Bookkeeping Course

introduction to bookkeeping: The Users of Financial Accounting Information

noreply@blogger.com (Ahmed Abdul-razek) — Mon, 2 Jul 2012 22:24:00 -0700

The Users of Financial Accounting Information

Decision Makers

Recall that the primary goal of financial accounting is to provide decision makers with useful information. This topic identifies the major users of financial statements and describes the decisions they make.

The predominant users of ﬁnancial accounting information are those parties who have a ﬁnancial interest in the organization and hence are concerned with its economic status. All organizations, whether not-for-proﬁt or investor owned, have stakeholders who have an interest in the business. In a not-for-proﬁt organization, such as a community hospital, the stakeholders include managers - staff physicians - employees - suppliers - creditors - patients - and even the community at large.

Investor-owned organizations have essentially the same set of stakeholders - plus owners. Because all stakeholders, by deﬁnition, have an interest in the organization, all stakeholders have an interest in its
ﬁnancial condition.

Of all the outside stakeholders, investors - who supply the capital (funds) needed by businesses - Investors fall into two categories: (1) owners (often stockholders ) (2) creditors (or lenders)

1- Owners :

Owners Present and potential owners (investors) are prime users of financial statements. They continually assess and compare the prospects of alternative investments.

The assessment of each investment is often based on two variables: expected return and risk.

Expected return refers to the increase in the investor’s wealth that is expected over the investment’s time horizon. This wealth increase is comprised of two parts:

(1) increases in the market value of the investment

(2) dividends (periodic cash distributions from the firm to its owners).

Both of these sources of wealth depend on the firm’s ability to generate cash. Accordingly, financial statements can improve decision making by providing information that helps current and potential investors estimate a firm’s future cash flows.

Risk refers to the uncertainty surrounding estimates of expected return. The term expected implies that the return is not guaranteed. For most investments, numerous alternative future returns are possible. For example, an investor may project that a firm’s most likely return for the upcoming year is $100,000. However, the investor recognizes that this is not the only possibility. There is some chance that the firm might
generate returns of $95,000 or $115,000. Still other possibilities might be $85,000 and $125,000.

The greater the difference among these estimates, the greater the risk. Financial statements help investors assess risk by providing information about the historical pattern of past income and cash flows.

Investment selection involves a trade-off between expected return and risk. Investments with high expected returns generally have a high risk. Each investor must assess whether investments with greater risk offer sufficiently higher expected returns.

2- Creditors :

The lending decision involves two issues: whether or not credit should be extended - and the specification of a loan’s terms. For example, consider a bank loan officer evaluating a loan application.

The officer must make decisions about the amount of the loan (if any)- interest rate - payment schedule - and collateral. Because repayment of the loan and interest will rest on the applicant’s ability to generate cash, lenders need to estimate a firm’s future cash flows and the uncertainty surrounding those flows.

Although investors generally take a long-term view of a firm’s cash generating ability, creditors are concerned about this ability only during the loan period.

Lenders are not the only creditors who find financial statements useful. Suppliers often sell on credit - and they must decide which customers will or will not honor their obligations.

Other Users :

A variety of other decision makers find financial statements helpful. Some of these decision makers and their decisions include the following:
1. Financial analysts and advisors. Many investors and creditors seek expert advice when making their investment and lending decisions. These experts use financial statements as a basis for their recommendations.

2. Customers. The customers of a business are interested in a stable source of supply. They can use financial statements to identify suppliers that are financially sound.

3. Employees and labor unions. These groups have an interest in the viability and profitability of firms that employ them or their members - As described in Reality Check 1-1 - unions in the airline industry have recently made several important decisions based - in part - on financial statements.

REALITY CHECK 1-1

United Airlines: Employees of United Airlines gained controlling ownership of United’s parent, UAL Corporation, by agreeing to billions of dollars in wage and benefit concessions. The employees needed to estimate the value of UAL so that they could determine the extent of the wages and benefits to sacrifice. Financial statements are frequently used in valuing businesses.
Northwest Airlines: In 1993, Northwest asked its pilots to forgo $886 million in wages and benefits over three years. Northwest’s reported 1993 loss of $115 million played a role in securing the pilots’ agreement. However, in 1997, Northwest reported a profit of $597 million. As you might imagine, the pilots became much more assertive in their bargaining, asking for wage increases, profit sharing, and bonuses.

4. Regulatory authorities. Federal and state governments regulate a large array of business activities. The Securities and Exchange Commission (SEC) is a prominent example. Its responsibility is to ensure that capital markets, such as the New York Stock Exchange, operate smoothly. To help achieve this, corporations are required to make full and fair financial disclosures. The SEC regularly reviews firms’ financial statements to evaluate the adequacy of their disclosures. Reality Check 1-2 describes another regulatory use of accounting information.

REALITY CHECK 1-2

California has perhaps the country’s toughest standards for vehicle emissions. One aspect of its program requires the major automakers to generate 10% of their California sales from electric vehicles by 2003. Compliance with this regulation will be assessed from financial accounting information.

In general, there is only one category of owners. However, creditors constitute a diverse group of investors including banks, suppliers granting trade credit, and bondholders.

