CDA COLLEGE ACC101: INTRODUCTION TO ACCOUNTING Lecture 4 Lecture 4 Lecturer: Kleanthis Zisimos

CDA COLLEGECDA COLLEGE

ACC101: INTRODUCTION TO ACC101: INTRODUCTION TO ACCOUNTINGACCOUNTING

Lecture 4Lecture 4

Lecturer: Kleanthis Zisimos Lecturer: Kleanthis Zisimos

Accrual AccountingAccrual Accounting The time period principle assumes that an The time period principle assumes that an

organization’s activities can be divided into specific organization’s activities can be divided into specific time period such as a month , three month quarter time period such as a month , three month quarter or a year. or a year.

Most organizations use a year as their primary Most organizations use a year as their primary accounting period and these reports are called accounting period and these reports are called annual financial statements.annual financial statements.

The annual reporting period is not always a The annual reporting period is not always a calendar ending on December 31 but it can be from calendar ending on December 31 but it can be from February 1 February 1stst until 31 January and so on. until 31 January and so on.

Most companies thought adopt the annual period Most companies thought adopt the annual period January 1January 1stst until December 31 until December 31

Accrual AccountingAccrual Accounting

The usual accounting process is to record The usual accounting process is to record transactions during an accounting period. After transactions during an accounting period. After transactions have been recorded , several transactions have been recorded , several accounts in the ledger need adjustment before accounts in the ledger need adjustment before their balances appear in the financial statements. their balances appear in the financial statements. This need arises because internal transactions This need arises because internal transactions remain unrecorded.remain unrecorded.

Adjustments are necessary for transactions that Adjustments are necessary for transactions that extend over more than one accounting period.extend over more than one accounting period.


Adjustments are grouped into the following four typesAdjustments are grouped into the following four types

Adjustments

Prepaid Expense

Cash paid before expenses are recognized

Accrued Expense

Cash paid after Expenses are recognized

Accrued Revenues

Cash received after revenues are recognized

Unearned Revenues

Cash received before

revenues are recognized


1.) Prepaid Expenses refer to items paid in advance.1.) Prepaid Expenses refer to items paid in advance.

Ex. We prepaid the rent of January 2011 for 400 euro in Ex. We prepaid the rent of January 2011 for 400 euro in December 2010.December 2010.

Journal Entry Dr CrJournal Entry Dr CrRent prepaid 400Rent prepaid 400 Cash 400Cash 400

Rent Prepaid account is an asset of the company and Rent Prepaid account is an asset of the company and goes to the balance Sheetgoes to the balance Sheet


2.) Accrued Expenses refer to costs that incurred in a 2.) Accrued Expenses refer to costs that incurred in a period but are unpaid and unrecordedperiod but are unpaid and unrecorded

Ex. Salaries for 1000 euro in December 2010 are not paid Ex. Salaries for 1000 euro in December 2010 are not paid and must be recorded.and must be recorded.

Journal Entry Dr CrJournal Entry Dr CrSalaries Expense 1000Salaries Expense 1000 Salaries payable 1000Salaries payable 1000

Salaries payable is a liability accountSalaries payable is a liability account


3.) Unearned Revenues refer to cash received in 3.) Unearned Revenues refer to cash received in advance for providing products or servicesadvance for providing products or services

Ex. Consulting services 2000 euro for January 2011 Ex. Consulting services 2000 euro for January 2011 are paid in advance in 2010.are paid in advance in 2010.

Journal Entry Dr CrJournal Entry Dr CrCash 2000Cash 2000 Unearned Con. Services 2000Unearned Con. Services 2000

Unearned Con. Services account is a liability to the Unearned Con. Services account is a liability to the company company


4.) Accrued Revenues refer to revenues earned in a 4.) Accrued Revenues refer to revenues earned in a period that are unrecorded and not receivedperiod that are unrecorded and not received

Ex. Subscriptions receivables for 3000 euro are not yet Ex. Subscriptions receivables for 3000 euro are not yet received nor recorded in the booksreceived nor recorded in the books

Journal Entry Dr CrJournal Entry Dr CrAccrued Subscriptions 3000Accrued Subscriptions 3000 Subscriptions Rec revenue 3000Subscriptions Rec revenue 3000

Accrued Subscriptions account is an asset to the Accrued Subscriptions account is an asset to the company company


Problem 1. solved in class.Problem 1. solved in class. On Dec 2010, McKay Company paid 1,200 euro On Dec 2010, McKay Company paid 1,200 euro

for the January insurance coverage. No for the January insurance coverage. No adjustments have been made to the Prepaid adjustments have been made to the Prepaid Insurance account and it is now December 31, Insurance account and it is now December 31, 2010. Prepare the journal entry to show the 2010. Prepare the journal entry to show the expiration of the insurance as of December 31, expiration of the insurance as of December 31, 20102010


Problem 2. solved in class.Problem 2. solved in class. Taylor company has received in December 2010, Taylor company has received in December 2010,

1800 euro for consulting services. Half of them 1800 euro for consulting services. Half of them for this year and half of them for the next year.for this year and half of them for the next year.

Prepare the T accounts for the above transactions. Prepare the T accounts for the above transactions.


The use of Work sheet The work sheet is an internal document not used The work sheet is an internal document not used

from external decision makers.from external decision makers. It is sometimes used to record the adjustments like It is sometimes used to record the adjustments like

the ones we discussed earlier in the lecture the ones we discussed earlier in the lecture It includes a listing of the accounts, their balances It includes a listing of the accounts, their balances

and adjustments, and their sorting into financial and adjustments, and their sorting into financial columns.columns.

Demonstration example page 176 for showing in Demonstration example page 176 for showing in practice the use of work sheet. practice the use of work sheet.

