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INTRODUCTION
TOPIC 1 : Accounting as a Form of Communication
TOPIC 2 : Financial Statements and the Annual Report
TOPIC 3 : Processing Accounting Information
TOPIC 4 : Income Measurement and Accrual Accounting
TOPIC 5 : Inventories and Cost of Goods Sold
TOPIC 6 : Receivables and Investments
TOPIC 7 : Operating Assets: Property, Plant and Equipment, and
Intangibles
TOPIC 8 : Liabilities
TOPIC 9 : Stockholders’ Equity
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“is the process of formally recording or incorporating
an item into the financial statements of an entity as an
asset, a liability, a revenue, an expense, or the like‘’
It includes depiction of an item in both words and
numbers, with the amount included in the totals of the
financial statements.
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“Includes the attribute to be measured and the unit of measure
of the item recognized‘’
What kind of amount ? What kind of yardstick ?
HISTORICAL COST CURRENT VALUE MONEY
The amount paid for an asset and The amount of cash or something accepted as
used as a basis for recognizing it its equivalent that could a medium of exchange
on the balance sheet and carrying be received by selling or as a means of
it on later balance sheets. an asset currently. payment. (USD, MAD …)
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“means that revenues are recognized when earned and
expenses are recognized when incurred.‘’
It doesn’t mean when revenues are cashed
in (or collected) and when expenses are
cashed out (or disbursed)
An Accounting system based on An Accounting system based on Revenues
Collections and Disbursements of Cash earning and Expenses incurring
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CASH FLOW STATEMENT INCOME STATEMENT 135
ACCRUALS ACCOUNTING CASH ACCOUNTING
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T#1: 2 individuals (Ibtissam & Taha) started a company (Gym) by investing 30.000 each
in the business. In return, each receives 3000 shares of capital stock.
T#2: The company buys a piece of property (building) for $470,000. The seller agrees to
accept a five-year promissory note.
T#3: The company buys $33,000 of exercise equipment: treadmills, barbells, and
stationary bicycles. The supplier agrees to accept payment in full in 40 days.
T#4: The company sold in January 600 monthly club memberships for $40 each. But the
members have until the 10th of the following month to pay.
T#5: The company sells court time. Court fees are paid at the time of use and amount to
$8,500 for the first month.
T#6: The company pays $13,000 of wages and salaries for the first month amount.
T#7: The company pays in cash $2,200 as the cost of utilities for the first month.
T#8: Some of the members have decided to pay their bills by the end of January ($15.000)
even though the January monthly memberships are not due until the 10th of the
following month.
T#9: The company pays a dividend of $2,300 on the shares of stock that each of them owns
Journalize the transactions according to the accrual accounting basis
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Jan. xx Cash 60 000,00
Capital Stock 60 000,00
Transaction #1
Jan. xx Building 470 000,00
Notes payable 470 000,00
Transaction #2
Jan. xx Equipement 33 000,00
Accounts payable 33 000,00
Transaction #3
Jan. xx Accounts payable 24 000,00
Retained Earnings 24 000,00
Transaction #4
Jan. xx Cash 8 500,00
Retained Earnings 8 500,00
Transaction #5
Jan. xx Retained Earnings 13 000,00
Cash 13 000,00
Transaction #6
Jan. xx Retained Earnings 2 200,00
Cash 2 200,00
Transaction #7
Jan. xx Cash 15 000,00
Accounts payable 15 000,00
Transaction #8
Jan. xx Dividends 4 600,00
Cash 4 600,00
Transaction #9
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T
ASSETS LIABILITIES STOCKHOLDERS’ EQUITY
# ACCOUNTS ACCOUNTS NOTES CAPITAL RETAINED
CASH EQUIPMENT BUILDING
RECEIVABLE PAYABLE PAYABLE STOCK EARNINGS
1 60.000 60.000
2 470.000 470.000
3 33.000 33.000
4 24.000 24.000
5 8.500 8.500
6 -13.000 -13.000
7 -2.200 -2.200
8 +15.000 -15.000
9 -4.600 -4.600
63.700 9.000 33.000 470.000 33.000 470.000 60.000 12.700
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T#1: 2 individuals (Ibtissam & Taha) started a company (Gym) by investing 30.000 each
in the business. In return, each receives 3000 shares of capital stock.
T#2: The company buys a piece of property (building) for $470,000. The seller agrees to
accept a five-year promissory note.
T#3: The company buys $33,000 of exercise equipment: treadmills, barbells, and
stationary bicycles. The supplier agrees to accept payment in full in 40 days.
