Accntg for Non Accnt 2B

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Understanding

Accounting and

Financial StatementsJuly 26, 2014

AHMIELLE D. SALAZAR, CPA, MBM

Accounting for NonAccounting for NonAccounting for NonAccounting for Non----AccountantsAccountantsAccountantsAccountants

1

Explain the functions and importance of

accounting. Explain the functions and major components of

the four principal financial statements: statement

of financial position, income statement, statement

of owners equity and statement of cash flows.

To utilize financial reports as guide and aid in

handling business activities efficiently and

effectively.

To know the different users of accounting

information and how they use it. 2

Why do you need to study accounting when you

are not an Accountant?

Accounting is an activity you will do simply

because it is necessary especially if you

engage in profit-oriented undertaking.

To understand business records to make good

business decision.

3

Accounting is a service activity. Its function is to

provide quantitative information, primarily financial

in nature, about economic entities that is intended to

be useful in making economic decisions, in making

reasoned choices among alternative courses of

action.

Accounting is also defined as the process of

identifying, measuring and communicating

economic information to permit informed judgment

and decision by the users of the information. 4

Service Activity.

A Process, an Art and a Discipline.

The Language of Business.

The Eyes of the Business.

5

Primary to prepare financial reports and provide them to economic decision makers.

Basic the process of identifying, measuring and communicating economic information to permit informed judgment for an economic decision.

Advance or Critical - audit function to test reliability of financial reports 6

The purpose of accounting is to help financial users see the true picture of the business in financial terms.

In order to help them, the financial reports must be understandable, reliable, relevanttimely and complete.

A well-informed management is vital for the survival of a business organization. The management must have the right information at the right time. 7

Over-all objective - to provide useful information for economic decision making.

Specifically, the objectives of accounting are:

1) To ascertain the results of the business operation;

2) To ascertain the financial position of the business;

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3) To assist financial users in predicting the enterprises financial capacity regarding the future cash flows, financial conditions and results of operation.

9

Financing activities provide necessary funds to start a business and expand it after it begins operating.

Investing activities provide valuable assets required to run a business.

Operating activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management.

10

Accounting process - set of activities involved in

converting information about transactions

into financial statements.

12

Assets - anything of value owned or leased by a business.

Liability - claim against a firms assets by a creditor.

Owners equity - all claims of the proprietor, partners, or

stockholders against the assets of a firm, equal to the excess of

assets over liabilities.

Basic accounting equation - relationship that states that

assets equal liabilities plus owners equity.

13

Double-entry bookkeeping - system by which accounting

transactions are entered using the dual aspect concept; each

individual transaction always has an offsetting transaction.

In Accounting, journalizing is the process of

recording transactions.

Debit XXX

Credit XXX

Journal Entry:

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A transaction is the act of conducting or negotiating

business affairs.

A transaction is an exchange or transfer of funds,

goods or services.

A transaction is a communicative action or activity

involving two parties or things that reciprocally

affect or influence each other.

15

Investing of money for capital purposes.

Selling of goods or services.

Purchase of merchandise inventory.

Collection of receivables.

Paying accounts to suppliers.

16

Accounting uses what we refer to as "accounts".

An account refers to assets, liabilities, revenues,

cost, expenses, and equity, as represented by

individual ledger pages, to which changes in value

are chronologically recorded with debit and credit

entries. These entries, referred to as postings,

become part of a book of final entry or ledger.

17

T device form where the debits are recorded on

the left-hand side and the credits are recorded on

the right hand side of the letter T.

To debit is to record the value received in an

economic transaction. To credit is to record the

value parted with in an economic transaction.

18

Ledger refers to the accounting book in which the

accounts and their related amounts as recorded in

the journal are posted periodically.

Ledger is called book of final entry.

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General Ledger is a grouping of all accounts used

in preparing the financial statements. It is generally

called the controlling account because it reports in

summarized form the activities that have taken

place as recorded in its subsidiary ledger.

Subsidiary Ledger is a group ff like accounts that

contains the independent data of a specific ledger.

20

A chart of accounts provides a listing of all financial

accounts used by particular business, organization,

or government agency.

Examples of common financial accounts are cash,

accounts receivable, inventories, PP&E, common

stock, sales, cost of sales, wages, and payroll.

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Account Name

Cash

Accounts Receivable

Inventory

Prepaid Expenses

Property, Plant & Equipment

Accumulated Depreciation

Other Assets

Accounts Payable

Accrued Expenses

Income Tax Payable

Common Stock

Retained Earnings

Sales

Cost of Sales

Salaries & Wages

Rent Expense

Supplies Expense

Depreciation Expense

Utilities Expense

Provision for Income Tax

Assets

Liabilities

Equity

Revenue & Cost

Expenses22

Trial Balance is a device used to periodically test

the equality of debits and credits as recorded in

the ledger accounts.

