Financial Accounting by Maliha Tahir 07
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The document provides an outline for a presentation on completing the accounting cycle. It discusses key accounting concepts like the fundamental accounting equation, double-entry system, chart of accounts, general journal, general ledger, adjusted trial balance, worksheet, closing entries and financial statements. The presentation covers analyzing transactions, journalizing, posting, preparing an unadjusted trial balance, making adjustments, preparing an adjusted trial balance, and closing temporary accounts to prepare financial statements at the end of the accounting period.
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Financial Accounting by Maliha Tahir 07
- 1. Completing the Accounting Cycle FUNDAMETAL ACCOUNTING Presented by: MALIHA
- 2. 2 Outline What is Accounting? Who uses accounting information? Main Division Of Accounting Chart of Account Accounting Concepts/Conventions Cash VS Accrual Accounting Accounting Cycle Fundamental Accounting Equation & Concept of Double Entry System The Basic Accounting Elements General Journal & General Ledger The preparation of adjusted Trial Balance Preparation of a Worksheet & its usefulness. The Closing process & Closing entries Preparation of Financial Statement Q & A Session Conclusion
- 3. What is Accounting? The Language of Business. A means to communicate Financial information. A way to convey information about a Business to users. 3
- 4. Who uses Accounting 4 Information? Owners Managers Investors (including potential) Analysts on their behalf Creditors (including potential) Government (tax assessment) Regulators Customers
- 5. Main Divisions of Accounting Financial accounting Primarily prepared for users external to the company. 5 →Revenues, earnings, assets, etc. Management accounting Primarily for internal purposes →Costing, budgeting, net present value, etc.
- 6. Recording Business 6 Transactions The Accounting Period One Year Calendar year Fiscal year Less than One Year Quarterly Monthly
- 7. CHART OF ACCOUNT What is the Chart of Accounts? It is the list of accounts used by a business. Each business entity has its unique chart of accounts. Every chart of accounts has the same numbered account categories: – Assets, Liabilities, Owner’s Equity – Revenues, Expenses 7
- 8. Accounting Concepts / 8 Conventions Business Entity Money Measurement Realization Dual Aspect (Double entry System) Substance over form Prudence Consistency Matching (Accruals) Going concern
- 9. Important Concepts 9 4 concepts as “Fundamental” ARE: 1.Going Concern 2.Consistency 3.Prudence 4.Accruals
- 10. CASH VS ACCRUAL ACCOUNTING 10 Cash Accounting Revenue is recorded when cash is received. Expense is recorded when cash is disbursed. Very straightforward. Facts determine the timing of entries. Less room for judgment. Accrual Accounting Revenue is recorded (recognized) when the revenue has been earned. When the product or service has been provided to the customer, regardless of when payment is received. Expenses are mmaattcchheedd to the revenue that they helped to earn, regardless of when payment is made.
- 11. The Accounting Cycle Process by which accountants prepare financial statements for an entity for a specific period of time 11
- 12. Accounting Cycle JJoouurrnnaalliizzee 3333.. . P PPoooossssttt t 44.. UUnnaaddjjuusstteedd ttrriiaall bbaallaannccee 66.. AAddjjuusstteedd ttrriiaall bbaallaannccee 12 11..AAnnaallyyzzee TTrraannssaaccttiioonnss 11..AAnnaallyyzzee TTrraannssaaccttiioonnss 22.. 22.. JJoouurrnnaalliizzee 44.. UUnnaaddjjuusstteedd ttrriiaall bbaallaannccee 5555.. ..AA AAddddjjuujjuussssttt t 66.. AAddjjuusstteedd ttrriiaall bbaallaannccee 77.. CClloossee AAccccoouunnttss 77.. CClloossee AAccccoouunnttss 88.. PPrreeppaarree FFiinnaanncciiaall ssttaatteemmeennttss 88.. PPrreeppaarree FFiinnaanncciiaall ssttaatteemmeennttss SSttaarrtt tthhee nneexxtt ccyyccllee
- 13. Accounting Cycle 13 Journalize Transaction Post to Accounts Adjust Accounts Close Accounts Prepare Financial Statements
- 14. Fundamental Accounting Equation As se ts = Liabilitie ss ++ OOwwnneerrss’’ EEqquuiittyy 14 This equation is always in balance In order for this equation to remain in balance, double-entry bookkeeping is employed. →That is, the recording of every transaction or event must have at least two parts Either an equal impact (increase or decrease) to both sides of the equation or equal and opposite impact to one side. →The recording of every transaction must keep this equation in balance