T#4: The company sold in January 600 monthly club memberships for $40 each. But the
members have until the 10th of the following month to pay.
T#5: The company sells court time. Court fees are paid at the time of use and amount to
$8,500 for the first month.
T#6: The company pays $13,000 of wages and salaries for the first month amount.
T#7: The company pays in cash $2,200 as the cost of utilities for the first month.
T#8: Some of the members have decided to pay their bills by the end of January ($15.000)
even though the January monthly memberships are not due until the 10th of the
following month.
T#9: The company pays a dividend of $2,300 on the shares of stock that each of them owns
Journalize the transactions according to the cash accounting basis
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Jan. xx Cash 60 000,00
Capital Stock 60 000,00
Transaction #1
Jan. xx Cash 8 500,00
Retained Earnings 8 500,00
Transaction #5
Jan. xx Retained Earnings 13 000,00
Cash 13 000,00
Transaction #6
Jan. xx Retained Earnings 2 200,00
Cash 2 200,00
Transaction #7
Jan. xx Cash 15 000,00
Retained Earnings 15 000,00
Transaction #8
Jan. xx Dividends 4 600,00
Cash 4 600,00
Transaction #9
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T
ASSETS LIABILITIES STOCKHOLDERS’ EQUITY
# ACCOUNTS ACCOUNTS NOTES CAPITAL RETAINED
CASH EQUIPMENT BUILDING
RECEIVABLE PAYABLE PAYABLE STOCK EARNINGS
1 60.000 60.000
5 8.500 8.500
6 -13.000 -13.000
7 -2.200 -2.200
8 +15.000 +15.000
9 -4.600 -4.600
63.700 60.000 3.700
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“Revenues are recognized in the income statement when
they are realized, or realizable, and earned“
When goods or services are exchanged for cash or
claims to cash, usually at the time of sale
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“The association of revenue of a period with all of the costs
necessary to generate that revenue.“
When they expire When they are
unexpired
SIMULTANEOUSLY DISJOINTLY
with the acquisition of the costs
ADMINISTRATIVE
LONG TERM SHORT TERM
COSTS ASSETS ASSETS
Some costs can be Others are indirectly matched
directly matched with the periods in which they ACCOUNT
with revenue will provide benefits RECEIVABLES
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“Journal entries made at the end of a period by a company
using the accrual basis of accounting“
When using the acrual basis, Revenues can be earned before
or after cash is received. The same holds true for Expenses
Which is not the case for cash accounting basis.
TYPES
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“When cash is paid before Expenses are incurred.“
Insurance policies
T#1: The company prepays, on September 1st, $5,700 for an insurance policy for the next
12 months.
Sept. 1 Prepaid insurance 5 700,00
Cash 5 700,00
Transaction #1
Sept. 30 Insurance expense 475,00
Prepaid insurance 475,00
Transaction #1
T
ASSETS LIABILITIES STOCKHOLDERS’ EQUITY
# ACCOUNTS ACCOUNTS NOTES CAPITAL RETAINED
CASH PPE OTHER
RECEIVABLE PAYABLE PAYABLE STOCK EARNINGS
-5.700 5.700
1
-475 -475
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T#2: On January 1st, the company buys new store fixtures, for which it pays $7,000.
According to The company’s notes on Form 10-K, it uses an estimated useful life of
five years and an estimated salvage value of $1,000 at the end of that time for these
particular fixtures. The company uses the straight-line method.
Jan. 1 Store fixtures 7 000,00
Cash 7 000,00
Transaction #2
Jan. 30 Depreciation Expense 100,00
Accumulated Depreciation (1) 100,00
Transaction #2
(1) Accumulated Depreciation is a contra-account
ASSETS LIABILITIES STOCKHOLDERS’ EQUITY
T
# ACCOUNTS ACCOUNTS NOTES CAPITAL RETAINED
CASH PPE OTHER
RECEIVABLE PAYABLE PAYABLE STOCK EARNINGS
-7.000 7.000
2
-100 -100
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“When cash is received before Revenues are earned.“
Insurance policies
T#1: The company received in advance, on September 1st, $5,700 for an insurance policy
for the next 12 months.
