Accounting For Managers

Transcription

1 Accounting For Managers Professor ZHOU Ning SCHOOL OF ECONOMICS AND MANAGEMENT BEIHANG UNIVERSITY

2 Chapter 4 Accounting Records and Systems

3 The objectives of chapter 4 Recording fundamentals The accounting process Transaction analysis The adjusting and closing process Accounting systems 4-3

4 Recording fundamentals Why learn basic record keeping procedures? Accounting is best learned by doing. Debit-credit mechanism, the principal technique, provides an analytical framework. 4-4

5 The Account Device used for calculating net change Simplest form is T-account. Increases listed on one side; decreases listed on other side. Balanced periodically. 4-5

6 Sample of T-account. 4-6

7 Permanent Accounts = real accounts = balance sheet accounts. Reported on balance sheet. Carried forward into next period: In this sense, they are permanent. 4-7

8 Temporary Accounts Revenue and expense accounts. Details of income statement and changes in retained earnings (RE). Helps summarize operating activity, such as sales revenue, COGS, selling expenses. Avoids cluttering RE account. At end of accounting period, amounts are totaled, combined and transferred to RE. Balances at beginning of each period are

9 General Ledger Ledger is a group of accounts. General ledger contains all accounts. Some accounts may be in summary form. E.g. accounts receivable, inventory, fixed assets. Detail or subsidiary ledgers kept for above. 4-9

10 Chart of Accounts List of all accounts, cash at beginning and RE at the end (p14, illustration1-3). Numbers assigned to accounts to make summaries for Balance Sheet and Income Statement easier. Minimum # is # of BS and IS lines. Usually many more. Management determines # of accounts based on information needs (p360, exhibit 2). May be several levels of detail. Can view as building blocks summarized in various ways. 4-10

11 Debit and Credit Left hand side (LHS) of an account arbitrarily called debit side. RHS is credit side. To debit or charge (credit) means to make an entry to LHS (RHS). For each transaction: Dr./dr. (debit) = Cr./cr. (credit) Assets = Liabilities + Owners Equity Thus double entry bookkeeping. 4-11

12 Rules for Dr. and Cr. Asset accounts: Increases on LHS (Dr.) Decreases on RHS (Cr.) Liability and OE accounts: Necessarily the opposite to maintain fundamental accounting equation: Increases on RHS (Cr.) Decreases on LHS (Dr.) 4-12

13 Rules for Dr. and Cr. (Con.) Revenue and expense accounts can be viewed as part of Retained Earnings or Owners Equity. Since revenues increase RE and expenses decrease RE: Revenue (& RE) accounts Increases on RHS (Cr.) Decreases on LHS (Dr.) Expense accounts Increases on LHS (Dr.) Decreases on RHS (Cr.) 4-13

14 Rules for Dr. and Cr. (Con.) Assets Liabilities Owners Equity Debit Credit = Debit Credit + Debit Credit

15 Rules for Dr. and Cr. (Con.) Accounting Equation Assets = Liabilities + Shareholders Equity Or Assets = Liabilities + (Contributed Capital + Retained Earnings Dividends + Revenue Expenses ) 4-15

16 Accounting Process or Accounting Cycle 1. Analysis of transactions (Judgment) 2. Journalize original entries (Mechanical) 3. Post from journal to ledger (Mechanical) 4. Make adjusting entries (Judgment) Ending balance sheet account balances from step 6 become beginning balances for repetition of the cycle in the next accounting period. 5. Journalize and post closing entries (Mechanical) 6. Prepare financial statements (Judgment) 4-16

17 Transaction Analysis Assets = Liabilities + Owners Equity Dr. = Cr. or, Cr. = Dr. Record which ever half of entry is more obvious. Example entry for Owner contributing $5,000 cash for stock: Cash 5,000 + Paid-in-capital 5,