Investors are the primary outside users of ﬁnancial accounting information. They use the information to make judgments pertaining to whether or not to make a particular investment, as well as to set the return required on the investment.

Although ﬁnancial accounting developed primarily to meet the information needs of outside parties, the managers of an organization, including its board of directors (trustees), also are important users of the information. After all, managers are charged with ensuring that the organization has the ﬁnancial strength to accomplish its mission, whether that mission is to maximize the wealth of its owners or to provide healthcare services to the community at large.

Thus, an organization’s managers are not only involved with creating ﬁnancial statements - but they are also important users of the statements, both to assess current ﬁnancial condition and to formulate plans to ensure that the future ﬁnancial condition of the organization will support its goals.

In summary, investors and managers are the predominant users of ﬁnancial accounting information as a result of their direct ﬁnancial interest in the organization. Furthermore, investors are not merely passive users of ﬁnancial accounting information - they do more than just read and interpret the statements.

Often, they create ﬁnancial targets based on the numbers reported in ﬁnancial statements that managers must attain or suffer some undesirable consequence. For example,many debt agreements require borrowers tomaintain stated ﬁnancial standards - such as a minimum earnings level - to keep the debt in force.

If the standards are not met - the lender can demand that the
business immediately repay the full amount of the loan - If the business fails to do so, it may be forced into bankruptcy.

The accounting profession views financial statements as being general purpose. They are intended to meet the common information needs of a wide variety of users - such as those in the preceding list.

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go to the frist introduction to accounting bookkeeping

introduction to bookkeeping: Historical of Financial accounting

Introduction to bookkeeping: Accounting flowchart

Accounting Transaction: double-entry Bookkeeping system

introduction to bookkeeping: Historical of Financial Accounting

noreply@blogger.com (Ahmed Abdul-razek) — Mon, 2 Jul 2012 21:27:00 -0700

Historical of Financial Accounting

( Go to the frist introduction to accounting bookkeeping )

It is all too easy to think of ﬁnancial statements merely as pieces of paper with numbers written on them, rather than in terms of the economic events and physical assets for Ex. land - buildings - and equipment .. that underlie the numbers.

However, if readers of ﬁnancial statements understand how and why ﬁnancial accounting began, and how ﬁnancial statements are used, they can better visualize what is happening within a business and why ﬁnancial accounting information is so important.

Thousands of years ago - individuals or families were self-contained in the sense that they gathered their own food, made their own clothes, and built their own shelters.

When specialization began, some individuals or families became good at hunting, others at making arrowheads, others at making clothing, and so on. With specialization came trade, initially by bartering one
type of goods for another.

At ﬁrst, each producer worked alone, and trade was strictly local. Over time, some people set up production shops that employed workers, simple forms of money were used, and trade expanded beyond the local area.

As these simple economies expanded - more formal forms of money developed and a primitive form of banking began, with wealthy merchants lending proﬁts from past dealings to enterprising shop owners and traders who needed money to expand their operations.

When the ﬁrst loans were made, lenders could physically inspect borrowers’ assets and judge the likelihood of repayment. Eventually, though, lending became much more complex. Industrial borrowers were developing large factories, merchants were acquiring ﬂeets of ships and wagons, and loans
were being made to ﬁnance business activities at distant locations.

At that point - lenders could no longer easily inspect the assets that backed their loans, and they needed a practical way of summarizing the value of those assets. Also, certain loans were made on the basis of a share of the proﬁts of the business, so a uniform - widely accepted method for expressing income was required.

In addition, owners required reports to see how effectively their own enterprises were being operated - and governments needed information for use in assessing taxes. For all these reasons, a need arose for ﬁnancial statements - for accountants to prepare the statements, and for auditors to verify the accuracy of the accountants’ work. The economic systems of the industrialized countries have grown enormously since the beginning - and the ﬁnancial accounting has become much more complex.

However, the original reasons for accounting statements still apply:
Bankers and other investors need accounting information to make intelligent investment decisions - managers need it to operate their organizations efﬁciently; and taxing authorities need it to assess taxes in an equitable manner.

It should be no surprise that problems can arise when translating physical assets and economic events into accounting numbers. Nevertheless - that is what accountants must do when they construct ﬁnancial statements.

To illustrate the translation problem - the numbers shown on the balance sheet to reﬂect a business’s assets and liabilities generally reﬂect historical costs and prices. However, inventories may be spoiled - obsolete - or even missing; land - buildings - and equipment may have current values that are much higher or
lower than their historical costs - and money owned to the business may be uncollectible. Also, some liabilities - such as obligations to make lease payments, may not even show up in the numbers. Similarly, costs reported on an income statement may be understated or overstated, and some costs - such as depreciation, do not even represent current cash expenses.

When examining a set of ﬁnancial statements - it is best to keep in mind the physical reality that underlies the numbers and also to recognize that many problems occur in the translation process.
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The Users of Financial Accounting Information

Regulation and Standards in Financial Accounting
Financial Accounting Standards Board (FASB)
Generally accepted accounting principles (GAAP)
American Institute of Certiﬁed Public Accountants (AICPA)

Basic Concepts of Financial Accounting
The preparation and presentation of ﬁnancial accounting data is based ona set of principles, the most important of which are:
(1) accounting entity,(2) going concern, (3) accounting period,
(4) objectivity, (5) reliability,(6) monetary unit,
(7) relevance, (8) full disclosure, (9) materiality,
(10) conservatism, (11) consistency, and (12) comparability.

