Fundamentals of Accounting, Business & Management PDF

FUNDAMENTALS OF ACCOUNTING, BUSINESS & MANAGEMENT EARL ESCAREAL SHS & COLLEGE LECTURER Business Transactions in the Service Industry & the Accounting Cycle  The term accounting cycle refers to the steps in preparing financial statements. It is called a cycle because the steps are repeated e...

FUNDAMENTALS OF ACCOUNTING, BUSINESS & MANAGEMENT EARL ESCAREAL SHS & COLLEGE LECTURER Business Transactions in the Service Industry & the Accounting Cycle  The term accounting cycle refers to the steps in preparing financial statements. It is called a cycle because the steps are repeated each reporting period.  The cycle begins with the analysis of source documents and ends with a post-closing trial balance. Business Transactions in the Service Industry & the Accounting Cycle Business Transactions in the Service Industry & the Accounting Cycle Business Transactions in the Service Industry & the Accounting Cycle  Entering the transactions in a journal is called Journalizing. For every transaction, the entry should include the date, the title of each account affected, the amounts, and a brief description: Business Transactions in the Service Industry & the Accounting Cycle  The process of copying the debits and credits from the journal to the ledger accounts is known as posting. All amounts entered in the journal must be posted to the general ledger accounts. Posting from the journal to the ledger is done daily or at frequent intervals. Business Transactions in the Service Industry & the Accounting Cycle Business Transactions in the Service Industry & the Accounting Cycle  A Trial Balance is used to prove that the totals of the debit and credit balances in the T accounts were equal. A trial balance is used to prove the equality of the debits and credits in the ledger accounts. A trial balance can be prepared daily, weekly, monthly, or whenever desired. Before preparing a trial balance, all transactions should be journalized and posted so that the effect of all transactions will be reflected in the ledger accounts.  The first Trial Balance is considered as having “Unadjusted” amounts. However, after the Adjusting Entries are made and posted, a second Trial Balance is prepared which is considered to be “Adjusted” already. Business Transactions in the Service Industry & the Accounting Cycle  Here’s a sample from Jessie Jane’s local business: Business Transactions in the Service Industry & the Accounting Cycle  A Work Sheet pulls together all of the information needed to enter adjusting entries and prepare the financial statements. Work Sheets are not financial statements, are not a formal part of the accounting system, and are not a required part of the accounting process. However, many accountants prepare them because they are very helpful in planning the adjustments and preparing the financial statements. Ordinarily, only the accountant uses it. For this reason, it is usually prepared in pencil or as a computer spreadsheet. As computer use has become more common, the term “spreadsheet” is often used in place of “work sheet.” Business Transactions in the Service Industry & the Accounting Cycle  Here’s a sample partial Work Sheet: Business Transactions in the Service Industry & the Accounting Cycle  Adjusting Entries are necessary for each of these so that revenues, expenses, assets, and liabilities are correctly reported. Specifically, an adjusting entry is made at the end of an accounting period to reflect a transaction or event that is not yet recorded. Each adjusting entry affects one or more income statement accounts and one or more balance sheet accounts (but almost never the Cash account). Business Transactions in the Service Industry & the Accounting Cycle  Prepaid Expenses like insurance are adjusted as necessary: Business Transactions in the Service Industry & the Accounting Cycle  Another adjusted account is Supplies: Business Transactions in the Service Industry & the Accounting Cycle  Depreciation is the process of allocating the costs of these assets over their expected useful lives and is adjusted as well: Business Transactions in the Service Industry & the Accounting Cycle  Calculating Straight Line Depreciation: Business Transactions in the Service Industry & the Accounting Cycle  Calculating Sum of Years Digits Depreciation: Business Transactions in the Service Industry & the Accounting Cycle  Calculating Double Declining Depreciation: Business Transactions in the Service Industry & the Accounting Cycle  Unearned (Deferred) Revenues are to be adjusted as well: Business Transactions in the Service Industry & the Accounting Cycle  Accrued Expenses require adjustments to be made too: Business Transactions in the Service Industry & the Accounting Cycle  Accrued Revenues are part of adjustments as well: Business Transactions in the Service Industry & the Accounting Cycle  The purpose of an Income Statement is to summarize the results of operations during an accounting period. The income statement shows the sources of revenue, types of expenses, and the amount of the net income or net loss for the period.  The single-step income statement lists all revenue items and their total first, followed by all expense items and their total. The difference, which is either net income or net loss, is then calculated. This is more suited for a business in the service industry. Business Transactions in the Service Industry & the Accounting Cycle Business Transactions in the Service Industry & the Accounting Cycle  The statement of owner’s equity reports information about how equity changes over the reporting period.  