- 15. Double Entry System 15 All journal entries have two “sides”: Debit and Credit For every journal entry, the total debits must equal the total credits →This ensures that the fundamental accounting equation (A = L + OE) is always in balance. The basic journal entry: Debit Account name1 PKR amount Credit Account name2 PKR amount To record…
- 16. 16 More Detail “Debit” and “Credit” are just accounting-speak for “increase” and “decrease” “Debit” means “increase” for some elements and “decrease” for other elements. Likewise for “credit”. →For example, a company pays its Rs 500 utility bill: In English: the company has incurred an expense (the amount of expense has increased) and the amount of cash in the company has decreased. An expense (Utilities) has increased An asset (Cash) has decreased In Journal entry: Debit Utility expense Rs 500 Credit Cash Rs 500 To record the payment of utility bill
- 17. 2 Kinds of Entries 17 1. Transactional • The recording of an exchange with another entity 2. Adjusting • Required only when financial statements are prepared to “adjust” accounts to where they should be • Always include at least one Balance Sheet account and one Income Statement account. • e.g. Depreciation of capital assets, earning of interest revenue.
- 18. The Basic Accounting 18 Elements: Asset Expense Liability Revenue Owners’ Equity
- 19. Basic Accounting Elements Asset 19 Has future benefit to the entity Liability Obligation to transfer assets in the future Owners’ Equity Owners’ interest in the company Revenue Increase in economic resources resulting from normal operations of the company Expense Decrease in economic resources resulting from normal operations of the company
- 20. The Basic Accounting 20 Elements: Balance Sheet Income Statement Balance Sheet/ Stmt of Retained Earnings Debit Asset Expense Credit Liability Revenue Owners’ Equity
- 21. Going back to the Fundamental 21 Accounting Equation: AAsssseettss == LLiiaabbiilliittiieess ++ OOwwnneerrss’’ EEqquuiittyy Debit Credit Credit Assets Current assets Long-term assets Liabilities Current liabilities Long-term liabilities Direct investment Capital stock Indirect investment Dividends (debit) Retained earnings Revenue (credit) Expense (debit)
- 22. General Journal What is the General Journal? It is the book of original entry. Transactions are written in a journal in chronological order. The format of the journal is important. Journalizing is the process of entering information as debits and credits to the correct accounts. 22
- 23. 23 General Ledger What is the General Ledger? It is the book of final entry. The information from the journal is transferred to the ledger in the posting process. Debits and credits in the journal remain exactly the same when posted to the accounts in the ledger.
- 24. 24 MORE DETAIL So far we have discussed the major concepts involves in the accounting cycle: Analyzing Recording Posting Unadjusted Trial Balance Adjusting Adjusted Trial Balance BBEE PPRRAACCTTIICCAA LL NNOOWW
- 25. What are on the Worksheet? A Worksheet includes following columns: Unadjusted trial balance. Adjusting entries Adjusted trial balance. Income statement Balance sheet Worksheet can be used to simplify the 25 preparation of financial statements. Used to help move data from the trial balance to the financial statements An internal document – not financial statement
- 26. A Blank Worksheet Adjusted Trial Balance Income Statement 26 Account Smith Inc. Work Sheet For Year ended Dec.31 2004 Balance Sheet and Statement of Owner's Equity Unadjusted Trial Balance Adjustments Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
- 27. Steps in preparation of the worksheet 27 Account Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 171000 Short-term investment 100000 Accounts Receivable 36000 Interest receivable Prepaid Expense 20000 Inventory 20000 Plant and Equipmemt 250000 Accumulated Depreciation Accounts Payable 50000 Wages payable Unearned Revenue 50000 Paid Capital 500000 Sales Revenue 36000 Interest Revenue Cost of Sales 30000 Operating expenses 9000 total 636000 636000 Smith Inc. Work Sheet For Year ended Dec.31 2004 Balance Sheet and Statement of Owner's Equity Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement SStteepp 11:: EEnntteerr tthhee aaccccoouunnttss aanndd uunnaaddjjuusstteedd ttrriiaall bbaallaannccee SStteepp 11:: EEnntteerr tthhee aaccccoouunnttss aanndd uunnaaddjjuusstteedd ttrriiaall bbaallaannccee