The financial Accounting flowchart
This topic describes the financial accounting process. It shows how information about transactions and events is accumulated to produce the balance sheet and the income statement. This early presentation is quite basic; subsequent chapters will present more complex issues. the cash flow effects of various transactions are addressed in another topic, the statement of cash flows is actually covered in detail in other topic, “Statement of Cash Flows.”

accounting equation

Recording and Compiling Accounting Data
explain the following terms used in the recording and compiling of accounting data:
• Transaction
• Account
• Posting
• Chart of accounts
• General ledger
• T account
• Double entry system

the frist introduction to accounting bookkeeping

noreply@blogger.com (Ahmed Abdul-razek) — Mon, 2 Jul 2012 11:07:00 -0700

the frist introduction to accounting bookkeeping

and the archive for our topics ( step by step )

Financial accounting involves identifying - measuring - recording - and communicating in dollar terms the economic events and status of an organization.
This information is summarized and presented in ﬁnancial statements... the three most important being the income statement - the balance sheet - and the statement of cash ﬂows. Because these statements communicate ﬁnancial information about an organization, organizations must understand the basics of ﬁnancial accounting because ﬁnancial statements are the best way to summarize a business’s ﬁnancial status and performance.
Our coverage of ﬁnancial accounting extends over several Topics.
This topic begins with an introduction to basic ﬁnancial accounting concepts and then explains how organizations report ﬁnancial performance - speciﬁcally revenues, costs, and proﬁts. In other topics, the discussion is extended to the reporting of ﬁnancial status, which includes assets - liabilities - and equity.

In addition, the reporting of cash ﬂows. another topics, discusses ﬁnancial statements - ﬁnancial statement analysis can be better understood after learning more about the ﬁnancial workings of a business.
Bookkeeping blog will provide you with a basic understanding of how ﬁnancial statements are created and used to make judgments regarding the ﬁnancial condition of an organization.

Historical Foundations of Financial Accounting

The Users of Financial Accounting Information

Regulation and Standards in Financial Accounting
Financial Accounting Standards Board (FASB)
Generally accepted accounting principles (GAAP)
American Institute of Certiﬁed Public Accountants (AICPA)

Basic Concepts of Financial Accounting
The preparation and presentation of ﬁnancial accounting data is based ona set of principles, the most important of which are:
(1) accounting entity,(2) going concern, (3) accounting period,
(4) objectivity, (5) reliability,(6) monetary unit,
(7) relevance, (8) full disclosure, (9) materiality,
(10) conservatism, (11) consistency, and (12) comparability.

The financial Accounting flowchart
This topic describes the financial accounting process. It shows how information about transactions and events is accumulated to produce the balance sheet and the income statement. This early presentation is quite basic; subsequent chapters will present more complex issues. the cash flow effects of various transactions are addressed in another topic, the statement of cash flows is actually covered in detail in other topic, “Statement of Cash Flows.”

accounting equation

Recording and Compiling Accounting Data
explain the following terms used in the recording and compiling of accounting data:
• Transaction
• Account
• Posting
• Chart of accounts
• General ledger
• T account
• Double entry system

Bookkeeping : Posting of closing entries

noreply@blogger.com (Ahmed Abdul-razek) — Sat, 30 Jun 2012 15:55:00 -0700

POSTING

The process of transferring information from the journal to the ledger for the purpose of summarizing is called posting. Primarily a clerical task, posting is ordinarily carried out in the following steps:

1. Record the amount and date. The date and the amounts of the debits and credits
are entered in the appropriate accounts.

2. Record the posting reference in the account. The number of the journal page is entered in the account.

3. Record the posting in the journal. For cross-referencing, the code number of the account is now entered in the P.R. column of the journal (solid line).

Preparing closing Entries

At the end of the accounting fiscal year, the balances of the nominal accounts are to be transferred from the trial balance to the profit and loss account through closing entries, these entries produce a zero balance in each nominal account.

Journalizing and posting closing entries is an essential step in the accounting cycle.

Separate closing entries could be prepared for each nominal account, but the following two
entries satisfy the desired result:

1. Debit each revenue account for its balance and credit profit and loss account for total revenues.

2. Debit profit and loss account for total expenses and credit each expense account for its balance.

Below, is closing entries illustration:

To illustrate the journalizing and posting of closing entries, we will assume that Banana, lawyer closes his books monthly. The closing entries at December ٣١ are shown in the following illustration.

Posting of closing entries

The posting of the closing entries are shown in the following accounts, all the nominal accounts have zero balances.

* Note that profit and loss account is used only in closing. No entries are journalized and posted to this account during the year.

Preparation of income statement

The income statement is designed the report the results of earning activities
(operations) for a specific time period such as a month, quarter, or year.

Net income for the period is the excess of revenues over expenses for that time.

