REVN03B Module 2 - FINANCIAL ACCOUNTING PDF

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FINANCIAL ACCOUNTING...

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MODULE 2 Accounting Information System SESSION TOPIC 1: Overview of Accounting Information System LEARNING OUTCOMES: The following specific learning objectives are expected to be realized at the end of the session: 1. Full understanding of AIS, and 2. Prepare financial statements using the accounting process.. KEY POINTS International Accounting Standards Financial accounting

Creation and composition Conceptual Framework of IAS Board

Presentation and disclosures

CORE CONTENT Introduction The accounting cycle, also commonly referred to as accounting process, is a series of procedures in the collection, processing, and communication of financial information. Accounting involves recording, classifying, summarizing, and interpreting financial information. Financial information is presented in reports called financial statements. But before they can be prepared, accountants need to gather information about business transactions, then record and collate them to come up with the values to be presented in the reports. The cycle does not end with the presentation of financial statements. Subsequent steps are needed to be done to prepare the accounting system for the next cycle. IN-TEXT ACTIVITY Accounting Cycle Steps 1. Identifying and Analyzing Business Transactions The accounting process starts with identifying and analyzing business transactions and events. Not all transactions and events are entered into the accounting system. Only those that pertain to the business entity are included in the process. For example, a personal loan made by the owner that does not have anything to do with the business entity is not accounted for. The transactions identified are then analyzed to determine the accounts affected and the amounts to be recorded. Events that occurred affect the decision – making to make it relevant. Thus, requiring recognition of such event, however, it should be measurable. The measures use are financial in nature i.e., monetary unit. The first step includes the preparation of business documents, or source documents. A business document serves as basis for recording a transaction. Note that the effects of a recognizable and measurable transaction could increase or decrease economic resources and/or economic obligations. The table below presents the different accounts with their normal balances.

Accounts ASSETS

Current: Cash Receivables Inventories Short-term Investments

ACCOUNTS WITH NORMAL BALANCES Normal Balance Effects Debit Credit Increase Increase Increase Increase

√ √ √ √

Effects Decrease Decrease Decrease Decrease

Normal Balance Debit Credit √ √ √ √

Prepaid Expenses Office Supplies

Increase Increase

√ √

Decrease Decrease

√ √

Non-current: Property, Plant & Equipment Long-term Investments Intangibles

Increase Increase Increase

√ √ √

Decrease Decrease Decrease Decrease

√ √ √

Current: Accounts Payable Accrued Expenses Short-term Notes Payable

Increase Increase Increase

√ √ √

Decrease Decrease Decrease

√ √ √

Non-current: Long-term Notes Payable Bank Loans Bonds Payable

Increase Increase Increase

√ √ √

Decrease Decrease Decrease

√ √ √

Capital Withdrawals

Increase Increase

√

Decrease Decrease

√

Revenues

Sales Service Other Income

Increase Increase Increase

Decrease Decrease Decrease

√ √ √

Expenses

Cost of sales Operating Expenses

Increase Increase

LIABILITIE

EQUITY

√ √ √ √ √ √

Decrease Decrease

√

√ √

2. Recording in the Journals A journal is a book – paper or electronic – in which transactions are recorded. Business transactions are recorded using the double-entry bookkeeping system. They are recorded in journal entries containing at least two accounts (one debited and one credited). To simplify the recording process, special journals are often used for transactions that recur frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to record those that cannot be entered in the special books. Transactions are recorded in chronological order and as they occur. Journals are also known as Books of Original Entry. Illustration 1

Transaction Analysis Transactions: a. Received P260,000 cash from clients for services rendered. b. Paid P480,000 of salaries to employees. c. Collected P120,000 from clients on accounts. d. The owner, Shalom, withdrew P80,000 cash for personal use. e. Purchased P140,000 of supplies on account. f. Billed clients P180,000 for services rendered. g. Paid P100,000 to suppliers on account. For each of the transactions for Winston Shalom Company, a sole proprietorship, fill in the spaces to answer the following questions: 1. What are the two accounts affected by the transaction? 2. What type of accounts is affected – asset, liability, owner’s capital, owner’s withdrawal, income or expense account? 3. Should the account be increased or decreased? 4. Should the account be debited or credited? Trans.

(1) Accounts Affected

(2) Type of Account

(3) Increase or Decrease

(4) Debit or Credit

a. b. c. d. e. f. g.

