Introduction to Hospitality Accounting.

Transcription

1 1 Intrductin t Hspitality Accunting. : Accunting And The Business Envirnment Tpic Objective: At the end f this tpic students will be able: Describe the nature and types f business rganizatins. Explain the rle f accunting in business rganizatins. Define Generally Accepted Accunting Principles and describe the basic accunting cncepts. Use the accunting equatin t analyze business transactins. Prepare financial statements and explain the relatinships between them. Explain the rle f ethics in accunting and business. Definitin/Overview& : Business: A business (als called firm r an enterprise) is a legally recgnized rganizatinal entity designed t prvide gds and/r services t cnsumers r crprate entities such as gvernments, charities r ther businesses. Businesses are predminant in capitalist ecnmies, mst being privately wned and frmed t earn prfit t increase the wealth f wners. A business is an rganizatin that sells prducts r services t custmers. One majr gal f a business is t generate a prfit, which is the difference between the sales price f the gds r services sld by the business and the cst f the resurces used t prvide these gds r services. Accunting: Accunting is a service activity. Its functin is t prvide quantitative infrmatin primarily financial in nature, abut ecnmic entities, that is intended t be useful in making ecnmic decisins, and in making reasned chices amng alternative curses f actin.

2 2 Key Pints& : 1. Business Organizatins An rganizatin that sells prducts r services t custmers and helps its wner t generate sme prfit is knwn as Business rganizatin Types f Business Organizatins A business rganizatin can be classified by what it prvides t its custmers Service cmpanies Service cmpanies perfrm services fr custmers. Sme service cmpanies prvide legal, accunting, medical, r banking services that require lts f expertise, and thers help with persnal services such as lawn mwing, il changing, hair styling, painting, plumbing, r cleaning. Examples include H&R Blck, Bank f America, Jiffy Lube, and Merry Maids Merchandise cmpanies Merchandise cmpanies, als knwn as retail cmpanies, sell prducts that are made by anther cmpany. Examples f merchandise cmpanies include Wal- Mart, Sears, Amazn.cm, and Ace Hardware. Many f these cmpanies keep large vlumes f gds n hand fr sale, such as Tys R& Us.

3 Manufacturing cmpanies Manufacturing cmpanies make their wn prducts that are sld directly t the final custmer r t ther cmpanies wh distribute the prducts t custmers. Tyta, Intel, and Apple are all examples f manufacturing cmpanies Frms f Business Organizatins A business rganizatin can als be classified based n hw it is rganized, and a business can be rganized in ne f three basic frms, as a prprietrship, a partnership, r a crpratin Prprietrship A Prprietrship: Has a single wner, called the prprietr, wh is ften the manager. Tends t be a small merchandising stre r the prfessinal business f a physician, attrney, r accuntant Partnership A partnership: Jins tw r mre individuals as c-wners. Each wner is a partner. Is a business such as a retail stre r prfessinal rganizatin f physicians, attrneys, r accuntants. Is small r medium-sized, but may be gigantic, exceeding 2,000 partners.

4 Crpratin A Crpratin: Is wned by stckhlders, r sharehlders. Stckhlders purchase an wnership interest in a crpratin by buying shares f its stck. Can be small, with as few as ne stckhlder, but are usually quite large because they get funds frm many wners r stckhlders. Begins when the state apprves its articles f incrpratin. Is a legal entity separate frm its wners that cnducts business in its wn name. 2. Accunting and Accuntability Business rganizatins are part f a larger cmmunity because businesses prvide gds and services t the cmmunity, as well as emplyment fr sme cmmunity members Organizatin Accuntability Accuntability is respnsibility fr ne s actins. Organizatin accuntability is the rganizatin s fiduciary respnsibility t manage its resurces carefully. Many different individuals and grups f peple, called stakehlders, have an interest in rganizatins. Stakehlders include investrs, creditrs, suppliers, emplyees, custmers, gvernment agencies, and investees Business s Activities A business s activities can be gruped int three categries.

5 Financing activities Organizatins and their management attract investrs and creditrs wh prvide cash r ther assets t the rganizatin. In exchange, rganizatins and their management use these resurces respnsibly t perate the business prfitably, and repay amunts wed when due while maintaining a psitive cash balance Investing activities Organizatins and their management btain items needed t perate the business. Sme f these are physical, lng-term things such as building space, equipment, and furniture. Others include stck in r lans t ther cmpanies as a way f using extra cash prfitably. In exchange, rganizatins and their management pay suppliers and investees fr these items in a timely manner Operating activities Organizatins and their management generate a prfit frm the sale f gds r services. Organizatins use resurces t sell gds r services. In exchange fr the resurces used, management pays suppliers and emplyees n time and prvides a safe wrk envirnment. Custmers buy gds r services. In exchange, management prvides quality gds r services in a timely manner. Organizatins and their management meet varius regulatry bligatins t the Securities and Exchange Cmmissin, the Internal Revenue Service, the Federal Trade Cmmissin, and ther federal and lcal gvernment agencies by reprting financial infrmatin, paying taxes, and beying laws.

