Business Accounting Basics.pptx

DIPLOMA IN HOTEL MANAGEMENT DIPLOMA IN CULIMARY ARTS DIPLOMA IN TOURISM MANAGEMENT DIPLOMA IN EVENT MANAGEMENT HOS 40604 BUSINESS ACCOUNTING BASICS Shantini Thuraiselvam [email protected] BA (Hons) Accounting, Fin...

DIPLOMA IN HOTEL MANAGEMENT DIPLOMA IN CULIMARY ARTS DIPLOMA IN TOURISM MANAGEMENT DIPLOMA IN EVENT MANAGEMENT HOS 40604 BUSINESS ACCOUNTING BASICS Shantini Thuraiselvam [email protected] BA (Hons) Accounting, Finance & Economics, UK Master in Finance, Australia Phd (Business) (Scholar) 1 Certified Financial Planner, CFPCERT TM Course Content Why is this chapter important for non-accountants? In performing your duties as a Senior Manager, you will be more involved in the Planning, Control and Decision-Making of the organisation’s resources. Information regarding Sales, Assets and Debts will be presented in the language of accounting What are you going to do? How are you going to read it? Accounting Basics Accounting Principles Accounting Equation Bookkeeping & Trial Balance Income Statement Balance Sheet 2 4 Accounting Basics Accounting – The Language of Business Accounting Accountingisisthe theinformation informationsystem systemthat... that... measures measuresbusiness businessactivities, activities, processes processesdata datainto intoreports, reports,and and communicates communicatesresults resultsto todecision decisionmakers. makers. The Flow of Accounting Information 1. People make decisions. 2. Business transactions occur. 3. Businesses prepare reports to show the results of their operations. Objectives of accounting Are we making a profit or loss? What is the business worth? What a transaction was worth? How much cash is available? How wealthy am I? How much am I owed? How much do I owe to someone else? Enough information so that I can keep a financial check on the things others do 6 Accounting is concerned with: Recording financial data Classifying and summarising data Communicating what has been learned from the data 7 What is bookkeeping? Bookkeeping is the process of recording data relating to accounting transactions in the accounting books Until about hundreds of years ago, all accounting data was kept by being recorded manually in books, hence the term “bookkeeping” Nowadays, most accounting data is recorded electronically and stored electronically using computers. 8 Who are the Users Accounting Information? Investors Customer Lenders s Accountin g Informati on Employee Public s Governme Suppliers nt 9 Trade Tax (IRB) creditors The basic accounting rules (Dyson, 8th edition, p26) 10 Accounting rules (1/3) Boundary rules Entity – accounting data must be restricted to the entity itself. Exclude private transactions of the owners and managers. Periodicity – accounts should be prepared at the end of a defined time e.g. monthly, quarterly, annually Going concern – the accounts are prepared on the assumption that the entity will continue to exist forever Measurement rules Money measurement – data must be translated into money terms before they are included in the accounting system e.g. gold, assets, etc. Historical cost – financial data should be recorded at 11 their original cost price or purchase price Accounting rules (2/3) Realisation – transactions are entered into the books when the products or the legal ownership has been transferred irrespective of when the cash is paid Matching – transactions are entered into the books as they occur not when it is paid e.g. electricity/ water bills to reflect the economic activity that has taken place Dual aspect – double entry bookkeeping, debit and credit Materiality – the basic accounting rules must not be rigidly applied to insignificant items e.g. 12 paperclips, printers, calculator Accounting rules (3/3) Ethical rules Prudence – if there is doubt of treatment of a particular item, income should be under- estimated and expenses should be over-estimated Consistency – accounting rules and policies should not be amended unless there is a drastic situation Objectivity – personal opinions must be avoided in the interpretation of the basic rules Relevance – accounting statement should include information that allows users to obtain a “TRUE AND FAIR VIEW” of the accounting communicated to them 13 The Reliability Principle (2) (2) (1) (1) can canbe beconfirmed confirmedbybyan an are areverifiable verifiableand and independent independent observer. observer. Other Characteristics of Accounting Information We expect the accounting information to be reliable, verifiable, and objective We expect consistency in the accounting information We expect comparability in the accounting information. 