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Introduction To Accounting

temas 3 y 4

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0% found this document useful (0 votes)
31 views15 pages

Introduction To Accounting

temas 3 y 4

Uploaded by

June C
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter 3: The accounting method

The Account
The account is a detailed record of changes that have occurred in a particular asset,
liability, or stockholders’ (owners’) equity item during a period of time.
The account is grouped into three categories, according to the accounting equation:
assets, liabilities or owners’ equity
- Assets
Assets are the economic resources that benefit the business now and in the future.
Cash shows the cash effects of a business’s transactions. It includes money and any
medium of exchange that a bank accepts.
Accounts Receivable represents a promise for future receipt.
Inventory (Merchandise, Merchandise Inventory) is merchandise held for sale to customers
Notes Receivable is a written pledge that the customer will pay.
Prepaid expenses refers to expenses paid in advance.
Land is a record of the cost of land a business owns and uses in its operation.
Buildings are the cost of a business’s buildings, e.g. office, manufacturing plant.
Equipment, Furniture, and Fixtures accounts record separate asset accounts for each
type of equipment.
- Liabilities
Liabilities are the debts of the company.
Notes Payable includes the amounts that the business must pay on promissory notes.
Accounts Payable represents the promise to pay off debts arising from credit purchases.
Accrued Liabilities are expenses that have not yet been paid, e.g., Interest Payable,
Salary Payable, and Income Taxes Payable.
- Stockholders’ (Owners’) equity
The stockholders’/owners’ equity is the owners’ claims to the assets of a corporation.
- A proprietorship uses a single account
- A partnership uses separate accounts for each owner’s capital balance and
withdrawals
- A corporation uses separate capital accounts for each source of capital
Common Stock represents the owners’ investment in the corporation.
Retained Earnings shows the cumulative net income earned by the corporation over its
lifetime, minus cumulative net losses and dividends.
Dividends indicates a decrease in retained earnings when dividends are paid by the
corporation.
Revenues are reported in a separate account for each increase in stockholders’ equity
created by delivering goods or services to customers, e.g., Sales Revenues, Service
Revenues, Rent Revenues, Interest Revenues.
Expenses are reported in a separate account for each type of expense, e.g., Cost of Sales,
Salary Expense, Rent Expense, Advertising Expense, Utilities Expense.

Double-entry Accounting/Bookkeeping
The Double-Entry System: Each transaction affects at least two accounts
Working definition: A way of systematically recording the financial transactions of a
company so that each transaction is recorded twice.
Formal definition: The most commonly used system of bookkeeping based on the
principle that every financial transaction involves the simultaneous receiving and giving of
value, and is therefore recorded twice.

The T-Account
The left side is called the debit side, and the right side is called the credit side.
Every business transaction involves both a debit and a credit.

Increases and Decreases in the Accounts


The type of account determines how increases and decreases are recorded in it:

Assets (debit-balance accounts) are on the opposite side of the equation from liabilities
and stockholders’ equity (credit balance accounts)
- Increases and decreases in assets are recorded in the opposite manner from those
in liabilities and stockholders’ equity
- Liabilities and stockholders’ equity, which are on the same side of the equal sign,
are treated in the same way
Additional Stockholders’ Equity Accounts: Revenues and Expenses
- Revenues: increases in stockholders’ equity from delivering goods to customers
- Expenses: decreases in stockholders’ equity due to the cost of operating the
business
The accounting equation can be expanded to include revenues and expenses
𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠' 𝑒𝑞𝑢𝑖𝑡𝑦 previoua
*
𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠' 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝐶𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 + 𝑅𝐸 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 + 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Using T-accounts expanded

Accounts that are increased with debits Accounts that are increased with credits
and have normal debit balances and have normal credit balances

