final project

in the accounting process, there may be economic events that do not immediately trigger the recording of the transaction. These are addressed via adjusting entries, which serve to match expenses to revenues in the accounting period in which they occur. There are two general classes of adjustments:

• Accruals - revenues or expenses that have accrued but have not yet been recorded. An example of an accrual is interest revenue that has been earned in one period even though the actual cash payment will not be received until early in the next period. An adjusting entry is made to recognize the revenue in the period in which it was earned.
• Deferrals - revenues or expenses that have been recorded but need to be deferred to a later date. An example of a deferral is an insurance premium that was paid at the end of one accounting period for insurance coverage in the next period. A deferred entry is made to show the insurance expense in the period in which the insurance coverage is in effect.
  
  
  
  
  
  

  Definition of 'Inventory'

  The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners. 
  
  

  Property, Plant and Equipment

  These are referred to as "fixed assets". In other words, these are the corporation's real estate, buildings, office furniture, telephones, cafeteria trays, brooms, factories, etc. They are the physical assets the company owns but can't quickly convert to cash. Depending on the type of business, these may or may not make up a large percentage of the total assets. Most of the assets of a railroad or airline will fall into this category (these companies must continue to buy railroad cars and planes to survive - both of which are fixed assets). An advertising agency on the other hand, will have far fewer fixed assets. They require nothing but their employees, some pencils, and a few computers. 
  
  
  

  Definition of 'Property, Plant And Equipment - PP&E'

  A company asset that is vital to business operations but cannot be easily liquidated. The value of property, plant and equipment is typically depreciated over the estimated life of the asset, because even the longest-term assets become obsolete or useless after a period of time.
  
  Depending on the nature of a company's business, the total value of PP&E can range from very low to extremely high compared to total assets. International accounting standard 16 deals with the accounting treatment of PP&E. 

  The Cash Flow Statement

  The Cash Flow Statement is divided into three distinct sections:
  

  • Cash flow from operations
  • Cash flow from investing activities
  • Cash flow from financing activities
  The Cash Flow Statement

  The Cash Flow Statement is the third report in the Financial Statement package (the financial triumvirate if you will). The Statement is fairly new to the financial statements financial package, as it was only added in 1987 when SFAS 95 (Statement of Cash Flows) was issued. Prior to 1987, companies were allowed to provide financial on a working capital or cash basis. For a while, many accepted that the adding back of depreciation to net income was an appropriate substitute for a cash flow statement, while others, especially creditors chose to use EBITDA (earnings before interest, taxes, depreciation and amortization). EBITDA is of course a measurement that maintained wide usage up to the late 1990s, before a string of corporate scandals (led by Enron and Worldcom) removed it from business pages.
  The Cash Flow Statement is divided into three distinct sections:
  

  • Cash flow from operations
  • Cash flow from investing activities
  • Cash flow from financing activities

  
  

  
  
  
  
  
  As is the case with the balance sheet, the cash flow statement does not form part of the double entry system of accounting. As a result, some students are often challenged in their attempts to prepare the statement, confusing the sources (income statement and balance sheet) from which the information should be drawn and where to place the information on the cash flow statement.
  

  The following will help you as you prepare your next cash flow statement:

  • Financial information thatyou'll need:
  •    The most recent income statement
  •    The most recent balance sheet
  •    The prior period balance sheet
  •    Any additional notes pertaining to the transactions of the company during the periods under consideration.
  • Note all the non-cash charges that were applied against revenue. The most common of these is Depreciation
  • Note all the non-cash income that was added to revenue. A common one is Profit from sale of fixed assets. This is usually "paper" profit that does not represent the flow of cash, and should therefore be deducted from income.
  • Compare the two balance sheets. Given the sectional nature of the cash flow statement (see above), you should divide your balance sheets into the three cash flow statement sections.
  • Deduct line items (except cash) on the prior period balance sheet from similar line item on the most recent balance sheet.
  • Deduct line items (except cash) on the prior period balance sheet from similar line item on the most recent balance sheet.
  • Use the following rule with changes in assets, liabilities and equity:
  •    An increase in an asset - A use of cash
  •    An increase in liability - a source of cash
  •    An increase in equity - a source of cash
  •    A decrease in asset - a source of cash
  •    A decrease in liability - a use of cash
  •    A decrease in equity - a use of cash

   

IAS 2 - Inventories

Inventory in IAS 2:

Inventory:

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that is ready or will be ready for sale.

