GAAP AND REVISION
INTRODUCE THE GENERALLY ACCEPTED A CCOUNTING PRINCIPLES (GAAP)
• Accounting standards
• The Conceptual Framework
• Accounting concepts & principles
CONCEPTUA L FRAMEWORK
• Describes objective of and concepts for financial reporting
• Purpose
o Assist IASB to develop Standards based on consistent concepts
o Assist preparers to develop consistent accounting policies when no Standard applies to a particular transaction/event
o Assist all parties to understand and interpret the Standards
• CF isn't Standard but guides preparation of Accounting Standards
• Set of Concepts defining the nature, purpose and content of general purpose of financial reporting
• Used by preparers and standard setters
OBJEC TIVE OF GENERA L PURPOSE FINANCIA L R EPORTING AND
THE REPOR TIN G EN TITY
• Objective
o 1st element and foundation of conceptual framework
• Provide financial info about reporting entity useful to existing and potential
equity investors, lenders and other creditors for making decisions about providing
resources to entity
• Info useful should be based on ethical accounting practices
• Info based on ethical accounting practices possess number of qualitative
characteristics
• Reporting entity
o Entity which it’s reasonable to expect the existence of users who depend on general purpose financial reports to
make eco decisions
o Entity which prepares general purpose financial reports according to accounting standards
QUALITA TIV E CHARAC TERISTICS
• Relevance- Fundamental
• Faithful representation- Fundamental
• Comparability- Enhancing
• Verifiability- Enhancing
• Timeliness- Enhancing
• Understandability- Enhancing
• Constraints
o Benefits to costs
DEFINITION OF ELEMEN TS OF FINANCIA L STA TEMEN TS
• Revision concepts
IDENTIFY THE ELEMENT S OF THE FOUR MAIN F INANCIAL STATEMENTS
• Main financial reports
o Statement of Profit or Loss
• Reports profit/loss
▪ Revenues less expenses for a particular period of time
• Purpose is to report success/failure of entity's operations for period of time
• Main elements
▪ Income- revenues and gains
▪ Expenses- expenses and losses
o Statement of Financial Position
• Reports assets and claims on those assets at a specific point in time
• Based on basic accounting equation
• Main elements
▪ Assets
▪ Liabilities
▪ Equity
o Statement of Changes in Equity
1
, • Reports total comprehensive income for the period and changes in equity
• Elements
▪ Profit
▪ Retained earnings
▪ Dividends
▪ Capital contributions
▪ Revenue
o Statement of Cash Flows
• Reports net cash provided/used during period
• Elements
▪ Cash receipts
▪ Cash payments
REVISE THE ACCOUNTIN G CONCEPTS AND PRINC IPLES
• Monetary principle
• Accounting entity concept
o Owners personal transactions shouldn’t be accounted for in business records
• Accounting period concept
o Life of business can be divided into periods more accurately reflects profits
• Going concern principle
o Statements should be prepared on a going concern basis unless the entity will cease trading or go into liquidation
• Full disclosure principle
o Requires any info that could impact decisions of users should be disclosed in the financial statements
• Materiality
REVIEW DEBITS & CRED ITS, JOURNALS, POSTI NG TO LEDGER AND TRI AL BALANCE
• Accounting transactions and events must be recorded as they effect assets, liabilities and equity
• Accounting equation must always balance
o Assets = Liabilities + Equity
• Accounting process
o Analyse each transaction in terms of effects on accounts
o Enter transaction info in a journal
o Transfer journal info to appropriate accounts in ledger
• Running balance format vs T account format
• Balance each of ledger accounts
o Prepare a trial balance
OVERVIEW RATIO ANALYSIS FOR EV ALUATING ENTITY’S PROFITABILI TY, LIQUIDITY AND
SOLVENCY
• Ratio analysis
o Highlights relationships among items of financial statement data
o Expressed as percentages, rates or proportions
• Insights into underlying conditions/helps in evaluations
o May not be apparent from simply viewing financial statements
• Other info
o Industry averages, economic conditions
• Main analyses
o Profitability, liquidity, solvency
• Profitability
o Measure operating success of an entity for a given
period of time
• Profit margin
