ADB Grant No.0133-CAM/Component 1: PFMRD ADB Grant 0133-CAM: Public Financial Management in Rural Development Ministries (Component 1) Day 1: May 04, 2010 Accounting Concepts and Procedures Basic Accounting, May , 2010

ADB Grant No.0133-CAM/Component 1: PFMRD Content 1.Accounting concepts 2.The Accounting Equation 3.Assets, Liabilities, Revenues and Expenses 4.The Double Entry accounting system 5.Debits and credits 2 Session 1 Accounting concepts and procedures

ADB Grant No.0133-CAM/Component 1: PFMRD 1.Accounting Concepts 3 Language of business Provides information to… – Managers – Owners – Investors – Governmental agencies

ADB Grant No.0133-CAM/Component 1: PFMRD 1.Accounting Concepts 4 Business Organizations Sole proprietorship – one owner Partnership – at least two owners Company/Corporation – owned by shareholders

ADB Grant No.0133-CAM/Component 1: PFMRD 1.Accounting Concepts 5 Business Classifications (Value Chain) Production Processing Manufacturing Merchandising Servicing Wholesaling Retailing

ADB Grant No.0133-CAM/Component 1: PFMRD AnalyzeRecordClassify Summarize Decision Makers InterpretReport 1.Accounting Concepts Accounting Process

ADB Grant No.0133-CAM/Component 1: PFMRD COMPARISON BETWEEN COMPUTERIZED ACCOUNTING AND MANUAL ACCOUNTING

General Manual Accounting System Computerized Accounting System Record transactions in manual record and then computerized accounting system General Journal Entries (both manual and computerized accounting system) Receipt Journals for cash and bank (computerized accounting system) Payment Journals for cash and bank (computerized accounting system) Complete month-end procedures checklist Print out reports from computer and put them in the required format Analyze transactions Manually record transactions in appropriate journal Manually prepare Trial Balance Manually prepare financial statements and put them in the required format Manually post transactions to correspondence ledger accounts Analyze transactions

ADB Grant No.0133-CAM/Component 1: PFMRD 1.Accounting Concepts 9 IGAAP : International Generally Accepted Accounting Principles/Practices – Procedures and guidelines that must be followed during the accounting process

ADB Grant No.0133-CAM/Component 1: PFMRD 10 Country / Region Application of IAS / IFRS European Union All listed companies required to use IFRS since Non-listed companies have a choice. USA Foreign listed companies allowed since Domestic listed companies must use US GAAP until Full adoption of IFRS by Australia Local standards based on IFRS with minor differences. Compliance with Australian standards is also fully compliant with IFRS. Malaysia Local standards similar to IFRS. Planned full adoption of IFRS by 2012.

ADB Grant No.0133-CAM/Component 1: PFMRD 11

ADB Grant No.0133-CAM/Component 1: PFMRD 12 Assets = Equities Properties (resources) of value owned by a firm Financial claims against the assets 2.The Accounting Equations Recording transactions in the basic accounting equation.

ADB Grant No.0133-CAM/Component 1: PFMRD 2.The Accounting Equation (Cont.) 13 Assets = Liabilities + Owner’s Equity Rights of creditorsRights of owner Traditionally, one effect is referred to as the debit side (abbreviated to Dr) and the other as the credit side of the entry (abbreviated to Cr).

ADB Grant No.0133-CAM/Component 1: PFMRD 3.Assets,Liabilities,Revenues and Expenses 14 Balance Sheet Reports financial position of a company as of a particular date Presents ending balances in assets, liabilities, and owner’s equity

ADB Grant No.0133-CAM/Component 1: PFMRD Assets Definition A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. Recognition Recognized when It is probable future economic benefits will flow in and the asset has a cost or value that can be measured reliably.

ADB Grant No.0133-CAM/Component 1: PFMRD Liabilities Definition An entity’s obligations to transfer economic benefits as a result of past transactions or events. Recognition Recognized when it is probable that an outflow of resources in the form of economic benefits will result from settlement of an obligation and the amount of settlement can be measured reliably.