6 Financial Accunting and Management Accunting T satisfy the needs f stakehlders, managers are required t prvide infrmatin that cmmunicates the decisins made and the results btained frm thse decisins. Because rganizatins are accuntable t thers fr actins taken, managers cmmunicate using accunting as the language f business. Financial accunting prduces reprts called financial statements that shw financial infrmatin abut a business. Management accunting prvides financial and nnfinancial infrmatin inside the rganizatin. This frward-lking infrmatin helps managers plan, cntrl, and make decisins cnsistent with the fiduciary rle managers have in perating a business. Management accunting infrmatin must be useful, and the benefits f this infrmatin must be greater than the csts f btaining it Generally Accepted Accunting Principles (GAAP) GAAP are the rules that gvern financial accunting, the law& f financial accunting, and must be fllwed when preparing financial statements. Financial statements allw investrs and creditrs t make investment decisins. Financial statements allw suppliers and custmers t determine the financial cnditin f a business. Financial statements reprt t regulatry agencies such as the Securities and Exchange Cmmissin, the Internal Revenue Service, and the Federal Trade Cmmissin. 3. Accunting Cncepts and Principles 3.1. The Entity Cncept The mst basic cncept in accunting is that f the entity. An accunting entity is an rganizatin r a sectin f an rganizatin that stands apart as a separate ecnmic unit.

7 7 The entity cncept specifies that bundaries must be drawn arund each entity s as nt t cnfuse its financial affairs with thse f ther entities The Reliability (Objectivity) Principle Accunting infrmatin is based n the mst reliable data available s that investrs and creditrs can use this infrmatin t make decisins. This guideline is the reliability, r bjectivity, principle. Reliable data is verifiable, which means that it may be cnfirmed by any independent bserver. Fr example, a bank lan is supprted by a prmissry nte, which is bjective evidence f the lan. Withut the reliability principle, accunting data might be based n whims and pinins The Cst Principle The cst principle states that acquired assets and services shuld be recrded at their actual cst, als called histrical cst. The cst principle als hlds that the accunting recrds shuld keep the histrical cst f an asset thrughut its useful life because this cst is a reliable measure The Ging-Cncern Cncept Anther reasn fr measuring assets at histrical cst is the ging-cncern cncept. This cncept assumes that the entity will stay in business fr the freseeable future, lng enugh t use existing resurces fr their intended purpse. Als, creditrs wh lan mney t a business r investrs wh prvide mney r assets in a business d s assuming the business will remain in peratin indefinitely. T reassure stakehlders that the business is a ging cncern, the business may have its financial statements audited by a CPA firm.

8 8 4. The Accunting Equatin The basic tl f accunting is the accunting equatin. It measures the ecnmic resurces f a business and the claims t thse resurces Assets Assets are the ecnmic resurces f a business that are expected t prvide benefits t the business in the future. Assets are what the business wns. Cash, merchandise inventry, furniture, and land are examples f assets Liabilities Liabilities are utsider claims t the assets f a business liabilities are debts wed t utsiders. These utside parties, called creditrs, include rganizatins that lan mney r prvide supplies, merchandise, furniture, r buildings Owner s Equity Owner s equity, r capital, represents the insider claims t the assets f a business. Equity means wnership, s wner s equity is the wner s claim t the cmpany s assets that cmes frm investing in the business Cmpnents f Owner s Equity By rearranging the accunting equatin, we see that wner s equity is the amunt f an entity s assets left after its liabilities are subtracted. Owner s Equity = Assets Liabilities

9 9 The wner s equity, r capital, f a business can increase in tw ways: Owner investments increase equity when the wner invests cash and ther assets in the business. Revenues increase wner s equity when the business sells gds r services t custmers. The wner s equity f a business can decrease in tw ways: Owner withdrawals decrease wner s equity when the wner takes assets ut f the business fr persnal use. Expenses decrease wner s equity when the business uses up resurces t deliver gds r prvide services t custmers Accunting fr Business Transactins Business is an rganizatin that is accuntable t its stakehlders, the business must accunt fr all actual transactins. A transactin is any event that affects the financial psitin f the business and can be measured reliably. A transactin invlves an exchange. In any transactin, smething is received by the business, and smething is given. 5. Financial Statements T present the results f the transactins we analyzed, we need t prepare financial statements. Financial statements include the fllwing: Incme statement Statement f wner s equity Balance sheet Statement f cash flws

10 Incme Statement An Incme Statement, als called a Prfit and Lss Statement (P&L), is a financial statement fr cmpanies that indicates hw Revenue (mney received frm the sale f prducts and services befre expenses are taken ut, als knwn as the "tp line") is transfrmed int net incme (the result after all revenues and expenses have been accunted fr, als knwn as the "bttm line"). The purpse f the incme statement is t shw managers and investrs whether the cmpany made r lst mney during the perid being reprted Statement f Owner s Equity Statement f wner s equity answers this questin by presenting the amunt f the wner s claim t assets and the changes t that claim during a specific time perid, such as a mnth r a year, as fllws: Remember that increases in wner s equity cme frm Owner investments Net incme (Revenues Expenses, when revenues are greater than expenses) 5.3. Balance Sheet Decreases in wner s equity result frm Owner withdrawals Net lss (Revenues Expenses, when expenses are greater than revenues) In financial accunting, a balance sheet r statement f financial psitin is a summary f a persn's r rganizatin's balances. Assets, liabilities and wnership equity are listed as f a specific date, such as the end f its financial year. A balance sheet is ften described as a snapsht f a cmpany's financial cnditin. Of the fur basic financial statements, the balance sheet is the nly statement which applies t a single pint in time.

