bookkeeping process: summary (basic), Appunti di Contabilità

Scarica bookkeeping process: summary (basic) e più Appunti in PDF di Contabilità solo su Docsity! 1 21 Cri&cally discuss the need for adjus&ng entries as well as the way adjustments sa&sfy that need. At the end of every period we need to make some adjustment entries in order to report a net income that is a fair representa8on of the en8ty’s ac8vity during the period, every adjustment entry involves a change in either a revenue or expense and an asset or a liability. It is needed because the effect of certain transac8ons could affect more than one accoun8ng period, however, companies usually record transac8ons when there is a source document (an evidence). It follows that there is the need of matching revenues with expenses, even if there is yet no source document and that is done adjus8ng entries. An example are wages expenses, which can be recorded at the end of an accoun8ng period, even if the payment has not happened yet (indeed “wages payable” is credited), in order to give a faithful representa8on. 22 Cri&cally discuss the Accruals type of adjustments, giving examples. Accruals represent transac8ons for which there were not cash flows yet (so there is no source document); however, the effect of such transac8on must be recorded in the accounts anyway, in order to accomplish a matching and a fair representa8on of revenues and expenses (accruals basis of accoun8ng). Examples may be: interest, property taxes, wages and salaries. For instance, whenever a company needs to accrue wages owed to an employee (an example of unpaid expense), in the balance sheet it will report a liability to be paid in future 8mes and the cost incurred in the actual period in order to generate a revenue. The liability generated by the lack of payment will be reduced when the debt is paid. On the Journal entry the firm will record a wages expense and a liability posted as "wages payable", which will decrease at the 8me of payment (when an ouPlow of cash will follow). 23 Cri&cally discuss the Reclassifica&ons type of adjustments, giving examples. The reclassifica8on type of adjustments occurs whenever an ini8al recording of a transac8on was a correct representa8on of it at the 8me, but fails to assign revenues to the period in which they were earned, or to assign expenses in the period in which they actually incurred. Therefore, the amount must be reclassified from one account to another in order to accomplish the proper matching of revenues and expenses. 2 Example of reclassifica8on of assets to expenses could be: prepaid insurance may be turned into insurance expense and example of reclassifica8on of liabili8es to revenues could be: unearned rental revenue becoming a rental revenue. 24 Cri&cally discuss the difference between temporary and permanent accounts. At the end of each accoun8ng period a bookkeeper should make ready the accounts for the next one. This process consist in closing all temporary accounts, which are the ones regarding expenses, revenues and dividends, they are closed at the end of every year so as not to be mixed with the income and expenses of the next periods. While assets accounts, liabili8es account and equi8es accounts remain open, hence, they are measure cumula8vely (ending balance of previous year is beginning balance of subsequent year). Temporary accounts’ balance is moved to zero. 25 Cri&cally discuss the func&oning of the closing process. At the end of each accoun8ng period a bookkeeper should make ready the accounts for the next one. The closing process consist in formally recognize in the ledger the movement from net income (or loss) and dividends to retained earnings (net income will be used to make new investments in the following year, if not distributed to shareholders through dividends). Closing entries produce zero balance in all temporary accounts, they are closed at the end of every year so as not to be mixed with the income and expenses of the next periods. Expenses, dividends and losses decrease retained earnings, while revenues and gains increase retained earnings. 26 Cri&cally discuss the difference between perpetual and periodic system to account for inventory. In the perpetual system company determines cost of goods sold any 8me they perform a sale. This means maintain detailed records of the cost of each inventory purchased and sold, be aware of the inventory on hand and provide a beVer control on inventory. In the periodic system the cost of goods sold is recorded only once a year aWer a physical count of the item in inventory at the end of the year. The cost of goods sold is determined adding from the beginning balance purchases made during the year and subtrac8ng ending balance. Nowadays the perpetual system is more used (automa8c and easier), mostly in big companies, while periodic inventory system was more used in the past, when recording was done by hand. 5 In case of unexpected collec8on of the receivable we can reverse the write off entry and record the collec8on. 34 Cri&cally discuss how the original cost of a Property, Plant, and Equipment item is determined. We can record the acquisi8on of a PPE only when we control the asset. In order to determine its cost we have to include all costs necessary to bring the item in the condi8on and loca8on intended to use it (installa8on cost, transporta8on cost, cost of permits…). So costs are capitalized (included as cost of the asset) when you cannot use the asset in the produc8on process without those expenses (costs). However, IFRS excludes some of these costs, such as, for example, administra8on costs or staff training costs because they do not represent a secure value (companies do not own employees). 