Lecture International accounting: Chapter 2 - Nguyễn Quốc Nhất

International Accounting<br /> <br /> Chapter 2: The Adjusting process<br /> <br /> Chapter 2: The adjusting process<br /> MA. Nguyen Quoc Nhat<br /> <br /> 1<br /> <br /> Accounting cycle<br /> <br /> 2<br /> <br /> Quick check- overview chapter 1<br /> What is the accounting term of these definitions?<br /> 1. A list of all a company’s accounts with their account<br /> numbers.<br /> 2. A system of accounting where every transaction<br /> affects at least two accounts.<br /> 3. Summary device that is shaped like a capital “T” with<br /> debits posted on the left side of the vertical line and<br /> credits on the right side of the vertical line. A<br /> “shorthand” version of a ledger.<br /> 4. A list of all the ledger accounts with their balances at<br /> a point in time.<br /> 3<br /> <br /> MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com<br /> <br /> 1<br /> <br /> International Accounting<br /> <br /> Chapter 2: The Adjusting process<br /> <br /> Quick check- overview chapter 1<br /> Answer:<br /> 1. A list of all a company’s accounts with their account<br /> numbers.  Chart of accounts<br /> 2. A system of accounting where every transaction<br /> affects at least two accounts.  Double – entry<br /> system<br /> 3. Summary device that is shaped like a capital “T” with<br /> debits posted on the left side of the vertical line and<br /> credits on the right side of the vertical line. A<br /> “shorthand” version of a ledger.  T - account<br /> 4. A list of all the ledger accounts with their balances at<br /> a point in time.  The trial balance<br /> 4<br /> <br /> Learning objective<br />  Differentiate between accrual and cash-basis<br /> <br /> accounting.<br />  Define and apply the accounting period concept,<br /> <br /> <br /> <br /> <br /> <br /> <br /> revenue recognition and matching principles, and<br /> time period concept.<br /> Explain why adjusting entries are needed<br /> Journalize and post adjusting entries<br /> Explain the purpose of and prepare an adjusted trial<br /> balance<br /> Prepare the financial statements from the adjusted<br /> trial balance<br /> 5<br /> <br /> Chapter’s contents<br /> 2.1 Accrual Accounting Versus Cash-Basis<br /> Accounting<br /> 2.2 Other Accounting Principles<br /> 2.3 Why We Adjust the Accounts<br /> 2.4 Two Categories of Adjusting Entries<br /> 2.5 The Adjusted Trial Balance<br /> 2.6 The Financial Statements<br /> 2.7 Ethical Issues in Accrual Accounting<br /> <br /> 6<br /> <br /> MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com<br /> <br /> 2<br /> <br /> International Accounting<br /> <br /> Chapter 2: The Adjusting process<br /> <br /> 2.1 Accrual Accounting Versus CashBasis Accounting<br /> Look at the picture, explain the difference between<br /> the accrual basis and the cash basis:<br /> <br /> 7<br /> <br /> 2.1 Accrual Accounting Versus CashBasis Accounting<br /> Accrual basis<br /> <br /> Cash basis<br /> <br /> Records the effect of each<br /> transaction as it occurs,<br /> that is:<br /> • Revenues are recorded<br /> when earned<br /> • Expenses are recorded<br /> when incurred.<br /> <br /> Records only cash receipts<br /> and cash payments, that<br /> is:<br /> • Revenues are recorded<br /> when cash is received<br /> • Expenses are recorded<br /> when cash is paid<br /> <br /> 8<br /> <br /> 2.1 Accrual Accounting Versus CashBasis Accounting<br /> Example 1: Smart Touch purchased $200 of office<br /> supplies on account on May 15, 2013, and paid the<br /> account in full on June 3, 2013. On the accrual basis,<br /> the business records this transaction as follows:<br /> <br />  Under the cash basis, the company would only<br /> <br /> recognize expense on June 3, 2013.<br /> 9<br /> <br /> MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com<br /> <br /> 3<br /> <br /> International Accounting<br /> <br /> Chapter 2: The Adjusting process<br /> <br /> 2.1 Accrual Accounting Versus CashBasis Accounting<br />  Example 2: Smart Touch performed service and<br /> <br /> earned revenue on May 20,2013, but did not collect<br /> cash until June 5, 2013. Under the accrual basis, the<br /> business records:<br /> <br />  Under the cash basis, the business would record no<br /> <br /> revenue until the cash receipt, which in this case<br /> would be on June 5.<br /> 10<br /> <br /> 2.1 Accrual Accounting Versus CashBasis Accounting<br /> Quick check: Which system of accounting is used in each of<br /> these case?<br /> 1. A business sold goods to Roy on 7th December on credit.<br /> The business recognizes this sale on 7th December.<br /> 2. A dentist receives fees from patient, 100$ on giving<br /> services. The dentist accounts for his fee only when cash<br /> received.<br /> 3. A internet service provider receives advance of $400 this<br /> month for services that he will provide in next month. He<br /> recognizes the income in the next month, when he<br /> provides service for it. (but records it as an advance<br /> immediately).<br /> 11<br /> <br /> 2.1 Accrual Accounting Versus CashBasis Accounting<br /> Answer:<br /> <br /> 12<br /> <br /> MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com<br /> <br /> 4<br /> <br /> International Accounting<br /> <br /> Chapter 2: The Adjusting process<br /> <br /> 2.2 Other Accounting Principles<br /> 2.2.1 The Accounting Period Concept<br /> 2.2.2 The Revenue Recognition Principle<br /> 2.2.3 The Matching Principle<br /> 2.2.4 The Time-Period Concept<br /> <br /> 13<br /> <br /> The Accounting Period Concept and<br /> The Time-Period Concept<br />  The time period (or periodicity) concept assumes<br /> that the economic life of a business can be divided<br /> into artificial time periods — generally a month, a<br /> quarter, or a year.<br />  The basic accounting period is one year, and<br /> most businesses prepare annual financial<br /> statements.<br />  Calendar year: from January 1 through December<br /> 31.<br />  Fiscal year: which ends on a date other than<br /> December 31.<br /> 14<br /> <br /> The Revenue Recognition<br /> Principle<br />  Record revenue when it has been earned<br /> <br /> 15<br /> <br /> MA. Nguyen Quoc Nhat –nhatnq.faa@gmail.com<br /> <br /> 5<br /> <br />