Accounting-Principles [Compatibility Mode]

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ACCOUNTINGPRINCIPLES

Juruteradalam Masyarakat (MFG4812)

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Prepared by:

Mrs. Nor Asiah YaakubFaculty of Economics & MuamalatUniversity Sains Islam Malaysia

COURSE OUTLINE

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DEFINITION OF ACCOUNTING

Generally accepted definition:“accounting is the process of identifying,measuring, summarizing andcommunicating economic information topermit informed judgments and decisions

by users of the information.”

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PURPOSE OF ACCOUNTING

• Provide useful information to users.

• Provide assistance in decision making.

• Performance evaluation tools.

• Controlling purposes.

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FIELDS IN ACCOUNTING

Accounting

FinancialAccounting

ManagementAccounting

Auditing

AccountingInformation

System

Taxation &Zakat

Public SectorAccounting &

Non profitOrganization

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ACCOUNTING PROFESSION

• Accountants employed by a business firm / non-for-profit organization

• Management Accountants

• Eg: industrial or cost accountants• Certified Management Accountant

(CMA)/Certified Internal Auditor (CIA)

PrivateAccounting

• Accountants and their staff who provideservices on a fee basis

• Individual or Public Accountants• Certified Public Accountant (CPAs)

PublicAccounting

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AccountingProfessional

Bodies

MICPA

MIA

MASB

FRF

ETHICS IN ACCOUNTING

Intergrity

Objectivity

Independence

Confidentiality

Professional competenceand due care

Compliance with technical standards

Professional behavior

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REGULATIONS IN ACCOUNTING

• Companies Act 1965• Section 167

• Section 169

• Ninth Schedule

• Financial Reporting Act 1997

• Accounting Standards

• MASB

• IAS

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• Who want to be an entrepreneur @ businessman?

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TYPES OF BUSINESS

ManufacturingTo change basic inputs into products that are

sold to individual customers.

MerchandisingSells product to customer. Rather than making

the products, they purchase them from otherbusinesses.

Service Provide services rather than products to

customer.

11 TYPES OF BUSINESSORGANIZATION

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SoleProprietorship

•Owned by one individual•Simple to establish•Owner controlled•Limited resources

Partnership

• •Owned by 2 or more•Shared control

•Broader skills andresources

Corporation

(company)

•

•Organized by stateor federal

•Ownership divide byshares of stocks

•Easier to raise funds•No personal liability


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USERS OF ACCOUNTING INFORMATION

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Internal External

PART 2: ACCOUNTINGCYCLE

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BUSINESS TRANSACTIONS

Definition: Business transaction is an economic event or condition

that directly changes an entity's financial condition ordirectly affects its result of operation

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Resources

The Accounting Equation

What are an organization’s resources called?

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Assets

Resources = Sources


What are thesources of the

assets?

Cost ofresources usedin the business


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Assets

Liabilities

Owner’s Equity

Resources = Sources

Cost ofresources usedin the business

Resourcessupplied by

creditors andowners

The Accounting EquationThe Accounting Equation20

ACCOUNTING EQUATION

Assets = Liabilities + Owner’s Equity

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•Assets are the economic resources of a business that

are expected to be of benefit in the future.

•Ex: cash, office, supplies, merchandise, furniture,

land and buildings

•Liabilities are the economic obligation( a debt)

payable to an individual or an organization outside

the business.

•Owner’s Equity - the claim of a business owner to

the assets of the business. Also call capital.

The Accounting Equation22

a.Auni deposits RM25,000 in a bank account forMuslimah Apparel

ASSETS

=OWNER’S Equity

Cash25,000

LIABILITIES

Auni,Capital25,000


23Business Transactions

b. Muslimah Apparel buys land for RM20,000.

ASSETS

=

OWNER’S EQUITY

LIABILITIES

Cash(20,000)

Land20,000+

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ASSETS

=OWNER’S EQUITY

LIABILITIES

c. Muslimah Apparel buys supplies for RM1,350,agreeing to pay the supplier in the near future.

Accounts Payable1,350

Supplies1,350

Business Transactions


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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash7,500

Fees Earned7,500

d. Muslimah Apparel provided services to customers,earning fees of RM7,500, receiving cash.

Business Transactions26

ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash(3,650)

Expenses(3,650)

e. Muslimah Apparel paid: wages, RM2,125; rent,RM800; utilities, RM450; and miscellaneous, RM275.


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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash(950)

Accounts Payable(950)

f. Muslimah Apparel pays $950 to creditors on account.


