Principles of Accounting

Accounting (related to the past) : Making financial statement/report that reflects the condition of the
company (profit/loss).
Finance (related to the future) :
Ex = Stocks and shares. We never know what will happen.
To predict the future we need a strong fundamental/basic which is Accounting.
Accounting is the basic to predicting the future and taking action. So, both accounting and finance are
always related.
Financial report : -Internal party/users = - Human Resources - Management
- Marketing - Finance
-External party/users = - Taxing Authorities - Regulatory Agencies
- Labor Unions - Investors
- Customers - Creditors
Human Resources: Can we afford to give our employees a pay rise? (Welfare of the employees, salary
for the employees)
Investors: Did the company earn a satisfactory income?
Management: Should any product lines be eliminated? (Director, Owner, etc)
Finance: Is cash sufficient to pay dividends to shareholders?
Marketing: What price for our product will maximize net income?
Creditors: Will the company be able to pay it’s debts?

If the company has a good financial report, then the bank would lend them money believing
that they will be able to pay them back. Also, it will attract people to invest.
Creditor: Someone who lends you money. Financial report is needed if a company want to borrow
some money from a bank.

What if the reports are fake? How do we know?

The financial report has to be checked/audited by an Auditor (internal/external)
Auditor : To check/to be a policemen for the report. The auditors need to have integrity and to be free
from any negative thing (bribes).

Purpose Of Accounting
To identify, record and communicate the economic events of an organization to interested users.
Interested Users : Potential investor, Creditors, etc
Identify : Which one is part/called a transaction. If there are no agreements between two sides, than it
does not count.
Record : Record, classify, and summarize (liability/assessment). Ex : Recording a transaction.
Communication : Prepare Accounting reports. Analyze and intrepet for users. Write/Type financial
statement to be publish. (can be written/verbal)
Note : Accounting process includes the book keeping function.
Transaction : Two or more parties are willing to buy and sell.

Types Of Company
 Public listed Company : The stock and shares are available for purchase. (Terbuka/tbk.)
 Private Company : Usually family business. The stock and shares cannot be bought by
society. Ex : PT Wonokoyo
To become a public listed company a company needs to be registered in “Bursa Efek”.
Why a company change from private  public?
60% of the stock/shares - Owners.
40% - Society
So, the company will get more money and can use it to expand the company.
Private  Public  Private
Ex : PT Aqua
The requirement for a public listed company to become a private company :
To buy every single share/stock from shareholders.
What happen if the shareholder refuse to sell their share/stock?
The company would eventually offer a better deal for the price (2-3x original price).

Ethics In Financial Reporting

Ethics : Standards of conduct by which one’s actions are judged as right or wrong, honest or
dishonest, fair or not fair.

 Recent financial scandals include: Enron (USA), Parmalat (ITA), Satyam Computer
Services (IND), AIG (USA), and others.

 Effective financial reporting depends on sound ethical behavior.

Steps In Analyzing Ethics Cases And Situations

1. Recognize an ethical situation and the ethical issues involved :
Use your personal ethics to identify ethical situations and issues. Some business and
professional organizations provide written codes of ethics for guidance in some
business situations.
2. Identify and analyse the principal elements in the situations :
Identify the stakeholders- persons or groups who may be harmed or benefited. Ask
the question : What are the responsibilities and obligations of the parties involved?
3. Identify the alternatives, and weigh the impact of each alternative on various
stakeholders :
Select the most ethical alternatives, considering all the consequences. Sometimes
there will be one right answer. Other situations involve more than one right solutions;
these situations require an evaluation of each and a selection of the best alternative.
Accounting Standards
International Accounting Standard Board (IASB) Financial Accounting Standards Board (FASB)
 related to  related to

International Financial Reporting Standards (IFRS) Generally Accepted Accounting Principles

(GAAP)

Assumptions
Monetary Unit Assumption – include in the accounting records only transaction data that can be
expressed in terms of money.
Economic Entity Assumption – requires that activities of the entity be kept separate and distinct
from the activities of its owner and all other economic entities.

Form of Business Ownership

 Proprietorship
 Individual entrepreneur/A business own by a single person.
 Often small service-type businesses
 Owner receives any profits, suffers any losses, and is personally liable for all debts.
 Partnership
 A group of small people that shares the ownership depending on the money they
invest. (2 or more person)
 Often retail and service-type businesses
 Partnership agreement
 Generally unlimited personal liability: Able to borrow money from each member.

+ = Each people have different ability, so they can work together and cover each other’s
flaws. They can also share the budget needed for the business.