1 2 1 2 1 2 1 2 1 2 1 2 1 2

Cash Service Revenue

asset Income

I I

Dr Cr

Illustration 2 Rosh Hashanah Landscapers is in the business of maintaining condominium grounds. The following are some of the account titles used by the company: 1. Cash = C 2. Accounts receivable = AR 3. Supplies = S 4. Equipment = E 5. Accounts payable = AP 6. Landscaping revenues =LR 7. Salaries expense = SE 8. Rent expense = RE Rosh Hashanah Landscapers completed the following transactions: Debit Credit a. paid for supplies purchased on account last month AP C b. received cash from customers billed last month c. made a payment on accounts payable d. purchased supplies on credit e. billed a client for landscaping services. f. made rent payment for this current month g. received cash from customers for landscaping services h. paid employees' salaries i. ordered equipment j. received and paid for the equipment ordered in (i)

3. Posting to the Ledger Also known as Books of Final Entry, the ledger is a collection of accounts that shows the changes made to each account as a result of past transactions, and their current balances. After the posting all transactions to the ledger, the balances of each account can now be determined.

For example, all journal entry debits and credits made to Cash would be transferred into the Cash account in the ledger. We will be able to calculate the increases and decreases in cash; thus, the ending balance of Cash can be determined.

Illustration 3 Anti-COVID19 organized Eternal Images, a photography and portrait studio, on Oct. 1, 2020. The studio completed the following transactions during the month: Oct 1 Deposited P350,000 in a bank account in the name of the business. 3 Paid two month’s rent deposit and one-month advance, P40,500. 5 Transferred to the business personal photography equipment valued at P129,000. 7 Ordered additional photography equipment, P75,000. 8 Purchased office equipment for cash,P54,000. 10 Received and paid for the photography equipment ordered on Oct. 7, P75,000. 12 Purchased photography supplies on credit, P21,000. 13 Received cash for previously unbilled portraits, P11,400. 17 Billed customers for portraits, P22,500. 19 Paid fifty percent of the supplies purchased on Oct. 12, P10,500. 25 Paid electricity bill for Oct., P3,600. 26 Paid the telephone bill for Oct., P2,100. 28 Received payments from the customers billed on Oct 17, P7,500. 29 Paid salaries to personnel, P12,000. 30 Received an advanced payment from a customer, P1,500. 31 Withdrew P16,000 from the business for a personal emergency. Required: 1. Read the transactions and develop a chart of accounts applicable to the business. 2. Record the transactions directly into T-accounts. 3. Determine the balance of each account.

10/1 10/8 10/10 10/13 10/28 10/30

10/1 10/5

10/1

CASH 01 350,000 40,500 54,000 75,000 11,400 10,500 7,500 3,600 1,500 2,100 12,000 16,000

AC-19, CAPITAL 10 350,000 129,000

Supplies 03 21,000

10/3

PREPAID RENT 04 27,000

10/5 10/10

PHOTOGRAPHY EQPT 06 129,000 75,000

10/3

RENT DEPOSIT 05 13,500

10/8

OFFICE EQUIPMENT 07 54,000

10/13

Service Revenues 11 11,400

10/19 10/25 10/26 10/29 10/31

10/12

Accounts Payable 08 21,000

2 10/19

Accounts Receivable 02 10/1 7

22,500

22,500

Utility Expense 13

7,500

10/25 10/26

Unearned Income 09 10/3 0

10,500

3,600 2,100

Salaries 12 10/29

12,000

Withdrawals 14

1,500

10/31

16,000

4. Unadjusted Trial Balance A trial balance is prepared to test the equality of the debits and credits. All account balances are extracted from the ledger and arranged in one report. Afterwards, all debit balances are added. All credit balances are also added. Total debits should be equal to total credits. When errors are discovered, correcting entries are made to rectify them or reverse their effect. Take note however that the purpose of a trial balance is only test the equality of total debits and total credits and not to determine the correctness of accounting records. Some errors could exist even if debits are equal to credits, such as double posting or failure to record a transaction.

Illustration 4 Using the data in illustration #3, prepare Unadjusted Trial Balance. Anti-COVID19 Eternal Images