▪ Measures % each sales dollar that
results in profit
• Liquidity
o Short-term ability to meet current obligations
• Current ratio
▪ Current assets/current liabilities
▪ 1.5:1 accepted ratio
• Solvency
o Measures ability of entity to survive over long period of time
• Debt to total assets ratio
▪ Total liabilities/total assets
▪ Higher debt more income needed to cover interest
2
,ACCRUAL ACCOUNTING CONCEPTS
DIFFERENTIATE BETWEE N CASH AND ACCRUAL B ASIS OF ACCOUNTING
• Cash-based accounting
o Revenue recognised when cash is received
o Expenses recognised when cash is paid
o Profit/loss difference between cash in/cash out
• Accrual-based accounting
o Revenue recognised when increase assets/decrease liabilities become probable and can be measured reliably
o Usually occurs at time when goods delivered and services provided
o Expenses recognised when reduction in assets/increase in liabilities become probable and can be measured reliably
o Usually occurs when decrease in future eco benefits for g/s received
EXPLAIN CRITERIA FOR REVENUE AND EXPENSE RECOGNITION
• Accounting period concept
o Economic life of a business divided into artificial periods for reporting purposes
• Revenue recognition criteria
o Recognised in period when increase in asset/decrease in liabilities become probable and measured reliably
• Expense recognition criteria
o Recognised in period when decrease in asset/increase in liabilities become probable and measured reliably
• Revenue and expense criteria
o Form part of generally accepted accounting principles (GAAP)
EXPLAIN WHY ADJUSTIN G ENTRIES ARE NEEDED AND IDENTIFY THE MAJOR TYPES OF
ADJUSTING ENTRIES
• Prepayments
1. Prepaid expenses
• Cash outflow precedes the entity receiving goods or services
2. Revenue received in advance
• Cash inflow precedes the entity supplying goods or services to customers
• Accruals
1. Accrued revenues
• Amounts not yet received or recorded for which goods or services have been provided
2. Accrued expenses
• The receipt of goods or provision of services precedes cash outflow to suppliers
PREPARE ADJUSTING ENTRIES FOR PREPAYMENT S AND ACCRUALS
PREPAYMEN TS
• Prepayments are initially treated as assets/expenses
• Adjustment is needed for the expired future economic
benefit
• Adjustment needed to recognise future economic
benefit that remains in the asset
• Adjustment needed for amount of revenue no long in
advance
• We prepare adjusting entries at the end of accounting periods
ACCRUALS
• Accrued revenues
o Revenues haven't been received and unrecorded at end of
reporting period
o Even though goods have been delivered/services provided to
customers
o Revenue and receivable recorded when cash received the
receivable reduced
• Accrued expenses
o Expenses not yet paid/recorded at end of reporting period
o Even though goods have been delivered/services provided by
suppliers
o Expense and payable recorded when cash paid the payable
reduced
3
, DESCRIBE THE NATURE AND PURPOSE OF THE A DJUSTED TRIAL BALANC E
• Adjusted trial balance is prepared after all adjusting entries have been made
• Used to prove the equality of total debit balances and total credit balances after adjusting entries are made
• Adjusted trial balance is the main basis for preparation of the financial statements
• Statement of profit or loss prepared from revenue and expense accounts
• Current period profit and dividends paid transferred to retained earnings account
• Statement of financial position prepared from A, L, E and balance of retained earnings accounts
EXPLAIN THE PURPOSE OF CLOSING ENTRIES
• Temporary accounts
o Relate to only one accounting period
o E.g. revenues, expenses, dividends
• Permanent accounts
o Carried forward to future accounting periods
o E.g. assets, liabilities, equity
• Closing entries
o Used to transfer the balances in temporary ledger
accounts to a permanent equity account
• Retained earnings or capital
o Close temporary accounts for new accounting
period
• Resent to zero balance
• Each revenue and expense account closed to Profit or
Loss Summary
o Temporary account
• Profit or Loss Summary account closed to Retained
Earnings
• Dividends closed to Retained Earnings
• Will result in all temporary accounts having closing balance of zero
REVENUE
EXPENSES
PROFIT OR LOSS SUMMA RY