ASSETS

=OWNER’S EQUITY

LIABILITIES

g. At the end of the month, the cost of supplies onhand (not yet used) is RM550. RM800 (RM1350-

RM550) was used and is treated as an expense.

Supplies(800)

SuppliesExpenses

(800)


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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash(2,000)

Auni, Drawing(2,000)

h. Auni withdraws RM2,000 in cash from the business forpersonal use.


Transaction Summary

ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash 5,900Supplies 550Land 20,000

Accts. Payable 400

Auni, Capital 25,000Auni , Drawing (2,000)Fees Earned 7,500Wages Expense (2,125)Rent Expense (800)Supplies Expense (800)Utilities Expense (450)Misc. Expense (275)

Balance = 26450

Assets = Liabilities + Owner’s Equity ?


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OWNER’S EQUITY

Effects of Transactions on Owner’s Equity

Owner’s withdrawals

Expenses

Owner’s investments

Revenues

decreased by increased by

NET INCOME

TEST YOUR MIND

• Paid rent for the current month

• Received cash on account from customers

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ASSETS LIABILITY OWNER’S EQUITY

THE ACCOUNTING CYCLE33

Source

Documents

Journal

Ledger Trial BalanceAdjustments

Adjusted

Trial Balance

Financial

Statements

Closing

EntriesPost Closing

Trial Balance

FISCAL YEAR VS CALENDAR YEAR

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Fiscal year

Calendar year

1st day of a month and ends

twelve months later on the

last day of a month.

1st January to 31st December

THE RULES OF DEBITS AND CREDITSTHE RULES OF DEBITS AND CREDITS

• Assets :• Debit => increase

• Credit => decrease

• Liabilities and Owner’s Equity :• Debit => Decrease

• Credit => Increase

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DR CR

36EXPANDED BASIC EQUATION ANDDEBIT/CREDIT RULES AND EFFECTS

EXPANDED BASIC EQUATION ANDDEBIT/CREDIT RULES AND EFFECTS

LiabilitiesAssets Owner’s Equity

= + -

+=

+ -

Assets

Dr. Cr.

+ -

Liabilities

Dr. Cr.

- +

Dr. Cr.

Owner’s

Drawing

+ -

Dr. Cr.

Revenues

- +

Dr. Cr.

Expenses

+ -

Dr. Cr.

Owner’s

Capital

- +


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DOUBLE-ENTRY SYSTEMDOUBLE-ENTRY SYSTEM

each transaction effects at least2 accounts.

total Dr must equal the total Crand the accounting equation willalways stay in balance.

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Assets Liabilities Equity

NORMAL BALANCENORMAL BALANCEEvery account classification has a normal

balance, whether it is a debit or credit.

For that particular account, the oppositeside entries should never exceed thenormal balance.

If an account which normally has a debitbalance but suddenly has creditbalance,(or vice versa) an error mayhave occurred or an unusual situationmay exist.

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Increase and Normal Balance

Dr Cr

ASSETS

DRAWINGS

LIABILITIES

OWNER’S EQUITY

ASSET + EXPENSES = LIABILITIES + EQUITY + REVENUE

Statement of Financial Position

INCOME STATEMENT ACCOUNTS:

EXPENSES REVENUES

THE JOURNALTHE JOURNAL

The journal makes several significantcontributions to the recording process:

1 discloses in one place the completeeffect of a transaction.

2 provides a chronological record oftransactions.

3 helps to prevent or locate errorsbecause the debit and credit amounts

for each entry can be compared.

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JOURNAL41

Name of the journal

Date Particular Folio Debit Credit

SIMPLE AND COMPOUNDJOURNAL ENTRIES

SIMPLE AND COMPOUNDJOURNAL ENTRIES

If an entry involves only two accounts, onedebit and one credit, it is considered asimple entry.

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When three or more accounts are requiredin one journal entry, the entry is referred toas a compound entry.


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THE LEDGERTHE LEDGER

Ledger is a group of accounts in abusiness entity.

A general ledger contains all the assets,liabilities, and owner’s equity accounts.

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GENERALLEDGER

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THE GENERAL LEDGERTHE GENERAL LEDGER

Individual

Liabilities

Interest Payable

Salaries Payable

Accounts Payable

Notes Payable

Individual

Owner’s Equity

Salaries Expense

Fees Earned

J. Lind, Drawing

J. Lind, Capital

Individual

Assets

Equipment

Land

Supplies

Cash

Acc. receivable

Cash

CHARACTERISTIC OF AN ACCOUNT

T account is the simplest form tounderstand the process of recording

1 the title of the account,

2 a left (debit side),

3 a right (credit side).