11 Statement f cash flws In financial accunting, a cash flw statement r statement f cash flws is a financial statement that shws a cmpany's incming and utging mney (surces and uses f cash) during a time perid (ften mnthly r quarterly). The statement shws hw changes in balance sheet and incme accunts affected cash and cash equivalents, and breaks the analysis dwn accrding t perating, investing, and financing activities. As an analytical tl the statement f cash flws is useful in determining the shrt-term viability f a cmpany, particularly its ability t pay bills. 6. Ethical Decisin Making 6.1. Ethics in Accunting and Business Ethics are the principles f right behavir that guide decisin making. These principles are based n values f respnsibility, fairness, trustwrthiness, respect, caring, and citizenship; the general rule f ethics is t bring n physical r emtinal harm t thers. Organizatins create a culture with standards representing the expected behavir f its members, smetimes in the frm f a cde f ethics. As individuals, we als have beliefs abut what is right r wrng. Ethical dilemmas can arise when persnal beliefs r rganizatinal culture differ frm ethical principles. Stakehlders need relevant, reliable, and cmparable infrmatin abut a cmpany. Cmpanies naturally want t lk as gd as pssible. The ptential fr cnflict here is significant Standards f Prfessinal Cnduct The American Institute f Certified Public Accuntants (the AICPA), has a Cde f Prfessinal Cnduct that prvides guidance t CPAs in their wrk. The preamble t the Cde states: [A] certified public accuntant assumes an bligatin f self-discipline abve and beynd the requirements f laws and regulatins... [and] an unswerving cmmitment t hnrable behavir....&

12 12 Similarly, Certified Management Accuntants (CMAs) have standards. The pening paragraph f the Standards f Ethical Cnduct f the Institute f Management Accuntants (IMA) states: Management accuntants have an bligatin t the rganizatins they serve, their prfessin, the public, and themselves t maintain the highest standards f ethical cnduct.& : Recrding Business Transactins Tpic Objective: At the end f this tpic students will be able: Describe the rle f accunts in summarizing business transactins. Explain duble-entry accunting. Recrd and summarize business transactins. Prepare and use a trial balance t create financial statements. Definitin/Overview& : Transactins: A transactin is any event that affects the financial psitin f the business and can be measured reliably. A transactin invlves an exchange. In any transactin, smething is received by the business, and smething is given.

13 13 Key Pints& : 1. The Rle f Accunts in Summarizing Business Transactins 1.1. Transactins All business transactins, like persnal transactins, invlve an exchange. S, transactins are the ecnmic events the exchanges that have a measurable impact n the financial psitin f the business Accunts The key summary device f accunting is the accunt. This is the detailed recrd f all the changes that have ccurred in a particular asset, liability, r wner s equity as a result f transactins Assets Assets are the ecnmic resurces f a business expected t prvide benefits t the business in the future. Mst businesses use the fllwing asset accunts: Cash The Cash accunt is a recrd f cash transactins. Cash includes mney, such as the business s bank accunt balance, paper currency, cins, and checks Accunts Receivable A business may sell gds r services in exchange fr an ral r implied prmise f future cash receipt. Such sales are made n credit, n accunt. The Accunts Receivable accunt hlds the amunts that custmers we the business fr gds

14 14 r services that have already been prvided, hw much the cmpany can expect t receive frm custmers in the future Ntes Receivable A business may sell gds r services r lan mney and receive a prmissry nte. A nte receivable is a written pledge that the custmer r brrwer will pay a fixed amunt f mney by certain date. Ntes Receivable is a recrd f the prmissry ntes that the business expects t cllect in cash Prepaid Expenses A business ften pays certain expenses, such as rent and insurance, in advance. A prepaid expense is an asset because the prepayment prvides a future benefit fr the business. A separate asset accunt is used fr each prepaid expense. Prepaid Rent and Prepaid Insurance are examples f prepaid expense accunts Land The Land accunt is a recrd f the cst f land a business wns and uses in its peratins Buildings The cst f a business s buildings, its ffices, warehuses, and stres, fr example, appear in the Buildings accunt.

15 Equipment, Furniture, and Fixtures A business has a separate asset accunt fr each type f equipment. Examples include Cmputer Equipment, Office Equipment, and Stre Equipment. The Furniture and Fixtures accunt likewise shws the cst f these assets Liabilities A business generally has fewer liability accunts than asset accunts because a business s liabilities can be summarized in a few categries: Accunts Payable A business may purchase gds r services in exchange fr an ral r implied prmise f future payment. Such purchases are made n credit, n accunt. The Accunts Payable accunt shws hw much cash the business must pay suppliers fr gds r services that have already been received Ntes Payable Ntes Payable represents amunts the business must pay because it signed prmissry ntes t brrw mney r t purchase gds r services Accrued Liabilities An accrued liability is a liability fr an expense that has been incurred but has nt yet been paid. Taxes Payable, Interest Payable, and Salary Payable are accrued liability accunts.

16 Owner s Equity The wner s claim t the assets f the business is called wner s equity, r capital. In a prprietrship r a partnership, wner s equity is split int separate accunts: Capital The Capital accunt summarizes the wner s claim t the assets f the business. Capital can be cmputed by subtracting its ttal liabilities frm its ttal assets. The Capital balance equals the wner s investments in the business plus net incme and minus any net lss and wner withdrawals Withdrawals When a business wner withdraws cash r ther assets frm the business fr persnal use, the business s assets and wner s equity decrease. The amunts taken ut appear in a separate accunt titled Withdrawals r Drawing. The Withdrawals accunt decreases wner s equity. If withdrawals were recrded directly in the Capital accunt, the amunt f wner withdrawals might be lst amng the ther Capital accunt changes Revenues The increases in wner s equity created by selling gds r services t custmers are called revenues. This accunt represents amunts earned by the cmpany even if the cmpany has nt yet been paid fr the gds and services prvided. A business will have as many revenue accunts as needed, depending n hw many ways it earns its revenue.