4
INTRODUCE THE GENERALLY ACCEPTED A CCOUNTING PRINCIPLES (GAAP)
• Accounting standards
• The Conceptual Framework
• Accounting concepts & principles
CONCEPTUA L FRAMEWORK
• Describes objective of and concepts for financial reporting
• Purpose
o Assist IASB to develop Standards based on consistent concepts
o Assist preparers to develop consistent accounting policies when no Standard applies to a particular transaction/event
o Assist all parties to understand and interpret the Standards
• CF isn't Standard but guides preparation of Accounting Standards
• Set of Concepts defining the nature, purpose and content of general purpose of financial reporting
• Used by preparers and standard setters
OBJEC TIVE OF GENERA L PURPOSE FINANCIA L R EPORTING AND
THE REPOR TIN G EN TITY
• Objective
o 1st element and foundation of conceptual framework
• Provide financial info about reporting entity useful to existing and potential
equity investors, lenders and other creditors for making decisions about providing
resources to entity
• Info useful should be based on ethical accounting practices
• Info based on ethical accounting practices possess number of qualitative
characteristics
• Reporting entity
o Entity which it’s reasonable to expect the existence of users who depend on general purpose financial reports to
make eco decisions
o Entity which prepares general purpose financial reports according to accounting standards
QUALITA TIV E CHARAC TERISTICS
• Relevance- Fundamental
• Faithful representation- Fundamental
• Comparability- Enhancing
• Verifiability- Enhancing
• Timeliness- Enhancing
• Understandability- Enhancing
• Constraints
o Benefits to costs
DEFINITION OF ELEMEN TS OF FINANCIA L STA TEMEN TS
• Revision concepts
IDENTIFY THE ELEMENT S OF THE FOUR MAIN F INANCIAL STATEMENTS
• Main financial reports
o Statement of Profit or Loss
• Reports profit/loss
▪ Revenues less expenses for a particular period of time
• Purpose is to report success/failure of entity's operations for period of time
• Main elements
▪ Income- revenues and gains
▪ Expenses- expenses and losses
o Statement of Financial Position
• Reports assets and claims on those assets at a specific point in time
• Based on basic accounting equation
• Main elements
▪ Assets
▪ Liabilities
▪ Equity
o Statement of Changes in Equity
1
, • Reports total comprehensive income for the period and changes in equity
• Elements
▪ Profit
▪ Retained earnings
▪ Dividends
▪ Capital contributions
▪ Revenue
o Statement of Cash Flows
• Reports net cash provided/used during period
• Elements
▪ Cash receipts
▪ Cash payments
REVISE THE ACCOUNTIN G CONCEPTS AND PRINC IPLES
• Monetary principle
• Accounting entity concept
o Owners personal transactions shouldn’t be accounted for in business records
• Accounting period concept
o Life of business can be divided into periods more accurately reflects profits
• Going concern principle
o Statements should be prepared on a going concern basis unless the entity will cease trading or go into liquidation
• Full disclosure principle
o Requires any info that could impact decisions of users should be disclosed in the financial statements
• Materiality
REVIEW DEBITS & CRED ITS, JOURNALS, POSTI NG TO LEDGER AND TRI AL BALANCE
• Accounting transactions and events must be recorded as they effect assets, liabilities and equity
• Accounting equation must always balance
o Assets = Liabilities + Equity
• Accounting process
o Analyse each transaction in terms of effects on accounts
o Enter transaction info in a journal
o Transfer journal info to appropriate accounts in ledger
• Running balance format vs T account format
• Balance each of ledger accounts
o Prepare a trial balance
OVERVIEW RATIO ANALYSIS FOR EV ALUATING ENTITY’S PROFITABILI TY, LIQUIDITY AND
SOLVENCY
• Ratio analysis
o Highlights relationships among items of financial statement data
o Expressed as percentages, rates or proportions
• Insights into underlying conditions/helps in evaluations
o May not be apparent from simply viewing financial statements
• Other info
o Industry averages, economic conditions
• Main analyses
o Profitability, liquidity, solvency
• Profitability
o Measure operating success of an entity for a given
period of time
• Profit margin
▪ Measures % each sales dollar that