Unadjusted Trial Balance For the Month, Ended October 31 Accounts Cash

ref 01 02 03 04 05 06 07 08 09 10 11 12

Dr

Cr

13 14 TOTALS

5. Adjusting Entries Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of the accounting period, some expenses may have been incurred but not yet recorded in the journals. Some income may have been earned but not entered in the books. Adjusting entries are prepared to update the accounts before they are summarized in the financial statements. Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or liability method), prepayments (asset method or expense method), depreciation, and allowances. 6. Adjusted Trial Balance An adjusted trial balance may be prepared after adjusting entries are made and before the financial statements are prepared. This is to test if the debits are equal to credits after adjusting entries are made. 7. Financial Statements When the accounts are already up-to-date and equality between the debits and credits have been tested, the financial statements can now be prepared. The financial statements are the end-products of an accounting system. A complete set of financial statements is made up of: (1) Statement of Comprehensive Income (Income Statement and Other Comprehensive Income), (2) Statement of Changes in Equity, (3) Statement of Financial Position or Balance Sheet, (4) Statement of Cash Flows, and (5) Notes to Financial Statements. 8. Closing Entries Temporary or nominal accounts, i.e. income statement accounts, are closed to prepare the system for the next accounting period. Temporary accounts include income, expense, and withdrawal accounts. These items are measured periodically. The accounts are closed to a summary account (usually, Income Summary) and then closed further to the appropriate capital account. Take note that closing entries are made only for temporary accounts. Real or permanent accounts, i.e. balance sheet accounts, are not closed. 9. Post-Closing Trial Balance In the accounting cycle, the last step is to prepare a post-closing trial balance. It is prepared to test the equality of debits and credits after closing entries are made. Since temporary accounts are already closed at this point, the post-closing trial balance contains real accounts only. *10. Reversing Entries: Optional step at the beginning of the new accounting period Reversing entries are optional. They are prepared at the beginning of the new accounting period to facilitate a smoother and more consistent recording process. In this step, the adjusting entries made for accrual of income, accrual of expenses, deferrals under the income method, and prepayments under the expense method are reversed. SESSION SUMMARY The purpose of the conceptual framework is to provide the IASB with guidance in developing accounting standards, provide preparers of financial statements with guidance in formulating accounting policies

when no accounting standards exist or when accounting standards allow an accounting choice, and help users better understand and apply accounting standards. The framework does not directly prescribe the IFRS but guides the IASB by providing an underlying foundation and basic reasoning on which to consider merits of alternatives.

SELF-ASSESSMENT 1. Assignment: Reaction Papers 2. Quiz : Synchronous LMS Activities – MOODLE

Activity 1 Ortiz provides web design services to a number of clients and has been using the cash basis of accounting. The following spreadsheet is used by Ortiz to keep up with the business's cash receipts and payments. This type of spreadsheet is very common for a small business. The "checkbook" is in green, noting the date, party, check number, check amount, deposit amount, and resulting cash balance. The deposits are spread to the revenue column (shaded in tan) and the checks are spread to the appropriate expense columns (shaded in yellow). Note that total cash on hand increased by $15,732.70 (from $7,911.12 to $23,643.82) during the month.

ACCRUAL BASIS Ortiz has been approached by Mega Impressions, a much larger web-hosting and design firm. Mega has offered to buy Ortiz's business for a price equal to "100 times" the business's monthly net income, as determined under generally accepted accounting principles. An accounting firm has been retained to prepare Ortiz's April income statement under the accrual basis. The following additional information is gathered in the process of preparing the GAAP-based income statement: Revenues:  The $9,000 deposit on April 7 was an advance payment for work to be performed equally during April, May, and June.

The $11,788.45 deposit on April 20 was collection of an account for which the work was performed during January and February.  During April, services valued at $2,000 were performed and billed, but not yet collected. Expenses:  Payroll -- The $700 payment on April 3 related $650 to the prior month. An additional $350 is accrued by the end of April, but not paid.  Rent -- The amount paid corresponded to the amount used.  Server -- The $1,416.22 payment on April 15 related $500 to prior month's usage.  Administrative -- An additional $600 is accrued by the end of April, but not paid. REQUIREMENT REQUIREMENT:: PREPARE CASH-BASIS AND ACCRUAL BASIS INCOME STATEMENT 

Activity 2 You were able to gather the following in connection with our audit of the Kap Inc. for the year ended December 31, 2021: 31-Dec-20 31-Dec-21 Accounts receivable

6,400,000

4,000,000

Notes receivable – trade

1,000,000

2,500,000

Allowance for bad debts

380,000

450,000

4,632,000

2,621,000

Unpaid merchandise invoices Accrued wages

85,000

125,000

Advertising supplies

35,000

75,000

Accrued advertising expense

14,250

40,000

Prepaid insurance

25,000

Unexpired insurance Merchandise inventory Equipment, net

-

2,250,000

41,000 3,120,000

11,000,000

15,000,000

During the year:  Amount collected from customers, P10,000,000, excluding a P100,000 collection from a previously written-off amount. Write-off of receivable during the year amounted to P150,000.  Sales returns (all prior to collections) amounted to P125,000 while sales discounts granted to customers amounted to P225,000.  Total payments to suppliers of merchandise amounted to P8,250,000. Purchase returns (all prior to payments amounted to P300,000).  Wages, Advertising and Insurance payments during the year were at P2,050,000 , P300,000 and P125,000, respectively.  The only transaction apart from the depreciation for the year, affecting equipment’s net book value was the equipment acquisition at the beginning of the year costing P4,500,000. Requirements: 1. Gross sales for 2021 under accrual basis is _____________ 2. Gross purchases for 2021 under accrual basis is __________ 3. Accrual wages expense for 2021 is ____________ 4. Accrual advertising expense in 2021 is __________ 5. Accrual basis net income for 2021 is ___________

REFERENCES Refer to the references listed in the syllabus of the subject....