15 The Accounting Equation Assets are the economic resources of a business that are expected to produce a benefit in the future. Liabilities are “outsider claims,” or economic obligations payable to outsiders. Owners’ equity represents the “insider claims” of a business. The Accounting Equation Assets Liabilities Owners’ Equity Assets = Liabilities + Owners’ Equity A–L=C A= C + L The Service Industry Country and sports clubs Hotels Spas and wellness centres Motels Cruise liners Restaurants Private hospitals Fast-food outlets / quick service restaurants Nursing homes Pubs and bars Casinos Budget airlines Resorts 18 Characteristics of the Service Industry Interdependency of functions Sales volatility e.g. seasonal influences – weather, trends High product perishability – food and beverage stocks High fixed assets – premises, equipment Labour intensive activities – skilled service staff 19 5a Accounting Equation 20 The Accounting Equation Assets – what the business owns Assets Liabilities Liabilities – what the business owes to others, ‘payables’ Owners’ equity = Owners’ Assets - Liabilities Equity Assets = Liabilities + Owners’ Equity 21 Assets – Resources of the company Fixed assets – tangible (or long- term) assets, physical assets that can be “touched”. For example, buildings, equipment, vehicles, furniture and fittings, etc. Current assets – resources that are expected to turn to cash or be used up within one year (short- term) of the balance sheet date. Current assets are shown in the order of liquidity: least liquid to most liquid. From stock → accounts receivable → prepaid expenses → cash. Intangible assets – assets that cannot be “touched”. For example, intellectual property 22 rights, patents, copyrights on books, music, etc. Liabilities – the company’s obligations Long-term liabilities > 1 year. For example, long-term loans, bonds, etc. Current liabilities < 1 year. For example, bank overdraft, accounts payable, short-term loans, accrued liabilities, etc. 23 24  Exercise 1 A=L+C lets go to slide no 43 Transaction Assets = Liabilities + Owners’ Equity Dec 1 + bank RM10,000 + Capital RM10,000 Dec 3 -bank 2k ; + comp 2k Dec 5 +inv 3k ; - bank 3k Dec 7 -inv 1k ; +bank 1.5k + profit 500 Dec 10 -inv1.5k ; +bank 3.5k + profit 2k Dec 15 -bank 5k, +frid 5k Dec 20 -inv 200, +Debtor200 Dec 25 +inv5k +SuppA 5k DEc 28 -bank 3k -SuppA 3k Dec 31 Close Bank 2k ; comp 2k; invt SuppA 2000 Cap 12500 5300, frid 5k; deb 200; 25  Bookkeeping 5 Why is this chapter important for non- accountants? b - to learn the language accountants use - to check the reliability of the information presented to you - to debate with your accountant on equal terms 26 Bookkeeping Bookkeeping was done by an actual bookkeeper. Company’s day-to-day financial records by manually recording every business transaction into a journal Journal entry included the date, the name of the accounts to be debited and credited, and the amounts. The bookkeeping process then required that all journal amounts be re-written in (or “posted” to) the company’s general ledger and subsidiary ledger accounts. With the writing and re-writing of so many amounts as well as the manual calculations, it was realistic to assume that some errors would occur 27  This potential for errors created the need to periodically “prove” that the company’s accounts were “in balance”; total debit balance = total of the credit balance An internal document called the trial balance was designed to give that proof. If the trial balance did not balance, the bookkeeper had to go back, transaction by transaction, to find and correct the imbalance. Once the trial balance was in balance, then the preparation of the financial statements can begin. Cash Individual asset accounts All individual accounts combined make up the ledger. Accounts Ledger Payable Individual liability accounts Capital Individual stockholders’ equity accounts Debits and credits Whether bookkeeping tasks are performed manually or computerised, one thing remains the same: every business transaction involves at least two accounts. Double-entry bookkeeping requires that for each transaction, one (or more) account must be debited, and one (or more) account must be credited. What is an account? To keep a company’s financial Assets data organised, accountants Liabilities developed a system that sorts transactions into records called Owners’ equity / “accounts”. Shareholders’ equity When a company’s Revenues accounting system is set up, Expenses the accounts most likely to be Gains affected by the company’s Losses transactions are identified and listed out. This list is referred to as the company’s chart of accounts. The chart is organised as follows:  Debits on the Left Credits on the Right!! Account Title Debit Credit LEFT SIDE RIGHT SIDE 32 DEAL and GIRLS?! Generally, these types of Generally, these types of accounts are increased accounts are increased with a debit: with a credit: Dividends / Drawings Gains Expenses Income Assets Revenues Losses Liabilities Shareholders’ equity / owners’ equity  T - Accounts 1. On June 1 a company borrows £5,000 from the bank. This causes the company’s asset CASH to increase by £5,000 and its liability NOTES PAYABLE to also increase by £5,000.  