A trial balance is useful to an accountant whenever

periodic financial statements are to be prepared.

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1. Balance Sheet (Statement of Financial Position)

2. Income Statement (Profit and Loss Statement)

3. Statement of Changes in Owners Equity

4. Statement of Cash Flows

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Balance sheet - statement of a firms financial

positionwhat it owns and the claims against its

assetsat a particular point in time.

Photograph of firms assets together with its liabilities

and owners equity

Follows the accounting equation

25

Income Statement - financial record of a companys

revenues and expenses, and profits over a period of

time.

Firms financial performance in terms of revenues,

expenses, and profits over a given time period.

Reports profit or loss.

Focus on revenues and costs associated with

revenues.

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Statement of Owners Equity - is designed to show

the components of the change in equity from the end

of one fiscal year to the end of the next.

Begins with the amount of equity shown on the

balance sheet.

Net income is added, and cash dividends paid to

owners are subtracted.

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Statement of cash flows - a firms cash receipts and

cash payments that presents information on its

sources and uses of cash.

Accrual accounting - method that records revenue

and expenses when they occur, not necessarily when

cash actually changes hands.

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Whole Accounting Cycle

Exercises

33

1/2/2013 Received cash and issued 100,000

shares of common stock with a par value

of P10 per share.

Dr. Cash 1,000,000

Cr. Common Stock 1,000,000

Journal Entry:

34

1/3/2013 Purchased kitchen equipment worth

P600,000. P300,000 was paid in cash and the

balance on account. The equipment has a 5

year estimated useful life.

Dr. Property, Plant & Equipment 600,000

Cr. Cash 300,000

Cr. Accounts Payable 300,000

Journal Entry:

35

1/4/2013 Paid P100,000 as deposits for telephone

and water lines.

Dr. Other Assets 100,000

Cr. Cash 100,000

Journal Entry:

36

1/4/2013 Paid in advance one year advance rental

amounting to P240,000.

Dr. Prepaid Expenses 240,000

Cr. Cash 240,000

Journal Entry:

37

1/5/2013 Purchased inventory worth P300,000 on

account.

Dr. Inventory 300,000

Cr. Accounts Payable 300,000

Journal Entry:

38

1/7/2013 Bought supplies for one month

consumption worth P400.

Dr. Supplies Expense 400

Cr. Cash 400

Journal Entry:

39

1/8/2013 Sold inventory for P210,000 on account.

The inventory cost is P150,000.

Dr. Accounts Receivable 210,000

Cr. Sales 210,000

Dr. Cost of Sales 150,000

Cr. Inventory 150,000

Journal Entries:

40

1/24/2013 Collected P100,000 from its receivable.

Dr. Cash 100,000

Cr. Accounts Receivable 100,000

Journal Entry:

41

1/29/2013 Paid P150,000 to the supplier of

inventory.

Dr. Accounts Payable 150,000

Cr. Cash 150,000

Journal Entry:

42

1/31/2013 Record amortization for one month

rental.

Dr. Rent Expense 20,000

Cr. Prepaid Expenses 20,000

Journal Entry:

43

1/31/2013 Record one month depreciation of

kitchen equipment.

Dr. Depreciation Expense 10,000

Cr. Accumulated Depreciation 10,000

Journal Entry:

44

1/31/2013 Record one month accrued salary of the

staff amounting to P5,000.

Dr. Salaries and Wages 5,000

Cr. Accrued Expenses 5,000

Journal Entry:

45

1/31/2013 Record telephone bill for January

amounting to P1,500 and water amounting to

P500.

Dr. Utilities Expense 2,000

Cr. Accrued Expenses 2,000

Journal Entry:

46

1/31/2013 Record income tax expense for the

month of January amounting to P6,780.

Dr. Income Tax Expense 6,780

Cr. Income Tax Payable 6,780

Journal Entry:

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Account Name Debit Credit

Cash 309,600

Accounts Receivable 110,000

Inventory 150,000

Prepaid Expenses 220,000

Property, Plant & Equipment 600,000

Accumulated Depreciation 10,000

Other Assets 100,000

Accounts Payable 450,000

Accrued Expenses 7,000

Income Tax Payable 6,780

Common Stock 1,000,000

Retained Earnings

Sales 210,000

Cost of Sales 150,000

Salaries & Wages 5,000

Rent Expense 20,000

Supplies Expense 400

Depreciation Expense 10,000

Utilities Expense 2,000

Provision for Income Tax 6,780

Total 1,683,780 1,683,780

JUNGLE COFFEE CORPORATION

TRIAL BALANCE

January 31, 2013

(In PhP)

