1. CDA COLLEGE ACC101: BOOK KEEPING II Lecture 2 Lecture 2 Lecturer: Kleanthis Zisimos

2. Lecture topic list Expenses due and expenses prepaid Expenses due and expenses prepaid Income receivable and income in advance Income receivable and income in advance Working Capital Working Capital

3. Accrual Accounting The time period principle assumes that an organization’s activities can be divided into specific time period such as a month, three month quarter or a year. The time period principle assumes that an organization’s activities can be divided into specific time period such as a month, three month quarter or a year. Most organizations use a year as their primary accounting period and these reports are called annual financial statements. Most organizations use a year as their primary accounting period and these reports are called annual financial statements. The annual reporting period is not always a calendar ending on December 31 but it can be from February 1 st until 31 January and so on. The annual reporting period is not always a calendar ending on December 31 but it can be from February 1 st until 31 January and so on. Most companies thought adopt the annual period January 1 st until December 31 Most companies thought adopt the annual period January 1 st until December 31

4. Accrual Accounting The usual accounting process is to record transactions during an accounting period. After transactions have been recorded, several accounts in the ledger need adjustment before their balances appear in the financial statements. This need arises because internal transactions remain unrecorded. The usual accounting process is to record transactions during an accounting period. After transactions have been recorded, several accounts in the ledger need adjustment before their balances appear in the financial statements. This need arises because internal transactions remain unrecorded. Adjustments are necessary for transactions that extend over more than one accounting period. Adjustments are necessary for transactions that extend over more than one accounting period.

5. Accrual Accounting Adjustments are grouped into the following four types Adjustments Prepaid Expense Cash paid before expenses are recognized Accrued Expense Cash paid after Expenses are recognized Prepaid Revenues Cash received before revenues are recognized Accrued Revenues Cash received after revenues are recognized

6. Prepaid Expenses 1.) Prepaid Expenses refer to items paid in advance. Ex. We prepaid the rent of January 2011 for 400 euro in December 2010. Journal Entry Dr Cr Rent prepaid 400 Cash 400 Cash 400 Rent Prepaid account is an asset of the company and goes to the balance Sheet Rent Prepaid account is an asset of the company and goes to the balance Sheet

7. Accrued Expenses 2.) Accrued Expenses refer to costs that incurred in a period but are unpaid and unrecorded Ex. Salaries for 1000 euro in December 2010 are not paid and must be recorded. Journal Entry Dr Cr Salaries Expense 1000 Salaries payable 1000 Salaries payable 1000 Salaries payable is a liability account

8. Prepaid Revenues 3.) Prepaid Revenues refer to cash received in advance for providing products or services Ex. Consulting services 3000 euro for January 2011 are paid in advance in 2010. Journal Entry Dr Cr Cash 3000 Prepaid Con. Services 3000 Prepaid Con. Services 3000 Prepaid Con. Services account is a liability to the company

9. Accrued Revenues 4.) Accrued Revenues refer to revenues earned in a period that are unrecorded and not received Ex. Subscriptions receivables for 3000 euro are not yet received nor recorded in the books Journal Entry Dr Cr Accrued Subscriptions 3000 Subscriptions Rec revenue 3000 Subscriptions Rec revenue 3000 Accrued Subscriptions account is an asset to the company

10. Discussion examples Problem 1. solved in class. On Dec 2010, McKay Company paid 1,200 euro for the January insurance coverage. No adjustments have been made to the Prepaid Insurance account and it is now December 31, 2010. Prepare the journal entry to show the expiration of the insurance as of December 31, 2010 On Dec 2010, McKay Company paid 1,200 euro for the January insurance coverage. No adjustments have been made to the Prepaid Insurance account and it is now December 31, 2010. Prepare the journal entry to show the expiration of the insurance as of December 31, 2010

11. Discussion examples Problem 2. solved in class. Taylor company has received in December 2010, 1800 euro for consulting services. Half of them for this year and half of them for the next year. Taylor company has received in December 2010, 1800 euro for consulting services. Half of them for this year and half of them for the next year. Prepare the T accounts for the above transactions.

12. Discussion examples Accruals example. Fisher Ltd pays electricity every 3 months. The following expenses incurred over 2010. Accruals example. Fisher Ltd pays electricity every 3 months. The following expenses incurred over 2010. February. Electricity 100 € May. Electricity 120 € August. Electricity 100 € November. Electricity 130 € In 2011 he paid December electricity for 90 € Prepare the Profit & loss Account for 2010

13. Working Capital Working capital is the difference between current assets and current liabilities Working capital is the difference between current assets and current liabilities Working capital= current assets-current liabilities Working capital= current assets-current liabilities