To increase the asset CASH, the account needs to be …….  To increase the company’s liability NOTES PAYABLE, this account needs to be ……. Cash (asset account) Debit Credit Increases an asset Decreases an asset Received $$ Paid $$ June 1 Notes Payable £5,000 Notes Payable (liability account) Debit Credit Decreases a liability Increases a liability Repaid a loan Borrowed more June 1 Cash £5,000  T - Accounts 2. On July 1 the company repaid £2,000 of the bank loan. This causes the company’s asset CASH to decrease by £2,000 and its liability NOTES PAYABLE to also decrease by £2,000.  To reduce the asset CASH, the account will need to be credited by £2,000.  To decrease the liability NOTES PAYABLE, this account will need to be debited. The T-accounts now look like this: Cash (asset account) Debit Credit Increases an asset Decreases an asset Received $$ Paid $$ June 1 Notes Payable £5,000 July 1 Notes Payable £2,000 July 31 Balance £3,000 Notes Payable (liability account) Debit Credit Decreases a liability Increases a liability Repaid a loan Borrowed more July 1 Cash £2,000 June 1 Cash £5,000 July 31 Balance £3,000  Journal Entries Another way to record a Date Account name Debit Credit business transaction is to write a general journal entry. June 1 Cash 5,000 Each general journal entry lists Notes Payable 5,000 the date, the account title(s) to be debited and the corresponding amount(s) Date Account name Debit Credit followed by the account title(s) to be credited and the July 1 Notes Payable 2,000 corresponding amount(s). The Cash 2,000 accounts to be credited are indented. Normal Balances Account classification Normal balance Assets Dr Liability Cr Owners’ equity Cr Owner’s drawing Dr Revenues / Sales Cr Expenses Dr Balancing off accounts: Accounts for debtors D Knight (AR / debtor) 1997 RM 1997 RM Aug 1 Sales 158 Aug 28 Bank 158 Aug 15 Sales 206 Aug 31 Balance carried down (c/d) 324 Aug 30 Sales 118 482 482 Sept 1 Balance brought down (b/d) 324 Step 3: finally enter balance Step 2: now enter totals Step 1: enter balance here to start off entries for level with each other here so that totals will be following month equal ~ Refer to Exercise Questions ~ 6 Profit and Loss Account / Income Statement 39 Income Statement / Profit and Loss Account The income statement is one of the major financial statements used by accountants and business owners. The other major financial statements are the balance sheet, statement of cash flows and statement of shareholders’ equity. The income statement is also referred to as the Profit and Loss Statement (P&L), statement of operations or statement of income The income statement is important because it shows the profitability of a company during the time interval specified in its heading. The period of time that the statement covers is chosen by the business and can vary. For example, the heading may state: For the Three Months Ended 31 December 2009 The period of 1 October through 31 December 2009 The Four Weeks Ended 27 December 2009 The period of 29 November through 27 December 2009 For the Year Ended 30 September 2009 The period 1 Oct 2008 through 30 September 2009 Keep in mind that the income statement shows revenues, expenses, gains and losses; it does not show cash receipts (money you receive) or cash disbursements (money you pay out)!!  NAME OF BUSINESS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20XX RM RM RM Sales / Revenue xxx (-) Return inwards xxx Net Sales COST OF GOODS SOLD: Opening stock xxx Purchases xxx (-) Return Outwards (xxx) xxx (+) Carriage Inwards xxx xxx (-) Closing stock (xxx) (C.O.G.S) GROSS PROFIT xxx ADD INCOME: Discount received xxx Rent received xxx Decrease in Provision of Bad Debts xxx Total Income xxx (LESS) EXPENSES: Salaries and wages xxx Rent and rates xxx Carriage outwards xxx Insurance premiums xxx Discounts allowed Misc. expenses xxx Lighting and heating xxx Bad Debts xxx Increase in provision for bad debts xxx Provision for depreciation xxx Total Expenses NET PROFIT (OR LOSS) xxx Definitions Revenue The reporting entity has to disclose all its revenue. Revenue is made up of sales or turnover for a retail business, fees for service providers and interest and related income from banking operations for banks. Sale of goods is recognised when the goods are delivered or when the service is performed. Cost of Goods Sold Shows the cost of the goods incurred including costs such as carriage inwards (transportation) and deducting return outwards as well as the value of the stock at the end of the month. Expenses These are costs that are incurred during the reporting period such as salaries and