The heading of the income statement indicates the name of the business, the name of the statement, and the time period covered by the statement. Below an illustration of Banana lawyer income statement for the month of December 2011.

Banana, Lawyer
Income Statement
For the month of December 2011

Note :

1. Revenues are defined as in flows of assets either from the sale of goods or the performance of services.
2. Expenses are defined as out flows or other uses of assets to produce revenue.

٣. Net income is defined as the excess of revenues over expenses, and will be transferred to the balance sheet as either profit or loss.

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Bookkeeping course

Accounting Transaction: General Journal

noreply@blogger.com (Ahmed Abdul-razek) — Sat, 30 Jun 2012 12:48:00 -0700

In the Bookkeeping course we showed the effects of transactions by making entries in T accounts. However- these entries do not provide the necessary data for a particular transaction - nor do they provide a chronological record of transactions.

The missing information is furnished by the use of an accounting form known as the journal.

General Journal
The journal, or day book, is the book of original entry for accounting data.
- It is the first book to record financial transaction in chronological order.
- It has spaces for date, accounts titles & explanations, references, and two money columns, as illustrated below:

Afterward - the data is transferred or posted to the ledger, the book of subsequent or secondary entry. The various transactions are evidenced by sales tickets, purchase invoices, check stubs, and so on. On the basis of this evidence, the transactions are entered in chronological order in the journal. The process is called journalizing. A number of different journals may be used in a business. For our purposes, they may be grouped into general journals and specialized journals.
The latter type - which are used in businesses with a large number of repetitive transactions, are described in Chapter 6. To illustrate journalizing - we here use the general journal, whose standard form is shown be
low.

Journalizing

Entering transaction data into Journal is known as Journalizing.

Steps for journalizing a transaction
- Analyze the transaction to determine which accounts are affected.
- Analyze the accounts to determine which account is the debit part and which one is the credit part.
- Record the transaction following the example illustrated below.

Note: The date should be entered in the date column.
- The year and the month are not repeated until the start of a new page or a new month.

- The title of the account to be debited is entered against the left margin of the title & explanation column.

- The amount to be debited to each account is entered in the debit column on the same line as the account title. ( The debit amount for each account is entered in this column. Generally, there is only one item, but there could be two or more separate items.)

- The account to be credited follows the same steps except being in the credit side.
( The credit amount for each account is entered in this column. Here again, there is generally only one account, but there could be two or more accounts involved with different amounts. )

- An explanation of the transaction may be entered on the next line below the journal entry.

- The posting reference column is left blank till the transaction is being posted.

The Next : Posting

Introduction to bookkeeping: Accounting flowchart process

noreply@blogger.com (Ahmed Abdul-razek) — Wed, 6 Jun 2012 05:41:00 -0700

Accounting Flowchart

Financial Accounting & Bookkeeping Cycle Steps

( Basic Concepts of Financial Accounting )

describes the financial accounting process and shows how information
about transactions and events is accumulated to produce the balance sheet and the in-
come statement. This early presentation is quite basic; subsequent chapters will pre-
sent more complex issues. Also, although the cash flow effects of various transactions
are addressed in another topic, the statement of cash flows is actually covered in detail
in other topic, “Statement of Cash Flows.”

Introduction:
Accounting is the art of recording, summarizing, classifying and reporting financial transactions and other events of an enterprise.

The following flowchart shows the steps in the accounting cycle. These are the accounting procedures normally used by enterprises to record transactions and prepare financial statements

Image of Accounting flowchart Cycle Steps

and Below, the flowchart steps have been explained in detail:

1. Transaction:
The processing of accounting data begins with an economic transaction, where two
or more parties engage in an exchange of goods or services for some form of
consideration. Evidence of this happening is the receipt of some form of a source
document. Common examples of such a source document include:

• A sales receipt - this can be in a variety of forms.
• A purchase invoice.
• A debit/credit memorandum.
• A copy of a contract entered into.
• A billing statement.
• A remittance statement.

There are a multitude of source documents, in type, shapes, and format used to record
the significant data. It is these documents, which become the basis for data input to the
accounting processing. But, prior to the actual data entry, the documents must be
subjected to a series of analysis and classification.

2. Analyze and classify:

2٫1. Analyze:
This phase of the accounting process includes the application of several of the
accounting principles, namely:

The Entity Concept - This is probably the most basic of all concepts in accounting.
As applied here in this phase of the accounting process, the analysis must determine that the transaction in question, first relates to the entity in question. If not it must be rejected and not allowed to continue through the process.

Monetary Concept - In addition the analysis must determine that the transaction can be measured in terms of a monetary basis. Those transactions, which cannot be measured in terms of amount (for e.g., Saudi Riyals), are eliminated from further consideration for inclusion in the accounting process.

Cost Principle - All transactions are recorded at cost and not at current market value.
Cost is determined from the source documents used as evidence of the transaction.

2٫2. Classify:
Once past the analysis phase, the transaction is then properly classified in preparation for entry into the accounting database, commonly using a Chart of Accounts.