# Double-entry checks
- Sales and purchases
There will never be a debit in a sales account or a
credit in a purchases account. Assets and liabilities
never pass through these accounts.
- Returns
Sales and purchases returns have their own accounts.
You will never find a credit in a sales return account
or a debit in a purchases return account.
- Assets and expenses
When making the initial entries you never credit a fixed assets or expenses account.
Recording Transactions in the Journal
Accountants record transactions first in a journal: a chronological record of an entity’s
transactions. The steps of the journalizing process are:
- Identify the transaction from source documents, such as bank deposit slips, sale
receipts, and check stubs
- Specify each account affected by the transaction and classify it by type (asset,
liability, stockholders’ equity, revenue, or expense)
- Determine whether each account is increased or decreased by the transaction
- Determine whether to debit or credit the account to record its increase/decrease
- Enter the transaction in the journal, including a brief explanation for the entry
- Enter the debit side first and the credit side next
A complete journal entry includes:
a. The date of the transaction
b. The title of the account debited (left)
c. The title of the account credited (indented)
d. The dollar amount of the debit (left)
e. The dollar amount of the credit (right)
f. A short explanation of the transaction

Copying Information (Posting) from the Journal to the Ledger


The ledger is a grouping of all accounts with their balances
Data must be copied to the appropriate accounts in the ledger — a process called posting

Example transactions of Air & Sea Travel, Inc.


Accounts after Posting
Each account has a balance, denoted as Bal.
This amount is the difference between the account’s total debits and
total credits.

The Trial Balance


The trial balance is a list of all accounts with their balances
- Assets first, followed by liabilities and then stockholders’ equity
It aids in the preparation of the financial statements by summarizing all the account
balances. It also provides a check on accuracy by showing if 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑖𝑡𝑠 = 𝑡𝑜𝑡𝑎𝑙 𝑐𝑟𝑒𝑑𝑖𝑡𝑠.

Correcting Accounting Errors


If the trial balance’s total debits and total are not equal, then there is an accounting error
The reason(s) behind many of the out-of balance conditions can be detected by computing
the difference between debits and credits on the trial balance and performing one or
more of the following actions:
- Search the trial balance for a missing account.
- Search the journal for the amount of the difference.
- Divide the difference between total debits and total credits by 2. A debit treated
as a credit, or vice versa, doubles the amount of the error.
- Divide the out-of-balance amount by 9. If the result is evenly divisible by 9, the
error may be a slide (writing $61 as $610) or a transposition (writing $61 as $16).
Chart of Accounts
A chart of accounts lists all accounts and account numbers
- Account numbers usually have two or more digits
- The second, third, and higher digits in an account number indicate the position of
the individual account within the category
A chart of accounts is just a useful guide for codification
- Group 1: Basic Financing
- Group 2: Non-current Assets (e.g.)
- Subgroup 21: Property, Plant and Equipment
- Subgroup 210: Land and Natural Resources
- Subgroup 211: Buildings
- Subgroup 212: Technical Installations
- Subgroup 213: Machinery
- Subgroup 28: Accumulated Amortization and Depreciation
- Subgroup 280: Accumulated amortization of intangible assets
- Subgroup 2800: Accumulated amortization of research
- Subgroup 2801: Accumulated amortization of development
- Group 3: Inventories
- Group 4: Trade Payables and Trade Receivables
- Group 5: Financial Accounts
- Group 6: Purchases and Expenses
- Group 7: Sales and Income
- Group 8: Expenses Recognised in Equity
- Group 9: Income Recognised in Equity

The Normal Balance of an Account


An account’s normal balance is the side of the
account —debit or credit— where increases are
recorded
- Assets are called debit-balance accounts
- Liabilities and stockholders’ equity are called
credit-balance accounts

Conceptual Framework
Accounting provides information useful for decision-making.
To be useful information must be: relevant, reliable, comparable, understandable