- = It takes longer time to make decisions compared to proprietorship. Because each

member has different ideas and opinions.

 Corporation
 Ownership divided into shares
 Limited liability: In this case one of the examples is a company can issue bonds. The
reason to do so is because the interest rate is much lower than borrowing money from
a bank.
 Separate legal entity organized under state corporation law: If the company face
bankruptcy, the management will not be involved in paying debts using individual
money.

The Basic Accounting Equation

Assets = Liabilities + Equity
Provides the underlying framework for recording and summarizing economic events.
Applies to all economic entities regardless of size.
Assets

 Resources a business owns.

 Provide future services or benefits.
 Cash, Inventory, Equipment, etc.
Equity

 Ownership claim on total assets.

 Referred to as residual equity.
 Share capital and retained earnings.
Liabilities

 Claims against assets (debts and obligations).

 Creditors - party to whom money is owed.
 Accounts payable, Notes payable, etc.
Account payable: Related to debt/loan. Small amount and it is done online. (Ex: Credit Cards)
Notes payable: Related to debt/loan. Huge amount and it is done offline. (Ex: Cheques)
Revenues: Results from business activities entered into for the purpose of earning income.
Generally results from selling merchandise, performing services, renting property, and lending
money.
Dividends: The distribution of cash or other assets to shareholders. (Reduce retained earnings, not an
expense)
Expenses: The cost of assets consumed or services used in the process of earning revenue.
Common expenses are salaries expense, rent expense, utilities expense, tax expense, etc.
Profit: Net Income
Cost of good gold: Cost of Production, the same thing with expenses (salaries, rent, utilities, etc)
Transactions: Business’ economic events recorded by accountants.

 May be external or internal.

 Not all activities represent transactions.
 Each transaction has a dual effect on the accounting equation.

Reason for a company to keep their profit (Retained Earnings)?

- They want to expand the company
- They predict that there will be a crisis
- Maybe the profit is too small
It is not obligatory for a company to give dividends to shareholders.
Week 3 Principles Of Accounting
The Recording Process
Account : Record of increases and decreases in a specific asset, liability, equity, revenue, or expense
item.
Debit = “Left”, Credit = “Right”
Double-entry accounting system

 Each transaction must affect two or more accounts to keep the basic accounting equation in
balance.

 Recording done by debiting at least one account and crediting another.

 DEBITS must equal CREDITS.

Journalizing

 Book of original entry.

 Transactions recorded in chronological order.

 Contributions to the recording process:

1. Discloses the complete effects of a transaction.
2. Provides a chronological record of transactions.
3. Helps to prevent or locate errors because the debit and credit amounts can be easily
compared.

Limitations of a Trial Balance

The trial balance may balance even when
1. a transaction is not journalized,
2. a correct journal entry is not posted,
3. a journal entry is posted twice,
4. incorrect accounts are used in journalizing or posting, or
5. offsetting errors are made in recording the amount of a transaction.

Week 4 Principles of Accounting

Bahas PR buat Quiz
Week 5 “The 5th step, Adjusting The Accounts”
Steps (that we learned)
1. Tabular Summary
2. Journal Entry
3. General Ledger
4. Trial Balance
5. Adjusting The Accounts
6. General Ledger
7. Adjusted Trial Balance
8. Financial Statement ; Income Statement, Retained Earning Statement, Cash flow
statement, Balance Statement (In order)
Purpose of adjusting the accounts
To update transaction data that have not been updated/do not reflect their true values.
There are two accounts that needs to be adjusted which are Expenses and Revenues.

Timing Issues
Accrual-Basis accounting (Service are done, cash has not been paid/received)
- Revenues are recognized when earned, rather than when cash is received
- Expenses are recognized when incurred, rather than when paid
- Record transactions even though cash is still neither received nor paid
Cash-Basis accounting (Cash are done, service has not been provided/received)
- Revenues are recognized when cash is received
- Expenses are recognized when cash is paid
- Not in accordance with IFRS
- Record transactions if you receive or pay money

Types of Adjusting Entries

 Deferrals (postponements) – Cash Basis Accounting
 Prepaid Expenses
Expenses paid in cash and recorded as assets before they are used or consumed.

Company (A), Individual (B)

A have paid cash to B but has not received the service. (Asset)
B started providing the service. (Increase (Debit) in Expense, Decrease (Credit) in
Asset/Accounts Receivable.

Ex : insurance, supplies, advertising, rent, maintenance on equipment, fixed assets

like equipment, machines, buildings, lands (depreciation – reduction in the value of
an asset with the passage of time, due in particular to wear and tear)

For depreciation, it goes like this :

 Depreciation expense 450
Accumulated depriciation – equipment 450

 Unearned Revenues
Revenues received in cash and recorded as liabilities before they are earned.

