & Dr, or Cr & Cr) then add the two amounts together and place the result in the same column in the Adjusted Trial Balance.
(2) If the amount in the Trial Balance column and the amount in the Adjustments column are in different columns (Dr & Cr, or Cr & Dr) then subtract the amounts and enter the result in the column that has the larger amount (Dr or Cr) in the Adjusted Trial Balance.
Step 4: Carry the balances for all of your revenue and expense accounts to the Income Statement columns. Total both columns.
Note : These columns won’t balance because the difference between the columns represents your Net Income or Loss.
Step 5: Carry the balances for all other accounts (assets, liabilities, and owners equity) to the Balance Sheet columns. Total both of these columns.
Note : The difference between the columns should be the same as the difference between the Income Statement columns. If they are not the same then you have made a mistake.
Step 6: Enter in the difference between the Dr and Cr columns under the column which has the smaller balance for both the Income Statement and Balance Sheet. Total these four columns again. The Dr and Cr column totals should balance now on both the Income Statement and the Balance Sheet.
Tips on determining if you have a net income or loss:
(1) If there is a Net Income, then you should have the difference entered in the Dr column of the Income Statement and in the Cr column of the Balance Sheet.
(2) If there is a Net Loss, then you should have the difference entered in the Cr column of the Income Statement and in the Dr column of the Balance Sheet.
Owner, Withdrawals Withdrawals account balance Owner, Capital Withdrawals account balance
UNIT 3:
3.
Difference between manufacturing and merchandising
Most merchandising companies purchase their inventories from other business organization in a ready to sell-condition. Companies that manufacture their inventories, such as General motors, IBM are called manufacturers, rather than merchandisers. The operating cycle of a manufacturing company is longer and more complex than that of the merchandising company, because the first transaction is purchasing merchandising is replaced by the many activities involved in manufacturing the merchandise.
The operating cycle is the repeating sequence of transactions by which a company generates revenue and cash receipts from customers. In a merchandising company, the operating cycle consists of the following transactions: (1) purchases of merchandise, (2) sale of the merchandise - often on account, and (3) collection of accounts receivable from customers.
UNIT 4:
Steps in Performing a Bank Reconciliation:
Step 1: Identify outstanding deposits and bank errors that need to be added to the current bank statement balance. Step 2: Identify outstanding checks and bank errors that need to be subtracted from the current bank statement balance. Step 3: Identify amounts collected by the bank (notes), amounts added to our balance by the bank (interest on account), and any errors made by the company, when recording the transactions, that need to be added to the current book balance. Step 4: Identify bank service charges, NSF checks, and any errors made by the company that need to be subtracted from the current book balance.
Bank Reconciliation format:
For the setup of Petty Cash :
The Petty Cash fund is established by transferring money from the Cash account to the Petty Cash account for the amount of the fund. The size of the fund can always be readjusted at a later time, either up or down depending on whether you wish to increase or decrease the fund.
Petty Cash Amount of fund Cash in bank Amount of fund
To increase the fund, you would use the same entry as above and debit the Petty Cash and credit Cash for just the amount of the increase. To decrease the fund, you would reverse the above entry, by debiting Cash and Crediting Petty Cash for the amount of the decrease.
For replenishment of petty cash :
When the Petty Cash fund needs to be replenished, you would debit each individual expense or asset account, not Petty Cash, for the amount spent on each one and credit Cash for the total. Petty Cash is only used in the journal entries when you are either establishing the fund or changing the size of the fund.
Office Supplies Amount spent Delivery Expense Amount spent Postage Expense Amount spent Misc. Expense Amount spent Cash in bank Total of receipts
Receivables:
Accounts Receivable - amounts to be collected from customers for goods or services provided
Notes Receivable - a written promise for the future collection of cash
Accounting for Uncollectible Accounts:
Allowance Method : - recording collection losses on the basis of estimates. There are two methods that can be used to estimate the Uncollectible Accounts expense:
(1) Percent of Sales - referred to as the Income Statement approach because it computes the uncollectible accounts expense as a percentage of net credit sales. Adjusting Entry : Uncollectible Accounts Exp Net credit sales * % Allowance for D. A. Net credit sales * % (2) Aging of Accounts Receivable - referred to as the Balance Sheet approach because this method estimates bad debts by analyzing individual accounts receivables according to the length of time that they are past due. Once separated by past due dates, each group is then multiplied by the percentage that each group is estimated to be uncollectible (as shown in the display below).
Adjusting Entry :
Uncollectible Accounts Exp Desired End Bal. - Current Bal. Allowance for D.A Desired End Bal. - Current Bal. Writing off an Uncollectible Account : Allowance for D.A. Amount uncollectible Acct. Rec. - Customer name Amount uncollectible