Chart of Accounts - The design of a good accounting system begins with the Chart of Accounts. This is a list of the accounts, which comprise the particular accounting system (it is designed with the particular company and its needs for information).
Accounts are grouped according to their relationship in the accounting equation (i.e., assets, liabilities, owner's equity, revenues and expenses). The numberings scheme assigns a block of numbers to the respective groups. A typical assignment of numbers might be as follows:

Assets ...................... 100-199
Liabilities ................. 200-299
Owner’s Equity ......... 300-399
Revenues ................. 400-499
Expenses .................. 500-599

The numbering blocks should provide a convenient manner for adding new accounts without having to renumber the accounts. Sometimes the account numbers are designed to provide additional information as to location, cost codes, etc. In any event they assist in arranging the accounts for convenience of financial statement preparation, account location, and category identification.

The next consideration is that of determining whether this transaction when recorded in the account will cause the balance of that account to be increased or decreased. Depending upon the type of account and what side of the accounting equation it appears, this means it must be reported as a debit or a credit. Of course the basic rule of having debits and credits equal must be followed. That means each transaction will require at lease one debit and one credit identity to be recorded correctly. Finally, a transaction can affect multiple accounts, requiring more than one debit and/or one credit in order to properly record it in the accounting process.

3. Journalize:

This step in the accounting cycle represents the first time that the transaction enters the accounting database. It is the data entry phase. Here the transaction, having been analyzed and classified, is recorded in the Accounting Voucher.

In entering the transaction, various types of vouchers depending on the type of organization are used. However, the most commonly used format of an accounting voucher is attached in Appendix.

Sometimes, accounting vouchers are not prepared and transactions are directly entered into Journals and this is for this reason that the journal is referred to as the "book of original entry." The journal can be likened to a diary in which events are recorded in chronological order of their occurrence. In the accounting process, two types of journals are used:

3٫1. General Journal
In the General Journal, transactions are recorded as they were analyzed and classified. First the event is dated as to when it actually happened. Then the debit side of the transaction is recorded first by itemizing the account(s) that must be debited. The amount(s) to be debited are then entered in the column to the left. This
process is continued until all of the debits have been recorded. The recording shifts to the account(s) to be credited. The recording(s) for the credits are indented to offset them from the debit recording(s). After recording the account(s) to be credited, the amounts are then entered into the column to the left of that of the debits.

If the transaction required only one debit and one credit, this is referred to as a simple entry. On the other hand, it is requires more than one debit and/or credit; it is referred to as a compound entry.

3٫2. Special Journals
As their name implies, these journals are used to record uniquely classified types of transactions by use of specially designed journals. They are designed to meet the needs of the specific entity, which uses them. There is no common format for their design, as this is determined by the individual entities. However, the most commonly used special journals are as follows:

• Sales Journals - generally used to record all credit sales of merchandise inventory items.
• Purchases Journals - generally used to record all credit purchases of merchandise inventory items.
• Cash Receipts Journals - generally used to record all inflows of cash.
• Cash Payments (Disbursement) Journals - generally used to record all outflows of cash.
• NOTE: The check register is sometimes used in place of the Cash Receipts and Cash Payments Journals.

4. Post:
Posting refers to the process of transferring or transcribing the information contained in the journal entries to the appropriate accounts in the general ledger. During this process debits in the journal entry are posted as debits in the ledger, and credits in the journal entry are posted as credits in the ledger. Along with the debits and credits, the information transferred includes the date of the journal entry and the voucher reference. This cross-reference is the audit trail by which a transaction can be traced from its entrance into the system via the journal/voucher to the final destination in the general ledger. This is an important part of the processing of accounting data.

General Ledger
The general ledger is the heart of any accounting system. It is the permanent record of the consequences resulting from the accumulation of transaction throughout the life of the entity. Each account in the accounting system has its separate page in the general ledger. In addition each account has its unique identification in the form of an account number as specified in the Chart of Accounts.

Subsidiary Ledger
An enterprise constantly needs detailed information about its dealings with individual customers and creditors. To provide this information, companies with several thousand customers and creditors, use a subsidiary ledger to keep track of individual balances. Thus a typical merchandising enterprise has subsidiary ledgers containing accounts with customers (customers’ ledger) and creditors (creditors’
ledger). An account in the general ledger is maintained that summarizes the details in the accounts receivable and accounts payable ledgers. This summary account in the general ledger is called a control account, because the summary account controls the subsidiary ledger.

5. Trial balance:
Simply defined, a Trial Balance is a list of all of the general ledger accounts having a balance amount as of that date. It contains the following columns:
• Account Number (from chart of accounts)
• Account Title(s).
• Applicable debit amounts.
• Applicable credit balance.

A trial balance provides a check on the accuracy of the postings, which occurred during the period by showing that the total debits posted equals the total credits posted. It is prepared at any time, following the posting of all journal entries. However, it is routinely prepared at the end of the accounting period, prior to making any adjustments to the books. Thus, the trial balance is a test of the mathematical equality of debits and credits after all postings have been completed. Its preparation is essential to the processing events leading up to the preparation of the financial statements.

6. Adjusting entries:
Throughout an accounting period, an entity will continue to be engaged in a variety of economic transactions. Some of those will affect the current period, while some of them will affect future periods throughout the life of the entity. At the time that they occur, each of these transactions, are supported by a source document (see step 1 above). If they are applicable to the current period, their flow through the accounting system is straight forward and without the need for any special handling or
considerations.

