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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, 2010Accounting Concepts and Procedures
Basic Accounting, Basic Accounting, May 04 - 07, 2010May 04 - 07, 2010Basic Accounting, Basic Accounting, May 04 - 07, 2010May 04 - 07, 2010
ADB Grant No.0133-CAM/Component 1: PFMRD
ADB Grant No.0133-CAM/Component 1: PFMRD
Content1. Accounting concepts2. The Accounting Equation3. Assets, Liabilities, Revenues and Expenses4. The Double Entry accounting system5. Debits and credits
2
Session 1Accounting concepts and procedures
ADB Grant No.0133-CAM/Component 1: PFMRD
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
ADB Grant No.0133-CAM/Component 1: PFMRD
1.Accounting Concepts
4
Business OrganizationsSole proprietorship – one ownerPartnership – at least two ownersCompany/Corporation – owned by shareholders
ADB Grant No.0133-CAM/Component 1: PFMRD
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
Analyze Record Classify
Summarize
DecisionMakers
Interpret Report
1.Accounting ConceptsAccounting Process
ADB Grant No.0133-CAM/Component 1: PFMRD
COMPARISON BETWEEN COMPUTERIZED ACCOUNTING
ANDMANUAL ACCOUNTING
ADB Grant No.0133-CAM/Component 1: PFMRD
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
ADB Grant No.0133-CAM/Component 1: PFMRD
1.Accounting Concepts
9
IGAAPIGAAP::
International Generally Accepted International Generally Accepted Accounting Principles/PracticesAccounting 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 2005.Non-listed companies have a choice.
USA Foreign listed companies allowed since 2008.Domestic listed companies must use US GAAP until 2010. Full adoption of IFRS by 2014.
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
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 EquationsRecording transactions in the basic accounting equation.
ADB Grant No.0133-CAM/Component 1: PFMRD
ADB Grant No.0133-CAM/Component 1: PFMRD
2.The Accounting Equation (Cont.)
13
Assets = Liabilities + Owner’s Equity
Rights of creditors Rights 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
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
15
3.1. Assets
DefinitionA resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
RecognitionRecognized 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
16
3.2. Liabilities
DefinitionAn entity’s obligations to transfer economic benefits as a result of past transactions or events.
RecognitionRecognized 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
17
3.3. Income
DefinitionIncome 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.
RecognitionRecognized 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
18
3.4. Expenses
DefinitionExpenses 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.
RecognitionRecognized 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
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, 200XAssets
Cash $40,000
Cleaning equipment 8,000
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
ADB Grant No.0133-CAM/Component 1: PFMRD
4.The Double entry accounting system (Cont..)
20
Liabilities
Cash +Accounts
Rec. +Computer
Equip. =Accounts Payable +
B. Bell, Capital -
B. Bell, W/D + Revenue - Expense
Assets Owner's Equity
$60,000 $60,000$7,000b.
a.$7,000
$60,000 $60,000$7,000 $7,000
Assets = $67,000 Equities = $67,000
ADB Grant No.0133-CAM/Component 1: PFMRD
ADB Grant No.0133-CAM/Component 1: PFMRD
4.The Double entry accounting system (Cont..)
21
Liabilities
Cash +Accounts
Rec. +Computer
Equip. =Accounts Payable +
B. Bell, Capital -
B. Bell, W/D + Revenue - Expense
Assets Owner's Equity
- 200 - 200
14,000d.
c.
$14,000
$60,000 $60,000$7,000 $7,000
Assets = $66,800 Equities = $66,800
$59,800 $60,000$7,000 $7,000 - $200
$73,800 $60,000$7,000 $7,000 - $200$14,000
Assets = $80,800 Equities = $80,800
ADB Grant No.0133-CAM/Component 1: PFMRD
ADB Grant No.0133-CAM/Component 1: PFMRD
4.The Double entry accounting system (Cont..)
22
Liabilities
Cash +Accounts
Rec. +Computer
Equip. =Accounts Payable +
B. Bell, Capital -
B. Bell, W/D + Revenue - Expense
Assets Owner's Equity
$30,000 30,000
- 4,000f.
e.
- 4,000
$73,800 $60,000$7,000 $7,000
Assets = $110,800 Equities = $110,800
$73,800 $60,000$7,000 $7,000 - $200
$69,800 $60,000$7,000 $7,000 -$4,200$44,000
Assets = $106,800 Equities = $106,800
$14,000 - $200
$30,000 $44,000
$30,000
ADB Grant No.0133-CAM/Component 1: PFMRD
ADB Grant No.0133-CAM/Component 1: PFMRD
4.The Double entry accounting system (Cont..)
23
Liabilities
Cash +Accounts
Rec. +Computer
Equip. =Accounts Payable +
B. Bell, Capital -
B. Bell, W/D + Revenue - Expense
Assets Owner's Equity
- 1,500g. - 1,500$69,800 $60,000$7,000 $7,000
Assets = $105,300 Equities = $105,300
$68,300 $60,000$7,000 $7,000 - $5,700
$44,000 - $4,200
$30,000 $44,000
$30,000
ADB Grant No.0133-CAM/Component 1: PFMRD
ADB Grant No.0133-CAM/Component 1: PFMRD
5.Debits and Credits
24
Assets = Liabilities + Owner’s EquityDr. Cr. Dr. Cr. Dr. Cr.
+ - +- +-
ADB Grant No.0133-CAM/Component 1: PFMRD
ADB Grant No.0133-CAM/Component 1: PFMRD
5.Debits and Credits (Cont…)
25
Dr. Cr.
ExpensesDr. Cr.
+ -
RevenuesDr. Cr.
+-
+-
WithdrawalsDr. Cr.
+ -
ADB Grant No.0133-CAM/Component 1: PFMRD
ADB Grant No.0133-CAM/Component 1: PFMRD
5.Debits and Credits (Cont…)
26
Recording cash transactionsShow 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
ADB Grant No.0133-CAM/Component 1: PFMRD
5.Debits and Credits (Cont…)
27
Bank
$ $
Sales (2) 230 Rent (1) 80
Sales (4) 3,400 Drawings (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
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?