Accounting & Financial Analysis 111 Lecture 2 Accrual Accounting, Policies and Procedures
Accounting period All companies prepare various financial and performance reports. These reports relate to a certain period of time. They could be weekly, fortnightly, monthly, quarterly, halfyearly or annually. The accounting period is the time that the report is covering. Public companies generally have their accounting period covering the year 1st July to 30th June. However their financial statements have to be published twice a year; As at 31st December, six months accounting period, and 30th June twelve months accounting period.
Accrual accounting The main principle for accrual accounting is to match all Revenue and Costs to the accounting period in which they were incurred. Profit is calculated by matching the income earned in a period with expenses incurred in earning that income. Income & expenditure is recognised when it is earned/incurred irrespective of whether the cash has been received or paid at that point of time. Therefore we need to identify all income and expenses relating to the accounting period.
Accrual accounting - 2 This requires end of period adjustments, processed by General Journals to the General Ledger, to account for: Accruals- Expenses incurred during the accounting period, for which invoices have not yet been received. (Telephone, electricity, stationery, repairs to photo-copier etc etc.)
Prepayments payments made for expenses that relate to a future date beyond the accounting / reporting period. (Insurance premiums, council rates & taxes, motor vehicle registration & insurance, etc
Adjustments Up-dating provision accounts to accurately reflect future liabilities/obligations. (Employee entitlements, workers compensation claims, provision for bad debts, etc.)
Other adjustments Calculation of depreciation for the period. Adjustments to inventory (Stock) to reflect the correct value as per periodic stock take.
Accrued revenue To include revenue earned, but for which invoices have not yet been issued. (Large contract job booked in stages of completion. Sales or jobs done outside the accounting monthly period (ends Friday) but within the calendar month (say 31st May 05)
Accrual vs Cash Accounting Accrual accounting is the method adopted by all Corporations. The other method of accounting is the "Cash Basis Accounting" (which only recognises income & expenses when cash is received or paid) this method is usually applied by sole traders and partnerships.
Auditor’s Statement Company financial statements are usually accompanied by an auditor's statement confirming that they represent a true and fair view of the company's position at a given date and that the financial reports are free from any material misstatements. This means that the auditors would have checked transactions that took place during the closing period and confirmed that the value, or at least a close estimate, was processed to the ledger.
Example 1 Assume XYZ Pty Ltd adopt 1 St July to 30th June as their accounting period. Towards the end of June the accountant realises that the last telephone bill received was for three months ending 15th April and amounted to $3,780, and the last electricity bill was for two months ending 30 April and amounted to $4,860. The next invoice will arrive some time towards the end of July by which time the end of year accounts would have been finalised. You are required to estimate the charge that will accrue from the last bill up to the 30th June for each account, and give a justification for the accrual.
Conclusion 1 End of period adjustments require an awareness of transactions that are processed. However in certain instances company policy will prevail over general practice. Example: The directors may decide that no stationery is to be considered as inventory, since this is not of a material consequence it is acceptable.
Conclusion 2 Charges such as: Depreciation, amortization, adjustments to employee entitlements, adjustments to inventories, and provisions for doubtful debts are also within the concept of accrual accounting. The scope of accrual accounting is to establish as accurately as possible the income and expenditure that relates to the accounting period being reported.
Have a go! CLASS EXERCISE Do examples 2 to 8 in your handouts
Policies & Procedures Why is it important for a company to have a register of its Policies & Procedures ?
Policies & Procedures 2 Policies & Procedures are written documents which explain the company's views and requirements with regards to specific issues. Policies & Procedures indicate the standard procedure to follow in order to accomplishcompany objectives
Policies & Procedures 3 A register allows all managers access to the Policies & Procedures Following the company's Policies & Procedures will provide uniformity and consistency in all company dealings.
Policies & Procedures 4 Name some Policies and Procedures you might find in a company’s register. See e.g.s in notes
Have a go! CLASS EXERCISE Do “Excel activity 1” exercise on http://bradip.angelfire.com