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Accounting Methods for Measuring Performance CASH BASIS OF ACCOUNTING ACCRUAL BASIS OF ACCOUNTING VS Chapter 22

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 23

Success Service Corporation - Dry Cleaning Company TL bank loan in January loan due 30 June monthly interest expense of TL 100. Paid two months rent on 1 January 2014 – total TL 200 Paid insurance premium of TL 120 to cover the whole year from January 1 to December 31 Purchased supplies of TL 90 to be used for 3 months and paid TL 75 of it; agreed to pay the rest in February In January-provided TL 750 worth of services and collected cash of TL 500 from customers; the rest would be collected next month Paid salaries of TL 500 at the end of January Chapter 24

Cash Base - Performance Chapter 25

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 26

Accrual Base - Performance Chapter 27

Recognition of Revenues Receipt of the computer 6 May Receipt of the bill 7 May Sales order 3 May Shipment of the goods 5 May Payment of the bill 2 June MILLENIUM CO. CUSTOMER Chapter 28

Recognition of Service Revenues Accrual basis of accounting generally requires that revenues be recognized when both of the following conditions are met: A company has performed all (or the major part of) the services, or has delivered the goods; i.e., when there is little or no uncertainty regarding the exchange of goods or services, and The price of the services or goods has been accepted by both seller and buyer, and seller has received either cash or some other form of asset, enabling reasonable determination of the time of payment (such as accounts receivable, which is the buyer’s promise to pay) Chapter 29

Recognition of Expenses Expenses are recognized when they are incurred and helped to produce revenue, regardless of the cash payment date Chapter 210

Generally Accepted Accounting Principles Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Financial reporting for the world's interconnected financial markets International financial markets have become increasingly interconnected. Financial events in any part of the world now influence every part of the world In such a globalised financial world, the argument for a single way to describe financial performance is compelling. So much so, that successive G20 Communiques have called for a rapid move towards a single set of high quality global accounting standards. Hans Hoogervorst IASB Chairman Chapter 211

Principles and Concepts Principle??? EntityEvery business 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 Periodicityeconomic 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 212

Accounting Cycle Chapter 213

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 214

Fundamental Accounting Equation ASSETS = EQUITIES ASSETS = LIABILITIES + OWNERS' EQUITY Chapter 215

How do we use the fundamental equation? Implications: – If assets increase : either Liabilities and/or Shareholders’ should also increase and vice versa For example: borrow cash, cash (asset) will increase and Liabilities will increase when it is paid back: cash (asset) will decrease and liabilities will decrease – What will happen when Shareholders’ Equity increase? – Which financial statement shows this equation? Assets = Liabilities + Shareholders’ Equity Chapter 216

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”) Changes in the accounts are entered manually into a book called a ledger computerized Basic forms of book ledgers: the two-column account format, and the four-column account format Chart of accounts Chapter 217

Forms of Ledgers Two-Column Account T-Account form that depicts the two-column account: Chapter 218

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 Chapter 219

Behavior of Accounts Liabilities and Owners’ Equity accounts increase on the credit side, decrease on the debit side Chapter 220

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 221

Illustration of Transaction Analysis and Recording: Express Travel Agency 1. Ms. Fodor invested TL at the inception Chapter 222

Express Travel Agency 2. On 1 January employed a full time secretary and a sales representative. Chapter 223

Express Travel Agency 3. On 1 January rented an office building and paid 3 months rent of TL 600. Chapter 224

Express Travel Agency 4. On 2 January office furniture and equipment is purchased for TL , for which TL is paid in cash and the rest would be paid later in January and February Chapter 225

Express Travel Agency 5. On 3 January insured the office building and the equipment effective from 1 January to 31 December 2014 and paid TL 120 for the whole period. Chapter 226

Express Travel Agency 6. On 5 January the company agreed with Turkish Airlines to sell airline tickets of THY and receive commissions in return. Chapter 227

Express Travel Agency 7. On 10 January Express Travel Agency borrowed TL from the bank at an annual interest rate of 24% for six months. The principal and the interest of the loan will be paid together on 10 July Chapter 228

Express Travel Agency 7. On 10 January Express Travel Agency borrowed TL from the bank at an annual interest rate of 24% for six months. The principal and the interest of the loan will be paid together on 10 July Chapter 229

Express Travel Agency 8. On 10 January purchased office supplies for TL in cash. Chapter 230

Express Travel Agency 8. On 10 January purchased office supplies for TL in cash. Chapter 231

Express Travel Agency 9. During the first half of January the agency sold tickets to various customers and on 16 January issued a commission invoice to THY amounting to TL that will be collected later in January Chapter 232

Express Travel Agency 9. During the first half of January the agency sold tickets to various customers and on 16 January issued a commission invoice to THY amounting to TL that will be collected later in January Chapter 233

Express Travel Agency 10. On 20 January the company paid TL for the furniture and equipment that were purchased on 2 January. Chapter 234

Express Travel Agency 10. On 20 January the company paid TL for the furniture and equipment that were purchased on 2 January. Chapter 235

Express Travel Agency 11. On 22 January received TL from a customer for organizing the accounting conference that will be held on February 2, Chapter 236

Express Travel Agency 11. On 22 January received TL from a customer for organizing the accounting conference that will be held on February 2, Chapter 237

Express Travel Agency 12. The company received the full payment of commission charged to THY of TL on 23 January. Chapter 238

Express Travel Agency 12. The company received the full payment of commission charged to THY of TL on 23 January. Chapter 239

Express Travel Agency 13. On 24 January paid salaries of TL employees in cash. Chapter 240

Express Travel Agency 13. On 24 January paid salaries of TL employees in cash. Chapter 241

Express Travel Agency 14. During the second half of January the agency sold tickets to various customers and on 31 January issued a commission invoice to THY amounting to TL which will be collected in February Chapter 242

Express Travel Agency 14. During the second half of January the agency sold tickets to various customers and on 31 January issued a commission invoice to THY amounting to TL which will be collected in February Chapter 243

Express Travel Agency 15. Ms. Fodor withdrew TL on 31 January for personal use. Chapter 244

Express Travel Agency 15. Ms. Fodor withdrew TL on 31 January for personal use. Chapter 245

Summary 1.determine the effects of transactions on three components of the accounting equation, 2.determine which specific accounts are affected, and 3.assure that total of the increases should be equal to either increases on the other side of the equation or to decreases on the same side, or a combination there of. Chapter 246

Behavior Summary Chapter 247

Accounting Cycle Chapter 248

Posting to the Ledger Chapter 249

Ledger-Cash Example- Express Travel Agency Chapter 250

Trial Balance Chapter 251

Normal Balances of Accounts 52Chapter 252

Chapter 253