1. © Prentice-Hall of India Private Limited, 2004. All rights reserved.1 Financial Accounting: A Managerial Perspective Second Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore

2. © Prentice-Hall of India Private Limited, 2004. All rights reserved.2 Measuring Business Income Chapter 3

3. © Prentice-Hall of India Private Limited, 2004. All rights reserved.3 Income Measurement Why measure income periodically? What is income? Net profit as income Revenues Gains Expenses Losses Chapter 3

4. © Prentice-Hall of India Private Limited, 2004. All rights reserved.4 Accrual Accounting Accrual basis and cash basis of accounting Why is accrual a better measure of performance? Accrual: Expected, not necessarily actual, cash receipts and payments Realisation principle: Revenue recognition Matching principle: Comparing accomplishment with effort Chapter 3

5. © Prentice-Hall of India Private Limited, 2004. All rights reserved.5 The Adjustment Process What are adjusting entries? Why are adjusting entries needed? Deferral Delaying the recognition of an expenditure (an expense already paid) or of a revenue already received. Accrual Recognising an expense that has not been paid or of a revenue that has not been received. Chapter 3

6. © Prentice-Hall of India Private Limited, 2004. All rights reserved.6 Deferral Apportioning recorded expenses Prepaid expenses Office supplies Depreciation Apportioning unearned revenues Advance collection of rents, air tickets, magazine subscriptions, insurance premium, etc. Chapter 3

7. © Prentice-Hall of India Private Limited, 2004. All rights reserved.7 Accrual Recording accrued expenses Expenses payable for services already used e.g., unpaid salaries, interest, and income tax Recording accrued revenues Revenue not received for services already provided e.g., professional fee revenue receivable, interest revenue receivable Chapter 3

8. © Prentice-Hall of India Private Limited, 2004. All rights reserved.8 Preparing Financial Statements from the Adjusted Trial Balance Adjusted trial balance Adjustments columns Extending balances to the adjusted trial balance columns Preparing financial statements Profit and loss account from the revenue and expense amounts Balance sheet from the asset, liability and equity amounts Chapter 3

9. © Prentice-Hall of India Private Limited, 2004. All rights reserved.9 Steps in the Accounting Cycle 1.Analyse transactions 2.Record transactions in the journal 3.Post journal entries to the ledger accounts 4.Prepare a trial balance 5.Journalise and post adjusting entries and prepare adjusted trial balance 6.Prepare financial statements 7.Journalise and post closing entries: temporary accounts 8.Carry forward the balance sheet accounts to the next accounting period: permanent accounts Chapter 3