18 Balancing Accounts & Trial Balance Original entries: Obvious: checks written, sales made, etc. Trial balance. List of all accounts & amounts; separate columns for dr. and cr. Shows equality of dr. and cr. Still could be errors, why? Convenient for making adjusting entries and preparing financial statements (BS & IS). 4-18

19 Balancing Accounts & Trial Balance Eg. P86-89 Original entries 1. Owner invests $5,000 in Business 1. Dr. cash 5,000 Cr. Paid-in-capital 5,000 Cash (1) 5,000 Paid-in-Capital (1) 5,

20 Balancing Accounts & Trial Balance 2. Firm Pays $750 for Rent 2. Dr. Prepaid expense 750 Cr. cash 750 Cash (1) 5,000 (2) 750 Prepaid Expense (2)

21 Balancing Accounts & Trial Balance 3. Firm borrowed $4,000 from a bank on a 9% note payable, with interest payable quarterly and the principal due in full at the end of two years. 3. Dr. cash 4,000 Cr. Notes payable 4,000 Cash (1) 5,000 (2) 750 (3) 4,000 Notes payable (3) 4,

22 Balancing Accounts & Trial Balance 4. Equipment costing $7,200 was purchased for cash. The expected life of the equipment was 10 years. 4. Dr. Equipment 7,200 Cr. cash 7,200 Cash (1) 5,000 (2) 750 (3) 4,000 (4) 7,200 Equipment, at Cost (4) 7,

23 Balancing Accounts & Trial Balance 5. An additional inventory of pizza ingredients and boxes was purchased on credit for $ Dr. inventory 800 Cr. Account payable 800 (5) 800 Inventory Accounts payable (5)

24 Balancing Accounts & Trial Balance 6. In August pizza sales were $12,000, all for cash. 6. Dr. cash 12,000 Cr. Sales revenue 12,000 Cash (1) 5,000 (2) 750 (3) 4,000 (6) 12,000 (4) 7,200 Sales revenue (6) 12,

25 Balancing Accounts & Trial Balance 7. During August the pizzeria s employees were paid $3,000 in wages. 7. Dr. Wage expense 3,000 Cr. cash 3,000 Cash (1) 5,000 (2) 750 (3) 4,000 (4) 7,200 (6) 12,000 (7) 3,000 Wage expense (7) 3,

26 Balancing Accounts & Trial Balance 8. During the month, an additional $5,750 of ingredients and boxes was purchased on credit. 8. Dr. inventory 5,750 Cr. Account payable 5,750 (5) 800 (8) 5,750 Inventory Accounts payable (5) 800 (8) 5,

27 Balancing Accounts & Trial Balance 9. August sales consumed $6,000 of ingredients and boxes. 9. Dr. cost of goods sale 6,000 Cr. inventory 6,000 Inventory (5) 800 (8) 5,750 (9) 6,000 (9) 6,000 COGS 4-27

28 Balancing Accounts & Trial Balance 10. At the end of month, bills for various utilities used in August were received, totaling $ Dr. Utilities expense 450 Cr. Account payable 450 Accounts payable (5) 800 (8) 5,750 (10) 450 Utilities expense (10)

29 Balancing Accounts & Trial Balance 11. During the month, $4,800 of accounts payable was paid. 11. Dr. Account payable 4,800 Cr. cash 4,800 Cash (1) 5,000 (2) 750 (3) 4,000 (4) 7,200 (6) 12,000 (7) 3,000 (11) 4,800 Accounts payable (11) 4,800 (5) 800 (8) 5,750 (10)

30 Balancing Accounts & Trial Balance 12. On August 13, the firm catered a party for a fee of $200. Because the customer was a friend of company, the customer was told that payment could be made later in the month. 12. Dr. Accounts receivable 200 Cr. Sales revenue 200 Sales revenue Accounts receivable (12) 200 (6) 12,000 (12)

31 Balancing Accounts & Trial Balance 13. On August 29, a check was receive for the party of August Dr. Cash 200 Cr. Accounts receivable 200 Cash (1) 5,000 (2) 750 (3) 4,000 (4) 7,200 (6) 12,000 (7) 3,000 (13) 200 (11) 4,800 Accounts receivable (12) 200 (13)