48


INCOME STATEMENT

FOR ONE MONTH PERIOD ENDING JANUARY 31, 2013

(In PhP)

Sales 210,000

Less: Cost of Sales 150,000

Gross Profit 60,000

Operating Expenses:


Rent Expense 20,000



Utilities Expense 2,000 37,400

Income Before Income Tax 22,600

Provision for Income Tax (30%) 6,780

Net Income 15,820 49

Sales 210,000

Cost of Sales 150,000


Rent Expense 20,000



Utilities Expense 2,000

Provision for Income Tax 6,780

Retained Earnings 15,820

210,000 210,000

To close nominal accounts to Retained Earnings 50

Account Name Debit Credit

Cash 309,600

Accounts Receivable 110,000

Inventory 150,000

Prepaid Expenses 220,000

Property, Plant & Equipment 600,000

Accumulated Depreciation 10,000

Other Assets 100,000

Accounts Payable 450,000

Accrued Expenses 7,000

Income Tax Payable 6,780

Common Stock 1,000,000

Retained Earnings 15,820

Total 1,489,600 1,489,600


POST CLOSING TRIAL BALANCE

January 31, 2013

(In PhP)

51


BALANCE SHEET

January 31, 2013

(In PhP)

Cash 309,600 Accounts Payable 450,000

Accounts Receivable 110,000 Accrued Expenses 7,000

Inventory 150,000 Income Tax Payable 6,780

Prepaid Expenses 220,000 Total Current Liabilities 463,780

Total Current Assets 789,600

Property, Plant and Equipment 600,000

Accumulated Depreciation (10,000)

Property, Plant and Equipment-Net 590,000 Capital Stock 1,000,000

Other Assets 100,000 Retained Earnings 15,820

Total Long Term Assets 690,000 Total Stockholders' Equity 1,015,820

Total Assets 1,479,600 Total Liabilities and Stockholders' Equity 1,479,600

ASSETS LIABILITIES

STOCKHOLDERS' EQUITY

52


STATEMENT OF CHANGES IN EQUITY


Retained

No. of Shares Amount Earnings Total

Balances at January 1, 2013 100,000 1,000,000 - 1,000,000

Profit for the month - - 15,820 15,820

Balances at January 31, 2013 100,000 1,000,000 15,820 1,015,820

Common Stock

(Par Value P10)

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STATEMENT OF CASH FLOWS


Cash flows from operating activities

Income before income tax 22,600

Adjustment for depreciation 10,000

Operating income before working capital changes 32,600

Changes in working capital:

Decrease (increase) in:

Accounts receivable (110,000)

Inventory (150,000)

Prepaid expenses (220,000)

Increase (decrease) in:

Accounts payable 450,000

Accrued expenses 7,000

Income tax payable 6,780

Net cash from operations 16,380

Income tax paid (6,780)

Net cash from operating activities 9,600

Cash flows from investing activities

Additions to property, plant & equipment (600,000)

Increase in other assets (100,000)

Net cash used in investing activities (700,000)

Cash flows from financing activities

Proceeds from issuance of common stock 1,000,000

Net increase in cash 309,600

Cash at the beginning of the month -

Cash at the end of the month 309,600

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Ratio analysis - tool for measuring a firms liquidity, profitability,

and reliance on debt financing, as well as the effectiveness of

managements resource utilization.

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Acid-test (or quick)

ratio measures the

ability of a firm to meet

its debt payments on

short notice.

Cash +accounts receivable

+ Prepaid Expenses

Total current liabilities

Current ratio compares

current assets to current

liabilities.

Total current assets

Total current liabilities

Current Ratio = Current Assets 789,600

= 1.70Current Liabilities 463,780

Acid Test Ratio = Current Assets-Inventory (789,600 - 150,000)

= 1.38Current Liabilities 463,780

56

Inventory turnover

ratio indicates the

number of times

merchandise moves

through a business.

Total asset turnover ratio

indicates how much in

sales each Peso invested

in assets generates.

Inventory Turn Over = Cost of Sales 150,000 = 1.00

(12X)Inventory 150,000

Asset Turn Over = Sales 210,000 = 0.14

(1.68)Total Assets 1,479,600

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Profitability ratios measure the organizations overall financial

performance by evaluating its ability to generate revenues in excess of

operating costs and other expenses.

Gross Profit Ratio = Gross Profit 60,000

= 29%Sales 210,000

Net Income Ratio = Net Income 15,820

= 7.53%Sales 210,000

Return on Equity = Net Income 15,820

= 1.56% (18.72%)Equity 1,015,820

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Leverage ratios measure the extent to which a firm relies on

debt financing.

Total liabilities to total assets ratio > 50 percent indicates that a

firm is relying more on borrowed money than owners equity.

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Accntg for Non Accnt 2B

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