EPFLAcForFinance17 3

THE ACCOUNTING CYCLE:
CAPTURING ECONOMIC
EVENTS
Accounting for Finance

Eric Cauvin, IAE Nice-Sophia-Antipolis
The Ledger
Accounts are individual
Cash records showing increases
and decreases.
Accounts
Payable
The entire group of
Capital accounts is kept together
Stock in an accounting record
called a ledger.

The Use of Accounts
Increases are recorded on

one side of the T- Title of the Account
account, and decreases
Left or Right or
are recorded on the Debit Credit
other side. Side Side

Let’s see how debits
and credits are
recorded in the Cash
account for JJ’s Lawn
Care Service.

Debit and Credit Entries
Cash
Receipts 5/1 8,000 5/2 2,500 Payments
are on the 5/25 75 5/8 2,000 are on the
debit side.
5/29 750 5/28 150 credit side.
5/31 50
5/31 4,125 The balance is the
difference between the
Bal. debit and credit entries
in the account.

Debit and Credit Rules
Debits and credits affect accounts as follows:
A = L + OE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase

Let’s record
selected
transactions for
JJ’s Lawn Care
Service in the
accounts.

 May 1: Jill Jones and her family invested $8,000 in JJ’s
Lawn Care Service and received 800 shares of stock.
Cash increases $8,000 Capital Stock

with a debit. increases $8,000 with
a credit.
Cash Capital Stock

5/1 8 000 5/1 8,000

 May 2: JJ’s purchased a riding lawn mower
for $2,500 cash.
Cash decreases $2,500 Tools & Equipment

with a credit. increases $2,500
with a debit.
Cash Tools & Equipment

5/1 8,000 5/2 2,500 5/2 2,500

 May 8: JJ’s purchased a $15,000 truck. JJ’s paid
$2,000 in cash and issued a note payable for the
remaining $13,000.
Cash decreases $2,000

Truck increases $15,000 with a credit. Notes
with a debit. Payable increases
$13,000 with a credit.
Cash
5/1 8,000 5/2 2,500
Truck
5/8 2,000
5/8 15,000
Notes Payable
Accounting for Finance 5/8 13,000
 May 11: JJ’s purchased some repair parts for $300 on
account.
Tools & Equipment Accounts Payable

increases $300 with a increases $300 with a
debit. credit.
Tools & Equipment Accounts Payable

5/2 2,500 5/11 300
5/11 300

 May 18: JJ’s sold half of the repair parts to ABC
Lawns for $150, a price equal to JJ’s cost. ABC Lawns
agrees to pay JJ’s within 30 days.
Tools & Equipment Accounts Receivable

decreases $150 with a increases $150 with a
credit. debit.
Tools & Equipment Accounts Receivable

5/2 2,500 5/18 150 5/18 150
5/11 300

Let’s analyze the
revenue and expense
transactions for JJ’s
Lawn Care Service for
the month of May.

Debits and Credits for
Revenue and Expense
Expenses EQUITIES Revenues
decrease Debit Credit increase
owner’s equity. for for owner’s equity.
Decrease Increase
EXPENSES REVENUES
Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase
 May 29: JJ’s provided lawn care services for a client
and received $750 in cash.
Sales Revenue increases

Cash increases $750
$750 with a credit.
with a debit.
Cash Sales Revenue

5/1 8,000 5/2 2,500 5/29 750
5/29 750 5/8 2,000

 May 31: JJ’s purchased gasoline for the lawn mower
and the truck for $50 cash.
Gasoline Expense
Cash decreases $50 with
increases $50 with a
a credit.
debit.
Cash Gasoline Expense

5/1 8,000 5/2 2,500 5/31 50
5/29 750 5/8 2,000
5/31 50

ACCOUNTING INFORMATION
FOR MERCHANDISING AND
MANUFACTURING
BUSINESSES

Operating Cycle of a
Merchandising Company
Cash
Accounts
Inventory
Receivable 2. Sale of merchandise
on account

