Accounting: Understanding Balance Sheet Accounts and Operating Cycle, Assignments of Accounting

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GENERAL ACCOUNTING

COURSE MATERIAL

2019 - 2020 SPRING SEMESTER

Prof. Dr. Halim SÖZBİLİR

Arş. Gör. Halenur Yılmaz

WEEKLY COURSE CONTENT

• 23 APRIL THE RECORDING PROCESS - II
• 30 APRIL THE ACCOUNTING CYCLE - I
• 7 MAY THE MAIN FINANCIAL STATEMENTS
• 14 MAY ACCOUNTS IN THE BALANCE SHEET
• 21 MAY DETAILS of INCOME STATEMENT ** 8 - 19 June Final Exam Week *** 29 - 05 July Make-Up Exam Week

Balance sheet shows the impact of all transactions on business up to a specific point in time cumulatively. In other words, this statement indicates the financial position of a business as of a certain date of time (a specific date). ACCOUNTS in the BALANCE SHEET Balance Sheet accounts are ASSETS, LIABILITIES, and EQUITY ACCOUNTS. 14 MAY

ASSETS

Assets are economic resources (properties) owned by a business. They are the things of value

that a company uses in production, consumption, and exchanging activities. In a business, those

things are useful for future operations.

Assets may have physical features such as cash, inventory, building, and vehicles as well as

intangible characteristics like rights, patents, and amounts due from customers.

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1. Current Assets 2 ) Long Term Assets Assets are divided into two main categories:

An operating cycle is the amount of time from commitment of cash for purchases until the

collection of cash resulting from sales of goods or services. It is the process by which a

company converts cash into short-term assets and back into cash as part of its ongoing

operating activities.

For a manufacturing company, this would entail purchasing raw materials, converting them to

finished goods, and then selling and collecting cash from receivables. Cash represents the

starting point, and the end point, of the operating cycle.

The operating cycle is used to classify assets (and liabilities) as either current or noncurrent…

DO YOU REMEMBER THAT… In Turkish Uniform Chart of Accounts (TUCA); a decimal coding system is employed, a three-digit number for each major account is used.

• The first digit identifies ‘account class’,
• Double digits show the ‘account group’, and
• The three-digit number is used for ‘major accounts’.
• Subsidiary accounts may be coded with additional one or three digits that are placed to the right of the three- digit number. For example, 100. Cash Account is account number 100 , ‘ 1 ’ is for Current Assets, ‘ 10 ’ is for Liquid Assets , and ‘ 100 ’ is the number of the account.

ACCOUNT GROUPS of CURRENT ASSETS The account groups of current assets in TUCA can be listed as follows:

10. Liquid Assets
11. Marketable Securities
12. Trade Receivables
13. Other Receivables
14. Inventories
15. Long-Term Construction and Maintenance Contract Costs
16. Prepaid Expenses and Accrued Revenues
17. Other Current Assets 14 MAY

LIQUID ASSETS This group includes the following accounts:

• 100. Cash: Cash includes both TL and foreign currencies such as coins, currency (paper money) on hand. Cash receipts increase the cash assets while disbursements decrease the cash. Thus, the account is debited with cash receipts and credited with cash payments. The cash account has a debit balance since it is an asset account. 10 CASH ACCOUNT Debit Credit Increase (Cash Receipts) Decrease (Cash payments) BALANCE: Debit
• 101. Checks Received: Cash is the most liquid asset because it is the device of the exchange. So that it needs safeguarding most. As a result, most companies keep their own money in a bank by opening an account and depositing their excess money in that account. This account consists of checks received from people and businesses. 101. Checks Received account is debited with the nominal value when checks are received. We credit this account when the checks are collected, endorsed, or deposited in the business bank account. When the depositor wants to pay cash to a third party, he or she can write a check (cheque). Check tells the bank to pay the stated amount of money to the bearer or named party. There are three parties to a check. a) The maker, or drawer, who signs the check, b) The payee, to whom the check is paid, and c) The bank on which the check is drawn. The check is a negotiable instrument so that can be transferable to another party by endorsement.

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• 102. Bank Accounts: The money of a business held in a bank is recorded in this account. When we open a business account in a bank and deposit cash in that account, we debit 102. Bank Account. When money is withdrawn from the bank account, this account is credited. Asset accounts are increased by debiting and decreased by crediting. In addition to the company’s own money held in the bank, the interest that accrues on that amount at the end of the period also increases the bank account. Sub- accounts are kept in subsidiary ledgers for bank accounts. At the end of each month, banks send statements to customers. A bank statement shows the account’s beginning and ending balances, cash payments and receipts, and accrued interest. The company’s books and bank statement usually report different balances. Differences arise because of time lag in recording transactions on both bank and books sides, and accrued interest that has not been yet recorded in the business books. For this reason, the companies must compare the bank statements with their own accounting records. As a result, an accountant must update business’ cash in the bank either online or after receiving bank statement. This updating process is called bank reconciliation which requires adjusting entries.
• 103. Outstanding Checks and Payment Orders (-): Payment orders and checks given to third parties are recorded in this account. This account is a contra asset account and thus it reduces the assets. When we give checks to other people or businesses, this account is credited. When the checks are paid to them by the bank, this account is debited.
• 108. Other Liquid Assets: Stamps, matured coupons, mailed orders, and the like are recorded in this account. Credit card receipts (credit card sales) are also recorded in this account.