- 28. Steps in preparation of the worksheet 28 Account Smith Inc. Work Sheet For Year ended Dec.31 2004 Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 171000 Short-term investment 100000 Accounts Receivable 36000 Interest receivable 2916.67 Prepaid Expense 20000 10000 Inventory 20000 Plant and Equipmemt 250000 Accumulated Depreciation 2600 Accounts Payable 50000 Wages payable 35000 Unearned Revenue 50000 25000.00 SStteepp22:: EEnnttrryy tthhee aaddjjuussttiinngg eennttrriieess’’ Paid Capital 500000 Sales Revenue 36000 25000 Interest Revenue 2916.67 Cost of Sales 30000 Operating expenses 9000 47600.00 total 636000 636000 75516.67 75516.67 Balance Sheet and Statement of Owner's Equity Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement SStteepp22:: EEnnttrryy tthhee aaddjjuussttiinngg eennttrriieess’’
- 29. Steps in preparation of the worksheet 29 Account Smith Inc. Work Sheet For Year ended Dec.31 2004 Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 171000 171000 Short-term investment 100000 100000 Accounts Receivable 36000 36000 Interest receivable 2916.67 2916. 67 Prepaid Expense 20000 10000 10000 Inventory 20000 20000 Plant and Equipmemt 250000 250000 Accumulated Depreciation 2600 2600 SStteepp33:: EEnnttrryy tthhee aaddjjuusstteedd ttrriiaall bbaallaannccee Accounts Payable 50000 50000 Wages payable 35000 35000 Unearned Revenue 50000 25000.00 25000. 00 Paid Capital 500000 500000 Sales Revenue 36000 25000 61000 Interest Revenue 2916.67 2916. 67 Cost of Sales 30000 30000 Operating expenses 9000 47600.00 56600. 00 total 636000 636000 75516.67 75516.67 676516. 67 676516. 67 Balance Sheet and Statement of Owner's Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement SStteepp33:: EEnnttrryy tthhee aaddjjuusstteedd ttrriiaall bbaallaannccee
- 30. Steps in preparation of the worksheet 30 Account Smith Inc. Work Sheet For Year ended Dec.31 2004 Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 171000 171000 Short-term investment 100000 100000 Accounts Receivable 36000 36000 Interest receivable 2916.67 2916. 67 Prepaid Expense 20000 10000 10000 Inventory 20000 20000 SStteepp44:: Plant and Equipmemt 250000 250000 Accumulated Depreciation 2600 2600 EEnnttrryy AAddjjuusstteedd AAmmoouunnttss ttoo IInnccoommee SSttaatteemmeenntt Accounts Payable 50000 50000 Wages payable 35000 35000 Unearned Revenue 50000 25000.00 25000. 00 CCoolluummnnss Paid Capital 500000 500000 Sales Revenue 36000 25000 61000 61,000 Interest Revenue 2916.67 2916. 67 2,917 Cost of Sales 30000 30000 30,000 Operating expenses 9000 47600.00 56600. 00 56,600 total 636000 636000 75516.67 75516.67 676516. 67 676516. 67 86,600 63,917 Net Income (22,683) Balance Sheet and Statement of Owner's Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement SStteepp44:: EEnnttrryy AAddjjuusstteedd AAmmoouunnttss ttoo IInnccoommee SSttaatteemmeenntt CCoolluummnnss
- 31. Steps in preparation of the worksheet 31 SStteepp55:: SStteepp55:: EEnnttrryy AAddjjuusstteedd AAmmoouunnttss ttoo BBaallaannccee sshheeeett CCoolluummnnss EEnnttrryy AAddjjuusstteedd AAmmoouunnttss ttoo BBaallaannccee sshheeeett CCoolluummnnss
- 32. 32 Closing Process The closing process occurs at the end of an accounting period after financial statements are prepared. Reasons for closing entries: Resets revenue and expense account balances to zero at the end of the period. Updates the retained earnings account to reflect net income and distributions.
- 33. Temporary and Permanent Accounts Temporary accounts are also called nominal accounts. They are opened at the beginning of a period, used to record events for that period and closed at the end of the period. They accumulate data related to one accounting period only. 33
- 34. TThhee cclloossiinngg pprroocceessss aapppplliieess oonnllyy ttoo tteemmppoorraarryy aaccccoouunnttss.. 34 TTeemmppoorraarryy AAccccoouunnttss IInnccoommee Summary Revenues EExxppeennsseess TThhee cclloossiinngg pprroocceessss aapppplliieess oonnllyy ttoo tteemmppoorraarryy aaccccoouunnttss..