32 Balancing Accounts & Trial Balance Balancing an account Balance -0- (1) 5,000 (3) 4,000 (6) 12,000 (13) ,200 Balance 5,450 Cash (2) 750 (4) 7,200 (7) 3,000 (11) 4,800 15,

33 Balancing Accounts & Trial Balance Balancing an account Accounts payable (11) 4, Balance (5) 800 (8) 5,750 (10) 450 7,000 2,200 Balance 4-33

34 Balancing Accounts & Trial Balance A trial balance: as of August

35 Trial Balance A trial balance is simply a list of the account names and the balances in each account as of a given moment of time, with debit balances shown in one column and credit balances in another column. The Purposes of a trial balance: Dr. = Cr. Preparing the FS 4-35

36 Adjusting Entries Modifies account balances at end of periodcontinuous transactions. Types: Recorded costs to be apportioned among 2 or more periods. Unrecorded expenses. Recorded revenues to be apportioned over 2 or more periods. Unrecorded revenues. 4-36

37 Adjusting Entries Depreciation expense: the systematic allocation of the cost of a long-lived asset to expense over the asset s useful life. Accumulated depreciation: instead of crediting depreciation to the account for the asset being depreciated, called a contra asset account. 4-37

38 Depreciation expense-example 4-38

39 Adjusting Entries - Exercise #1 We purchased equipment for $20,000. The equipment has a life of 5 years. What are the depreciation entries for years 1 and 2? (Assume straight line) How much is the accumulated depreciation (contra asset) at the end of year 2? What is a contra asset account? What is the book value at the end of year 2? What is the fair (or market or current) value of the equipment at the end of year 2? 4-39

40 Adjusting Entries Answer for Exercise #1 We purchased equipment for $20,000. The equipment has a life of 5 years. What are the depreciation entries for years 1 and 2? (Assume straight line) Depreciation expense 4,000 Year 1 Depreciation expense 4,000 Year

41 Adjusting Entries Answer for Exercise #1 We purchased equipment for $20,000. The equipment has a life of 5 years. How much is the accumulated depreciation (contra asset) at the end of year 2? Year 2 Accumulated Depreciation 8,

42 Adjusting Entries Answer for Exercise #1 We purchased equipment for $20,000. The equipment has a life of 5 years. What is a contra asset account? What is the book value at the end of year 2? Equipment, at cost $20,000 less: accumulated depreciation 8,000 net equipment 12,000 What is the fair (or market or current) value of the equipment at the end of year 2? 4-42

43 Adjusting Entries - Exercise #2 Prepare entries for the following: We purchase office supplies on 1/15 for $14,000. On hand at YE (12/31) are $3,000 of office supplies. 4-43

44 Adjusting Entries Allowance for Doubtful Account: another contra asset account-accounts receivable. Not all customers will pay their bills, thus, Accounts receivable account may overstated. Bad debt expense (detail in chapter 5) to adjust. 4-44

45 Bad debt expense-example 4-45

46 Adjusting Entries - Exercise #3 Prepare entries for the following: Credit sales for the year are $1,000,000. Dr. account receivable $1,000,000 Cr. Sales $1,000,000 At year end, we estimate we will collect all but approximately 1.5% of our sales from customers due to customers that go bankrupt or disappear. Account receivable gross $1,000,000 less: allowance for doubtful accounts $15,000 Net Account receivable $985,

47 Adjusting Entries 14. Adjusting entries for Rent expense 14. Dr. Rent expense 750 Cr. Prepaid expense 750 Prepaid Expense (2) 750 (14) 750 (14) 750 Rent expense 4-47

48 Adjusting Entries 15. Adjusting entries for Depreciation expense 15. Dr. depreciation expense 60 Cr. Accumulated depreciation 60 Depreciation Expense (15) 60 Accumulated Depreciation (15)