MARKETABLE SECURITIES The accounts in this group are:

• 110. Share Certificates
• 111. Private Sector Bonds and Notes
• 112. Public sector Bonds and Notes
• 118. Other Securities
• 119. Allowance for Valuation Loss on Marketable Securities (-) 14 MAY

12. TRADE RECEIVABLES

The term receivables mean the amounts due from individuals and other companies. In other

words, receivables are claims that are expected to be collected in cash. One of the most

important factors underlying the growth of entities is the selling goods and services on account.

Accounts receivable comprises one of the largest assets of many merchandising companies.

The ability of any company to generate cash from receivables depends on the amount,

collectability, and maturity dates of its receivables. Receivables are usually converted into

cash within a period of 30 to 60 days, but sometimes companies sell merchandise on longer-

term installment plans, such as 18 to 24 months.

Some receivables may arise from other transactions (called other receivables) beside sales

transactions (called trade receivables) that are expected to be collected within one operating

cycle, while some of them may require longer than one year to be collected.

Therefore, receivables arising from both normal business transactions and other transactions

are classified into two categories:

1 ) Receivables in current assets (Account groups; 12 and 13 ), and

2 ) Receivables in long-term assets (Account groups; 22 and 23 ).

15. INVENTORIES^16 Inventories are goods held for sale as part of a company’s normal business operations. With the exception of certain service organizations, inventories are essential and important assets of companies. We scrutinize inventories because they are a major component of operating assets and directly affect determination of income. In a merchandising company (retailer or wholesaler), inventory includes the many different items (merchandise) available to resale to customers in the ordinary course of business. They purchase it from wholesalers or manufacturers as finished products to sell to their customers. For example, in a grocery store canned goods; dairy products, and meat are some of the inventory items. Manufacturers, on the other hand, define inventory a little bit differently because they produce their own products to sell to customers. Thus, they need to account for the inventory at every stage of production. In a manufacturing company, the inventory consists of raw materials (components on hand waiting to be used in production), work-in process (goods in the various production phases), and finished goods (goods that are completed and ready for sale). For example, in a furniture manufacturing company, plywood, wood varnish, paint, wood, dressed timber, and upholstery are some of the raw materials. Furniture like table, chairs, desks, beds, and cupboards are finished goods. And some furniture which might be still in the production process are the examples of work-in process. Keep in mind that for service businesses, the inventories consist of office supplies and other items that are used in rendering services are in fact the prepaid expenses. They are acquired not for resale purposes.

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Accounts stated in the inventories group are as follows:

• 150. Raw Materials
• 151. Work-in Process
• 152. Finished goods
• 153. Merchandise
• 157. Other Inventories
• 158. Allowance for Valuation loss on Inventories (-)
• 159. Advance Payments for Purchase Orders
  160. Raw Materials account is used to keep track of raw materials, packaging materials, and others that are used in production process. This account is debited when the items are purchased, and credited in case of transferring to the production process.

151. Work-in Process: This account is debited with the amount which is accounted for each item or process by the cost accounting. Cost accounting identifies the accounts for 710. Direct Raw Materials Cost,
152. Direct Labor Cost, and 730. Manufacturing Overhead Costs and determines the cost of work-in process using these accounts in the appropriate manner. After the manufacturing process being finished, a proper inventory account ( 152. Finished Goods) is debited, and 151. Work-in Process is credited.
153. Finished goods: After the production of goods is completed, the produced items that are ready for sale are recorded in this account. In other words, the amounts accumulated in the account of 151. Work-in Process, and also in its detailed sub-accounts are carried over to 152. Finished Goods and of course its sub- accounts indicating the each item produced.

18. PREPAID EXPENSES AND ACCRUED REVENUES
19. Prepaid Expenses Prepaid expenses arise when a business pays for goods or services in advance. The initial expenditure results in an asset. As the time passes, the portion of cost of the asset is computed for the current period and are gradually transferred to the related expense account at the end of each accounting period. For example, prepaid rent, prepaid insurance, and supplies are prepaid expenses. Prepaid expenses are expected to be used or consumed within one operating cycle. Those which are expected to be consumed longer than one year will be recorded in 280. Prepaid Expenses.
20. Accrued Revenues As explained previously, accrued revenues are comprised of the revenues that are earned in the current period but have not been recorded yet. For example, the amount of interest on notes receivable for the current period must be computed and recorded at the end of each period. To do this, the 181. Accrued Revenues account is debited, and an appropriate revenue account is credited for the amount earned in that current period. 14 MAY

19. OTHER CURRENT ASSETS The accounts in this group are used in monitoring the effects of transactions on current assets when the accounts stated above are not suitable to use. This group consists of following accounts:

20. Value Added Tax Transferred

21. Value Added Tax Deductible

22. Other Value Added Tax

23. Prepaid Taxes and Funds

24. Advances to Employees

25. Inventory Shrinkage

26. Other Current Assets

27. Allowance for loss on Other Current assets (-) 14 MAY