FINANCIAL & MANAGERIAL

ACCOUNTING

PRESENTED BY
EI EI KYAW MYINT

July 8, 2023
 Materiality Concept

 Full disclosure of all important information.

 But, insignificant events may be disregarded.

 Overriding concern: Would knowledge of event affect

decisions of users?

 Application of judgment and common sense

ACCOUNTING RECORDS AND SYSTEMS
 Eight steps in accounting cycle

1. Journalize (record) transaction

2. Post journal entry to ledger account
3. Prepare trial balance
4. Making end-of-period adjustment
5. Prepare trial balance
6. Prepare financial statement
7. Journalizing and posting closed entry
8. Prepare after closing trial balance
 Trial Balance

 Provide proof that the ledger is in balance

 Equal debit and credit are recorded
 Contain both balance sheet and income statement account
 Proof that ledger is in balance
 Adjusting Entries
Ensure that the revenue recognition and expense recognition
principles are followed.
Necessary because the trial balance may not contain up-to-date and
complete data.
Required every time a company prepares financial statements.
Willinclude one income statement account and one balance sheet
account.
 Type of Adjusting Entries

1. Converting assets to expenses.

e.g supplies, unexpired insurance
2. Converting liabilities to revenue.
e.g. unearned revenue, customer deposit
3. Accruing unpaid expense.
e.g. interest expense, salary expense
4. Accruing uncollected revenue.
e.g. account receivable, interest receivable
5. Accruing income tax expense
e.g Income tax expense
Types of Adjusting Entries
 Prepare adjusting entries for deferrals

Deferrals are expenses or revenues that are recognized at a date later than
the point when cash was originally exchanged. There are two types:
 Prepaid expenses and
 Unearned revenues.
 Current Assets: Current Portion of
Long-Term Expenses (prepaid expenses)

1. Payments of expenses that will benefit more than one accounting period.

2. At the end of month, calculate how much used the whole month.

3. Make sure the entries as expenses.

unexpired insurance rent
supplies Depreciationfor buildings
advertising and equipment
 Depreciation

 Buildings, equipment, and motor vehicles (assets that provide service for many
years) are recorded as assets, rather than an expense, on the date acquired.

 Depreciation is the process of allocating the cost of an asset to expense over its
useful life.

 Depreciation does not attempt to report the actual change in the value of the asset.

Straight-line method
 Prepaid Expense

e.g. Pioneer Advertising Inc. Inc. purchased supplies costing $2,500

on October 5. Pioneer recorded the purchase by increasing (debiting)
the asset Supplies. This account shows a balance of $2,500 in the
October 31 trial balance. An inventory count at the close of business
on October 31 reveals that $1,000 of supplies are still on hand.

Oct 31 Supplies expense 1500

Supplies 1500
Prepaid Expense
 Current Liabilities: Deferred Revenue

1. Receipt of cash that is recorded as a liability because the service has not
been performed.

2. Also called unearned revenues or pre-collected revenue.

3. After giving services or goods, recorded as revenue earned .

Rent Magazine subscriptions
Airline tickets Customer deposits
 Deferred Revenue (Unearned Revenue)

e.g. Pioneer Advertising Inc. received $1,200 on October 2 from R. Knox for
advertising services expected to be completed by December 31. Unearned
Service Revenue shows a balance of $1,200 in the October 31 trial balance.
Analysis reveals that the company performed $400 of services in October.

Oct 31 Unearned service revenue 400

Service revenue 400
Deferred Revenue (Unearned Revenue)
 Current Assets: Accrue Revenue
Revenues for services performed but not yet received in cash or
recorded.

1. Account Receivable, Interest Receivable, rent.

2. After receiving from customer, recorded as service revenue earned,

interest earned .
 Accrue Revenue
e.g.
In October, Pioneer Advertising Inc. performed services worth $200 that were not
billed to clients in October.
On November 10, Pioneer receives cash of $200 for the services performed.

Oct 31 Account receivable 200

Service revenue 200
Nov 10 Cash 200
Account receivable 200
Accrue Revenue
 Current Liabilities: Accrued Expenses

Expenses incurred but not yet paid in cash or recorded.

1. Usually no invoice.

2. Includes interest payable, wages payable, income tax payable.

3. After paid, recorded as interest expenses, salary expenses, income tax

expenses.
 Accrued Expenses
e.g. Pioneer Advertising Inc. signed a three-month note payable in the
amount of $5,000 on October 1. The note requires Pioneer to pay interest
at an annual rate of 12%.

Oct 31 Interest expense 50

Interest payable 50
Accrued Expenses
Adjusting Entry for Insurance
Adjusting Entry for Depreciation
Adjusting Entry for Bad Debts
 Income Taxes Unprofitable Period
• When business losses are incurred, the company recognized a negative
amount of income taxes expense.
• The adjusting entry to record income taxes at the end of an unprofitable
accounting period.
• Debit to income tax payable and credit to income taxes expense.
Closing Entries
 Temporary (i.e., income statement) accounts are closed out to
the Income Summary.
– Clearing account.
– Also called Profit & Loss, Expense and Revenue Summary.
– Result is zero balance in temporary accounts.
 Income summary account is then closed out to Retained
Earnings.
– Only permanent accounts will then have balances
Internal Accounting Controls
 Basic principle: Make it difficult (as is practical) for people to be
dishonest or careless.
 Activities that reduce possibility of theft, or intentional or
unintentional mistakes.
– Accuracy checks (e.g., trial balance, bank reconciliation).
– Segregation of duties (i.e., record keeping, custody of assets,
authorization of transactions).