17 Expenses Expenses are the decreases in wner s equity frm using resurces t deliver gds r prvide services t custmers. A business needs a separate accunt fr each type f expense, such as Salary Expense, Rent Expense, Advertising Expense, and Utilities Expense. Businesses strive t minimize their expenses in rder t maximize net incme Chart f Accunts Organizatins use a chart f accunts t list all their accunts alng with the numbers they assign t them. Accunting is cnsistent; accunts are listed in the chart f accunts in the balance sheet rder f assets, liabilities, capital, withdrawals, revenues, and expenses. Accunt numbers usually have tw r mre digits. 2. Duble-Entry Accunting The rule that reflects the fact that every transactin invlves at least tw accunts is called duble-entry accunting Rules f Debits and Credits T understand duble-entry accunting, yu need t knw the rules f debits and credits. The left side f any accunt is called the debit side, smetimes abbreviated as Dr. The right side f any accunt is called the credit side, smetimes shwn as Cr. Yu may be cnfused by the wrds debit and credit, especially if yu use a debit r credit card.

18 T-Accunt A T-accunt is an infrmal accunt frm used t summarize transactins. It isn t really used in accunting fr business transactins, but it des prvide a handy way f getting used t debits and credits. The T-accunt gets its name frm the fact that it is shaped like the letter T& Nrmal Balance An accunt s nrmal balance falls n the side f the accunt where increases are recrded. 3. Recrding and Summarizing Business Transactins In real life, the accunting prcess actually begins when business transactins are entered in a jurnal. The jurnal is the chrnlgical, r date rder, recrd f the transactins f a business. The accunting system tracks each exchange by creating a recrd in the jurnal shwing the transactin, the date it ccurred, and hw it affected the business s accunts. Because f the duble-entry system f accunting where each exchange invlves at least tw accunts every jurnal entry includes an equal amunt f debits and credits The Transactin Analysis T prperly recrd, r jurnalize transactins in the jurnal and summarize them in the T-accunts, yu will cmplete a five-step transactin analysis. Steps 1 thrugh 4 analyze the transactin fr the jurnal entry. Step 5 reflects the psting f the transactin frm the jurnal int the accunts.

19 Balancing the Accunts After transactins are recrded and psted t accunts, yu will calculate each accunt s balance. A balance is the difference between the accunt s ttal debits and its ttal credits Details f Jurnals and Ledgers The jurnal and the ledger prvide infrmatin that creates a trail& that can be used t fllw transactins thrugh the accunting recrds f a business. 4. Trial Balance The trial balance lists all the accunts f a business and their balances in balance sheet rder. A trial balance can be cnstructed at any time, but is mst cmmnly put tgether at the end f the accunting perid. Because the ttal f the debit balances shuld equal the ttal f the credit balances, the purpse f the trial balance is t summarize all accunt balances t be certain that ttal debits equal ttal credits befre the financial statements are prepared. After cmpleting the trial balance, yu can prepare the financial statements. Set up the financial statements Trial Balance Errrs When recrding and psting transactins, accunting errrs can and d ccur in bth manual and cmputerized accunting systems. The trial balance helps us find thse errrs that cause ttal debits and ttal credits t be unequal. T find an errr, yu start with the trial balance and wrk back thrugh the accunting recrds thrugh the ledger and thrugh the jurnal t the transactin. Errrs can ccur in the fllwing activities: Preparing the trial balance Calculating accunt balances Psting amunts int the accunts

20 20 Recrding jurnal entries : The Adjusting Prcess Tpic Objective: At the end f this tpic students will be able: Describe the accunting principles that help businesses measure incme. Describe the fur types f adjusting entries. Make adjusting entries. Prepare an adjusted trial balance. Prepare financial statements frm an adjusted trial balance. Definitin/Overview& : Adjusting Entries: In accunting/accuntancy, adjusting entries are jurnal entries usually made at the end f an accunting perid t allcate incme and expenditure t the perid in which they actually ccurred. The revenue recgnitin principle is the basis f making adjusting entries that pertain t unearned and accrued revenues under accrual-basis accunting. They are smetimes called Balance Day adjustments because they are made n balance day. Prfit: Prfit generally is the making f gain in business activity fr the benefit f the wners f the business. The wrd cmes frm Latin meaning "t make prgress," is defined in tw different ways, ne fr ecnmics and ne fr accunting.

21 21 Key Pints& : 1. Measuring Business Incme Using Accunting Principles One f the primary gals in business is t earn a prfit. Generally Accepted Accunting Principles (GAAP) guide us in measuring net incme accurately, and accrding t GAAP, we accunt fr transactins n an accrual basis t make this happen. Accrual basis accunting dictates that we recrd revenues when they are earned and expenses when they are incurred in rder t prduce revenues. In this way, revenues f a perid are matched against the expenses f that perid. The basic accunting perid is typically ne year lng, and nearly all businesses prepare annual financial statements. 2. Types f Adjusting Entries At the end f that perid, the accuntant prepares a trial balance and uses it t prepare financial statements. Hwever, befre mst business can prepare crrect financial statements, the accuntant will have t prepare adjusting entries. Adjusting entries are jurnal entries needed t ensure that accrual basis accunting is accmplished s that business incme can be measured accurately. Tw types f adjustments are made fr deferrals: Divide prepaid expenses, supplies, buildings, equipment, r ther assets between perids. These assets will be used, r expensed, ver mre than ne time perid after the cash has been paid. We wait t recrd the expenses until the pint in time when we use the items. Divide unearned revenues between perids. These liabilities represent bligatins t prvide gds r services and will be earned ver mre than ne time perid after the cash has been received. We wait t recrd the revenues until the pint in time that we deliver the gds r prvide the services t the custmer. Tw types f adjustments are made fr accruals:

22 22 Accrue, r recrd, unrecrded expenses. These liabilities represent the cmpany s bligatin t pay fr unrecrded expenses that have been incurred, r used, in the current perid. We recrd the expenses in the current perid even thugh we have nt yet paid fr them. Accrue, r recrd, unrecrded revenues. These assets represent the cmpany s right t receive payments frm custmers r ther parties fr unrecrded revenues that have been earned. We recrd the revenues in the current perid, even thugh we have nt yet received cash frm the custmers. 3. Adjusting the Accunts At the end f the accunting perid, the accuntant prepares the financial statements by first preparing a trial balance Deferrals Dividing Assets between Perids Prepaid Rent: Prepaid rent and prepaid insurance are examples f prepaid expenses, items that are paid fr befre they are used. Often, landlrds require tenants t pay rent in advance and this prepayment creates an asset fr the renter. Supplies: Supplies are accunted fr in the same way as prepaid expenses. Depreciatin n Lng-Term Assets: A special type f deferral relates t lngterm assets. Lng-term assets are lng-lived, tangible assets used in the peratin f a business. Lng-term assets last fr mre than a year. The Accumulated Depreciatin Accunt Dividing Liabilities between Perids Unearned Revenues: Sme businesses cllect cash frm custmers in advance. Receiving cash frm a custmer befre earning it creates a liability called

23 23 unearned revenue, r deferred revenue, because the cmpany wes a prduct r a service t the custmer Accruals Accruing Expenses Salary Payable Accruing Revenues Accunts receivable, as we just discussed, sme expenses ccur befre they are paid, which creates an accrued expense. Likewise, businesses smetimes als earn revenue befre they receive the cash. Assets such as Accunts Receivable and Interest Receivable hld this accrued revenue amunt until cash is received. 4. The Adjusted Trial Balance A useful step in preparing the financial statements is t list the accunts and their adjusted balances n an adjusted trial balance t make sure ttal debits still equal ttal credits after adjusting entries have been recrded and psted. Preparing the adjusted trial balance by using the fllwing steps: 4.1. Step 1 Cpy accunt titles and trial balance amunts directly frm the trial balance. Place debit balances in the debit clumn and credit balances in the credit clumn f the Trial Balance clumns.

24 Step 2 Enter the adjusting jurnal entries int the crrect debit r credit clumn f the Adjustments sectin f the wrksheet. Label each entry with the letter that identifies it as ne f the adjusting entries recrded in Exhibit Step 3 Calculate new, adjusted balances fr each accunt. Start with the balance frm the Trial Balance clumns. Add r subtract the change in the balance as shwn in the Adjustments sectin. Enter the new balance int the crrect debit r credit clumn f the Adjusted Trial Balance clumns. Remember that accunts will be affected differently by adjusting entries. : Cmpleting The Accunting Cycle Tpic Objective: At the end f this tpic students will be able: Explain the steps in the accunting cycle. Prepare a wrksheet. Prepare financial statements using the wrksheet. Clse the revenue, expense, and withdrawals accunts. Classify assets and liabilities as current r lng-term.

25 25 Definitin/Overview& : Accunting Cycle: The Accunting Cycle is a series f steps which are repeated every reprting perid. The prcess starts with making accunting entries fr each transactin and ges thrugh clsing the bks. Use this tutrial fr an verview f the accunting cycle, cvering activities required bth during and at the end f the accunting perid. Key Pints& : 1. The Accunting Cycle Accuntants use financial accunting t prepare financial statements that cmmunicate the decisins made and the results btained frm thse decisins. The financial statements tell the stry& f the business s past activities. The accunting cycle is the prcess f gathering financial infrmatin and preparing these financial statements Step 1 The accuntant identifies business transactins by examining surce dcuments, cntracts, and internal business reprts. Surce dcuments are dcuments that represent a business transactin. Business cntracts include bank lans, mrtgage lans, lease agreements, and ther arrangements. Cntracts bligate the business t repay the lan r mrtgage, pay fr the use f assets wned by smene else, r fulfill sme ther requirement agreed t in the dcument. Internal business reprts include lists f assets used t calculate depreciatin as well as payrll registers that shw payments t emplyees.

26 Step 2 The accuntant recrds these transactins in the jurnal Step 3 The accuntant psts the jurnal entries int accunts in the ledger. Steps 1 thrugh 3 happen thrughut the accunting perid as the business engages in transactins Step 4 At the end f the accunting perid, the accuntant prepares a wrksheet, r smetimes simply prepares a trial balance, and uses this as a basis fr adjusting the accunts. If a business prepares nly a trial balance, then it will use this trial balance t cmplete the rest f the steps in the cycle instead f the wrksheet Step 5 Using the wrksheet, the accuntant prepares the financial statements Step 6 Using the wrksheet, the accuntant recrds adjusting entries in the jurnal and psts them t accunts in the ledger Step 7 Using the wrksheet, the accuntant recrds clsing entries in the jurnal and psts them t accunts in the ledger.

