W. F. Bentz Financial Accounting I William F. Bentz Accounting & MIS

W. F. Bentz Early Accounting for ASSETS l Early accounting amounted to listing one’s assets.

W. F. Bentz Income on a Cash Basis Early measures of income were cash based. Income is equal to cash receipts less cash disbursements. As interpreted today, cash accounting involves no recognition of unpaid expenses, and no recognition of revenues until cash is received. A statement of financial position would be independent of cash income.

W. F. Bentz Accrual Accounting Accrual accounting involves the recognition of expenses incurred but not yet paid (liabilities), and the recognition of revenues earned but not yet received (receivables). Similarly, prepaid expenses are recognized as assets, and unearned revenues as liabilities.

W. F. Bentz Accrual Accounting The relationship among assets, liabilities and the equity interests of owners is described by the accounting model (equation). The accounting model is used to implement accrual accounting.

W. F. Bentz The Bookkeeper’s Oath If there were such a thing as a bookkeeper’s oath, it might be something like follows: I hereby promise to l accrue all unpaid liabilities; l update annually all provisions and estimates; l record all required allocations of cost (e.g., depreciation);

W. F. Bentz The Bookkeeper’s Oath (Cont.) l record annually the ending inventories and cost of sales for periodic inventory systems; l correct all known errors; and l reclassify all non-current items that will become due within one year or the operating cycle, whichever is longer.

W. F. Bentz Epilog l The bookkeeper’s oath represents the basic tasks that distinguish accrual accounting from cash accounting.

W. F. Bentz Double-Entry Accounting l Luca Pacioli invented double entry accounting in l East Indian Companies were formed in several countries to trade with India and neighboring countries in early 1600’s. This created a need to account for the business transacted on each venture.

W. F. Bentz The Accounting Model l The accounting equation: Assets = Equities

W. F. Bentz The Accounting Model l The accounting equation: Assets = Sources of Assets

W. F. Bentz The Accounting Model l The accounting equation: Assets = Liabilities + Owners’ Equity

W. F. Bentz The Accounting Model l The accounting equation: Current Assets + Long-lived Assets = Liabilities + Owners’ Equity

W. F. Bentz The Accounting Model l The accounting equation: Assets - Liabilities = Owners’ Equity

W. F. Bentz The Accounting Model l The accounting equation: Current Assets + Long-lived Assets = Current Liabilities + Long-term liabilities + Owners’ Equity

W. F. Bentz The Accounting Model l The accounting equation: Assets = Equities

W. F. Bentz Components of Changes in Equity Revenues Expenses Gains Losses Dividends Errors Equities =

W. F. Bentz Debit/Credit Conventions l Assets (debits) = Equities (credits)) l Assets (dr) - Contra-assets (cr) = Equities (cr) - Contra-equities (dr)

W. F. Bentz Account Conventions l Contra accounts represent reductions in an associated primary account l Example: Equipment is a primary account (debit balance), and Accumulated Depreciation is a related, contra-account (credit balance)

W. F. Bentz Account Conventions l Other contra accounts: Allowance for Uncollectible Accounts, Allowance for Uncollectible Notes, and Billings on Long-Term Construction Contracts.

W. F. Bentz Account Conventions (Continued) l Valuation accounts represent reductions in an associated primary account

W. F. Bentz Account Conventions (Continued) l Valuation accounts represent reductions in an associated primary account l Example: The accounts “Discount on Bonds Payable” (debit) and “Premium on Bonds Payable” (credit) serve to “value” the liability at the original amount borrowed, less any unamortized discount, or plus any unamortized premium.

W. F. Bentz Accounting Subsystems l A general ledger is a set of accounts (total of debit entries equals the total of the credit entries) l Entries must balance before the system will “post” the entry. l When the entry is accepted, the accounts are immediately updated.

W. F. Bentz Accounting Subsystems - Payroll l Payroll subsystems include personnel data, prior withholding information, labor distribution information, tax rates, and calculation programs. l Employee numbers, vacation time, sick leave, hours worked, and other relevant information are entered each payroll period.

W. F. Bentz Accounting Subsystems - Payroll l Outputs include paychecks, accounting entries posted directly to the accounts, labor reports, and updated employee records.

W. F. Bentz Accounting Subsystems - Accounts Payable l Payable systems have files of approved vendors with names, addresses, discount terms, past transactions, etc. l Inputs involve invoices which require payment by specified dates, and other information as needed.

W. F. Bentz Accounting Subsystems - Accounts Payable l Outputs include checks, remittance advices, accounting entries posted directly to relevant accounts, expense reports, and updated vendor record files.

W. F. Bentz Accounting Subsystems - Inventories l Perpetual inventory systems by item number as well as management information.

W. F. Bentz THE END