However, those transactions, which effect the present and future accounting periods, will at some future date require special considerations and handling. The special considerations are caused by absence of a source document, which gives cause to their existence. Keep in minds that these transaction either happened in a prior period or have not yet happened The special handling is a continuation of the special consideration, in that these transaction must be dealt with in a manner which adjusts their effects in the current period, by means of special journal entries. Many have already been recorded in the accounting system. What is needed then is to ensure that their consequences are applied to the proper accounting period. Some of the examples of adjusting entries are:

• Accruals
• Amortization of prepayments and intangibles
• Deferred revenues and expenses

Also some, balances have to be reclassified from one account to another for the purpose of proper presentation in the financial statements. Some of the examples of such transactions are as follows:

• Reclassification of current portion of long-term loan from long term liability to current liability
• Reclassification of debit balances in creditors account
• Reclassification of credit balances in debtors account

This, then, is accomplished through the use of Adjusting Entries and Reclassifying entries.

7. Adjusted trial balance:
After all Adjusting Entries and Reclassifying Entries have been journalized and posted an ADJUSTED TRIAL BALANCE is prepared from the ledger accounts. It shows the balance of all accounts, including those that have been adjusted, at the end of the accounting period. The purpose of an adjusted trial balance is to show the effects of all financial events that have occurred during the accounting period. The financial
statements are usually prepared from this trial balance.

8. Financial statements:
The following are the basic financial statements, which are prepared at the end of each accounting period. Each portrays a different representation of the entities financial status and results of activities. All of them are linked together in a manner, which presents the financial position and results of economic activities, and therefore all three must always be presented together.

Income statement:
• Presents the results of economic activities, which occurred during the specific accounting period.
• Bridges the balance sheet of the previous accounting period with that of the current accounting period. Therefore, it covers a period of time.
• Develops the net income for the current accounting period. This is used to reflect the profitability of that period.
• is linked to the balance sheet via the net income amount, which appears in both of those statements.

Statement of Changes in Owners’ Equity
Presents the changes that have occurred in the owner's equity as a result of the current period's activities. Therefore its results represent what occurred within a period of time. It is linked to the balance sheet via the capital account, retained earnings, and any reserves.

Balance Sheet
Sometimes referred to as the statement of financial position, reports the assets, liabilities, and owner’s equity of an enterprise at a specific date.

Statement of Cash Flows
The basic purpose of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an enterprise during a period. To achieve this purpose, the statement of cash flows reports the cash effects of:
• Operations during a period
• Investing transactions
• Financing transactions; and
• Net increase or decrease in cash during the period

9. Closing entries
Closing an account means to "bring the balance to zero". We close what we call the temporary (or nominal) accounts. In the closing process all of the revenue and expense account balances (income statement items) are transferred to a clearing or suspense account called Income Summary (or Income for the year), which is used only at the end of each accounting period (yearly). Revenues and Expenses are matched in the Income Summary account and the net result of this matching, which represents the net income or net loss for the period, is then transferred to an owners’ equity account i.e., retained earnings. All closing entries are posted to the appropriate general ledger accounts.

10. Post closing trial balance
A trial balance is prepared after all temporary accounts have been closed. The accounts, which remain open are called real accounts and include: Asset accounts, Liability accounts and the Capital account. In other words, the balance sheet accounts remain open.

Practical Session:
Although, an attempt has been made above to explain how an accounting cycle works, but in order to make the students understand the whole process of flow of transactions from beginning till the financial statements are produced, a practical session including the following steps is recommended:

• A chart of accounts should be created keeping in view requirements of a service enterprise.
• Accounting vouchers must be prepared for transactions affecting all aspects of the financial statements .
• Vouchers must be posted to their individual General Ledger Accounts using the form in Appendix ٢.
• A trial balance should be prepared using the final balances in general ledger.

• Adjusting and reclassifying entries must be prepared and then posted to general ledger.
• Adjusted trial balance should be prepared.
• Financial statements should be prepared from the adjusted trial balance.
• Closing process should be performed.
• A post closing trial balance should be prepared.
• Opening of a new accounting period in the books should be demonstrated using the post closing trial balance.

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bookkeeping and financial accounting training course

Accounting Transaction: double-entry Bookkeeping system

noreply@blogger.com (Ahmed Abdul-razek) — Wed, 6 Jun 2012 03:17:00 -0700

double entry Bookkeeping system

For the Accounting Transaction Posting

Preparing a new equation A = L + C after each transaction - would be cumbersome and costly especially

when there are a great many accounting transactions in an accounting period. and Also, information for a speciﬁc item - such as cash would be lost as successive transactions were recorded.

This information could be obtained by going back and summarizing the transactions, but that would be very time-consuming. Thus we begin with the account - Account which records the accounting transactions so you must know what the accounting transactions and how to post accounting transaction.

Financial Accounting Transaction :
What is the Accounting Transaction ?
The processing of accounting data begins with an economic transaction, where two or more parties engage in an exchange of goods or services for some form of consideration.
Evidence of this happening is the receipt of some form of a source document. Common examples of such a source document include:

• A sales receipt - this can be in a variety of forms.
• A purchase invoice.
• A debit/credit memorandum.
• A copy of a contract entered into.
• A billing statement.
• A remittance statement.