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Debit (Dr)

Title of Account

Credit (Cr)

Debit balance Credit balance

$ 8,050

46TABULAR SUMMARY COMPARED TO

ACCOUNT FORMTABULAR SUMMARY COMPARED TO

ACCOUNT FORM

Tabular Summary

Cash

$15,000- 7,000

1,2001,500

- 1,700- 250

600- 1,300

Cash

Debit Credit

15,0001,2001,500

600

7,0001,700

1,300250

Balance

Account Form

(Debit)$8,050

18,300 10,250

ACCOUNT47

Name of the account

Debit Credit

Date Particular Folio Total

Date Particular Folio Debit Credit Balance

Name of the account

T-Account

Three Columns Account

Chart of accounts lists the accounts and the accountnumbers which identify their location in the ledger.Accounts are listed in order in which they appear inFinancial Statement

48CHART OF ACCOUNTSCHART OF ACCOUNTS


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INVESTMENT OF CASH BY OWNERINVESTMENT OF CASH BY OWNER

Basic

Analysis

Debit-Credit

Analysis

TransactionOctober 1, Auni invests $10,000 cash in an

advertising venture to be known as the

Muslimah Apparel.

The asset Cash is increased $10,000, and

owner’s equity Auni, Capital is increased

$10,000.

Debits increase assets: debit Cash $10,000.

Credits increase owner’s equity: credit

Auni,

Capital $10,000.

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INVESTMENT OF CASH BY OWNERINVESTMENT OF CASH BY OWNERJOURNAL ENTRY

POSTING

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PAYMENT OF MONTHLY RENTPAYMENT OF MONTHLY RENT

Basic

Analysis

Debit-Credit

Analysis

TransactionOctober 3, office rent for October is paid in

cash, $900.

The expense Rent is increased $900

because the payment pertains only to the

current month; the asset Cash is

decreased $900.

Debits increase expenses: debit Rent

Expense $900. Credits decrease assets:

credit Cash $900.

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PAYMENT OF MONTHLY RENTPAYMENT OF MONTHLY RENT

JOURNAL ENTRY

POSTING

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HIRING OF EMPLOYEESHIRING OF EMPLOYEES

Basic

Analysis

Debit-Credit

Analysis

Transaction

October 9, hire four employees to begin work on

October 15. Each employee is to receive a weeklysalary of $500 for a 5-day work week, payable every

2 weeks -- first payment made on October 26.

A business transaction has not occurred. There is

only an agreement between the employer and the

employees to enter into a business transaction

beginning on October 15.

A debit-credit analysis is not needed because there is

no accounting entry.

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PAYMENT OF SALARIESPAYMENT OF SALARIES

Basic

Analysis

Debit-Credit

Analysis

TransactionOctober 26, employee salaries of $4,000 are owed

and paid in cash. (See October 9 transaction.)

The expense account Salaries Expense is increased

$4,000; the asset Cash is decreased $4,000.

Debits increase expenses: debit Salaries Expense

$4,000. Credits decrease assets: credit Cash $4,000.


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PAYMENT OF SALARIESPAYMENT OF SALARIES

JOURNAL ENTRY

POSTING

THE TRIAL BALANCETHE TRIAL BALANCE

A trial balance is a list of accounts and theirbalances at the end of accounting period.

Purpose:- to prove (check) that the debits equal the credits

in the ledger after posting.- To ensure that no error made in posting the debit

& credit from journal to ledger

The procedures for preparing a trial balanceconsist of:

1 List the account titles and their balances in theledger.

2 Total the debit and credit columns.

3 Prove the equality of the two columns.

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The totaldebits must

equal thetotal credits.

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A TRIAL BALANCEA TRIAL BALANCE

DEPRECIATION

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• Plant Asset – Long lived tangible assets suchas land, building and equipment-used in theoperations of a business.

• Depreciation- The allocation of a plant asset’scost to expense over its useful life.

• TIP: An expense is recorded whenever a goodor service is used. As plant assets are used,the portion of the cost that is used during theperiod is called depreciation.

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• Depreciation is the allocation of the cost of anasset to expense over its useful life in a rationaland systematic manner.

• Depreciation is an estimate rather than a factualmeasurement of the cost that has expired.

• In recording depreciation, Depreciation Expense is debited and a contra asset account,

Accumulated Depreciation , is credited

• The difference between the cost of anydepreciable asset and its related accumulateddepreciation is referred to as the book value ofthe asset.

DEPRECIATION

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DepreciationMethods

Straight Line Method

Reducing Balance Method

DEPRECIATION


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Straight-linedepreciation allocates equal amountof an assets net cost to depreciation during theestimated useful life.