- 35. Permanent Accounts LLiiaabbiilliittiieess OOwwnneerr’’ss 35 AAsssseettss PPeerrmmaanneenn tt AAccccoouunnttss CCaappiittaall TThhee cclloossiinngg pprroocceessss ddooeess nnoott aappppllyy ttoo ppeerrmmaanneenntt TThhee cclloossiinngg pprroocceessss ddooeess nnoott aappppllyy ttoo ppeerrmmaanneenntt aaccccoouunnttss.. aaccccoouunnttss..
- 36. Steps in the Closing Process Set an Income Summary account. Close Revenue accounts to Income 36 Summary. Close Expense accounts to Income Summary. Close Income Summary account to Retained Earnings
- 37. Close Revenue Accounts to Income Sales Revenue 61,000 61,000 The entries : Interest Revenue Dr. Sales Revenue 61000 2,917 2,917 37 Summary … - Income Summary 63,917 63,917 The entries : Dr. Sales Revenue 61000 Interest Revenue 2917 Interest Revenue 2917 6 3 9C1r.7 Income Summary 6 3 9C1r.7 Income Summary
- 38. Close Expense Accounts to Income Cost of Sales Operating Expense 38 Summary … 30,000 30,000 - Income Summary 86,600 63,917 (22,683) The entries: Dr. Income 86600 The entries: Dr. Income 86600 Cr. Cost of Sales Cr. Cost of Sales 30000 30000 Operating Expense 56600 Operating Expense 56600 … 56,600 56,600 -
- 39. Close Income Summary to Retained Income Summary 86,600 63,917 The Entries: (22,683) - Dr. Income Summary 22683 2 2 C6r8. 3Retained Earnings 39 Earnings (22,683) Retained Earnings … (22,683) The Entries: Dr. Income Summary 22683 2 2 C6r8. 3Retained Earnings
- 40. The Closing Entries Close Revenue Accounts to Income Summary. The entries are: Dr. All Revenue 40 Cr. Income Summary
- 41. The Closing Entries Close Expense Accounts to Income Summary. The entries are: Dr. Income Summary 41 Cr. All Expenses
- 42. The Closing Entries Close Income Summary account to Retained Earnings. 42 If there is a profit, the entries are: Dr. Income Summary Cr. Retained Earnings If there is a loss, the entries are: Dr. Retained Earnings Cr. Income Summary
- 43. Post-Closing Trial Balance Post-Closing Trial Balance is a list of balances for all accounts that not closed. The purpose of a post-closing trial balance is to verifies that: Total debits = total credits for permanent accounts. All temporary accounts have zero balances 43
- 44. Post-Closing Trial Balance 44 Account Smith Inc. Post-Closing Trial Balance For Year ended Dec.31 2004 Balance Sheet Dr Cr Cash 171000 Short-term investment 100000 Accounts Receivable 36000 Interest receivable 2916. 67 Prepaid Expense 10000 Inventory 20000 Plant and Equipmemt 250000 Accumulated Depreciation 2600 Accounts Payable 50000 Wages payable 35000 Unearned Revenue 25000 Paid Capital 500000 Retained Earnings ( 22683) Sales Revenue Interest Revenue Cost of Sales Operating expenses total 589,917 589,917
- 45. Preparing the Financial Statements Financial Statements can be prepared easily using the completed worksheet. 45
- 46. Financial Statements There are 4 statements in a standard set of financial statements 46 1. Balance Sheet → The “what do we have?” statement → Shows what the entity owns and owes (the difference being the owners’ residual interest) 1. Income Statement → The “what did we do?” statement → Shows the activity the entity undertook in its normal course of operations. 1. Statement of Retained Earnings → Shows the changes in Retained earnings in the year Often shown at the bottom of the Income Statement 1. Statement of Cash Flows → Shows the sources and uses of cash in the year Information is derived from the B/S and I/S and other
- 47. The Classified Balance 47 Sheet Debit side Current assets Long-term assets Credit side Current liabilities Long-term liabilities
- 48. The END But Knowledge has No END