Company (A), Individual (B)

A have received cash, but has not provide service for B. (Liabilities)
A started to provide the service. (Decrease (Debit) in Liabilities/ … payable,
Increase (Credit) in Revenues)

Ex: rent, airline tickets, school tuition, magazine subscriptions, customer deposits for
future service
 Accruals (Service are done, cash has not been paid/received)
 Accrued Revenues
Revenues earned but not yet received in cash or recorded.

Company (A), Individual (B)

A has provided service for B, B has not paid A. (Literally)

(Increase (Debit) in Assets/Accounts receivable, Increase (Credit) in Revenues)

Ex: rent, interest (a company/bank loan money to customers), services performed but
not collected
 Accrued Expense
Expenses incurred but not yet paid in cash or recorded.

Company (A), Individual (B)

B has provided service for A, A has not paid B. (Literally)
(Increase (Debit) in Expense, Increase (Credit) in liability account)

Ex: rent, interest (bank/customers loan money to company), taxes, salaries

Unadjusted vs Adjusted Trial Balance

 Unadjusted trial balance is the first list of ledger account balances, compiled without making
any period end adjustments.
 Adjusted trial balance is the trial balance compiled after considering adjustment entries at the
close of the accounting period.
 Unadjusted trial balance does not include adjustment entries.
 Adjusted trial balance includes all adjustment entries.

Ex : a prepaid insurance in unadjusted trial balance is considered increasing the assets and liability
account, but after adjustment, meaning after the period of time when the service is performed, it
decreases liability
Week 6 “Completing the Accounting Cycle”
Summary of the Accounting Cycle
1. Analyze business transactions (Tabular summary)
2. Journalize the transactions (Journal Entry)
3. Post to ledger accounts (General Ledger)
4. Prepare a trial balance (Trial balance)
5. Journalize and post adjusting entries (adjusted journal entry and general ledger)
6. Prepare an adjusted trial balance (adjusted trial balance)
7. Prepare financial statements
8. Journalize and post the closing entries
9. Prepare a post-closing trial balance
Worksheet
 A multiple-column form used in preparing financial statements.

 Not a permanent accounting record. (Doesn’t have to be shown to public, it is for

personal use)

 Five step process.

 Use of worksheet is optional.

The classified statement of financial position

 Presents a snapshot at a point in time.
 To improve understanding, companies group similar assets and similar
liabilities together.
Assets
 Intangible assets
Assets that do not have physical substance.

Ex: Goodwill, Film library, Customer list, Cable television franchise, Sport franchises,
Brands, Trademarks and other intangible assets
 Property, plant, and equipment
o Long useful lives.
o Currently used in operations.
o Depreciation - allocating the cost of assets to a number of years.
o Accumulated depreciation - total amount of depreciation expensed thus far in the
asset’s life.
Ex: Land, Buildings, Structures, Machinery, Vehicles
 Long-term investments
o Investments in stocks and bonds of other companies.
o Investments in long-term assets such as land or buildings that a company is not
currently using in its operating activities.
 Ex: Long term-Marketable debt pieces

 Current assets
o Assets that a company expects to convert to cash or use up within one year or the
operating cycle, whichever is longer.
o Operating cycle is the average time it takes from the purchase of inventory to the
collection of cash from customers.
Ex: Inventories, Trade and other receivables, Derivative financial instruments, Current tax
assets, Short-term investments, Cash and cash equivalents, etc
Equity and Liabilities
 Equity
o Proprietorship - one capital account.
o Partnership - capital account for each partner.
o Corporation – Share Capital and Retained Earnings.
Ex: share capital, share premium, other reserves, retained earnings
 Non-current liabilities
Obligations a company expects to pay after one year.

Ex: Long term debt, deferred income taxes, other non-current liabilities
 Current liabilities
o Obligations the company is to pay within the coming year.
o Usually list notes payable first, followed by accounts payable. Other items follow in
order of magnitude.
o Liquidity - ability to pay obligations expected to be due within the next year.
Ex: Notes payable, Accounts payable, Current maturities of long-term debt, other current
liabilities, taxes payable, Accrued compensation payable

Income Statement
 Report the revenues and expenses for a specific period of time
 Net income – revenues exceed expenses
 Net loss – expenses exceed revenues

Retained Earnings statement

Statement indicates the reasons why retained earnings has increased or decreased during the period.

Financial statement
The ending balance in retained earnings is needed in preparing the statement of financial position