Eg: Equipment costing RM26,000, estimated to have auseful life of 4 years and expected to be sold forRM8,000 at the end of the 4th year.

Formula: Cost - Scrap Value

Estimated useful life

DEPRECIATION

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Calculation: RM26,000 - RM8,000

4 years

= RM4,500 per year

Adjustingentries:

Dr. Depreciation Expense 4,500

Cr. Accumulated Depn. 4,500

DEPRECIATION

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Depreciation Expense

Accumulated Depn.Acc. Eqpt. 4,500

Depn. Exp. 4,500 Assets

Equipment

Bal 25,000

DEPRECIATION

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BOOK VALUE

The statement of financial position shows therelationship between Equipment andaccumulated Depreciation.

The asset’s cost minus accumulated

depreciation.Statement of Financial Position:

Assets:Equipment 26,000Less Accumulated depreciation (4500)Book value 21,500

DEPRECIATION

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Reducing Balance depreciation :

Eg: Equipment costing RM35,000, accumulated depreciationRM5,250. The depreciation rate is 15% on book value.

Formula: Net Book Value x Depreciation rate

(Cost - Accumulated Depn) x Depreciation rate

DEPRECIATION

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Calculation:(RM35,000 - RM5,250) x 15%

= RM4,463 per year

Adjustingentries:

Dr. Depreciation Expense 4,463

Cr. Accumulated Depn. 4,463

DEPRECIATION


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Statement of Financial Position: Assets:Equipment 35,000Less Accumulated depreciation (9713)Book value 25,287

DEPRECIATION

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PREPARING THE FINANCIALSTATEMENTS

• The income statement is prepared from therevenue and expense accounts.

• The owner’s equity statement is derived fromthe owner’s capital and drawing accounts andthe net income (or net loss) from the incomestatement.

• The Statement of Financial Position is thenprepared from the asset and liability accounts andthe ending owner’s capital balance as reported inthe owner’s equity statement.

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Income Statement

Muslimah ApparelIncome Statement

For the Month Ended November 30, 2015

Fees earned $7,500Operating expenses:

Wages expense $2,125Rent expense 800Utilities expense 450Miscellaneous expense 275Supplies expense 800

Total operating expenses 4,450Net income $3,050

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Muslimah ApparelStatement of Owner’s Equity

For the Month Ended November 30, 2015

Statement of Owner’s Equity

Auni, capital, November 1, 2014 $ 0Investment on November 1, 2014 $25,000Net income for November 3,050

$28,050Less withdrawals 2,000Increase in owner’s equity 26,050Auni, capital, November 30, 2015 $26,050

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Muslimah ApparelStatement of Financial Position

November 30, 2015

Balance Sheet

AssetsCash $5,900Supplies 550Land 20,000

Total assets $26,450Liabilities

Accounts payable $ 400Owner’s Equity

Auni, capital 26,050Total liabilities andowner’s equity $26,450

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CLOSING ENTRIES

Temporary /

Nominal Accounts

Permanent /

Real Accounts

All revenue accounts

All expense accounts

Owner’s drawings

All asset accounts

All liability accounts

Owner’s capital account

CL

O

S

E

C

N L

O O

T S

E


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CLOSING ENTRIES

Revenues

Expenses

Income

Summary

Drawings

Owner’s

Capital

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CLOSING ENTRIES

Drawings Dr. Owner’s Capital

Cr. Drawings Account

Income

Summary

Loss

ProfitDr. Income Summary

Cr. Owner’s Capital

Dr. Owner’s Capital

Cr. Income Summary

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POST CLOSING TRIALBALANCE

• The last procedure for a period

• The purpose to make sure that the ledger is inbalance at the beginning of the next period.

• Since all temporary accounts have zero balances,the post closing trial balance will contain onlypermanent Statement of Financial Positionaccounts.

PART 3: ACCOUNTINGFOR MERCHANDISING

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• The activities of service business is different fromthose of a merchandising business.

• The revenue activities of a service business involveproviding services to customers.

• The revenue activities of a merchandising businessinvolve the buying and selling of merchandise.

• When this merchandise is sold, the revenue isreported as sales, and its cost is recognized as anexpense called the cost of merchandise sold.

• Merchandise on hand at the end of anaccounting period is called merchandiseinventory.