27 Step 8 The accuntant prepares a pst-clsing trial balance. 2. The Wrksheet Accuntants ften use a wrksheet, a dcument that hlds the trial balance, adjustments, and adjusted trial balance, t summarize data fr the financial statements. The wrksheet is nt part f the ledger r the jurnal, and it is nt a financial statement. It is merely a tl that accuntants use t gather infrmatin befre financial statements are prepared. Listing all the accunts and their unadjusted balances helps identify the accunts that need adjustment. Once cmpleted, the wrksheet is useful when jurnalizing adjusting and clsing entries and when preparing financial statements. 3. Cmpleting the Accunting Cycle The wrksheet helps accuntants prepare the financial statements, recrd the adjusting entries, and clse the accunts The Fur Clsing Entries At the end f the accunting perid, the results f the business s perating activities and wner withdrawal activity mve frm the temprary accunts t the wner s equity permanent accunt. T jurnalize clsing entries, cmplete the fllwing steps:

28 Step 1 Clse the revenue accunts and mve their balances int the Incme Summary accunt. Incme Summary is a temprary, hlding accunt that cllects revenue and expense amunts during the clsing prcess. The Incme Summary accunt is nly used during this prcess Step 2 Clse the expense accunts and mve their balances int the Incme Summary accunt Step 3 At this pint, Incme Summary nw hlds revenues and expenses, which means it nw hlds net incme r net lss. Clse the Incme Summary accunt by mving its balance, the net incme r net lss, int the wner s capital accunt Step 4 Clse the wner s withdrawals accunt and mve the ttal amunt withdrawn int the wner s capital accunt Pst-Clsing Trial Balance The accunting cycle ends with the preparatin f a pst-clsing trial balance. This trial balance lists the accunts and their adjusted balances after clsing. Only assets, liabilities, and capital appear n the pst clsing trial balance. N temprary accunts revenues, expenses, r withdrawals are included because they have been clsed. The accunts in the ledger are nw up-t-date and ready fr the next perid s transactins.

29 29 4. Classifying Assets and Liabilities Liquidity refers t a business s ability t pay its bills. Since bill-paying ability relies n cash, liquidity depends n hw quickly a cmpany can cnvert assets int cash. Managers are interested in liquidity because business difficulties arise frm a shrtage f cash. A classified balance sheet lists assets and liabilities in classes in the rder f their liquidity, s that the financial statement users can analyze the business s ability t pay its bills n time Assets Current Assets Current assets are assets that will be cnverted t cash, sld, r used up during the next 12 mnths r within the business s nrmal perating cycle if the cycle is lnger than a year. The perating cycle is the length f time a business needs t btain resurces, use the resurces t sell gds and services t custmers, and cllect cash frm theses custmers. Fr mst businesses, the perating cycle is a few mnths. Cash, Accunts Receivable, Ntes Receivable due within a year, and Prepaid Expenses are current assets Lng-Term Assets Lng-term assets are generally lng-lived, tangible assets, althugh this categry usually includes all assets ther than current assets. One categry f lng-term assets is called plant assets r fixed assets and can be seen n the balance sheet as prperty, plant, and equipment. Land, buildings, furniture, fixtures, and equipment are examples f these assets.

30 Liabilities Current Liabilities Current liabilities are the debts r bligatins f the business that must be paid with cash r fulfilled with gds and services within ne year r the entity s perating cycle if the cycle is lnger than a year. Accunts Payable, Ntes Payable due within ne year, Salary Payable, Interest Payable, and Unearned Revenue are current liabilities Lng-Term Liabilities Lng-term liabilities are bligatins that extend beynd ne year. Often, a business wner signs a cntract t repay a nte r mrtgage ver several years. The prtin f the nte r mrtgage payable within ne year will be a current liability. The remaining balance will be a lng-term liability. : Accunting Fr A Retail Business Tpic Objective: At the end f this tpic students will be able: Describe the supply chain that links suppliers, retailers, and custmers. Jurnalize transactins between the supplier and retailer. Jurnalize transactins between the retailer and custmer. Jurnalize shipment transactins and identify ther selling expenses in a retail business. Prepare a retailer s financial statements. Cmpute the grss prfit percentage and inventry turnver rate.

31 31 Definitin/Overview& : Supply Chain: A supply chain r lgistics netwrk is the system f rganizatins, peple, technlgy, activities, infrmatin and resurces invlved in mving a prduct r service frm supplier t custmer. Supply chain activities transfrm natural resurces, raw materials and cmpnents int a finished prduct that is delivered t the end custmer. In sphisticated supply chain systems, used prducts may re-enter the supply chain at any pint where residual value is recyclable. Supply chains link value chains. Key Pints& : 1. The Supply Chain A supply chain is the chain f transactins between businesses that supply gds and the custmers that ultimately use these gds; it begins when a manufacturer purchases raw materials and uses them t prduce prducts. Merchandisers, whlesalers and retailers, buy these manufactured gds and deliver them t the ultimate user, the custmer. Whlesalers typically buy large lts f prducts frm manufacturers and resell them t retailers. Retailers buy gds frm manufacturers r whlesalers, then sell smaller quantities t the public, the final cnsumers. Thus, this sequence f events invlves the flw f materials, cmpleted gds, and related infrmatin between manufacturers, whlesale and/r retail merchandisers, and custmers The Supplier/Retailer Relatinship Activities between suppliers and retailers i.e. Retailers: Identify suppliers, either manufacturers r whlesalers. Purchase gds frm these suppliers, ften n credit.