Objectives of IAS 2:

Provide guidance about the accounting treatment for inventories. It provides guidance about inventories in following ways

When inventory is purchased, how it should be recorded

When inventory should be recorded as an expense

Scope:

The following 3 types of inventories are included in IAS 2

o   Finished goods

o   Work in process

o   Raw material

The following inventories are not included in IAS 2

o   Work in process arising under construction contracts

o   Financial instruments e.g. shares and bonds

o   Biological assets related to agricultural activity and agricultural produce at the point of harvest e.g. cattle and crops

Fundamental Principle of IAS 2:

Inventories are required to be stated at the lower of cost and net realizable value (NRV).

Measurement of Inventories:

Cost should include all:

• costs of purchase (including taxes, transport, and handling)
• costs of conversion i.e. labour and overhead
• other costs incurred in bringing the inventories to their present location and condition

Note:

In some circumstances borrowing cost is also included in cost of inventory

The following cost is not included in the inventory cost;

·         Abnormal waste

·         Storage costs

·         Administrative FOH unrelated to production

·         Selling costs

·         Foreign exchange differences

·         Interest cost when inventories are purchased with deferred settlement terms

Cost Formulas:

·         Items which are not ordinarily interchangeable should be valued at individual cost basis.

·         For interchangeable items FIFO and Weighted Average Cost methods are used.

Write-Down to Net Realizable Value:

·         NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale.

·         Any write-down to NRV should be recognized as an expense in the period in which the write-down occurs.

·         Any reversal should be recognized in the income statement in the period in which the reversal occurs.

Expense Recognition:

IAS 18 Revenue:

When inventories are sold and revenue is recognized, the carrying amount of those inventories is recognized as an expense.

[IAS 2.34]

Any write-down to NRV and any inventory losses are also recognized as an expense when they occur.

Disclosure

• accounting policy for inventories
• Carrying amount, of merchandise, supplies, materials, work in progress, and finished goods.
• carrying amount of any inventories carried at fair value less costs to sell 

Accounting adjusting entries solution Case 4.1

 c) 

As we know the customers are billed after the services are rendered. So an adjusting entry is required to record the amount of services rendered in December 2009.The effect of this adjusting entry would be an increase in asset,increase in revenue earned during this period and an increase in owner's equity.

d)

No adjusting entry is required because the insurance will go into effect on January 02, 2010.And no benefit has been derived from the asset.So no insurance expense will be recorded on December 2009.

e)

An adjusting entry is required because the depreciation on equipment is required to be recorded on December 2009.The effect of this would be an increase in expense,decrease in asset and decrease in Owner's equity.

f)

An adjusting entry is required for the amount of salaries for December 2009, because the salaries of this month are due on Janauary 02,2010.The effect of this adjusting entry would be an increase in expense , increase in liability and decrease in owner's equity.     

accounting cycle

ACCOUNTING CYCLE:
                         "It is the procedure for recording, classifying and summarizing the accounting information in different financial reports".
There are various steps include in accounting cycle. These steps are to be followed for recording the business transactions and for the preparation of complete Financial Statement. As it is a cycle , so this procedure to be repeated again and again for keeping up to date records of business transactions.
Steps Included:
                     Following steps are included in an Accounting Cycle ;
1. Journal
2. Ledger
3. Trial Balance
4. Adjustments at the end
5. Adjusted Trial Balance
6. Financial Statements
7. Closing Entries
8. After Closing Trial Balance

JOURNAL:
               "It is a day to day record of business transactions".
The basic type of journals are known as General Journals. Analysing the business transactions and recording them in the form of Journal entries. Analysing business transaction means whether the particular event effect the assets, liabilities and owner's Equity. Two accounts are involved in it.One is debited and other is credited.Journal is made in proper format. As soon as an event is happen it is recorded in the form of journal entries.