Any withdrawals or additional investments are reflected in it along with the income or loss for the period  After the very first year of operation, it will reflect a beginning balance and is adjusted depending on the results of operations. Business Transactions in the Service Industry & the Accounting Cycle Business Transactions in the Service Industry & the Accounting Cycle  The balance sheet reports the financial position of a company at a point in time, usually at the end of a month, quarter or year.  if the presentation of the balance sheet used is the the account form, the assets will be on the left while liabilities and equity will be on the right.  Another presentation is the report form: assets on top, followed by liabilities and then equity. Top to bottom.  Either presentation is acceptable. Business Transactions in the Service Industry & the Accounting Cycle Business Transactions in the Service Industry & the Accounting Cycle  The purpose of the Statement of Cash Flows is to report cash receipts (inflows) and cash payments (outflows) during a period. This includes separately identifying the cash flows related to operating, investing, and financing activities. The statement of cash flows does more than simply report changes in cash. Prepared using a Direct (Cash Activities) or Indirect Method (Income Statement), it is the detailed disclosure of individual cash flows that makes this statement useful to users. Information in this statement show which activity money was spent on:  Operating activities include those transactions and events that determine net income. Examples are the production and purchase of merchandise, the sale of goods and services to customers, and the expenditures to administer the business. Not all items in income, such as unusual gains and losses, are operating activities. Business Transactions in the Service Industry & the Accounting Cycle  Investing activities generally include those transactions and events that affect long-term assets—namely, the purchase and sale of long-term assets. They also include (1) the purchase and sale of short-term investments in the securities of other entities, other than cash equivalents and trading securities and (2) lending and collecting money for notes receivable.  Financing activities include those transactions and events that affect long- term liabilities and equity. Examples are (1) obtaining cash from issuing debt and repaying the amounts borrowed and (2) receiving cash from or distributing cash to owners. These activities involve transactions with a company’s owners and creditors. They also often involve borrowing and repaying principal amounts relating to both short- and long-term debt. Business Transactions in the Service Industry & the Accounting Cycle Business Transactions in the Service Industry & the Accounting Cycle Business Transactions in the Service Industry & the Accounting Cycle  The Closing Process is an important step at the end of an accounting period after financial statements have been completed. It prepares accounts for recording the transactions and the events of the next period. In the closing process we must (1) identify accounts for closing, (2) record and post the closing entries, and (3) prepare a post- closing trial balance. The purpose of the closing process is twofold:  First, it resets revenue, expense, and withdrawals account balances to zero at the end of each period. This is done so that these accounts can properly measure income and withdrawals for the next period.  Second, it helps in summarizing a period’s revenues and expenses. This section explains the closing process. Business Transactions in the Service Industry & the Accounting Cycle  The Closing Process requires you to be able to identify between 2 major classifications of accounts:  Temporary (or nominal) accounts accumulate data related to one accounting period. They include all income statement accounts, the withdrawals account, and the Income Summary Account. They are temporary because the accounts are opened at the beginning of a period, used to record transactions and events for that period, and then closed at the end of the period. The closing process applies only to temporary accounts.  Permanent (or real) accounts report on activities related to one or more future accounting periods. They carry their ending balances into the next period and generally consist of all balance sheet accounts. These asset, liability, and equity accounts are not closed. Business Transactions in the Service Industry & the Accounting Cycle Business Transactions in the Service Industry & the Accounting Cycle Business Transactions in the Service Industry & the Accounting Cycle  The last step, a Post-Closing Trial Balance is a list of permanent accounts and their balances from the ledger after all closing entries have been journalized and posted. It lists the balances for all accounts not closed. These accounts comprise a company’s assets, liabilities, and equity, which are identical to those in the balance sheet. The aim of a post-closing trial balance is to verify that (1) total debits equal total credits for permanent accounts and (2) all temporary accounts have zero balances. Business Transactions in the Service Industry & the Accounting Cycle References  Brigham, E.F., Houston, J.F.; 2009; Fundamentals of Financial Management; Ohio, U.S.A.  Heintz, J.A., Parry Jr., R.W.; 2011; College Accounting; Ohio, U.S.A.  Kotler, P., Armstrong, G.; 2012; Principles of Marketing; New Jersey, U.S.A.  Philips, F., Libby, R., Libby P.A.; 2011; Fundamentals of Financial Accounting; New York, U.S.A.  Walker, J.; 2006; Fundamentals of Management Accounting; Massachusetts, U.S.A.  Wild, J.J., Shaw, K.W, Chiappetta, B.; 2018; Financial and Managerial Accounting: Information for Decisions; New York, U.S.A.