32 32 Pay cash t suppliers fr gds purchased. Return gds purchased frm suppliers as necessary Retail Inventry Systems The prducts that manufacturing and whlesale businesses supply retailers becme inventry f the retailer. Inventry refers t the gds that the retailer wns and has available t sell t its custmers; it is the prducts that the business hlds fr sale as part f its nrmal peratins. Retail businesses buy and sell prducts, als called merchandise inventry, instead f services. Thrughut the remainder f the bk we refer t merchandise inventry simply as inventry. It is typically a retailer s mst imprtant asset because it is prbably the business s largest current asset, as well as the center f merchandising transactins. Businesses that have inventry use ne f tw systems t keep track f the cst f gds: Peridic Inventry System Peridic Inventry System is a system f accunting fr inventry that des nt keep a cntinuus, running recrd f all gds wned. Instead, it nly updates the inventry accunt peridically. Under this methd, the business physically cunts the gds in inventry at the end f the accunting perid. It then multiplies the number f each item wned by the cst f the item t get a ttal value fr the prduct. Finally, it then adds the ttal value f each prduct type tgether t calculate a new balance fr the inventry accunt Perpetual Inventry System Perpetual Inventry System is a system f accunting fr inventry that keeps a running recrd f inventry wned and the cst f the inventry sld. Every time the business engages in a transactin invlving inventry, it immediately adjusts

33 33 the balance in the inventry accunt. In this way, the inventry balance is perpetually up-t-date The Retailer/Custmer Relatinship Activities between the retailer and the custmer i.e. Retailers: Attract and retain custmers. Sell gds fr cash r credit t custmers. Cllect cash frm custmers. Accept returns f gds sld t custmers as necessary. 2. Accunting fr the Supplier/Retailer Relatinship Thrughut the year, the retailer engages in a number f inventry transactins with suppliers: Cash purchases: Purchase gds fr cash paid immediately. Credit purchases: Purchase gds n accunt and prmise t pay cash later. Purchase discunts: Receive deductin frm the amunt due by paying cash earlier than the due date. Purchase returns and allwances: Return damaged gds t supplier fr a refund r accepts an allwance n thse gds. 3. Accunting fr the Retailer/Custmer Relatinship The retailer engages in several different types f business transactins with its custmers: Cash sales: Sell gds fr cash received immediately. Credit sales: Sell gds n accunt and receive custmer s prmise t pay cash later. Sales discunts: Grant reductin in the amunt receivable frm custmer as an incentive fr custmer s payment within the discunt perid.

34 34 Sales returns and allwances: Accept damaged gds frm custmer fr a refund r grant custmer an allwance fr them. 4. Accunting fr Delivery and Other Selling Expenses In additin t purchases and sales transactins, a retailer must als manage shipping csts and ther selling expenses. Retailers ften pay the fllwing csts: T receive gds frm suppliers T deliver gds t custmers T advertise and sell gds 4.1. Csts t Receive Gds frm Suppliers Shipping and handling increases the cst f what yu purchased. The same thing happens when retail businesses buy merchandise frm suppliers. When retailers rder items, they ften have t pay the cst f getting thse items shipped t their place f business in additin t paying the purchase price f the items themselves. Fr a business, these shipping csts are ften referred t as freight charges. Buyers and sellers specify wh will pay shipping csts by setting shipping terms. Shipping terms specify the pint at which wnership f the gds transfers frm seller t buyer and als fix respnsibility fr paying shipping csts Csts t Deliver Gds t Custmers The cst f shipping gds t custmers is usually recrded in a Delivery Expense accunt. Delivery Expense is an expense n the incme statement and, as an expense accunt, nrmally hlds a debit balance. This cst ccurs when the seller agrees t ship gds t the final destinatin, shipping terms FOB destinatin.

35 Other Selling Csts Retail businesses use resurces t supprt their relatinships with custmers. The csts f advertising and selling merchandise are expenses f perating a business that sells gds. 5. Preparing a Retailer s Financial Statements In the previus chapter, we studied the cmpletin f the accunting cycle. Recall that the cycle includes the fllwing steps: Identify business transactins, recrd them in the jurnal, and pst them t the ledger. Prepare a trial balance r wrksheet, adjusting the accunts as necessary. Prepare financial statements. Jurnalize and pst adjusting and clsing entries. Prepare a pst-clsing trial balance. 6. Tw Key Ratis fr Decisin Making Inventry is the mst imprtant asset fr a retail business because it is ften the largest current asset and the fcus f retail peratins. Statement readers use several ratis t evaluate peratins invlving inventry, including the grss prfit percentage and the rate f inventry turnver The Grss Prfit Percentage Grss prfit, als called grss margin, is a key tl in evaluating retail peratins; remember that grss prfit is net sales revenue minus the cst f gds sld. Thus, grss prfit is the amunt left ver frm sales after deducting the cst f the merchandise sld. Retailers strive t maximize grss prfit, and the grss prfit percentage shws hw well they are meeting this gal. Grss prfit percentage, als called the grss margin

36 36 percentage, measures the relatinship between grss prfit and sales. It is cmputed by dividing grss prfit by net sales revenue. Instructins 6.2. The Rate f Inventry Turnver Owners and managers strive t sell inventry quickly because inventry generates n prfit until it is sld. The faster a business prduces sales, the higher the sales revenue available t create incme will be. Inventry turnver, the rati f cst f gds sld t average inventry, measures the number f times a cmpany sells, r turns ver, its average level f inventry during a perid. In Sectin 2 f this curse yu will cver these tpics: Internal Cntrl And Cash Receivables Inventry Lng-Term Assets: Plant Assets And Intangibles Yu may take as much time as yu want t cmplete the tpic cverd in sectin 2. There is n time limit t finish any Sectin, Hwever yu must finish All Sectins befre semester end date. If yu want t cntinue remaining curses later, yu may save the curse and leave. Yu can cntinue later as per yur cnvenience and this curse will be avalible in yur area t save and cntinue later. : Internal Cntrl And Cash Tpic Objective: At the end f this tpic students will be able:

37 37 Define fraud and describe the different types f fraud in business. Describe an internal cntrl system. Apply internal cntrls fr cash and prepare bank recnciliatin. Recrd jurnal entries fr the petty cash fund. Reprt cash n the balance sheet. Definitin/Overview& : Fraud: A fraud is a deceptin made fr persnal gain. In criminal law, fraud is the crime r ffense f deliberately deceiving anther in rder t damage them usually, t btain prperty r services unjustly. Fraud can be accmplished thrugh the aid f frged bjects. In the criminal law f cmmn law jurisdictins it may be called "theft by deceptin," "larceny by trick," "larceny by fraud and deceptin" r smething similar. Internal Cntrl: In accunting and rganizatinal thery, Internal cntrl is defined as a prcess effected by an rganizatin's structure, wrk and authrity flws, peple and management infrmatin systems, designed t help the rganizatin accmplish specific gals r bjectives. It is a means by which an rganizatin's resurces are directed, mnitred, and measured. It plays an imprtant rle in preventing and detecting fraud and prtecting the rganizatin's resurces, bth physical and intangible.

38 38 Key Pints& : 1. Fraud in Business Fraud invlves deceit r trickery that causes financial harm t a business, its stakehlders, r bth. Accrdingly, the accunting prfessin believes that fraud includes intentinal actins that result in a misstatement f the financial statements The Fraud Triangle Fr fraud t ccur, fraud investigatrs believe that three factrs must be present: perceived pressure, perceived pprtunity, and ratinalizatin. Figure 1 presents the Fraud Triangle, which shws the cnnectin f the three factrs necessary t cmmit fraud Fraud The accunting prfessin believes that business fraud invlves misstated financial statements, s it believes that there are really tw types f fraud as fllws: Misapprpriatin, r theft, f business assets Fraudulent financial reprting caused by falsifying accunting recrds Emplyee Embezzlement Emplyee embezzlement is emplyee fraud invlving misapprpriatin f assets, which ccurs when emplyees steal frm their emplyers. Emplyee fraud invlving disbursement schemes ccurs when an emplyee tricks a cmpany int giving up cash fr an invalid reasn. Examples f disbursement schemes include:

39 39 Check tampering: Emplyee writes a fraudulent check and makes the check payable t him. Or, the emplyee btains a check intended fr an utside party, endrses the check, and then cashes it. Cash register schemes: Emplyee gives a false refund fr returned merchandise by filling ut a refund frm, putting it in the cash register, then taking the cash and pcketing it. Anther, related scheme happens when the emplyee accepts cash frm the custmer fr a purchase but des nt recrd the transactin in the cash register, keeping the cash fr persnal use. Expense schemes: Emplyee ver-bills the cmpany fr travel and ther business-related expenses, such as lunches, htels, air travel, parking fees, and cab fares Management Fraud Management fraud typically invlves fraudulent financial reprting by management. This intentinal misrepresentatin f financial infrmatin n the financial statements is driven by greed, such as a manager s desire t receive a larger cash bnus, r pressure t keep his jb by shwing wners that the business is mre prfitable than it really is. These pressures, cmbined with the pprtunity t manipulate financial infrmatin and the ratinalizatin that an unethical slutin is really acceptable, lead managers t cmmit fraud. 2. Organizatin Accuntability fr Fraud 2.1. Objectives f Internal Cntrl The mst effective way fr a business t prevent fraud is t eliminate the perceived pprtunity fr an emplyee t freely steal an asset r fr a manager t reprt false financial infrmatin. This pprtunity can be reduced thrugh internal cntrls. Internal cntrl is a plan, r prcess, that helps an rganizatin achieve these bjectives:

40 40 Safeguard assets and reprt financial infrmatin prperly. Operate efficiently and effectively. Cmply with laws and regulatins that apply t the rganizatin s peratins Cntrl Activities Cntrl activities are the plicies and prcedures f an internal cntrl system. The types f cntrl activities used by an rganizatin vary frm firm t firm. Generally, the cntrls chsen fr an entity are based n its cntrl envirnment, the cmpany s assessment f risk, the size and structure f the cmpany, as well as the nature f its peratins. Cmmn cntrl activities include: Separatin f duties D nt allw any ne emplyee t be respnsible fr mre than ne f the fllwing functins: Authrizing transactins Maintaining custdy f assets Keeping accunting recrds Assigning an individual with respnsibility fr mre than ne f these duties creates an pprtunity fr fraud Physical safeguards Limit the number f emplyees wh have access t the business s assets, such as cash, inventry, and supplies, as well as its financial recrds. Fr instance, use cash registers, vaults, and lcked strage units t cntrl access t assets. Use passwrds t restrict access t cmputerized accunting recrds and limit cntact with jurnals and ledgers t the accunting staff. Allwing t many peple

41 41 access t assets and recrds creates pprtunity fr fraud and makes it mre difficult t find the perpetratr Prper authrizatin Establish and require apprpriate authrizatin fr transactins. Fr example, in a small business, the wner culd review and apprve a purchase invice befre a check is written t pay the amunt. In a larger cmpany, price lists and credit plicies set criteria fr credit sales transactins. Gd authrizatin prcedures reduce the chance that an unauthrized transactin may ccur, thus prviding an emplyee with access t assets Adequate dcuments and recrds Implement a system t prvide evidence f transactins. An audit trail, a trail f business dcuments and recrds, evidences the details f business transactins. Dcuments include checks and invices, and recrds include jurnals and ledgers. Dcuments shuld be pre-numbered, s gaps in the numbered sequence draw attentin. Creating an effective audit trail diminishes the chance that inapprpriate activity will g unnticed Independent checks n perfrmance Assign an emplyee wh des nt have access t assets r the accunting recrds t check fr errrs and discrepancies.