There are a multitude of source documents, in type, shapes, and format used to record
the significant data. It is these documents, which become the basis for data input to the
accounting processing. But, prior to the actual data entry, the documents must be
subjected to a series of analysis and classification.

Now let's know the Basis for Post the accounting Transaction : basis of accounting treatment for the transaction

1- Debits and Credits

The terms debit and credit mean left and right, respectively, the abbreviation of
these two words as follows:

* Debit Dr. * Credit Cr.

* These abbreviations come from the Latin words debere (Dr.) and credere (Cr.).

When an amount is entered on the left side of an account ( In Base No. 2 will explain what is the account ), it is a debit, and

the account is said to be debited. When an amount is entered on the right

side, it is a credit, and the account is said to be credited. The abbrevia

tions for debit and credit are Dr. and Cr., respectively.

Whether an increase in a given item is credited or debited depends on the category of the item. By convention, asset and expense increases are recorded as debits, whereas liability, capital, and income increases are recorded as credits. Asset and expenses decreases are recorded as credits, whereas liability, capital, and income decreases are recorded as debits. The following tables summarize the rule.

2- The Account
An account may be deﬁned as a record of the increases, decreases, and balances in an individual item of asset, liability, capital, income (revenue), or expense.

The simplest form of the account is known as the “T” account because it resembles the letter “T.”A ┬ Account has a left side and a right side, thus, an account is debited when an amount is entered on the left side and credited when an amount is entered on the right side.

The account has three parts:
1. the name of the account and the account number
2. the debit side (left side)
3. the credit side (right side).

Whether a debit or credit is an increase or decrease to the account balance depends on the account
classification as illustrated below:

The increases are entered on one side, the decreases on the other. The balance (the excess of the total of one side over the total of the other) is inserted near the last ﬁgure on the side with the larger amount.

every recorded transaction affects at least two accounts ( for Ex. account on the right and other on the left side or 2 on this side)

An account has a debit balance when the sum of its debits exceeds the sum of its credits; it has a credit balance when the sum of the credits is the greater.

What are made in Base No. 1 and No. 2, called double-entry transaction recording

In double-entry accounting, which is in almost universal use, there are equal debit and credit entries for every transaction. Where only two accounts are affected, the debit and credit amounts are equal. If more than two accounts are affected, the total of the debit entries must equal the total of the credit entries.

Therefore, it is important to know : For every transaction entry, debits must equal credits

Note, however, that the term “double entry” does not mean that a transaction must affect each side of the transaction, it may effects one.

Example: Accounting Transaction
purchase of equipment for cheque – Tom purchased a computer for 2000$ paid by cheque.

This transaction results in an
equal increase and decrease in total assets, though the composition of assets is changed:
Bank is decreased by 2000$ and the assets Equipment is increased by 2000$

we discussed the nature of business transactions and the manner in which they are analyzed and classiﬁed. The primary emphasis was the “why” rather than the “how” of accounting operations - we aimed at an understanding of the reason for making the entry in a particular way. We showed the effects of transactions by making entries in T accounts. However, these entries do not provide the necessary data for a particular transaction, nor do they provide a chronological record of transactions.

The missing information is furnished by the use of an accounting form known as the journal.

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Quiz -Tested yourself

1. To classify and summarize a single item of an account group, we
use a form called an _______.

2. The left side of the account is known as the _______, while the
right side of the account is known as the _________.

3. What do the term debit and credit mean?

4. What does double entry mean?

5. The left side of the account is known as the ________, where as the right side
is the ___________.

Answers: 1. account; 2. debit, credit; 3. do it by yourself; 4. do it by yourself ; 6. do it by yourself ,

accounting equation and Basic Elements of Financial Position

noreply@blogger.com (Ahmed Abdul-razek) — Mon, 4 Jun 2012 05:54:00 -0700

Classification of accounts

( Basic Elements of Financial Position )

Basic Concepts of Financial Accounting

Two types of accounts: The ﬁnancial condition or position of a business enterprise is represented by the relationship of assets to liabilities and capital.

First: Accounts belong to the Balance Sheet and represent the basic accounting equation.

These accounts are:

1. Assets 2. Liabilities 3.Owners Equity

These three basic elements are connected by a fundamental relationship called the accounting equation. This equation expresses the equality of the assets on one side with the claims of the creditors and owners on the other side:

( Remember : Assets must be equal to the sum of Liabilities and Owners equity)

It should balance after every transaction.

This relationship - which is called the accounting identity or basic accounting equation, is expressed in equation form as:

A = L + E
Assets = Liabilities + Owners Equity

where A = Total assets, L = Total liabilities, and E = Equity. Because creditor claims are paid before equity claims if a healthcare organization is liquidated - liabilities are shown before equity both on the balance sheet and in the basic accounting equation.

