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Accounting & Financial Analysis 11 Lecture 1

Accounting & Financial Analysis 11 Lecture 1. Introduction to Accounting - Revision. Accounting Methods for Measuring Performance. CASH BASIS OF ACCOUNTING. VS. ACCRUAL BASIS OF ACCOUNTING. Accounting Methods for Measuring Performance. (a) Cash basis of accounting

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Accounting & Financial Analysis 11 Lecture 1

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  1. Accounting & Financial Analysis 11Lecture 1 Introduction to Accounting - Revision

  2. Accounting Methods for Measuring Performance CASH BASIS OF ACCOUNTING VS ACCRUAL BASIS OF ACCOUNTING Mugan-Akman 2007

  3. Accounting Methods for Measuring Performance (a) Cash basis of accounting • Revenues are recognized when cash is received and expenses are recognized when cash is paid (b) Accrual basis of accounting • Revenues and expenses are recognized on an economic basis regardless of when cash is paid or received Mugan-Akman 2007

  4. Success Service Corporation - Dry Cleaning Company • TL 3.000 bank loan in January 2007- loan due 30 June 2007- monthly interest expense of TL 100. • Paid two months rent on 1 January 2007 – total TL 200 • Paid insurance premium of TL 120 to cover the whole year from January 1 to December 31 • Purchased supplies of TL 90 to be used for 3 months and paid TL 75 of it; agreed to pay the rest in February • In January-provided TL 750 worth of services and collected cash of TL 500 from customers; the rest would be collected next month • Paid salaries of TL 500 at the end of January Mugan-Akman 2007

  5. Mugan-Akman 2007

  6. Accounting Methods for Measuring Performance (a) Cash basis of accounting • Revenues are recognized when cash is received and expenses are recognized when cash is paid (b) Accrual basis of accounting • Revenues and expenses are recognized on an economic basis regardless of when cash is paid or received Mugan-Akman 2007

  7. Mugan-Akman 2007

  8. Shipment of the goods 5 May Receipt of the bill 7 May Payment of the bill 20 May Recognition of Revenues Sales order 3 May MILLENIUM CO. Receipt of the computer 6 May CUSTOMER Mugan-Akman 2007

  9. Recognition of Service Revenues Accrual basis of accounting generally requires that revenues be recognized when both of the following conditions are met: • A company has performed all (or the major part of) the services, or has delivered the goods; i.e., when there is little or no uncertainty regarding the exchange of goods or services, and • The price of the services or goods has been accepted by both seller and buyer, and seller has received either cash or some other form of asset, enabling reasonable determination of the time of payment (such as accounts receivable, which is the buyer’s promise to pay) Mugan-Akman 2007

  10. Recognition of Expenses Expenses are recognized when they are incurred and helped to produce revenue, regardless of the cash payment date Mugan-Akman 2007

  11. Generally Accepted Accounting Principles and Concepts • Entity - Every entity is a separate economic unit and should be kept distinct from the activities of its owners and other companies • Monetary Unit- only economic events that have monetary transactions will be reported in the financial statements • Cost Principle- assets are presented at their original (historical) cost • Going Concern- companies are established with the goal that they will operate for an indefinitely long period of time • Periodicity- economic activities of any firm can be divided into discrete time periods for reporting purposes • Matching Principle -all revenues must be recorded in the accounting period in which the goods are sold or services are rendered and all expenses must be recorded in the accounting period in which they are incurred to produce such revenues Mugan-Akman 2007

  12. Adjust the accounts and prepare trial balance Analyze and record the transactions Post the transactions and prepare trial balance Prepare the financial statements Close the accounts and prepare trial balance Accounting Cycle Mugan-Akman 2007

  13. Analysis and Recording Business Transactions • Business transaction is an economic event that causes a change in the financial position • Financial Position: • What we own • How we own Mugan-Akman 2007

  14. Fundamental Accounting Equation ASSETS = EQUITIES ASSETS = LIABILITIES + OWNERS' EQUITY Mugan-Akman 2007

  15. Recall the Balance Sheet Equation: Assets = Liabilities + Shareholders’ Equity Implications: If assets increase : either Liabilities and/or Shareholders’ should also increase and vice versa For example: borrow cash, cash (asset) will increase and Liabilities will increase when it is paid back: cash (asset) will decrease and liabilities will decrease How do we use the “balance sheet” equation? Mugan-Akman 2007

  16. How do we record? • an ACCOUNT: accounting report of a specific asset, liability or owners’ equity item • Has 3 elements: title, debit side and credit side (also called the “T-Account”) • Changes in the accounts are entered manually into a book called a ledger • computerized • Basic forms of book ledgers: the two-column account format, and the four-column account format • Chart of accounts Mugan-Akman 2007

  17. Forms of Ledgers Two-Column Account T-Account form that depicts the two-column account: Mugan-Akman 2007

  18. How do accounts behave? Assets = Liabilities + Shareholders’ Equity + + + So Assets increase on the left hand or debit side then they decrease on the credit side Assets + - debit credit Mugan-Akman 2007

