Accounting Systems 1

1. AccountingSystems 1 Vysokáškolafinanční a správní Jaromír R. Stemberg jaromir@mail.vsfs.cz

2. Course Layout • Three two-hour lessons • Three credits • The course is to generalize, integrate, and broaden the financial accounting knowledge, acquired during previous studies, by - introduction of selected accounting theories - presenting multiple views at accounting - outlining special needs of the management - pointing out international accounting issues

3. Literature • Nobes, Ch: Comparative International Accounting Harlow: Prentice Hall, Financial Times, 2008 • Roberts, C.B.: International Financial Accounting: A Comparative ApproachLondon, San Francisco, Kuala Lumpur: Financial Times, Pitman, 1998 • Schroeder, R. G.: Financial Accounting Theory And Analysis: Text And CasesHoboken: John Wiley and Sons, 2009

4. Grading • Pass / Fail • Attendance: 45% each two-hour lesson 15%(late arrival -5%) • Paper: 55%correctness, presentation of facts 20%originality, own views 15%formal appearance + grammar 10% on-time submission 10% • Minimum to pass: 65%

5. Paper • Topic:Contents and usage of one of the IAS/IFRS standards (pick one of your choice that is still valid) • Required length: 3 standard A4 pages of text, font size 10 or 11 pts.excluding cover page, footnotes and literature • Due:December 13, 2010 at 17:30 the latesteither a MS Word file sent via e-mail or a hard copy presented before the lesson

6. Contents • Introduction- history of money and accounting - the role and functions of accounting- management information systems - characteristics of accounts and balanced principle • Accounting Statements- the nature and role of the balance sheet - theories of balance and their development- creation of the second balance - third and fourth balance, their formation and construction

7. Contents • Concept of capital- preservation of the capital substance of a company- ways of addressing it • Accounting systems in the world- characteristics of accounting systems- process of accounting harmonization- US GAAP- IAS/IFRS, link to the directives of the European Union

8. History of Money and Accounting

9. Barter Trade • Exchange of personal possessions of value for other goods • From 9,000-6,000 B.C., livestock was often used as a unit of exchange; as agriculture developed, people used crops for barter • This kind of exchange started at the beginning of humankind and is still used today

10. Barter Trade Problems • Finding the other party: - interest - time • Establishing equal value of exchanged goods • Durability of the exchanged goods, potentiality to store it • Need for a common, durable, storable, non-decaying, generally accepted unit of exchange

11. Cowry Shells • The first money (or medium of exchange) • Began to be used at about 1200 B.C. in China • Accepted in some African regions till 1950s

12. Metal Coins • China, 1000 BC: Bronze and copper cowry imitations were considered the earliest forms of metal coins. They contained holes so they could be put together like a chain. • Lydia (Turkey), 500 BC:The first coins developed out of lumps of silver and were stamped with emperors to mark their authenticity. The techniques were quickly copied by the Greeks, Persians, and the Roman Empire. Unlike Chinese coins, these were made from precious metals such as silver and gold, which had more inherent value.

13. Banknotes • China, 100 BC:Leather money – pieces of painted white deerskin. • China, 800 AD:The first paper banknotes appeared. • China, 1450 AD:Printing money led to a soaring inflation so the use of paper money in China disappeared (this was still years to come before paper currency would be used in Europe).

14. Development of Accounting • Babylon, 18th century B.C.- first organized records kept to account for assets and loans- other ancient civilizations (Roman Empire, Greek Cities, Egypt) followed • Europe, 1st millennium A.D.fall of the Roman Empire caused serious setback in education • Italy, 13th century A.D. - growing trade in the Mediterranean and accumulation of wealth in Italy gave grounds to the development of banking- double-entry bookkeeping was invented by Luca Pacioli

15. Modern Times Accounting • 17th century France: - obligation to present bi-yearly balances of financial situation Italy:- complete theory of accounting Holland:- first corporation established, need for equity accounting • 19th century- massive increase of accounting operations- perfection of accounting principles- rules for asset evaluation

16. Current History of Accounting in USA • 1938: American Institute of Certified Public Accountants began to develop accounting standards (request of the Securities and Exchange Commission) • 1959: Accounting Principles Board established, introduction of GAAP • 1971: growing criticism of inconsistency, APB replaced by the Financial Accounting Standards Board (full-time professionals) • 2002: Sarbanes-Oxley Act (SOX) to ensure ethics in reporting

17. Current Accounting History in Europe • 1973: - the International Accounting Standards Board (IASB) formed- start of development of International Accounting Standards (IAS) • 2001:- 41 IAS issued so far- all new standards are called International Financial Reporting Standards (IFRS) • 2005: - all listed EU companies are required to use IFRS- IFRS becomes a standard for many non-European countries

18. Principles of Accounting

19. Accounting Systems The term of “Accounting System” can be understood as • Structure of recording(cash or accrual accounting) • Purpose of record keeping(financial or managerial accounting) • SW, ERP system(SAP, Oracle, Navision, …) • Accounting standards(national standards, IAS/IFRS, GAAP)

20. Record Keeping • Information – a basic management tool needed for - past references and reporting- present registration and evidence - future planning and management decision making • Registered entries keep track of: - amount how much- count how many- time when- place where- person who