LEDGERS:
               "A book to which the record of accounts is transferred from original postings".
Next step after journalizing the transactions is the formation of the accounts in the form of ledgers. Every account in the journal entry has its own ledger account. The format of ledgers are according International Accounting Standards. Ledgers have a debit or credit balance. All the transactions from the journal are posted tto ledgers after each entry is done in such a way that debit amount of a journal entry is transferred to the debit side of the particular ledger and the credit amount is transferred to the credit side of the particular ledger.

TRIAL BALANCE:
              "A statement of all the open debit and credit items in a double entry ledger, made to test their equality".
In trial balance there is a list of the balances of ledgers of a business at a specific time,at the end of a specific period. An unadjusted trial balance is made before any adjustment is made in the ledger. All what is done in the trial balance is to list the balances of the ledgers of a business. A Trial balance has a format in which all the ledger accounts are posted to get an equal of a debit and a credit of posted accounts. It is made under the instructions provided by the IAS.

ADJUSTING ENTRIES:
          " An accounting entry made at the end of accounting period to allocate items between accounting periods".
Adjusting entries are recorded at the end of accounting period to adjust ledger accounts for any changes that relate to the current accounting period but have not yet been recorded. A common characteristic of all adjusting entries is that they involve at least one revenue or expense account. Not all journal entries recorded at the end of a period are adjusting entries. The main purpose of adjusting entries is to match revenues and expenses to the current accounting period which is a requirement of the matching principle of accounting.

ADJUSTED TRIAL BALANCE:
         An Adjusted Trial Balance is a list of the balances of ledgers which is made after the adjusting entries are done. Adjusted trial balance contains balances of revenues and expenses along with those of assets, liabilities and equities after the changes occur due to adjusting entries.

FINANCIAL STATEMENTS:
         Financial statements are structured presentation of a business's financial performance, financial position and changes in financial position over time. It is the final output of an accounting information.
 Following are the types of financial statements ;
1. Income Statement.
2. Balance Sheet.
3. Statement of Cash Flow.
4. Statement of Changes in Equity.
5. Notes and Other Disclosures.

CLOSING ENTRIES:
         It is necessary to close the temporary accounts in order to make their balances zero at the end of accounting period. The temporary accounts are closed when their balances are transferred to permanent accounts.Closing entries are based on the balances of accounts in the adjusted trial balance.
Temporary accounts include:
1. Revenues
2. Expenses
3. Dividends
4. Income Summary

AFTER CLOSING TRIAL BALANCE:
            Post closing trial balance is a list of balances of ledgers prepared after passing adjusting entries and their postings to the ledgers. Post closing trial balance is prepared in  the last step of the accounting cycle and its purpose is to assure that sum of debits equal the sum of credits before the new accounting period starts.

CLOSING ENTRIES

CLOSING ENTRIES

To update the balance in the owner's capital account, accountants close revenue, expense, and drawing accounts at the end of each fiscal year or, occasionally, at the end of each accounting period. For this reason, these types of accounts are called temporary or nominal accounts. Assets, liabilities, and the owner's capital account, in contrast, are called permanent or real accounts because their ending balance in one accounting period is always the starting balance in the subsequent accounting period. When an accountant closes an account, the account balance returns to zero. Starting with zero balances in the temporary accounts each year makes it easier to track revenues, expenses, and withdrawals and to compare them from one year to the next. There are fourclosing entries, which transfer all temporary account balances to the owner's capital account.

1. Close the income statement accounts with credit balances (normally revenue accounts) to a special temporary account named income summary.
2. Close the income statement accounts with debit balances (normally expense accounts) to the income summary account. After all revenue and expense accounts are closed, the income summary account's balance equals the company's net income or loss for the period.
3. Close income summary to the owner's capital account or, in corporations, to the retained earnings account. The purpose of the income summary account is simply to keep the permanent owner's capital or retained earnings account uncluttered.
4. Close the owner's drawing account to the owner's capital account. In corporations, this entry closes any dividend accounts to the retained earnings account. For purposes of illustration, closing entries for the Greener Landscape Group follow.

bank reconsiliration

A form that allows individuals to compare their personal bank account records to the bank's records of the individual's account balance in order to uncover any possible discrepancies.