Accounting Principles and Concepts


Going concern
Unless there is evidence to the contrary, it shall be presumed that the company will
continue in operation in the foreseeable future. Therefore, the aim when applying the
accounting principles and criteria is not to determine the value of the company’s net
equity with a view to disposing of part or the entire business of the company, or the
amount that would be obtained in the event of liquidation.
Accrual
The effects of transactions and other economic events shall be recognised when they
occur. The related expenses and income shall be recognised in the annual accounts for the
reporting period to which they relate, irrespective of the payment or collection date.
Consistency
Once a criterion has been selected from amongst the available options, this should be
maintained over time and applied consistently to other similar transactions, events and
conditions, insofar as the circumstances that gave rise to its selection remain unchanged.
Should the grounds for the original choice of a criterion change, a different policy could be
applied and details of this situation should be disclosed in the notes, indicating the
quantitative and qualitative effect of the variation on the annual accounts.
Prudence
The prudence principle introduces an element of caution into accounting. Income and
profits should only be recorded in the books when they are certain to result in an inflow of
cash. By contrast, provisions or liabilities should be made as soon as they are recognised,
even though their amount may not be known with certainty. Prudence is controversial
because it introduces asymmetry into the accounting process.
Offsetting
Assets and liabilities, and income and expenses, shall not be offset unless expressly
permitted by a standard. The components of the annual accounts shall be measured
separately.
Materiality ,

mapua
Strict application of certain accounting principles and criteria may be waived when the
quantitative or qualitative materiality of the variation arising as a result is of little
significance and, therefore, does not affect fair presentation. When items or amounts are
not material, these may be aggregated with other items of a similar nature or function.

A large company has a building in the hurricane zone during Hurricane Sandy. The company
building is destroyed and after a lengthy battle with the insurance company, the company reports
an extra ordinary loss of $10,000. The company has net income of $10,000,000. The materiality
concept states that this gain is immaterial because the average financial statement user would
not be concerned with something that is only 1% of net income.
Assume the same example above except the company is a smaller company with only $50,000 of
net income. Now the loss is 20% of net income. This is a substantial loss for the company.
Investors and creditors would be concerned about a loss this big. To the smaller company, this
$10,000 would be considered material. -

A small company bookkeeper doesn't do a are very good job of keeping track of expenses. Most
random expenses get recorded in the miscellaneous expense account. At the end of the year the
miscellaneous expense account has a total of $1424.25 in it. The total net income of the
company is $36,940. The miscellaneous account is immaterial to the overall financial picture of
the company and there is no need to reclassify the expenses in it.
Chapter 4: The accounting process
The Business Cycle
Businesses pay cash to buy goods and services.
Businesses sell goods and services, receiving cash to complete the cycle.

Accrual vs Cash Accounting


Accrual Accounting
The impact of business transactions are recorded when the transaction occurs
- Revenues are recognized and recorded when earned
- Expenses are recognized and recorded when incurred
It is required by GAAP; based on a conceptual framework that includes a number of
accounting concepts and principles.
> casn accounting

Transactions are recorded when cash is received or paid


- Revenues are recorded when cash is received
- Expenses are recorded when cash is paid

Updating the Accounts for the Financial Statements: The Adjustment Process
The adjustment process begins with the trial balance.
The unadjusted trial balance lists the accounts and their balances after the period’s
transactions have been recorded.
These trial balance accounts are incomplete because they omit certain revenue and
expense transactions that affect more than one accounting period.
> acumulation
The accrual basis requires adjustment at the end of the period to produce correct
balances for the financial statements.
* Consider the Supplies account
- Supplies is adjusted once a month
- The amount on the trial balance represents the cost of supplies available for use
during the month
- The supplies on hand at the end of the month must be counted to determine the
correct amount to report on the balance sheet:
The adjustment of Supplies (and Supplies Expense) at the end of the accounting period

The adjusting entry updates both the Supplies asset account and the Supplies Expense account

Accountants make adjusting entries in the journal at the end of the period to enter
adjustments into the accounting records
Adjusting entries update the asset and liability accounts through the assignment of
revenues to the period in which they are earned and expenses to the period in which they
are incurred.