  19. Behavior of Accounts Liabilities and Owners’ Equity accounts increase on the credit side, decrease on the debit side Liabilities or Owners’ Equity Accounts - + debit credit Mugan-Akman 2007

  20. Transaction Analysis and The Duality Concept if an asset account increases, because of duality concept there must be a corresponding 1.increase in a specific liability account 2.or a decrease in a another asset account 3.or an increase in owners' equity account. Mugan-Akman 2007

  21. Illustration of Express Travel Agency 1. Ms. Fodor invested TL100.000 at the inception Mugan-Akman 2007

  22. 2. On 1 January employed a full time secretary and a sales representative. Mugan-Akman 2007

  23. 3. On 1 January rented an office building and paid 3 months rent of TL 600. Mugan-Akman 2007

  24. 4. On 2 January office furniture and equipment is purchased for TL 15.000 , for which TL 5.000 is paid in cash and the rest would be paid later in January and February 2007. Mugan-Akman 2007

  25. 5. On 3 January insured the office building and the equipment effective from 1 January to 31 December 2004 and paid TL 120 for the whole period. Mugan-Akman 2007

  26. 6. On 5 January the company agreed with Turkish Airlines to sell airline tickets of THY and receive commissions in return. Mugan-Akman 2007

  27. 7. On 10 January Express Travel Agency borrowed TL 15.000 from the bank at an annual interest rate of 24% for six months. The principal and the interest of the loan will be paid together on 10 July 2007. Mugan-Akman 2007

  28. 7. On 10 January Express Travel Agency borrowed TL 15.000 from the bank at an annual interest rate of 24% for six months. The principal and the interest of the loan will be paid together on 10 July 2004. Mugan-Akman 2007

  29. 8. On 10 January purchased office supplies for TL 2.500 in cash. Mugan-Akman 2007

  30. 8. On 10 January purchased office supplies for TL 2.500 in cash. Mugan-Akman 2007

  31. 9. During the first half of January the agency sold tickets to various customers and on 16 January issued a commission invoice to THY amounting to TL 5.000 that will be collected later in January 2007. Mugan-Akman 2007

  32. 9. During the first half of January the agency sold tickets to various customers and on 16 January issued a commission invoice to THY amounting to TL 5.000 that will be collected later in January 2004. Mugan-Akman 2007

  33. 10. On 20 January the company paid TL 5.000 for the furniture and equipment that were purchased on 2 January. Mugan-Akman 2007

  34. 10. On 20 January the company paid TL 5.000 for the furniture and equipment that were purchased on 2 January. Mugan-Akman 2007

  35. 11. On 22 January received TL 7.500 from a customer for organizing the accounting conference that will be held on February 2, 2004. Mugan-Akman 2007

  36. 11. On 22 January the company received TL 7.500 from a customer for organizing the accounting conference that will be held on 2 February 2007. Mugan-Akman 2007

  37. 12. The company received the full payment of commission charged to THY of TL 5.000 on 23 January. Mugan-Akman 2007

  38. 12. The company received the full payment of commission charged to THY of TL 5.000 on 23 January. Mugan-Akman 2007

  39. 13. On 24 January paid salaries of TL 9.000 employees in cash. Mugan-Akman 2007

  40. 13. On 24 January paid salaries of TL 9.000 employees in cash. Mugan-Akman 2007

  41. 14. During the second half of January the agency sold tickets to various customers and on 31 January issued a commission invoice to THY amounting to TL 7.500 which will be collected in February 2004. Mugan-Akman 2007

  42. 14. During the second half of January the agency sold tickets to various customers and on 31 January issued a commission invoice to THY amounting to TL 7.500 which will be collected in February 2007. Mugan-Akman 2007

  43. 15. Ms. Fodor withdrew TL 3.000 on 31 January for personal use. Mugan-Akman 2007

  44. 15. Ms. Fodor withdrew TL 3.000 on 31 January for personal use. Mugan-Akman 2007

  45. Summary • determine the effects of transactions on three components of the accounting equation, • determine which specific accounts are affected, and • assure that total of the increases should be equal to either increases on the other side of the equation or to decreases on the same side, or a combination there of. Mugan-Akman 2007

  46. Behavior Summary Assets = Liabilities + Owners’ Equity + - - + - + Dr Cr Dr Cr Dr Cr Expense Revenue + - - + Dr Cr Dr Cr Withdrawals/Dividends + - Dr Cr Mugan-Akman 2007

  47. Adjust the accounts and prepare trial balance Analyze and record the transactions Post the transactions and prepare trial balance Prepare the financial statements Close the accounts and prepare trial balance Accounting Cycle Mugan-Akman 2007

  48. Posting to The Ledger Mugan-Akman 2007

  49. Mugan-Akman 2007

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