wages, rental, advertising, heat and lighting, etc. These expenses are recorded regardless of whether it has been paid or not. ~ Refer to Exercise Questions ~ 1 Statement of Financial Position Balance Sheet 0 43 Introduction The accounting balance sheet is one of the major financial statements used by accountants and business owners. (The other major financial statements are the income statement, statement of cash flows, and statement of stockholders' equity) The balance sheet is also referred to as the statement of financial position – it presents the company’s financial position at the end of a specified date. Some describe the balance sheet as a "snapshot" of the company's financial position at a point (a moment or an instant) in time. Since the balance sheet informs the reader of a company's financial position as of one moment in time, it allows someone--like a creditor--to see what a company owns as well as what it owes to other parties as of the date indicated in the heading. This is valuable information to the banker who wants to determine whether or not a company qualifies for additional credit or loans. Others interested users include current investors, potential investors, company management, suppliers, some customers, competitors, government agencies, and labor unions. Assets = Liabilities + Owners’ Equity Assets are things that the company owns. They are the resources of the company that have been acquired through transactions, and have future economic value that can be measured and expressed in dollars. Assets also include costs paid in advance that have not yet expired, such as prepaid advertising, prepaid insurance, prepaid legal fees, and prepaid rent. Fixed assets These are assets that were not bought to be re-sold, are expected to be used in the business to generate more revenue and expected to be of use to the business for a long time. Land and buildings Fixtures and fittings Machinery Motor vehicles Current assets These are known as short-term assets and will change hands within 12 months of the balance sheet date. They include items held for re-sale at a profit e.g. stock, amounts owed by customers (debtors or accounts receivable), cash in the bank and cash in hand. These are listed in increasing order of liquidity – starting with the asset that is most difficult to convert to cash and finishing with cash itself. (Closing) Stock Debtors / Accounts receivable Prepayments Cash at bank Cash in hand  Assets = Liabilities + Owners’ Equity Liabilities are obligations of the company; they are amounts owed to creditors for a past transaction and they usually have the word "payable" in their account title. Along with owner's equity, liabilities can be thought of as a source of the company's assets. They can also be thought of as a claim against a company's assets. Liabilities also include amounts received in advance for future services. Since the amount received (recorded as the asset Cash) has not yet been earned, the company defers the reporting of revenues and instead reports a liability such as Unearned Revenues or Customer Deposits. Current liabilities – items that have to be paid within a year of the balance sheet date. Bank overdrafts Accruals Creditors / Accounts payable Long-term liabilities – items that have to be paid more than a year after the balance sheet date. Bank loans Debentures / bonds Assets = Liabilities + Owners’ Equity Owner's Equity--along with liabilities--can be thought of as a source of the company's assets. Owner's equity is sometimes referred to as the book value of the company, because owner's equity is equal to the reported asset amounts minus the reported liability amounts. Owner's equity may also be referred to as the residual of assets minus liabilities. These references make sense if you think of the basic accounting equation: Assets = Liabilities + Owner's Equity and just rearrange the terms: Owner's Equity = Assets – Liabilities Both owner's equity and stockholders' equity accounts will normally have credit balances. Contra owner's equity accounts are a category of owner equity accounts with debit balances. An example of a contra owner's equity account Drawings Format of the Balance Sheet NAME OF BUSINESS STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20XX RM RM RM Cost Accumulated Net Book Value (NBV) Depreciation FIXED ASSETS: Buildings xxx - xxx Machinery xxx (xxx) xxx Motor vehicles xxx (xxx) xxx xxx CURRENT ASSETS: Stock or Inventory xxx Debtors or AR xxx (-) Provision for bad debts (xxx) xxx Prepayments xxx Bank xxx Cash xxx Total CA LESS: CURRENT LIABILITIES Creditors or AP xxx Bank overdraft xxx Accruals xxx (Total CL) Working capital xxx OWNERS’ EQUITY: Capital xxx ADD: Net Profit /(LESS: Net Loss) xxx xxx LESS: Drawings (xxx) xxx ADD: LONG-TERM LIABILITES Long-term loan xxx Bonds / Debentures xxx xxx xxx END ! 49