Comparing Merchandising Activities
with Manufacturing Activities
Manufacture
Purchase inventory inventory and have a
in ready-to-sell longer and more
condition. complex operating
cycle.
Merchandising Accounting for Finance

Manufacturing Company
Company Eric Cauvin, IAE Nice-Sophia-Antipolis
Merchandising Businesses
Merchandising: Business buying goods for resale. Will
hold inventories (stocks of goods).
Manufacturing: Converting raw materials to finished
products. Will hold inventories (stocks) of:
Raw materials
Work-in-progress (part-completed)
Finished goods.

Income Statement of a
Merchandising Company
Computer Barn Cost of goods
Condensed Income Statement sold
For the Year Ended December 31, 2016 represents the
Revenue from sales $ 900 000 expense of
Less: Cost of goods sold 540 000 goods that are
Gross profit $ 360 000 sold to
Less: Expenses 270 000
customers.
Net income $ 90 000
Gross profit is a useful means of measuring the

profitability of sales transactions.
Transactions of a Merchandising
Business
Apr Purchase goods from manufacturer, 100 200
1 items at $2 each, paying in cash, and store in
warehouse
Apr Remove 70 items from warehouse to meet a 140
4 customer's request. Those 70 items cost $2
each on Apr 1. They are delivered to the
customer, who accepts the delivery
Apr The customer pays in cash. Selling price is 175

4 $2.50 per item
Transactions of a Merchandising
Business (Continued)
What is the profit on the sale of 70 items?
MATCHING the COST of goods sold against the amount earned

by the SALE of the goods.
In accounting that calculation might be set out as follows:
$
Sale of goods (70 items) 175
Cost of goods sold (70 items) 140
Gross profit 35
There is an asset of unsold goods (30 items) which cost $2 each or
$60 in total. Since that item is an asset, it will appear in the balance
sheet. Accounting for Finance
Transactions of a Manufacturing
Business
Business transactions of the entity A – L = OI
Purchase raw materials from
supplier, 100 trays at $2 each,
↑ ↓
RM
paying in cash, and place in raw
materials store
cash
Remove 80 trays from raw RM ↑
materials store to meet production
department's request (cost $2 each) ↓ WIP

Transactions of a Manufacturing Business
(Continued)
Carry out labor work and use
cash ↓
production facilities to convert raw
materials into finished goods.
Additional costs incurred for labor ↑ WIP
and use of facilities were $1.50 per
tray processed.
Finished goods are transferred to WIP ↓
finished goods store. The job has
cost $3.50 per tray in total (80 ↑ FG
trays × $3.50 = $280)
60 trays, which cost $3.50 each to FG expense:
manufacture, are delivered to a
↓ ↑cost of
customer goods
sold
Transactions of a Manufacturing Business
(Continued)
The customer pays a price of $5 cash revenue

cash per tray immediately on
delivery
↑ ↑

INVENTORIES AND THE COST
OF GOODS SOLD

Inventory Defined
Inventory
Goods owned Current

and held for sale asset
to customers

The Flow of Inventory Costs
BALANCE SHEET
Current assets:
As purchase cost
Inventory
(or manufacturing $
costs) are incurred $
as goods are
INCOME STATEMENT
sold
Revenue
Cost of goods sold $
Gross profit
Expenses
Net income
Inventory Subsidiary Ledger
A separate subsidiary account is maintained for each item in
inventory.
Item LL002 Primary supplier Electronic City

Description Laser Light Secondary supplier Electric Company
Location Storeroom 2 Inventory level: Min: 25 Max: 200
Purchased Sold Balance
Cost of
Unit Unit Goods Unit
Date Units Cost Total Units Cost Sold Units Cost Total
Sept. 5 100 $ 30 $ 3,000 100 $ 30 $ 3,000
Sept. 9 75 50 3,750 100 30 3,000
75 50 3,750
Sept. 10 10 ? ? ? ? ?
? ? ?
How can we determine the unit cost for the Sept. 10 sale?
Inventory Cost Flows
We use one of these inventory valuation
methods to determine cost of inventory sold.
Average Cost
FIFO LIFO