Completion of the accounting Completion of the accounting CycleCycle

The The closing process closing process is an important step at the is an important step at the end of an accounting period end of an accounting period after financial after financial statements have been completed. It prepares statements have been completed. It prepares accounts for recording the transactions of the accounts for recording the transactions of the next next period. period.

In the closing process we mustIn the closing process we must(1) Identify accounts for closing (1) Identify accounts for closing (2) Record and post the closing entries,(2) Record and post the closing entries,(3) Prepare a post-closing trial balance. (3) Prepare a post-closing trial balance.


The purpose of the closing process is twofold. First, The purpose of the closing process is twofold. First, it resets revenue, expense, and withdrawal account it resets revenue, expense, and withdrawal account balances to zero at the end of each period. This is balances to zero at the end of each period. This is done so that these accounts can properly measure done so that these accounts can properly measure income and withdrawal amounts for the next income and withdrawal amounts for the next period. Second, it helps in summarizing a period's period. Second, it helps in summarizing a period's revenues and expenses. revenues and expenses.


Temporary and Permanent AccountsTemporary and Permanent Accounts

Temporary Temporary (or (or nominal) nominal) accounts accounts accumulate accumulate data related to one accounting period. They include data related to one accounting period. They include all income statement accounts, withdrawal all income statement accounts, withdrawal accounts, and Income Summary. They are accounts, and Income Summary. They are temporary because the accounts are opened at the temporary because the accounts are opened at the beginning of a period, used to record events for beginning of a period, used to record events for that period, and then closed at the end of the that period, and then closed at the end of the period. period. The closing process applies only to The closing process applies only to temporary accountstemporary accounts


Permanent Permanent (or (or real) real) accounts accounts report on activities report on activities related to related to one or more future accounting periods. one or more future accounting periods. They carry their ending balances into the next They carry their ending balances into the next period and include all balance sheet accounts. period and include all balance sheet accounts. Asset, liability, and capital accounts are not closed Asset, liability, and capital accounts are not closed as long as a company continues to own the assets, as long as a company continues to own the assets, owe the liabilities, and have equity.owe the liabilities, and have equity.

Exhibition Example in the class page 193, ex 5-1Exhibition Example in the class page 193, ex 5-1

Closing The Ledger a/csClosing The Ledger a/cs

We have seen so far how we record the We have seen so far how we record the transactions to the accounts. But what is transactions to the accounts. But what is the exact amount in each account to be the exact amount in each account to be transferred in the Balance sheet and Profit transferred in the Balance sheet and Profit & Loss?& Loss?

We transfer the closing balance of each We transfer the closing balance of each transaction to the Financial statements.transaction to the Financial statements.

We will demonstrate this theory with the We will demonstrate this theory with the following examplefollowing example

DETERMINING THE BALANCE DETERMINING THE BALANCE OF A OF A TT ACCOUNTACCOUNT

The balance of a ledger account is the The balance of a ledger account is the difference in Euro between the total debits difference in Euro between the total debits and the total credits in the account. and the total credits in the account.

If the debit total exceeds the credit total, If the debit total exceeds the credit total, the account has athe account has a debit balancedebit balance..

If the credit total exceeds the debit total, If the credit total exceeds the debit total, the account has a the account has a credit balancecredit balance..

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Discussion question 3Discussion question 3 J Jones started business on 1 March 2010 with 5,000 cash J Jones started business on 1 March 2010 with 5,000 cash

at bank and 1,000 cash in hand. During March the at bank and 1,000 cash in hand. During March the following transactions took place:following transactions took place:

1.1. March 2March 2 Bought office furniture 1,500 by cheque.Bought office furniture 1,500 by cheque.2.2. 55 Paid cash 500 for the purchase of additional office Paid cash 500 for the purchase of additional office

furniture.furniture.3.3. 1111 Received cash 100 from the sale of furniture.Received cash 100 from the sale of furniture.4.4. 1717 Sold furniture 300 to S Smith on credit.Sold furniture 300 to S Smith on credit.5.5. 2222 Bought furniture valued £2,000 from A Adams on Bought furniture valued £2,000 from A Adams on

credit.credit.6.6. 2525 Received 200 by cheque from S Smith.Received 200 by cheque from S Smith.7.7. 2828 Paid 1,600 to A Adams, by cheque.Paid 1,600 to A Adams, by cheque.REQUIREDREQUIRED Enter the above transactions in the books of J Jones and Enter the above transactions in the books of J Jones and

close the accountsclose the accounts

Closing the accounts and Closing the accounts and Financial StatementsFinancial Statements

On 1 January 2011 Andrei Ltd had a cash balance of ₤3500, a bank On 1 January 2011 Andrei Ltd had a cash balance of ₤3500, a bank balance of ₤8000 and equity 11500. The following transaction took balance of ₤8000 and equity 11500. The following transaction took place during Januaryplace during January

Jan 3 Paid telephone Jan 3 Paid telephone €€200 by cash200 by cash Jan 4 Provided consulting services to David for Jan 4 Provided consulting services to David for €€ 3000 3000 Jan 13 Bought a used car for Jan 13 Bought a used car for €€ 2000 by cheque 2000 by cheque Jan22 Received a cheque from David Jan22 Received a cheque from David €€ 2000 2000 Jan28 Paid Rent Jan28 Paid Rent €€ 250 by cash 250 by cash

RequireRequire1.1. Open the accounts on 1 January 2011Open the accounts on 1 January 20112.2. Post the transactionsPost the transactions3.3. Close the accountsClose the accounts4.4. Prepare an income statement and a Balance sheetPrepare an income statement and a Balance sheet

Documents

CDA COLLEGE ACC101: INTRODUCTION TO ACCOUNTING Lecture 4 Lecture 4 Lecturer: Kleanthis Zisimos