Kế toán, kiểm toán - Chapter 3: The accounting information system and measurement issues

CHAPTER 3:THE ACCOUNTING INFORMATION SYSTEM AND MEASUREMENT ISSUES2After studying this chapter, you should be able to:Understand basic accounting terminology and double-entry rules.Explain how transactions affect the accounting equation.Identify the steps in the accounting cycle and the steps in the recording process.Explain the reasons for and prepare adjusting entries.Explain how the type of ownership structure affects the financial statements.Prepare closing entries and consider other matters relating to the closing process.Use valuation techniques to measure financial statement elements.Use IFRS 13 to measure fair value.Identify differences in accounting between ASPE and IFRS, and what changes are expected in the near future.3Chapter 3: THE ACCOUNTING INFORMATION SYSTEM AND MEASUREMENT ISSUESThe Accounting Information System and Measurement Issues4Basic TerminologyEvent: The cause of changes of assets, liabilities, and equityTransaction: A transfer or exchange between two or more entities or partiesAccount: Where transactions are recorded A separate account is used for each asset, liability, revenue, expense, gain, loss and capital (owner’s equity)5Basic Terminology Permanent accounts (or “real” accounts)Asset, liability, and equity accountsAppear on the balance sheetPermanent accounts are not closed at year end Temporary accounts (or “nominal” accounts)Revenue, expense, and dividend accountsRevenue and expenses are on the income statement; dividends are on the statement of changes in shareholders equity.Temporary accounts are closed at year end6Basic TerminologyJournalizing and PostingA Journal is a book of original entry for all transactionsThe General Journal is a chronological listing of transactions expressed as debits and credits to particular accounts (known as a journal entries)Special Journals are used to summarize transactions with common characteristics (e.g. cash receipts, sales, purchases)Posting: when the transaction information entered in the journal is transferred to the ledger accounts7Basic TerminologyLedgerBook (or electronic database) containing all accountsEach account has a separate pageGeneral ledger contains all asset, liability, and all equity related accounts (capital, revenue, and expenses)Subsidiary ledger contains details related to a specific general ledger account (example: accounts receivable subsidiary ledger)8Basic TerminologyTrial balanceListing of all accounts and their balances from the general ledger at a given point in timeObjective: prove the mathematical equality of debits and credits after posting (i.e. to ensure general ledger is in balance)Typically prepared after end of period adjustments (called Adjusted Trial Balance) and possibly after closing entries (called Post-closing Trial Balance)9Basic TerminologyAdjusting entriesEntries made at the end of an accounting periodBrings all accounts up to date on an accrual accounting basisSeven classifications of adjusting entries:Prepayment Accruals Estimated Items 1. Prepaid Expenses 3. Accrued Revenues 5. Bad Debts2. Unearned Revenues 4. Accrued Expenses 6. Unrealized Holding Gain or Loss 7. Unrealized Holding Gain or Loss - OCI10Basic TerminologyFinancial statementsFinal summaries of the accounting data for a specific time periodFour statements:Statement of Financial Position (or Balance Sheet under ASPE) - shows financial condition at a specific dateStatement of Comprehensive Income (or Income Statement under ASPE) - measures the results of operations during a period of timeStatement of Cash Flows - shows sources and uses of cashStatement of Changes in Shareholders’ Equity (Statement of Retained Earnings under ASPE) 11Debits and CreditsDebit (Dr.)To record or enter anamount on the left sideof a general ledgeraccount12Credit (Cr.)To record or enter anamount on the right sideof a general ledgeraccountThis system of recording transactions is referred to as the double-entry accounting system; the two-sided effect of each transaction is recorded in appropriate accountsWhen a transaction is “in balance”, the debits equal the creditsDebits and credits do not mean “increases” and “decreases”The Accounting Equation13Assets = Liabilities + Shareholders’ Equity**Shareholder’s Equity = Common Shares + Retained Earnings – Dividends + Revenues - ExpensesAssets = Liabilities + Common Shares + Retained Earnings – Dividends + Revenues - ExpensesThe Rules of Debit and CreditTo increase the balance of any account, record the amount in the normal balance columnTo decrease the balance of any account, record the amount in the column opposite to its normal balanceWhen any transaction is correctly recorded, the accounting equation will remain in balance14The Rules of Debit and Credit15DecreaseIncreaseExpensesIncreaseDecreaseRevenueIncreaseDecreaseShareholders’ EquityIncreaseDecreaseLiabilitiesDecreaseIncreaseAssetsCreditDebitAccountThe Accounting Cycle: StepsAnalyze the transactionJournalize the transactionPost the transaction to general ledger (and sub-ledgers) accountsPrepare the (unadjusted) trial balancePrepare necessary adjusting journal entriesPrepare the (adjusted) trial balancePrepare financial statementsPrepare closing journal entries for the yearPrepare post-closing trial balance (optional)Prepare reversing entries (optional)16Recording a Transaction:Shares are issued for $3,000 cash17 Assets = Liabilities + Shareholders’ Equity+ $3,000+ $3,000To record this transaction as a journal entry (in General Journal):Dr. Cash $3,000 Cr. Common Shares $3,000These amounts are then posted to the general ledgerCashCommon Shares3,0003,000Preparation of Trial BalanceCopyright © John Wiley & Sons Canada, Ltd.18PIONEER ADVERTISING AGENCY INC. at October 31, 2017Cash80,000Revenue100,000Dividends5,000Notes Payable50,000Account Debit CreditCash 80,000Accounts Receivable 72,000Advertising Supplies 25,000Prepaid Insurance 6,000Fair Value Investments 10,000Office Equipment 50,000Notes Payable 50,000Accounts Payable 35,000Unearned Service Revenue 12,000Common Shares 100,000Dividends 5,000Service Revenue 100,000Salaries Expense 40,000Rent Expense 9,000TOTALS 297,000 297,000Preparation of Trial BalanceFrom the previous example, we can see that the trial balance is “in balance”However, the trial balance only proves the mathematical accuracy of the ledger Errors may still exist such as the following:Transaction not journalizedCorrect journal entry not postedJournal entry posted twiceIncorrect accounts used in either the journal entry or postingOffsetting errors made during recording19Adjusting Journal EntriesAdjusting entries ensure that revenue recognition and matching are followed within the periodReasons for adjusting entries include:To record those events that are not journalized dailyTo record those costs, which expire with time and are therefore not recordedTo record item previously unrecordedAdjusting entries are required each time financial statements are prepared20Adjusting Entries for PrepaymentsPrepaid ExpensesPrepayments made in cash and recorded as assets before item is usedUnearned RevenuesRevenue received in cash and recorded as liabilities before being earned21Adjusting Entries for PrepaymentsPrepaid expenses expire either with the passage of time (e.g. rent and insurance) or by being used and consumed (e.g. supplies)Example: Company paid $6,000 for one year insurance when coverage begins October 1 and debited Prepaid Insurance for $6,000.Adjust Prepaid Insurance on Dec. 31:Dr Insurance Expense 1,500Cr Prepaid Insurance 1,500($6,000/12 * 3)22Adjusting Entries for PrepaymentsWhen payment is received from customers for services (or goods) that will be provided in a future accounting period, a liability (unearned revenue) is recognizede.g. Rent, magazine subscriptions, depositsExample: Company received $12,000 for four months’ advertising services that begins Oct. 1. $12,000 was credited to unearned revenueAdjustment required on December 31: Dr Unearned Revenue 9,000 Cr Service Revenue 9,000 ($12,000/4 * 3)23Adjusting Entries for AccrualsAccrued RevenuesRevenues earned but not yet received in cash and not recordedAccrued ExpensesExpenses incurred but not yet paid in cash and not recorded24Adjusting Journal EntriesExpenses must be accrued when they are incurred; also revenues must be recorded as earnedAccruals needed: interest expense, salaries expense, bad debts expense, interest earnedExample: assume on January 5, a company pays $20,000 for salaries which includes $10,000 of salaries for December Adjustment required on December 31: Dr Salaries Expense 10,000Cr Salaries Payable 10,00025Adjusting Entries for Estimated