49 Adjusting Entries 16. Adjusting entries for accrued interest expense 16. Dr. interest expense 30 Cr. Interest payable 30 Interest Expense (16) 30 Interest payable (16)

50 Closing Entries Temporary or IS accounts are closed out to the clearing account Income Summary (= Profit & Loss Summary = Expense and Revenue Summary). Close out = zero out = transfer balance to another account Income summary account is closed out to RE. Only Permanent Accounts remain open. 4-50

51 Closing Entries A. closing the sales Revenues account. (A) 12,200 Sales revenue (6) 12,000 (12) 200 Balance: 12,200 Income Summary (A) 12,

52 Closing Entries B. closing the cost of sales account. Cost of Sales (9) 6,000 (B) 6,000 Income Summary (B) 6,000 (A) 12,

53 Closing Entries H. closing the cost of sales account. Income Summary (B) 6,000 (C) 3,000 (D) 450 (E) 750 (F) 60 (G) 30 10,290 (17) 382 (H) 1,528 (A) 12,200 12,200 Income Summary (17) 382 Retained Earnings Balance 0 To Balance 1,528 (H) 1,528 Balance 1,

54 Financial Statement-Income Statement Sales reveues 12,200 Cost of sales 6,000 Gross margin 6,200 Operating expense Wages expense 3,000 rent 750 Utilities expense 450 Depreciation 60 Interest 30 4,290 Income before income taxes 1,910 Income tax expense 382 Net income 1,

55 Financial Statement-Balance Sheet Assets Liabilities and Owner's Equity Cash 5,450 Accounts payable 2,200 Accounts receivable - Notes payable 4,000 Inventory 550 Accrued expenses 30 Prepaid expense - Income tax liability 382 Total current assets 6,000 Total liabilities 6,612 Equipment at cost 7,200 Paid-in capital 5,000 less: accumulated depreciation 60 Retained earnings 1,528 Equipment net 7,140 Total owner's equity 6,528 Total assets 13,140 Total L+E 13,

56 Financial Statement-Income Statement 4-56

57 Accounting System Consists of: Journals. Ledgers. Rules for using them. Manual, computerized, or anything between. In a computerized system: Bookkeeping steps are done electronically. Discussion problem 4-2, P

58 Objectives of Accounting System To process information efficiently (low cost). To obtain reports quickly. To ensure a high degree of accuracy. To minimize possibility of theft or fraud. 4-58

59 Summary of Chapter 4 Recording fundamentals The accounting process Transaction analysis The adjusting and closing process Accounting systems 4-59

60 Assignments of Chapter 4 Problem 4-2, P103 Problem 4-3, P103 Case 4-1, P105 Case 4-3, P

61 Thank you 4-61

62 Answer for Discussion problem 4-2 1) dr. Prepaid Rent $14,340 cr. Cash $14,340 Prepaid rent is an asset. 2) dr. Sales Discounts and Allowances $34,150 cr. Provision for Sales Discounts and Allowances $34,150 Sales discounts and allowances is a deduction from gross sales to arrive at net sales. The provision is a liability. 3) dr. Interest Receivable $35 cr. Interest Revenue $35 Interest receivable is an asset. Interest income would be listed as other income in this period s income statement. 4-62

63 Answer for Discussion problem 4-2 4) dr. Depreciation Expense $13,660 cr. Accumulated Depreciation $13,660 Depreciation expense is an income statement item. Accumulated depreciation is disclosed as a deduction from the related depreciable asset. 5) dr. Cash $2,730 cr. Deferred Revenue $2,730 Deferred revenue is a liability. 6) dr. Stamp Expense $100 Stamp Inventory $72 cr. Cash $172 Stamps expense is an income statement item. Stamp inventory is an asset. 7) Bad debt expense $1,350 Allowance for doubtful accounts $1,350 Bad debt expense account is an expense account. Allowance for doubtful accounts is a contra asset displayed as a deduction from the asset accounts receivable. 4-63

64 Example of Balance Sheet 4-64