Balancesheet Sample

UNIT 3

Accounting Cycle

• The accounting process involves first identifying economic events or transactions that affect the financial position of a company.
• These transactions are measured and a dollar value is assigned to them.
• The transactions are recorded, classified and summarised, and finally they are reported in the form of financial statements.

5 Steps in Accounting Cycle

• Journal – db, cr daily entries
• General Ledger – T accounts
• Adjusted transaction in ledger
• Trial balance, adjusted trial balance
• Financial statements

Transactions

• An accounting transaction is an economic event that affects the financial position of a company.
• All accounting transactions cause a measurable change in the balance sheet accounts.
• After a transaction is identified, it is assigned a dollar value that reflects the event’s effect on the company.
• Transactions can be either external or internal.
• Internal transactions are events that affect the financial position of a company but do not involve an outside entity. E.g depreciation

• expiration of assets
• accrual of unrecorded expenses
• emergence of unearned revenue
• accrual of unrecorded revenues.

• External transactions- PPE purchase, the sale of goods or services, and the borrowing of money

Ledger Accounts

• Set of accounts- ledger account
• Accounts are used to systematise the accumulation of transactions.
• Each account corresponds to a balance sheet or revenue and expense item, such as cash, receivables, inventory, sales.
• Accounts help summarise all of the changes in each balance sheet item.
• The vertical stem of the ‘T’ divides the account into two columns: one for recording increases in the account and the other for recording decreases.

Period end adjustments

• External transactions are usually easy to identify because they represent specific economic events involving parties outside the company.
• Internal transactions, on the other hand, are more difficult to identify because they tend to represent continuous economic events within the company.
• There are four types of adjusting entries that need to be made:

• expiration of assets
• accrual of unrecorded expenses
• emergence of unearned revenue
• accrual of unrecorded revenues.

• With ‘noncurrent assets’ it is usual to create a separate ‘contra-asset’ (XA) account to record the reduction in the asset.
• Accrual of unrecorded expenses:

• These expenses have been incurred in earning the revenue for the period but have not yet been paid in cash.
• The cash disbursement comes after expense recognition.
• When the cash is subsequently paid in the next period, the journal entry would be to debit accrued interest payable and credit cash.

• Unearned revenue to emerge:

• When cash is received from customers before the revenue is earned, it is considered unearned revenue (also referred to as ‘deposits’ and ‘revenue received in advance’).
• This is a liability to the company because it is now required to provide a service to its customers (or return the cash).

• Retained Earnings

• At the end of the accounting period, the balances of the revenue and expense accounts are transferred (or closed) to the retained profits account.
• This ensures that the revenue and expense accounts have nil balances at the beginning of the next accounting period.
• Because the revenue and expense account balances are transferred to retained profits, they are called temporary accounts.
•  Retained profits as well as the other asset, liability and owners’ equity accounts are called permanent, or statement of financial position, accounts.
• the sales revenue account has a credit balance (RHS). The journal entry to close the account is:

• Sales revenue (OE) -Dr
• Retained profits (OE) -Cr

• For a company that has been in business for a number of years, the retained profits amount represents all past profits earned that have not been distributed to shareholders in the form of dividends (or transferred to the reserve account).
• because the retained profits account accumulates all past profits retained within the firm, a loss made in the current period will reduce but not necessarily eliminate the opening (credit) balance in retained profits.

• Opening & Closing Balance

• Balance Sheet – can have an opening balance
• Income statement – no opening balance since rev- exp = profit/ loss is closed and added to retained earnings at the end of every accounting period
• Cash Ending Balance= Beginning balance+ All receipts of cash – all payments of cash
• AR ending balance = Beginning balance + Sales- payments received

• A major consequence of recognising revenue prior to the receipt of cash is the occurrence of bad or doubtful debts.
• Therefore Accounts Recievable (debtors) is subject to impairment.
• The failure to properly account for this impairment overstates both revenue and receivables.
• It is therefore desirable to test for this impairment and recognise it as a cost of credit sales and matched against credit sales in each period.

• Inventory

• The balance in inventory is the dollar value of goods on hand for resale.
• Increases (debits) occur when the business purchases merchandise for resale.
• The corresponding credit could be to either cash if a cash purchase is made, or to accounts payable (creditors) if the merchandise is purchased on credit (the usual case).
• The decreases in inventory (credits) occur when the business sells goods to a customer.
• When this occurs, inventory decreases by the cost of the merchandise to the business. The corresponding debit is to cost
•  (–)of goods sold (an expense),income statement:
• Inventory Ending Balance = Opening Inventory + Purchases – COGS

• Prepaid Expense

• prepayments occur when the business pays for a service in advance.
• Increases in prepaid expense account(s) (debits) occur at the time of the advance purchase of the service.
• credit at this time will generally be to cash or perhaps accounts payable.
• The decreases (credits) occur as the service is ‘used up’ and becomes part of the adjusting journal entry process we have already seen.
• Prepaid Expense Ending Balance = Beginning Balance + Purchase of pre-paid expense (cash / credit)

• Store Equipment

• Increases (debits) in noncurrent assets occur when these items are purchased.
• They may be purchased for cash, in which case the corresponding credit will be to the cash account, or, what is more likely, on credit, in which case the corresponding credit will be to a liability account, perhaps a bank loan.
• Store Equipment Ending Balance= Beginning Balance+ Purchases (cash/ credit)- Disposal

• Accumulated Depreciation

• Enging Acc Depreciation = Beginning Acc Dep + Dep for store eq – acc depreciation

• Creditors

• A typical increase (credit) in this account results from the purchase of inventory on credit.
• Reductions (debits) are nearly always from the payment of the debt with cash to these suppliers.
• Ending Balance= Beginning Balance + Purchase on credit – Payments of cash for credit purchases

• Accruals

• Ending Balance= Beginning balance + Amount of expense owed at period end – payments of expense next period

• Retained Earnings

• Ending balance= Beginning balance + profit (- loss) – dividends paid