ItemsBad DebtsExpenses relating to impaired accounts receivable estimated in the period and relating to revenue that has been earnedInvestments – Fair Value AdjustmentsFor certain categories of investments, an unrealized gain or loss must be recorded in the statement of comprehensive incomeAdjustment made either through: Net Income, orOther Comprehensive Income 26Financial Statements and Ownership Structure27Financial Statements and Ownership Structure28The Closing ProcessClosing entries are made to close all nominal accounts (revenue and expense accounts) for the yearThe balances in these accounts are transferred to a clearing account (Income Summary)The balance in Income Summary represents net income or net loss for the periodReal (or permanent) accounts are not closedThe Dividends account is closed to retained earnings29The Closing ProcessThe following closing entries are made (assume net income and other comprehensive income for the year):1. Income Summary $$$ Expense Accounts (individually) $$$2. Revenue Accounts (individually) $$$ Income Summary $$$3. Income Summary $$$ Retained Earnings $$$4. Retained Earnings $$$ Dividends $$$5. OCI Accounts (individually) $$$ Accumulated OCI $$$30Retained Earnings: Closing Entries314312Income SummaryRet. EarningsDividendsExpenseRevenueClosing Entries: Inventory32In a periodic inventory system, closing entries are made to record cost of goods sold and ending inventoryIn a perpetual inventory system, such entries are not requiredPeriodic Inventory: Closing EntryCollegiate Apparel Shop has the following balances at year end. The company uses a periodic inventory system.33Beginning Inventory $ 30,000Purchases (gross) $200,000Transportation-In $ 6,000Purchases Returns $ 1,000Purchase Discounts $ 3,000Ending Inventory $ 26,000Periodic Inventory: Closing EntryFirst Step: Determine Cost of Goods Sold34Beginning Inventory $ 30,000Purchases $200,000Less: Purchase returns $1,000 Purchase discounts 3,000 4,000Net Purchases 196,000Plus: Transportation-In 6,000Cost of Goods Purchased 202,000Cost of Goods Available for Sale 232,000Less: Ending Inventory 26,000Cost of Goods Sold $206,000Periodic Inventory: Closing Entry35Cost of Goods SoldInventory (Ending) Purchases ReturnsPurchase Discounts$ 206,000$ 26,000$ 1,000$ 3,000 Purchases (Gross) Transportation-in Inventory (Beginning)$ 200,000$ 6,000$ 30,000AccountDr.Cr.Valuation Techniques36There are two common types of valuation techniques market models and income modelsMarket models: use prices and other information from identical or similar transactionsIncome models: uses future cash flows and converts them to current amounts Valuation Techniques37When determining the value of a financial statement element, an accountant must ask: Which model or technique is being used?Which inputs should be used? Does the resulting measurement result in useful information?Valuation Techniques38Which model should be used?Depends on the item being measuredDepends on the information availableIncome models are frequently used in practice as cash flow projections are readily availableFair Value More Details - IFRS 13Under IFRS13 in order to determine fair value the following must be considered:Attributes of the assets being measured including nature, condition, location etc.How would or could it be used?The marketplace what market is it that the entity normally would buy and sell it in?Valuation technique/model39Fair Value More Details - IFRS 13For the valuation model to use the question is then asked “is it an observable market or not?”Tied to this question is what level does an input fit into? Level 1 – observable input reflects quoted prices in an active market Level 2 – Inputs other than quoted prices in level 1 but that are observable with corroborative observable data Level 3 – Unobservable inputs – includes a company's data or assumptions (more subjective)40Fair Value More Details - IFRS 13Select the model that provides the best quality fair value measure.This selection draws on professional judgement, an evaluation of the assets characteristics and the available information.41IFRS/ASPE ComparisonKey difference is that IFRS has a well-development framework specifically for measuring fair values, with most of the guidance found in IFRS13 ASPE does not – instead is spreads its guidance on fair value throughout its body of knowledge42