NATURE OF MERCHANDISINGBUSINESS

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Merchandising and Inventory

Merchandising involves selling inventory Inventory is usually an important asset

Inventory must be accounted for

periodically or perpetually

Traditional periodic method is often being

replaced by perpetual inventory accounting


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Income Statement Comparison

Fees earned $150,000

Operating expenses 120,000

Net income $ 30,000

Service Business

Sales revenue $600,000

Cost of mdse. so ld 450,000

Gross profit $150,000


Net income $ 30,000

Merchandising Business

20% of revenues

5% of revenues

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Income Statement Comparison

Fees earned $150,000


Net income $ 30,000

Service Business

Sales revenue $600,000

Cost of mdse. sold 450,000



Net income $ 30,000

Merchandising Business

20% of revenues

5% of revenues

75% of revenues

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Muslimah ApparelMerchandising Chart of Accounts

Statement of Financial Position Accounts

200 Liabilities210 Accounts Payable211 Salaries Payable212 Unearned Rent215 Notes Payable

300 Owner ’s Equity310 Chris Clark, Capital311 Chris Clark, Drawing

312 Income Summary

100 Assets110 Cash111 Notes Receivable112 Accounts Receivable113 Interest Receivable115 Merchandise Inventory116 Office Supplies

117 Prepaid Insurance120 Land

123 Store Equipment124 Accumulated Depreciation—Store Equipment

125 Office Equipment126 Accumulated Depreciation—

Office Equipment

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Muslimah ApparelMerchandising Chart of Accounts

Income Statement Accounts

600 Other Income610 Rent Income611 Interest Income

700 Other Expense710 Interest Expense

400 Revenues410 Sales411 Sales Returns and

Allowances412 Sales Discounts

500 Costs and Expenses510 Cost of Merchandise Sold520 Sales Salaries Expense521 Advertising Expense522 Depreciation Expense—

Store Equipment523 Transportation Out529 Misc. Selling Expense530 Office Salaries Expense

531 Rent Expense532 Depreciation Expense—

Office Equipment533 Insurance Expense534 Office Supplies Expense539 Misc. Admin. Expense

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Income Statement

a)Multiple-Step Form

Contains several sections, subsections and subtotals.

b)Single-Step Form

The total of all expenses is deducted in one step from the

total of all revenues.

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Revenue from sales:Sales $720,185Less:Sales returns and allow. $ 6,140

Sales discounts 5,790 11,930Net sales $708,255

Cost of merchandise sold 525,305


MUSLIMAH APPARELINCOME STATEMENT (MULTIPLE-STEP)

FOR THE YEAR ENDED DECEMBER 31, 2015

Continued


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Operating expenses:Selling expenses:

Sales salaries expense $60,030Advertising expense 10,860Depr. expense–store equip. 3,100Miscellaneous selling expense 630

Total selling expenses $ 74,620Administrative expenses:

Office salaries expense $21,020Rent expense 8,100Depr. expense–off ice equip. 2 ,490Insurance expense 1,910Office supplies expense 610Misc. admin. expenses 760

Total admin. expenses 34,890Total operating expenses 109,510

Income from operations $ 73,440

Continued

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Other income:Interest revenue $ 3,800Rent revenue 600

Total other income $ 4,400Other expense:

Interest expense 2,440 1,960

Net income $75,400

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Revenues:Net sales $708,255Interest revenue 3,800Rent revenue 600

Total revenues $712,655Expenses:

Cost of merchandise so ld $525,305Selling expenses 74,620

Administrative expenses 34,890Interest expense 2,440

Total expenses 637,255

Net income $ 75,400

MUSLIMAH APPARELINCOME STATEMENT (SINGLE-STEP)

FOR THE YEAR ENDED DECEMBER 31, 2002

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MUSLIMAH APPARELSTATEMENT OF FINANCIAL POSITION

DECEMBER 31, 2015

Continued

AssetsCurrent assets:

Cash $ 52,950Notes receivable 40,000Accounts receivable 60,880Interest receivable 200Merchandise inventory 62,150Office supplies 480Prepaid insurance 2,650

Total current assets $219,310

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DECEMBER 31, 2015

Property, plant, andequipment:

Land $ 10,000Store equipment $ 27,100

Less accum. depreciation 5,700 21,400

Office equipment $ 15,570Less accum. depreciation 4,720 10,850

Total property, plant, andequipment 42,250

Total assets $261,560

Continued

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DECEMBER 31, 2015

LiabilitiesCurrent liabilities:

Accounts payable $ 22,420Note payable (current portion) 5,000Salaries payable 1,140Unearned rent 1,800

Total current liabilities $30,360Long-term liabilities:

Note payable (due 2004) 20,000

Total liabilities $ 50,360Owner’s Equity

Chris Clark, capital 211,200

Total liabilities and owner’s equity $261,560

Accounting-Principles [Compatibility Mode]

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