The Principle of Consistency
Once a company has
adopted a particular
accounting method, it
should follow that
method consistently,
rather than switch
methods from one year
to the next.
Cost Accounting Systems
Evaluate and Disclose
reward inventories
employee and cost of
performance. goods sold.
Cost accounting systems are the procedures

and techniques used by management.
Track resources
Manage activities
consumed by
that consume
products and
resources.
services.
Cost Objects, Direct Costs, and Indirect
Costs
Cost objects are anything for which a separate measurement of
costs is desired.
What are direct costs? Direct costs are those costs that can be
specifically traced to the cost object.
What are indirect costs? Indirect costs are costs that cannot be
specifically traced to the cost object.

Accounting for Manufacturing Operations
Steps in the Manufacturing Process:
Buy raw Convert raw materials Sell finished

materials. into finished goods. goods.
Direct Direct labor and

Cost of goods
materials manufacturing
sold.
costs. overhead costs.

Inventoriable Product Costs
Direct Direct Indirect Indirect
Other
Materials Labor Labor Materials
Manufacturing Overhead
Direct Materials
Raw materials &
component parts Can be traced
that become an directly and
integral part of conveniently to
finished products. products.
If materials cannot be traced directly to products, the materials are

considered indirect and are part of manufacturing overhead.

Direct Labor
Includes the payroll cost of direct workers.
Direct labor Wage Those employees who

× work directly on the
hours rate goods being
manufactured.

All manufacturing costs other than direct
materials and direct labor.
Includes:
Indirect materials.
Indirect labor.
Does not include selling
Machinery and equipment or general and
costs. administrative
expenses.
Cost of regulatory
compliance.
The cost to
produce a unit of
product includes:
Direct material
Manufacturing overhead must be
Direct labor mathematically allocated to each
unit of product using an
Manufacturing overhead application rate.
overhead

Product Costs Versus Period
Costs
Balance Sheet
Product Costs
(manufacturing Current assets and
costs) inventory
as
incurred
When goods are
Income Statement sold.
Revenue
Period Costs COGS
(operating expenses Gross profit
and income taxes) Expenses
Net income.
as Accounting for Finance
incurred
Financial Statements for Merchandising
Companies
BALANCE SHEET INCOME STATEMENT
Inventoriable
Costs Sales Revenue
deduct
when
Purchases of sales
occur
Cost of
Inventory plus Inventory
Goods Sold
freight-In equals Gross Margin
deduct
Period Operating
Costs
Expenses
Accounting for Finance equals Operating Income
Financial Statements for Manufacturing
Companies
BALANCE SHEET INCOME STATEMENT
Inventoriable
Costs
Sales Revenue
deduct
when
Materials Finished sales
occur
Inventory Cost of
Goods
Goods Sold
Inventory equals Gross Margin
deduct
Work in Period Operating

Process Costs
Expenses
Inventory Accounting for Finance equals Operating Income
The Flow of Physical Goods
Materials
Direct Direct Factory
Warehouse
materials materials used
purchased
Direct labor & Mfg. overhead
Finished goods Finished goods

Warehouse
Goods sold

The Flow of Manufacturing
Costs
Direct Materials Direct Work in Process
materials Inventory materials used Inventory
purchased
€€€ €€€ €€€ €€€
Direct labor & Mfg. overhead
Cost of goods
Cost of Goods Finished Goods manufactured
Sold Inventory
€€€ €€€ €€€