results in profit
• Liquidity
o Short-term ability to meet current obligations
• Current ratio
▪ Current assets/current liabilities
▪ 1.5:1 accepted ratio
• Solvency
o Measures ability of entity to survive over long period of time
• Debt to total assets ratio
▪ Total liabilities/total assets
▪ Higher debt more income needed to cover interest
2
,ACCRUAL ACCOUNTING CONCEPTS
DIFFERENTIATE BETWEE N CASH AND ACCRUAL B ASIS OF ACCOUNTING
• Cash-based accounting
o Revenue recognised when cash is received
o Expenses recognised when cash is paid
o Profit/loss difference between cash in/cash out
• Accrual-based accounting
o Revenue recognised when increase assets/decrease liabilities become probable and can be measured reliably
o Usually occurs at time when goods delivered and services provided
o Expenses recognised when reduction in assets/increase in liabilities become probable and can be measured reliably
o Usually occurs when decrease in future eco benefits for g/s received
EXPLAIN CRITERIA FOR REVENUE AND EXPENSE RECOGNITION
• Accounting period concept
o Economic life of a business divided into artificial periods for reporting purposes
• Revenue recognition criteria
o Recognised in period when increase in asset/decrease in liabilities become probable and measured reliably
• Expense recognition criteria
o Recognised in period when decrease in asset/increase in liabilities become probable and measured reliably
• Revenue and expense criteria
o Form part of generally accepted accounting principles (GAAP)
EXPLAIN WHY ADJUSTIN G ENTRIES ARE NEEDED AND IDENTIFY THE MAJOR TYPES OF
ADJUSTING ENTRIES
• Prepayments
1. Prepaid expenses
• Cash outflow precedes the entity receiving goods or services
2. Revenue received in advance
• Cash inflow precedes the entity supplying goods or services to customers
• Accruals
1. Accrued revenues
• Amounts not yet received or recorded for which goods or services have been provided
2. Accrued expenses
• The receipt of goods or provision of services precedes cash outflow to suppliers
PREPARE ADJUSTING ENTRIES FOR PREPAYMENT S AND ACCRUALS
PREPAYMEN TS
• Prepayments are initially treated as assets/expenses
• Adjustment is needed for the expired future economic
benefit
• Adjustment needed to recognise future economic
benefit that remains in the asset
• Adjustment needed for amount of revenue no long in
advance
• We prepare adjusting entries at the end of accounting periods
ACCRUALS
• Accrued revenues
o Revenues haven't been received and unrecorded at end of
reporting period
o Even though goods have been delivered/services provided to
customers
o Revenue and receivable recorded when cash received the
receivable reduced
• Accrued expenses
o Expenses not yet paid/recorded at end of reporting period
o Even though goods have been delivered/services provided by
suppliers
o Expense and payable recorded when cash paid the payable
reduced
3
, DESCRIBE THE NATURE AND PURPOSE OF THE A DJUSTED TRIAL BALANC E
• Adjusted trial balance is prepared after all adjusting entries have been made
• Used to prove the equality of total debit balances and total credit balances after adjusting entries are made
• Adjusted trial balance is the main basis for preparation of the financial statements
• Statement of profit or loss prepared from revenue and expense accounts
• Current period profit and dividends paid transferred to retained earnings account
• Statement of financial position prepared from A, L, E and balance of retained earnings accounts
EXPLAIN THE PURPOSE OF CLOSING ENTRIES
• Temporary accounts
o Relate to only one accounting period
o E.g. revenues, expenses, dividends
• Permanent accounts
o Carried forward to future accounting periods
o E.g. assets, liabilities, equity
• Closing entries
o Used to transfer the balances in temporary ledger
accounts to a permanent equity account
• Retained earnings or capital
o Close temporary accounts for new accounting
period
• Resent to zero balance
• Each revenue and expense account closed to Profit or
Loss Summary
o Temporary account
• Profit or Loss Summary account closed to Retained
Earnings
• Dividends closed to Retained Earnings
• Will result in all temporary accounts having closing balance of zero
REVENUE
EXPENSES
PROFIT OR LOSS SUMMA RY
4