Adjusting entries can be grouped into three basic categories:


- Deferrals caplazamiento

Adjustment of an asset/liability for which the business paid or received cash in advance
- Prepaid expenses
- Unearned revenues I s ya ha pagado , abrado con antelacion

- Depreciation
Systematic allocation of the cost of a plant asset to expense over the asset’s useful life.
- Accruals
accrued accin ;
The recording of an expense or a revenue before paying or receiving cash
1 . 2 ainers.

deterral 11 .
diner ; 2 . accin

- Accrued expenses -

> acumulads
- Accrued revenues
Prepaid Expenses
Prepaid expenses are expenses paid in advance.
Because they provide future economic benefit, prepaid expenses are classified as assets.
Before financial statements are prepared, prepaid expenses are adjusted to reflect the
amount used during the period of the statements.
Adjusting prepaid expenses:

Adjusting supplies:
Unearned Revenues
An unearned revenue is an obligation arising from receiving cash in advance of providing a
product or a service. Revenue is recognized when the services are provided.
An unearned revenue is a liability, not a revenue.

Unearned Service Revenue is a liability because it represents Air & Sea’s obligation to perform
service for the client.

Depreciation of Plant Assets


Plant assets are long-lived tangible assets, such as land, buildings, furniture, machinery,
and equipment used in the operations of the business.
Depreciation is the process of allocating the cost of the decline in value of a plant asset
to expense.
All plant assets (except land) decline in usefulness as they age. This decline in usefulness
is an expense. The allocation of the cost of an asset to several periods is depreciation.

The straight-line method of depreciation gives an annual depreciation expense of $3,300:


$16,500/5 years = $3,300 per year
Depreciation for the month of April is $275: $3,300/12 months = $275 per month
The Accumulated Depreciation account shows the cumulative sum of all depreciation
expenses from the date of acquiring the asset.
It is a contra asset account: an asset account with a normal credit balance.
A contra account always has a companion account, as well as a normal balance that is
opposite of that of the companion account.
After posting, the Furniture, Accumulated Depreciation - Furniture, and Depreciation
Expense - Furniture accounts appear as follows:

The book value is the net amount of a plant asset (cost — accumulated depreciation):
balance sheet

Accrued Expenses
An accrued expense is a liability that arises from an expense that the business has
incurred but has not yet been paid.
Accrued Revenues
An accrued revenue is a revenue that has been earned but not received in cash.

Prepaid-and accrual-type adjustments

Summary of the Adjusting Process

Category of adjusting Entry Debited Credited

Prepaid expense Expense Asset *

Depreciation Expense Contra asset *

Accrued expense Expense Liability *

Accrued revenue Asset Revenue *

Unearned revenue Liability * Revenue

The Adjusted Trial Balance


The adjusted trial balance lists the accounts, along with their adjusted balances.
Summary of Adjusting Process
- Prepare a trial balance
- Review trial balance and other records for adjustments that should be made:
- Accruals
- Deferrals
- Depreciation
- Prepare and post adjusting entries
- Prepare an adjusted trial balance to ensure accuracy of debits/credits after posting
- Prepare financial statements
Preparing the Financial Statements from the Adjusted Trial Balance
The April financial statements of Air & Sea Travel can be prepared from the adjusted trial
balance.

Closing the Books


Prepare the accounts for the next period’s transactions.
Closing entries transfer revenue, expense, and dividends balances from their respective
accounts to the Retained Earnings account.
Temporary (nominal) accounts are closed at the end of the accounting period.
- Revenue, expense, and dividends accounts
Permanent (real) accounts are not closed at the end of the period because their balances
are not used to measure income.
- Assets, liabilities, and stockholders’ equity accounts
The following are the steps in closing the accounts of a corporation:
The first entry transfers the sum of the expenses to the debit side of Retained Earnings:

Debit Retained Earnings for the sum of Credit each expense account for the
the expenses amount of its debit balance

The second entry transfers the sum of the revenues to the credit side of R. Earnings:

Debit each revenue account for the Credit Retained Earnings for the sum of
amount of its credit balance the revenues

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