Bank reconciliation statement helps businesses to reduce the amount of unutilized cash in suspense accounts. By adding deposits in transit, deducting outstanding business checks and adding or deducting bank errors, Bookkeeping Services India work closely with you to adjust the bank reconciliation statement in your bank statement and also preparefinancial statement.

The following was obtained from the records of ABC Computers of 30 September 2009

Bank reconciliation statement on 31 August 2009 (Previous month)

		£	£
Balance as per bank statement			12200
Outstanding deposit:			2100
Total			14300
Outstanding cheques:	No: 100	2200
	No: 106	740
	No: 109	540	(3480)
Total			10820 (Opening balance for cash book)

			Cash Book for September 2009
Date	Details	Amount (£)	Cheque	Date	Details	Amount (£)
3	Sales and VAT	3700	110	3	Water and Electricity
4	A Jones	2400			and VAT	400
10	Deposit	3100	111	4	S Payne	21100
15	Sales and VAT	850	112	9	J Kooste	350
30	Deposit	1670	113	10	Purchases and VAT	2700
			114	12	Salaries	4200
			115		Donation	500
			116	20	Purchases and VAT	3150
			118		J Goosen	600
	Pencil Total	11720			Pencil Total	33000

Bank Statement for September 2009

		Debit	Credit	Balance
Date		£	£	£
1	Balance			12200	Cr
4	Cheque 111	21100		8900	Dr
	Deposit		3700	5200	Dr
	Deposit		2100	3100	Dr
5	Deposit		2400	700	Dr
	SF	60		760	Dr
	DO	1400		2160	Dr
10	Cheque 113	2070		4230	Dr
	Cheque 110	400		4630	Dr
	Deposit		3100	1530	Dr
	Cheque 112	530		2060	Dr
	Cheque 614	2180		4240	Dr
	CB	20		4260	Dr
	Cheque 109	540		4800	Dr
	SF	100		4900	Dr
12	Cheque 115	500		5400	Dr
15	Deposit		850	4550	Dr
20	Cheque 118	600		5150	Dr
	Deposit		4050	1100	Dr

Additional information:

1. Cheque 100 was drawn on the 10 March 2008 to pay a payable. (This cheque is therefore regarded as "stale" for this example - some countries may have different requirements for stale cheques)
2. ABC Computers signed a debit order for the monthly instalment on their motor vehicle bought from Speedy Car Sales.
3. Cheque 614 was not drawn by ABC Computers. (Therefore must be taken out of the bank reconciliation)
4. According to the paid cheques, cheque 112 was drawn for £350 and cheque 113 was drawn for £2070.
5. A receivable deposited the amount of £4050 owed by him directly into ABC Computers bank account.

Required:

1. Complete the cash book for September 2009 by starting with the pencil totals.
2. Prepare the bank reconciliation statement as at 30 September 2009.

[edit]Solution

Compare all amounts in the cash book for September 20.9 with the amounts that are present on the bank statement to see if they are the same. All correct amounts should be crossed off on both statements as they do not contain errors. Any erroneous amounts should be marked so that they can be addressed.

Erroneous amounts may include:

1. Reversed numbers i.e. 164 to 614
2. Outstanding cheques
3. Payments received that have not yet been reflected
4. Errors on cheques
5. Date discrepancies (though amounts and figures may be correct)

Prepare the following two statements for any bank reconciliation:

Cash book (Bank account) of ABC Computers	Dr		Cr
Balance b/f	10820
Pencil total	11720	Pencil total	33000
Payable (Cheque 100)	2200	Speedy Car Sales	1400
Purchases and VAT (Cheque 113)	630	Bank Charges and VAT (60+20+100)	180
Receivable	4050
Balance c/f	5160
	34580		34580
		Balance b/f	5160

Bank reconciliation statement

Bank reconciliation	Debit	Credit
Balance as per bank statement	1100
Erronerous cheque (614)		2180
Error on cheque 112 (£530-£350)		180
Outstanding deposit		1670
Outstanding cheques:
Cheque 114	4200
Cheque 116	3150
Cheque 106	740
Credit balance as per cash book		5160
	9190	9190