ADB Grant No.0133-CAM/Component 1: PFMRD Income Definition Income increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants. Recognition Recognized when there is an increase in future economic benefits due to an increase in assets or a decrease in liabilities that can be measured reliably

ADB Grant No.0133-CAM/Component 1: PFMRD Expenses Definition Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. Recognition Recognized when there is a decrease in future economic benefits due to a decrease in assets or an increase in liabilities that can be measured reliably.

ADB Grant No.0133-CAM/Component 1: PFMRD 3.Assets,Liabilities,Revenues and Expenses (cont..) 19 Total liabilities & owner’s equity$48,000 Jingle Cleaners Balance Sheet November 30, 200X Assets Cash$40,000 Cleaning equipment8,000 Liabilities & Owner’s Equity Liabilities Accounts payable$19,000 Owner’s Equity J. Jingle, capital Total Assets$48,000 Assets - Liabilities = Owner’s Equity $48,000 - $19,000 = ?? 29,000

ADB Grant No.0133-CAM/Component 1: PFMRD 4.The Double entry accounting system (Cont..) 20 $60,000 $7,000 b. a. $7,000 $60,000 $7,000 Assets = $67,000Equities = $67,000

ADB Grant No.0133-CAM/Component 1: PFMRD 4.The Double entry accounting system (Cont..) ,000 d. c. $14,000 $60,000 $7,000 Assets = $66,800Equities = $66,800 $59,800$60,000 $7,000 - $200 $73,800$60,000 $7,000 - $200$14,000 Assets = $80,800Equities = $80,800

ADB Grant No.0133-CAM/Component 1: PFMRD 4.The Double entry accounting system (Cont..) 22 $30,000 30, ,000 f. e. - 4,000 $73,800$60,000 $7,000 Assets = $110,800Equities = $110,800 $73,800$60,000$7,000 - $200 $69,800$60,000 $7,000 -$4,200$44,000 Assets = $106,800Equities = $106,800 $14,000- $200 $30,000 $44,000 $30,000

ADB Grant No.0133-CAM/Component 1: PFMRD 4.The Double entry accounting system (Cont..) ,500 g. - 1,500 $69,800$60,000 $7,000 Assets = $105,300Equities = $105,300 $68,300$60,000$7,000 - $5,700 $44,000- $4,200 $30,000$44,000 $30,000

ADB Grant No.0133-CAM/Component 1: PFMRD 5.Debits and Credits 24 Assets =Liabilities + Owner’s Equity Dr.Cr.Dr.Cr.Dr.Cr

ADB Grant No.0133-CAM/Component 1: PFMRD 5.Debits and Credits (Cont…) 25 Dr.Cr. Expenses Dr.Cr. +- Revenues Dr.Cr Withdrawals Dr.Cr. +-

ADB Grant No.0133-CAM/Component 1: PFMRD 5.Debits and Credits (Cont…) 26 Recording cash transactions Show the following transactions in ledger accounts: (Tip: the ledger accounts you need are Bank, Rent, Drawings, and Sales) (1) Kamran pays $80 for rent by cheque. (2)Kamran sells goods for $230 cash which he banks. (3)He then takes $70 out of the business for his personal living expenses. (4)Kamran sells more goods for cash, receiving $3,400.

ADB Grant No.0133-CAM/Component 1: PFMRD 5.Debits and Credits (Cont…) 27 Bank $ $ Sales (2)230Rent (1)80 Sales (4)3,400Drawings (3)70 Sales $ $ Bank (2)230 Bank (4)3,400 Rent $ $ Bank (1)80 Drawings $ $ Bank (3)70

ADB Grant No.0133-CAM/Component 1: PFMRD 5.Debits and Credits (Cont…) 28 Example 2 for double entry (1)Buys goods for cash for $380. (2)Pays $20 in sundry expenses. (3)Makes $1,000 in sales. (4)Receives a bank loan of $5,000. (5)Pays $2,600 for fixtures and fittings. What is the total entry to the credit side of the cash T account?