Sept. 1 Cash 5 700,00
Insurance Collected in Advance 5 700,00
Transaction #1
Sept. 30 Insurance Collected in Advance 475,00
Insurance revenue 475,00
Transaction #1
ASSETS LIABILITIES STOCKHOLDERS’ EQUITY
T
# ACCOUNTS ACCOUNTS NOTES CAPITAL RETAINED
CASH PPE OTHER
RECEIVABLE PAYABLE PAYABLE STOCK EARNINGS
5.700 5.700
1
-475 475
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Interests
“When Expenses are incurred before cash is paid.“
T#4: The company pays a total of $175,000 in wages on every other Friday. Assume that
the last payday was Friday, June 28. The next payday will be Friday, July 12.
June. 28 Wages Expense 175 000,00
Cash 175 000,00
Transaction #4
June. 30 Wages Expense 25 000,00
Wages Payable 25 000,00
Transaction #4
July. 12 Wages Expense 150 000,00
Wages Payable 25 000,00
Cash 175 000,00
Transaction #4
ASSETS LIABILITIES STOCKHOLDERS’ EQUITY
T
# ACCOUNTS ACCOUNTS WAGES CAPITAL RETAINED
CASH PPE OTHER
RECEIVABLE PAYABLE PAYABLE STOCK EARNINGS
-175.000 -175.000
4 25.000 -25.000
-175.000 -25.000 -150.000
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Interests
“When Revenues are earned before cash is received.“
T#5: The company rents warehouse space to a number of tenants. Most of its contracts
call for prepayment of rent for six months at a time. Its agreement with one tenant,
however, allows the tenant to pay the company $3,300 in monthly rent anytime within
the first ten days of the following month
Apr. 30 Rent Receivable 3 300,00
Rent Revenue 3 300,00
Transaction #5
May. 7 Cash 3 300,00
Rent Receivable 3 300,00
Transaction #5
ASSETS LIABILITIES STOCKHOLDERS’ EQUITY
T
# ACCOUNTS ACCOUNTS WAGES CAPITAL RETAINED
CASH PPE OTHER
RECEIVABLE PAYABLE PAYABLE STOCK EARNINGS
3.300 3.300
5
3.300 -3.300
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a situation in which no cash a situation in which cash
has been paid or received has been paid or received
yet but it is necessary to but the expense or revenue
recognize, or accrue, an has been deferred to a later
expense or a revenue time
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Paid
Revenue Deffered Revenue Cash is debited for R
Or Or
Expense Deffered Expense Cash is credited for E
Earned Not earned
Or Or
Incurred Not incurred
Revenue is credited in AA Accrued Asset
Should not
Or
be recorded
Expense is debited in AL Accrued Liability
Unpaid
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“A series of steps performed each period and culminating
with the preparation of a set of financial statements.“
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“A series of entries made at the end of an accounting period.”
They have two purposes
to return the balance of revenue, to transfer the net income of
expense, and dividend accounts to zero the period, to Retained
to begin the next period Earnings.
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• Accounts of the Balance Sheet • Accounts of Expenses, Revenues and
• Permanent in nature Dividends
• Are never closed • Temporary in nature
• The balance in each of them is • Closed in every period (returned to 0)
carried over from one period to • The balance is not carried forward from
the next one accounting period to the next
HOW TO CLOSE ?
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T#1: 2 individuals (Ibtissam & Taha) started a company (Gym) by investing 30.000 each
in the business. In return, each receives 3000 shares of capital stock.
T#2: The company buys a piece of property (building) for $470,000. The seller agrees to
accept a five-year promissory note.
T#3: The company buys $33,000 of exercise equipment: treadmills, barbells, and
stationary bicycles. The supplier agrees to accept payment in full in 40 days.
T#4: The company sold in January 600 monthly club memberships for $40 each. But the
members have until the 10th of the following month to pay.
T#5: The company sells court time. Court fees are paid at the time of use and amount to
$8,500 for the first month.
T#6: The company pays $13,000 of wages and salaries for the first month amount.
T#7: The company pays in cash $2,200 as the cost of utilities for the first month.
T#8: Some of the members have decided to pay their bills by the end of January ($15.000)
even though the January monthly memberships are not due until the 10th of the
following month.
T#9: The company pays a dividend of $2,300 on the shares of stock that each of them owns
Journalize the closing entries for this company
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Jan. xx Revenues 24 000,00
Retained Earnings 24 000,00
Transaction #4
Jan. xx Revenues 8 500,00
Retained Earnings 8 500,00
Transaction #5
Jan. xx Retained Earnings 13 000,00
Expenses 13 000,00
Transaction #6
Jan. xx Retained Earnings 2 200,00
Expenses 2 200,00
Transaction #7
Jan. xx Retained Earnings 4 600,00
Dividends 4 600,00
Transaction #9
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