The Flow of Manufacturing Costs Example
Pure-Ice Inc. had €52,000 of inventory in

direct materials inventory on January 1,
2016. During the year, Pure-Ice
purchased €586,000 of additional direct
materials. At December 31, 2016, €78,000
of the direct materials were still on hand.
How much direct material was put
into the production process during
2016?
Beginning materials
inventory 52000
+ Materials purchased 586 000
Materials available to be
=
placed into production 638 000
Materials placed into
–
production ??
Ending materials
=
inventory 78000

Beginning materials
inventory 52 000
+ Materials purchased 586 000
=
Materials available to be
placed into production
Materials placed into
638 000 !
–
production 560 000
Ending materials
=
inventory 78 000

In addition to the direct materials, Pure-

Ice incurred €306,000 of direct labor cost
during 2016. Manufacturing overhead for
2016 was €724,000.
Pure-Ice started 2016 with €132,000 in
work in process. During 2016, units
costing €1,480,000 were transferred to
finished goods inventory.
How much is still in work in process
at December 31, 2016?
Beginning work in
process inventory € 132 000
+ Manufacturing costs
added 1 590 000
= Total costs in process
during
Direct the year € 560 000 1
Materials 722 000
–Direct
CostLabor
of goods 306 000
completed during the
Manufacturing
year
Overhead 724 000(1 480 000)
Ending work in
=Total costs added
process inventory ?
during the year € 1 590 000
Beginning work in
+ Manufacturing costs
added 1 590 000
= Total costs in process
during the year 1 722 000 !
– Cost of goods
completed during the
year (1 480 000)
= Ending work in

Flow of Costs through a Manufacturer’s
Accounts
Direct Materials Inventory Work in Process Inventory

Beginning inventory Beginning inventory
+ Direct materials used
+ Purchases and freight-in + Direct labor
+ Manufacturing overhead
= Total manufacturing costs
= Direct materials available for to account for
– Ending inventory
use = Cost of goods manufactured
= Direct materials used

Flow of Costs through a Manufacturer’s
Accounts
• Finished Goods Inventory

• Beginning inventory
+ Cost of goods manufactured
= Cost of goods available for sale
= Cost of goods sold


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THE ACCOUNTING CYCLE:

Accounting for Finance

Accounting for Finance

Increases are recorded on

Accounting for Finance

Accounting for Finance

Accounting for Finance

Accounting for Finance

Accounting for Finance

Cash increases $8,000 Capital Stock

Cash Capital Stock

Accounting for Finance

Cash decreases $2,500 Tools & Equipment

Cash Tools & Equipment

Accounting for Finance

Cash decreases $2,000

Tools & Equipment Accounts Payable

Tools & Equipment Accounts Payable

Accounting for Finance

Tools & Equipment Accounts Receivable

Tools & Equipment Accounts Receivable

Accounting for Finance

Accounting for Finance

Sales Revenue increases

Cash Sales Revenue

Accounting for Finance

Cash Gasoline Expense

Accounting for Finance

Accounting for Finance

Accounting for Finance

Merchandising Accounting for Finance

Accounting for Finance

Gross profit is a useful means of measuring the

Apr The customer pays in cash. Selling price is 175

MATCHING the COST of goods sold against the amount earned

Accounting for Finance

The customer pays a price of $5 cash revenue

Accounting for Finance

Accounting for Finance

Goods owned Current

Accounting for Finance

Item LL002 Primary supplier Electronic City

Accounting for Finance

Cost accounting systems are the procedures

Accounting for Finance

Steps in the Manufacturing Process:

Buy raw Convert raw materials Sell finished

Direct Direct labor and

Accounting for Finance

If materials cannot be traced directly to products, the materials are

Accounting for Finance

Direct labor Wage Those employees who

Accounting for Finance

Accounting for Finance

Work in Period Operating

Direct labor & Mfg. overhead

Finished goods Finished goods

Accounting for Finance

€€€ €€€ €€€ €€€

Direct labor & Mfg. overhead

€€€ €€€ €€€

Pure-Ice Inc. had €52,000 of inventory in

Accounting for Finance