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 Chapter 2 Mugan-Akman 2007
Accounting Methods for Measuring Performance X (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 Chapter 2 Mugan-Akman 2007
Recognition of Revenues Significant risks and benefits of ownership passes from the seller to the buyer (Transfer of title of goods) Chapter 2 Mugan-Akman 2007
Recognition of Expenses Expenses are recognized when they are incurred and helped to produce revenues Chapter 2 Mugan-Akman 2007
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 Chapter 2 Mugan-Akman 2007
Accounting Cycle Post the transactions and prepare trial balance Analyze and record the transactions Adjust the accounts and prepare trial balance Prepare the financial statements Close the accounts and prepare trial balance Chapter 2 Mugan-Akman 2007
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 Chapter 2 Mugan-Akman 2007
Fundamental Accounting Equation ASSETS = EQUITIES ASSETS = LIABILITIES + OWNERS' EQUITY Chapter 2 Mugan-Akman 2007
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. Chapter 2 Mugan-Akman 2007
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”) Title Debit Credit Chapter 2 Mugan-Akman 2007
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 Chapter 2 Mugan-Akman 2007
Liabilities or Owners’ Equity Accounts 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 Chapter 2 Mugan-Akman 2007
Yağmur Bulut completed the following transactions during October 2007: 1 October, invested TL 50.000 to start an accounting practice, Yağmur Bulut, SMMM 2 October, Rented office space and paid TL 1.200 for October and November. 4 October, paid cash for a Dell computer, TL 2.000. The computer is expected to remain in service for five years 5 October, purchased furniture and fixtures for the office on account, TL 5.400 . These items have an estimated useful life of 5 years. 6 October, purchased supplies on account, TL 150 8 October, performed tax filing services for a client on account, TL 375 Chapter 2 Mugan-Akman 2007
27 October, paid the liability for the purchase of office supplies 22 October, made an agreement with a client to perform bookkeeping for 6 months and received TL 1.200 in advance 23 October, the electricity invoice for an amount of TL 52 was received, which will be paid in November 27 October, paid the liability for the purchase of office supplies 29 October, the client who was billed on 8 October paid TL 275 31 October, Withdrew cash to pay her son’s school fee, TL 1.600 Chapter 2 Mugan-Akman 2007
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Accounting Cycle Adjust the accounts and prepare trial balance Post the transactions and prepare trial balance Analyze and record the transactions Adjust the accounts and prepare trial balance Prepare the financial statements Close the accounts and prepare trial balance Chapter 2 Mugan-Akman 2007
Posting to The Ledger Chapter 2 Mugan-Akman 2007
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NORMAL BALANCES OF ACCOUNTS Category of the Account Increase Recorded By Normal Balance Assets Debits Debit Liabilities Credits Credit Shareholders’ Equity Capital Dividends or Withdrawals Revenues Expenses Chapter 2 Mugan-Akman 2007