35 Cri&cally discuss the Straight-line deprecia&on method. Every 8me an asset is used, the firm using it faces an expense, PPE items are, generally, useful for several years. Therefor, the management of the company will need to es8mate how much the asset will last and, based on that, it will calculate how much (each year) the cost of that asset will be used up. In order to allocate the cost of the asset in the years in which we benefit from its use, we have to depreciate it. Deprecia8on will represent the expenses for the usage of a PPE item. According to the straight-line deprecia8on method, in order to find the deprecia8on expense we subtract from the cost of the PPE the es8mated salvage value (leW value at the end of its useful life), then divide it by the es8mated useful life. Than we make the following entry: Deprecia8on expenses is disclosed in the Income statement, while Accumulated deprecia8on is disclosed in the Statement of financial posi8on as a contra-asset. According to this method we depreciate the asset for the same amount every year (deprecia8on stops when net book value = salvage value). This method is recommended to depreciate buildings. 36 Cri&cally discuss the Units-of-produc&on deprecia&on method. Every 8me an asset is used, the firm using it faces an expense, PPE items are, generally, useful for several years. Therefore, the management of the company will need to es8mate how much the asset will last and, based on that, it will calculate how much (each year) the cost of that asset will be used up. In order to allocate the Deprecia8on expenses XXX Accumulated deprecia8on XXX 6 cost of the asset in the years in which we benefit from its use, we have to depreciate it. Deprecia8on will represent the expenses for the usage of a PPE item. In the Units-of-produc8on method, we charge an amount directly related to the actual usage of the item, however is a bit more complicated because requires much accurate informa8on (indeed is not suitable for every item of PPE). In order to calculate the deprecia8on expense per unit: (cost – es8mated salvage value)/ es8mated total units to be made. Mul8plica8ng the result for the units made during the year will give an accurate representa8on of the yearly deprecia8on expense, (deprecia8on stops when net book value = salvage value). This method is recommended for machinery. 37 Cri&cally discuss the Declining-balance deprecia&on method. Every 8me an asset is used, the firm using it faces an expense, PPE items are, generally, useful for several years. Therefor, the management of the company will need to es8mate how much the asset will last and, based on that, it will calculate how much (each year) the cost of that asset will be used up. In order to allocate the cost of the asset in the years in which we benefit from its use, we have to depreciate it. Deprecia8on will represent the expenses for the usage of a PPE item. According to this method the annual deprecia8on expense is = double the straight- line deprecia8on method (which is calculated dividing 1 over Life in years and mul8plying by 2) mul8plied for the book value at the beginning of the year. Deprecia8on stops when net book value = salvage value. The characteris8c of this method is that we charge a higher amount in the fist year of the PPE’s life because it is based on the assump8on that the PPE item is more useful to the company in the earlier stages of its useful life. This method is suggested for items that looses efficiency over 8me, such as computers. 38 Cri&cally discuss the possible effects on financial statements of the different deprecia&on methods alterna&ves. Regardless of the deprecia8on method used, the total deprecia8on es8mated at the end of the useful life of the PPE item will always be the same. The straight-line deprecia8on method is the easiest to es8mate, but the annual deprecia8on expense that we calculate is far from the real usage, indeed, according to this method we charge every year the same expense. However, can be a good deprecia8on method for items used evenly over the year, such as buildings. Double decline deprecia8on method accommodates the real usage more than the straight-line method because in most of the cases the years when we benefit the 7 most from the usage of an item of PPE are the firsts, mostly when items loose efficiency easily. So we will charge a higher amount of expenses in first years and a lower in the last ones, moreover it is not difficult to es8mate it. Comparing the effects of the two methods, it can be said that the accelerated method results in a lower net income in the first years (higher expenses), but a higher one (lower expenses) in the last years, while in the straight line method expenses and so net incomes over the years are constant. Units of produc8on method is the closer to the real usage of an asset, but is more complicate to apply because requires a lot of informa8on. About it we cannot say if result in a higher or lower net income compared to the other method because the annual expense depends directly on the units produced during the year. 39 Property, plant and equipment: Measurement a]er recogni&on – revalua&on model . AWer the recogni8on of an asset, to measure the value of an item of PPE (in order to present the asset in the SFP with that amount), an en8ty can choose between two models: cost model or revalua8on model. The cost model will compute the carrying amount aWer recogni8on as its original cost, minus any accumulated deprecia8on and accumulated impairment losses. With the revalua8on model, the item can be revalued and recorded at the revalued amount, calculated as: its fair value at the date of the revalua8on, less any accumulated deprecia8on and accumulated impairment losses. This model used whenever the fair value of the PPE item can be measured in a reliable way. Apart from that, other two condi8ons are to be met in order to use this kind of model: the revalua8on must occur with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the repor8ng period, and if an item of PPE is revalued, all items that fall under the same category have to be revalued If an asset’s carrying amount is increased as a result of a revalua8on, the increase should be recognized in the OCI (because IFRS requires not to overes8mates assets) as an unrealized gain and accumulated under the heading of revalua8on surplus; or in Profit or Loss if it reverses a revalua8on decrease of the same asset previously recognized in profit or loss. If an asset’s carrying amount is decreased as a result of a revalua8on, the decrease shall be recognized: in profit or loss; or in the OCI if it reverses a revalua8on increase previously recorded in respect of that asset. 40 Impairment test