21. Double-Entry Accounting • Accounts- recognition of individual transactions- debit and credit to be recorded at the same time • General Ledger (hlavníkniha)- transactions recorded in accounts, total of both sides must be equal- can be extended by subsidiary ledgers • Journal (účetnídeník)- transactions recorded in order as they occurred- both sides of the record must be equal

22. Management Information Systems • Computerization of accounting- need to process high volume of transactions- financial statements change with every new transaction • Management information systems development1960s: first civil use of computers for accounting in USA1970s: a mainframe and work stations became a standard corporate equipment, custom-made MIS 1980s: mass personal computer utilization started with standardization of HW and DOS, off-shelf accounting SW, Microsoft, SAP and Oracle go public1990s: Y2K virus scare, mass replacement of HW+SW, internet boom, MS Windows, 2000s: development of enterprise resource planning systems

23. Purpose of Record Keeping • Financial accounting- provides information for owners, investors and other stake holders- serves as a base for income tax due calculation- subject to regulations by accounting standards- must be true and honest • Managerial accounting- serves the managers as base for strategy planning and decision making- provides specified pieces of information - outcomes don’t have to be understood by the general public

24. Multiple Balance Accounting Systems

25. Balance Sheet AssetsLiabilities Current Assets Current Liabilities Cash and Equivalents Short-Term Accounts Payable Short-Term ReceivablesCurrent Tax Payable Inventory Short-Term Loans and Borrowings Accruals and Other S/T Assets Accruals and Other S/T Liabilities Long-Term AssetsLong-Term Liabilities Intangible Fixed Assets Long-Term Payables • Tangible Fixed AssetsProvisions • Long-Term Receivables • Owners’ Equity Share Capital Share Premium and Capital Funds Retained Earnings Y-T-D Profit (Loss)

26. Single-Balance Accounting System • Balance Sheet can be the only financial statement for accounting - focused on expressing the structure of assets and their sources- results of business conduct are summarized in aggregate figures • Disadvantages of single-balance accounting system- makes it difficult to monitor and review transactions- the balance sheet must be re-done after every transaction- to keep track of changes, all previous B/Ss must be preserved for comparison

27. Double-Balance Accounting System • Introduces Profit & Loss Statement - good supplement to the Balance Sheet - focuses also on result – revenues and expenses- noticeably higher explanatory ability than the single-balance system- gives not only balances at a given time but also results over a period of time • Disadvantages of double-balance accounting system- accrual accounting doesn’t keep track of cash-based results over a time period- doesn’t trace changes in equity over a time period- to keep track of these changes, all previous B/Ss would have to be preserved for comparison

29. Triple and Quadruple Balance Systems • The Third Balance introduces the Cash Flow Statement (or Statement of Changes in Financial Position) • The Forth Balance introduces the StatementofChanges in Equity • If kept truly, honestly and in accordance with the standards, the Quadruple Balance Accounting System gives, together with the Footnotes, a full picture of the accounting in a sufficient manner

30. Cash FlowStatement

31. StatementofChanges in Equity

32. Quadruple Balance Principle

33. Closing Procedures

34. Year-End Entries • End of the year requires to perform certain closing procedures • Depreciation • P&L Accruals and Deferrals • Closing into Income Summary account • Result recognition in the Balance Sheet • Financial Statements + Notes

35. Depreciation • Straight-line depreciation: (original cost – salvage value) / periods of useful life • Units-of-production method: (original cost – salvage value) / estimated units to be produced • The sum-of-the-years’-digits (SYD) method(original cost – salvage value) * (remaining years / SYD) Example: 5 years = 1+2+3+4+5=15; hence 1st year (original cost – salvage value) * 5/15 2nd year (original cost – salvage value) * 4/15 etc. • The double declining-balance methodtwice the straight-line rate applied to the remaining book value

36. World‘s Accounting Models

37. Anglo-Saxon Model • Great Britain + its former colonies USA, Canada, Jamaica, India, Australia, New Zealand, English-speaking Africa; also Mexico, the Netherlands, and others • Historically formed by impact of international trade, capital financial markets and investors • Accounting it is oriented towards capital investors and influenced by their information needs • Linked to US GAAP

38. Continental Model • Germanic (German-speaking countries), Roman and Francophone (Italy, France, Belgium, Spain, Portugal, French-speaking Africa), Nordic (Scandinavian countries), and mixed (post-communist Europe) sub-models • Heavily influenced by the government, legislation and taxation, oriented towards government reporting requirements • Tightly linked to the banking system • Conservative approach, limited willingness to adopt to requirements of new economic processes

39. Central Planning Model • Used in Soviet Union,East Germany, Poland, Czechoslovakia, Hungary, Romania, Bulgaria, China, Vietnam and other communist countries in 2nd half of 20th century • Still occasionally used (Cuba, North Korea) • Based on needs of planned economy, oriented towards budget and reporting of accomplishment of budgeted goals

40. South American Model • Most of Latin-American countries except of Mexico • Influenced by heavy government regulations and high inflation • Inflationary accounting calculates with inflation and reflects it in financial reports • The same financial reports for reporting and tax purposes, taxation affected by inflation

41. Financial Reports

42. IncomeStatement by Kind

43. IncomeStatement by Function

44. SpecializedIncomeStatement

45. SpecializedIncomeStatement

46. Flash Report

49. Balance Sheet