Introduction Accounting Equation (A= L + SE) Accounting Cycle Accounting Concepts Revenue Expense Revenue Recognition Matching Principle Types of Adjusted Entries Examples of Adjusted Entries Impact without entries Fei

Classification of Accounts Personal Account Real Account Nominal Account

Classification of Accounts (Contd.) Type Rules for Debit Rules for Credit Personal Accounts Debit the Receiver Credit the Giver Real Accounts Debit what comes in Credit what goes out Nominal Accounts Debit all expenses and losses Credit all incomes and gains

The Accounting Equation Relationship among the assets, liabilities and stockholders’ equity of a business: Illustration 3-3 Emily The equation must be in balance after every transaction. For every Debit there must be a Credit.

The Accounting Cycle Transactions 9. Reversing entries Illustration 3-6 Transactions 9. Reversing entries 1. Journalization 8. Post-closing trail balance 2. Posting 7. Closing entries 3. Trial balance Michael 6. Financial Statements Work Sheet 4. Adjustments 5. Adjusted trial balance

Adjusting Entries Revenues - recorded in the period in which they are earned. Expenses - recognized in the period in which they are incurred. Adjusting entries - needed to ensure that the revenue recognition and matching principles are followed. F

Types of Adjusting Entries Illustration 3-20 Prepayments Accruals 1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed. 3. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned. 4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded. F

Expedient Recording Method Records an expense upon payment of cash before goods or services are consumed Records revenue upon receipt of cash before goods or services are provided Katie

Standard Recording Method Asset upon payment of cash Liability upon receipt of cash before goods or services are provided Katie

Conclusion Accounting Concepts Standard Vs. Expedient Recording Method Revenue and Expense Revenue Recognition and Matching Principle Standard Vs. Expedient Recording Method Types of Adjusted Entries Prepayments : Prepaid Expense and Unearned Revenue Accruals: Accrued Rev. and Accrued Exp. Impact without adjusted entries Overstated A, L, SE, NI, RE Understated A, L, SE, NI, RE Katie and Fei

Statements of Financial Information Balance Sheet Profit and Loss Account Statement of changes in financial position - Cash flow statement - Fund flow statement

Contents of Profit and Loss Account Revenues : Turnover Other income Sale of fixed assets Expenses Profit / Loss

Revenues Revenue is defined as the income that accrues to the firm by sale of goods and services or through investments Sales Revenue is the amount earned through sale of goods/services Gross sales is the total sales, while Net sales is gross sales minus the trade discounts

Revenue (Contd.) Other income is earned through other sources of investments Examples: Interest, dividend, royalty, commission, fee, etc Sale of Fixed Assets are the revenues which come into the business when unused / unwanted assets are sold and money recovered by the company

Expenses The cost of earning the revenues are the expenses Examples: variable expenses like cost of manufacture, cost of selling, fixed expenses like salaries, administrative expenses

Expenses The cost of earning the revenues are the expenses Examples: variable expenses like cost of manufacture, cost of selling, fixed expenses like salaries, administrative expenses

Expenses The cost of earning the revenues are the expenses Examples: variable expenses like cost of manufacture, cost of selling, fixed expenses like salaries, administrative expenses

Expenses (Contd.) Manufacturing expenses These include all expenses related to plant and manufacturing operations like power and fuel, repairs and maintenance, stores consumed, water consumed, etc Excise Duty This is the amount paid to the Govt. as a tax, before the goods are dispatched from the factory

Expenses (Contd.) Salaries and Wages These are the cost of labour and other staff and will also include all other employee benefits and amenities. The other benefits include Provident Fund, ESI contributions, medical benefits, LTC, bonus, gratuity, pension, other superannuation benefits, etc

Expenses (Contd.) Administrative Expenses These include office expenses, secretarial costs, postage and telephones, director’s remuneration and other administrative expenses Selling Expenses These include freight, advertising and sales promotion, commissions and discounts and other selling and distribution costs

Expenses (Contd.) Interest The interest costs consist of interest on long term loans, debentures, bank loans for working capital, interest on public deposits and other loans Depreciation This represents a non cash expenditure as it is only an accounting provision. This amount is not paid to an outside party Other expenses This includes auditor’s remuneration, petty expenses, donations, etc

Profit / Loss The difference between the revenue and expense is profit When expense exceeds the revenue, the company ends up with a loss. PBID: Profit before Interest and Depreciation PBT: Profit before Tax PAT: Profit after Tax

The Profit Appropriations Profit after Tax (PAT) is available for appropriations for Debenture Redemption Reserve General Reserve Dividend on Preference Share Dividend on Equity Share