Note that the accounting identity can be rearranged as follows:

E = A − L

This format reinforces the concept that equity represents a residual claim against the total assets of the business and the fact that equity can be negative.
If a business writes down (decreases) the value of its assets, its liabilities are unaffected because these amounts are still owed to creditors and others. If total assets are written down so much that their value drops below that of total liabilities - then the equity reported on the balance sheet becomes a negative
amount.

The basic accounting equation is simply an algebraic form of the balance sheet.

1. Assets
Assets are the cash and non cash resources owned by a business and have economic value, and
used in carrying out future services or benefits to the entity using them.

Classification of assets:
- Current assets
Current assets are cash and other types of assets that are reasonably expected
to be converted into cash, sold, or used up during the normal operating year.

Examples of current assets include:
Cash, Bank, Goods, Accounts Receivable, Prepaid expenses, Inventory and
Marketable securities etc.

- Fixed assets
Fixed assets are those assets that are used in the normal operations of the
entity to produce and sell goods or perform services for customers. Fixed assets
are expected to service for a number of years are not for re-sell.

Examples of fixed assets include:
Lands, cars, buildings, equipments, and furniture etc.

- Intangible assets

Intangible assets are those assets that have no physical substance but they
are expected to provide benefits to the entity for several years.

Examples of intangible assets include:
Patents, trade marks, copyrights, goodwill, franchise fees, and trade name.

2. Liabilities
Liabilities are claims against assets, Amounts owed to outsiders, such as notes payable, accounts
payable, bonds payable.

Classification of Liabilities:
- Short-term Liabilities
Short-term liabilities are obligations of the entity that are reasonably
expected to be paid or settled in the next year or the normal operating cycle.

Examples of short-term liabilities include:
Short-term notes payable, accounts payable, salaries and wages payable and
other types of accrued liabilities for services received but not yet paid for.

- Long-term Liabilities
Long-term liabilities are those obligations that do not require payment within
the next year or the normal operating cycle. In other words, liabilities not classified
as short-term are reported in the Long-term liabilities section of the balance sheet.

Examples of long-term liabilities include:
Loan, bonds, and any other obligation that mature in a period more than one
year beyond the balance sheet date is reported as long-term.

3. Owner’s Equity
Owner’s equity represents the owner’s interest in the assets of the entity.
It is equal to total assets minus total liabilities, also known as Capital.

There are two main sources of owner’s equity:
(١) Amounts contributed by the owner (Capital)
(٢) Amount earned by the entity but not yet taken by the owner.

Second: Accounts belong to the Income Statement and involve in the determination of
net income or net loss of a business entity for a specific period of time. These accounts
are:

1. Expenses 2. Revenues

1. Expenses
Expenses are the cost of assets consumed or services used in the process of earning revenue in other words; expenses are outflows or other uses of assets resulting from the sale or delivery of goods or the provision of services by the entity during specific time period.

Examples of expenses include:
Utility expenses (electric and water), telephone bill expense, rent expense, wages and salaries expense and depreciation expense etc.

2. Revenues
Revenues are cash in-flow result from the sale of goods or the rendered of services.

To illustrate the affect (increase & decrease) of a financial transaction on the above classified accounts, study the following chart:

Basic Accounting Equation

You have already learned the basic accounting equation. However, in the above illustration note the expansion of the basic accounting equation to show the accounts that comprise owner’s equity besides expenses and revenues with their effect (increase, decrease) of the debit /credit rules on each type of account.

To student
Please study the above diagram carefully; it will help you understand the fundamentals of the double-entry system.

------------------------------- Example -------------------------------

During the month of January, Mr. Tom Banana, lawyer,
1. Invested $6,000 to open his law practice.
2. Bought ofﬁce supplies on account, $500.
3. Received $3,000 in fees earned during the month.
4. Paid $100 on the account for the ofﬁce supplies.
5. Withdrew $500 for personal use.

These transactions could be analyzed and recorded as follows:

Assets = Liabilities + Capital

Cash Tom, Capital

1. + $6,000 = + $6,000

Supplies Accounts Payable

2. + $500 = + $500

Cash

3. + $3,000 = Fees Income

+ $3,000

Cash

4. − $100 = Accounts Payable

− $100

Cash

5. − $500 = Tom, Capital

− $500

Notice that for every transaction, two entries are made. After every transaction, the accounting equation remains balanced.

Notice that for Preparing a new equation A = L + C after each transaction would be cumbersome and costly, especially when there are a great many transactions in an accounting period. Also, information for a speciﬁc item such as cash would be lost as successive transactions were recorded. This information could be obtained by going back and summarizing the transactions, but that would be very time-consuming. Thus we begin with the account, Account which records the accounting transactions so you must know what the accounting transactions and how to post accounting transaction (Double-entry bookkeeping system)

Quiz -Tested yourself

1. The accounting equation is _______ = ________ + ________.
2. Items owned by a business that have monetary value are ______.
3. _________ is the interest of the owners in a business.
4. Money owed to an outsider is a(n) _________.
5. The difference between assets and liabilities is ___________.
6. An investment in the business increases _______ and ________.
7. To purchase “on account” is to create a ___________.

Answers: 1. Assets, liabilities, capital; 2. Assets; 3. Capital; 4. Liability;
5. Capital; 6. Assets, capital; 7. Liability

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bookkeeping and financial accounting training course