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Financial Accounting I. William F. Bentz. Accounting & MIS. Early Accounting for ASSETS. Early accounting amounted to listing one’s assets. Income on a Cash Basis. - PowerPoint PPT Presentation
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W. F. Bentz
Financial Accounting I
William F. Bentz
Accounting & MIS
W. F. Bentz
Early Accounting for ASSETS
Early accounting amounted to listing one’s assets.
W. F. Bentz
Income on a Cash Basis
Early measures of income were cash based. Income is equal to cash receipts less cash disbursements. As interpreted today, cash accounting involves no recognition of unpaid expenses, and no recognition of revenues until cash is received. A statement of financial position would be independent of cash income.
W. F. Bentz
Accrual Accounting
Accrual accounting involves the recognition of expenses incurred but not yet paid (liabilities), and the recognition of revenues earned but not yet received (receivables). Similarly, prepaid expenses are recognized as assets, and unearned revenues as liabilities.
W. F. Bentz
Accrual Accounting
The relationship among assets, liabilities and the equity interests of owners is described by the accounting model (equation). The accounting model is used to implement accrual accounting.
W. F. Bentz
The Bookkeeper’s Oath
If there were such a thing as a bookkeeper’s oath, it might be something like follows:
I hereby promise to accrue all unpaid liabilities; update annually all provisions and
estimates; record all required allocations of cost (e.g.,
depreciation);
W. F. Bentz
The Bookkeeper’s Oath (Cont.)
record annually the ending inventories and cost of sales for periodic inventory systems;
correct all known errors; and reclassify all non-current items that
will become due within one year or the operating cycle, whichever is longer.
W. F. Bentz
Epilog
The bookkeeper’s oath represents the basic tasks that distinguish accrual accounting from cash accounting.
W. F. Bentz
Double-Entry Accounting
Luca Pacioli invented double entry accounting in 1494.
East Indian Companies were formed in several countries to trade with India and neighboring countries in early 1600’s. This created a need to account for the business transacted on each venture.
W. F. Bentz
The Accounting Model
The accounting equation:
Assets = Equities
W. F. Bentz
The Accounting Model
The accounting equation:
Assets = Sources of Assets
W. F. Bentz
The Accounting Model
The accounting equation:
Assets = Liabilities + Owners’ Equity
W. F. Bentz
The Accounting Model
The accounting equation:
Current Assets + Long-lived Assets = Liabilities + Owners’ Equity
W. F. Bentz
The Accounting Model
The accounting equation:
Assets - Liabilities = Owners’ Equity
W. F. Bentz
The Accounting Model
The accounting equation:
Current Assets + Long-lived Assets = Current Liabilities + Long-term liabilities + Owners’ Equity
W. F. Bentz
The Accounting Model
The accounting equation:
Assets = Equities
W. F. Bentz
Components of Changes in Equity
•Revenues•Expenses•Gains•Losses •Dividends•Errors
Equities =
W. F. Bentz
Debit/Credit Conventions
Assets (debits) = Equities (credits))
Assets (dr) - Contra-assets (cr) = Equities (cr) - Contra-equities (dr)
W. F. Bentz
Account Conventions
Contra accounts represent reductions in an associated primary account
Example: Equipment is a primary account (debit balance), and Accumulated Depreciation is a related, contra-account (credit balance)
W. F. Bentz
Account Conventions
Other contra accounts: Allowance for Uncollectible Accounts, Allowance for Uncollectible Notes, and Billings on Long-Term Construction Contracts.
W. F. Bentz
Account Conventions (Continued)
Valuation accounts represent reductions in an associated primary account
W. F. Bentz
Account Conventions (Continued)
Valuation accounts represent reductions in an associated primary account
Example: The accounts “Discount on Bonds Payable” (debit) and “Premium on Bonds Payable” (credit) serve to “value” the liability at the original amount borrowed, less any unamortized discount, or plus any unamortized premium.
W. F. Bentz
Accounting Subsystems
A general ledger is a set of accounts (total of debit entries equals the total of the credit entries)
Entries must balance before the system will “post” the entry.
When the entry is accepted, the accounts are immediately updated.
W. F. Bentz
Accounting Subsystems - Payroll
Payroll subsystems include personnel data, prior withholding information, labor distribution information, tax rates, and calculation programs.
Employee numbers, vacation time, sick leave, hours worked, and other relevant information are entered each payroll period.
W. F. Bentz
Accounting Subsystems - Payroll
Outputs include paychecks, accounting entries posted directly to the accounts, labor reports, and updated employee records.
W. F. Bentz
Accounting Subsystems - Accounts Payable
Payable systems have files of approved vendors with names, addresses, discount terms, past transactions, etc.
Inputs involve invoices which require payment by specified dates, and other information as needed.
W. F. Bentz
Accounting Subsystems - Accounts Payable
Outputs include checks, remittance advices, accounting entries posted directly to relevant accounts, expense reports, and updated vendor record files.
W. F. Bentz
Accounting Subsystems - Inventories
Perpetual inventory systems by item number as well as management information.
W. F. Bentz
THE END
