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ACCRUAL BASIS OF ACCOUNTING

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Transaction Analysis and The Duality Concept ... asset account increases, because of duality concept there must be a corresponding ... – PowerPoint PPT presentation

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Title: ACCRUAL BASIS OF ACCOUNTING


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Accounting Methods for Measuring Performance
VS
ACCRUAL BASIS OF ACCOUNTING
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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

4
  • Success Service Corporation - Dry Cleaning
    Company
  • TL 3.000 bank loan in January 2007- loan due 30
    June 2007- monthly interest expense of TL 100.
  • Paid two months rent on 1 January 2007 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

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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

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Recognition of Revenues
Sales order 3 May
MILLENIUM CO.
 
Receipt of the computer 6 May
CUSTOMER
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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 buyers promise to pay)

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

11
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

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Accounting Cycle
13
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

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Fundamental Accounting Equation
ASSETS EQUITIES
ASSETS LIABILITIES OWNERS' EQUITY
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How do we use the balance sheet equation?
  • Recall the Balance Sheet Equation
  • Assets Liabilities Shareholders Equity
  • 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

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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

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

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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

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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.

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Illustration of Express Travel Agency
  • 1. Ms. Fodor invested TL100.000 at the inception

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  • 2. On 1 January employed a full time secretary
    and a sales representative.

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  • 3. On 1 January rented an office building and
    paid 3 months rent of TL 600.

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  • 4. On 2 January office furniture and equipment is
    purchased for TL 15.000 , for which TL 5.000 is
    paid in cash and the rest would be paid later in
    January and February 2007.

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  • 5. On 3 January insured the office building and
    the equipment effective from 1 January to 31
    December 2004 and paid TL 120 for the whole
    period.

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  • 6. On 5 January the company agreed with Turkish
    Airlines to sell airline tickets of THY and
    receive commissions in return.

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  • 7. On 10 January Express Travel Agency borrowed
    TL 15.000 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 2007.

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  • 7. On 10 January Express Travel Agency borrowed
    TL 15.000 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 2004.

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  • 8. On 10 January purchased office supplies for TL
    2.500 in cash.

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  • 8. On 10 January purchased office supplies for TL
    2.500 in cash.

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  • 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 5.000 that will be collected
    later in January 2007.

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  • 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 5.000 that will be collected
    later in January 2004.

33
  • 10. On 20 January the company paid TL 5.000 for
    the furniture and equipment that were purchased
    on 2 January.

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  • 10. On 20 January the company paid TL 5.000 for
    the furniture and equipment that were purchased
    on 2 January.

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  • 11. On 22 January received TL 7.500 from a
    customer for organizing the accounting conference
    that will be held on February 2, 2004.

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  • 11. On 22 January the company received TL 7.500
    from a customer for organizing the accounting
    conference that will be held on 2 February 2007.

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  • 12. The company received the full payment of
    commission charged to THY of TL 5.000 on 23
    January.

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  • 12. The company received the full payment of
    commission charged to THY of TL 5.000 on 23
    January.

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  • 13. On 24 January paid salaries of TL 9.000
    employees in cash.

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  • 13. On 24 January paid salaries of TL 9.000
    employees in cash.

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  • 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 7.500 which will be collected in
    February 2004.

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  • 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 7.500 which will be collected in
    February 2007.

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  • 15. Ms. Fodor withdrew TL 3.000 on 31 January for
    personal use.

44
  • 15. Ms. Fodor withdrew TL 3.000 on 31 January for
    personal use.

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Summary
  • determine the effects of transactions on three
    components of the accounting equation,
  • determine which specific accounts are affected,
    and
  • 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.

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Behavior Summary
  • Assets Liabilities Owners
    Equity
  • - -
    -
  • Dr Cr Dr Cr Dr
    Cr

  • Expense Revenue

  • - -
  • Dr
    Cr Dr Cr

  • Withdrawals/Dividends

  • -

  • Dr Cr

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Accounting Cycle
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Posting to The Ledger
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Trial Balance
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Normal Balances of Accounts
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