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THE LANGUAGE OF ACCOUNTING

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  1. THE LANGUAGE OF ACCOUNTING Ahmed Elshahat

  2. 1. THE LANGUAGE OF ACCOUNTING • ACCOUNTING DEFINED • WHO USES ACCOUNTING? • TYPES OF ACCOUNTING INFORMATION • ACCOUNTING PRINCIPLES, ASSUMPTIONS / CONCEPTS • FORMS OF BUSINESS ORGANIZATION • FINANCIAL STATEMENTS • TYPES OF ACCOUNTS Ahmed Elshahat

  3. TYPES OF ACCOUNTING INFORMATION • Financial: Used by management and external users... Ex. financial statements • Internal Auditing: Evaluating system of internal control... reports are accurate and reliable • (Income) Tax Accounting: Must pay Uncle Sammy • Management (cost) Accounting: Internal use... (CMA) Ahmed Elshahat

  4. GAAP (Generally Accepted Accounting Principles) • Broad rules adopted by the accounting profession. Sources; • FASB: Financial Accounting Standards Board • SEC: Securities & Exchange Commission • AICPA: American Institute of CPA's • GASB: Government Accounting Standards Board • AAA: American Accounting Association • CMA: Certified Management Accountants Ahmed Elshahat

  5. ACCOUNTING PRINCIPLES, ASSUMPTIONS / CONCEPTS • Cost principle • Ongoing concern concept • Business entity concept • Objectivity principle • Stable-dollar concept • Realization principle • Monetary unit assumption Ahmed Elshahat

  6. Types of accounts • Balance Sheet Accounts • Assets - Liabilities + Owner's Equity • "Real", "Permanent" • Income Statement Accounts • Revenues - Expenses • "Nominal", " Temporary" Ahmed Elshahat

  7. The complete accounting cycle Ahmed Elshahat

  8. 2. The recording process • TRANSACTIONS • Source documents • Journal (General Journal): • ACCOUNT TERMINOLOGY • DOUBLE ENTRY ACCOUNTING • CHART OF ACCOUNTS • Journalizing • POSTING • TRIAL BALANCE Ahmed Elshahat

  9. Transaction • All financial dealings of the business must be: • identified - source document • recorded - in "journal" • summarized - statements and reports • Business Paper: Source document... proof transaction happened. • Ex.- check, invoice, receipt, etc. Ahmed Elshahat

  10. Journal (General Journal): Book of original entry Ahmed Elshahat

  11. ACCOUNT TERMINOLOGY • Asset: Resources owned by a business. • Ex.: Cash, Accounts Receivable, Supplies, Building, Land, etc. • Liabilities: Creditorship claims on total assets (debts). • Ex.: Accounts Payable, Notes Payable, Unearned Revenue, etc. • Owner's Equity Accounts: The ownership claim on total assets. Ex.: capital account, withdrawal account (drawing) • "Real" Accounts: Balance sheet accounts. • Ex.: assets, liabilities, owner's equity • "Nominal" Accounts (Temporary): Income statement accounts. Ex.: revenues, expenses • “T” Accounts: Used for working papers, teaching technique, etc. - not part of accounting records. • Balance-column Accounts: Ledger accounts. Ahmed Elshahat

  12. DOUBLE ENTRY ACCOUNTING • Every transaction affects and is recorded in two or more accounts with equal debits and credits. • Debit - (Dr) Left side of an account • Credit - (Cr) Right side of an account Ahmed Elshahat

  13. JOURNALIZING Ahmed Elshahat

  14. CHART OF ACCOUNTS • Is a numeric listing of all the entity's assets, liabilities, equity, revenue and expense accounts; • Is used to code each transaction entered into the accounting system, and • Facilitates the uniform reporting process. Ahmed Elshahat

  15. CHART OF ACCOUNTS Ahmed Elshahat

  16. General Journal Ahmed Elshahat

  17. Posting Ahmed Elshahat

  18. TRIAL BALANCE Ahmed Elshahat

  19. Ex. TRIAL BALANCE Ahmed Elshahat

  20. 3. ADJUSTING AND CLOSING ENTRIES • WHAT ACCOUNTS ARE ADJUSTED? • WHY ADJUST? • Depreciation • Accrual Relationships • Types of Entries • INCOME STATEMENT PREPARATION • BALANCE SHEET PREPARATION • Closing Entries Ahmed Elshahat

  21. WHAT ACCOUNTS ARE ADJUSTED? Ahmed Elshahat

  22. WHY ADJUST? • Time Period Concept/Periodicity: • The idea that the life of a business is divisible into time periods of equal length. Ex: monthly, quarterly, annual... financial reports; • fiscal year • calendar year • natural business year Ahmed Elshahat

  23. WHY ADJUST? (Cont.) • Realization Principle requires that revenue be assigned to the accounting period in which it is earned, rather than to the period it is collected in cash (this is the basis for accrual accounting) • Matching Principle requires that revenues and expenses be matched; all expenses incurred in earning a revenue must be deducted from the revenue in determining net income • "True picture" -- accuracy Ahmed Elshahat

  24. Depreciation Ahmed Elshahat

  25. Accrual Relationships Ahmed Elshahat

  26. Types of Entries Ahmed Elshahat

  27. Adjusting -- Posting of Adjusting Entries • Exercise:The following unadjusted accounts and related balances are provided at September 30: • Accounts Receivable$2,400 • Supplies1,200 • Salary Payable-0- • Unearned Revenue500 • Revenue15,000 • Salary Expense2,100 • Depreciation Expense-0- • Accumulated Depreciation3,000 Ahmed Elshahat

  28. Instructions: • Open T-accounts and post the adjusting entries indicated from the following data: (a) Supplies on hand, $200 (b) Revenue earned but not accrued, $900 (c) Unearned revenue earned but not recorded, $400 (d) Salary owed to employees, $700 (e) Depreciation of $200 is recognized. Ahmed Elshahat

  29. Answer; Ahmed Elshahat

  30. Summary Ahmed Elshahat

  31. Closing Entries • PURPOSE OF CLOSING ENTRIES • WHAT ACCOUNTS ARE CLOSED? • STEPS IN MAKING CLOSING ENTRIES • SUMMARY OF THE CLOSING PROCESS Ahmed Elshahat

  32. PURPOSE OF CLOSING ENTRIES • Closing Entries are made to clear and close nominal accounts (Revenue and Expense) and to transfer the amount of net income or loss to capital accounts (i.e. Owner's Equity). • Accounts to be closed are; Revenues, expenses, drawings, income. Ahmed Elshahat

  33. STEPS IN MAKING CLOSING ENTRIES • Transfer credit balances from income statement to Income Summary • Transfer the debit balances from income statement to Income Summary • Transfer the Income Summary balance to the Capital account • Transfer the Withdrawals account balance to the Capital account Ahmed Elshahat

  34. SUMMARY OF THE CLOSING PROCESS Ahmed Elshahat