The double-entry system. Elements of financial statements.

An account is the basic storage unit for accounting data. An accounting system has separate accounts for most of the assets, liabilities, components of owner’s equity, including revenues and expenses.

Asset, liability, owner’s equity accounts are shown on the balance sheet. Expense and revenue accounts are shown on the income statement.

A list of account numbers with the corresponding account names is called a chart of accounts.

An account has 3 parts:

1. A title.

2. A left side which is called the debit side, or the debit.

3. A right side which is called the credit side, or the credit.

This form of the account is called a T-account, and is used to analyze transactions.

The double-entry system is based on the principle of duality. In the double-entry system each transaction must be recorded at least in one debit and in one credit, in such a way that the total amount of debits and the total amount of credits equal each other. And the whole system is always in balance.

All accounting systems are based on this principle of duality.

Presentation of financial statements.

Financial statements are a structured representation of the financial position and financial performance of an entity. The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions.

Financial statements also show the results of the management’s stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity’s:

(a) assets(b) liabilities;(c) equity; (d) income and expenses, including gains and losses; (e) contributions by and distributions to owners in their capacity as owners; and (f) cash flows.

A complete set of financial statements comprises: (a) balance sheet (b) income statement; (c) a statement of changes in equity; (d) a statement of cash flows; (e) notes, comprising a summary of significant accounting policies and other explanatory information.

An entity shall clearly identify each financial statement and the notes. In addition, an entity shall display the following information: (a) the name of the reporting entity, and any change in that information from the end of the preceding reporting period;

(b) whether the financial statements are of an individual entity or a group of entities;

(c) the date of the end of the reporting period or the period covered by the set of financial statements or notes;

(d) the presentation currency;

(e) the level of rounding used in presenting amounts in the financial statements.

As a minimum, the balance sheet shall include line items that present the following amounts:

(a) property, plant and equipment; (b) intangible assets; (c) financial assets; (d) inventories; (e) trade and other receivables; (f) cash and cash equivalents; (g) trade and other payables; (h) provisions; (i) financial liabilities; (j) liabilities and assets for current tax and deferred tax; (k) issued capital and reserves.

4. Property, plant and equipment: definition, cost, depreciation methods.

Property, plant and equipment are tangible items that:

— (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and

— (b) are expected to be used during more than 1 year.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

Carrying amount is the amount at which an asset is recognized after deducting any accumulated depreciation.

(a) land;(b) buildings;(c) machinery;(d) ships;(e) aircraft;(f) motor vehicles;(g) furniture and fixtures; (h) office equipment;(i) bearer plants.

An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost.

The cost of an item of PP&E comprises:

— (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts.

— (b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

— (c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

— Depreciation methods:

— 1. Straight-line method

— 2. Diminishing-balance (declining-balance) method

— 3. Units-of-production method

— 4. Sum-of-years’ digits method

Intangible assets: definition, cost, amortization methods. Goodwill as a unique intangible asset.

An intangible asset isan identifiable non-monetary asset without physical substance.

Examples of intangibles assets:a) computer software b) patents, copyrightsc) motion picture films d) customer lists e) franchises d) customer or supplier relationships, etc.

Amortization. The depreciable amount of an intangible asset with a finite useful life shall beallocated on a systematic basis over its useful life.

An intangible asset with an indefinite useful life shall not be amortized.

Amortization methods:

1. Straight-line method

2. Diminishing-balance (declining-balance) method

3. Units-of-production method

An intangible asset shall be derecognised:(a) on disposal; or(b) when no future economic benefits are expected from its use or disposal.

6. Inventories: definition, cost, cost formulas.

Inventories are assets:

(a) held for sale in the ordinary course of business;

(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Inventories include:

~ goods purchased and held for resale;

~ finished goods;

~materials and supplies awaiting use in the production process.

The cost of inventories shall comprise all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.

The costs of purchase of inventories comprise the purchase price, import duties and other taxes, and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services.

Trade discounts and other similar items are deducted in determining the costs of purchase.

The costs of conversion of inventories include costs directly related to the units of production, such as direct labor.

Cost formulas:

1. Specific identification

2. Weighted average

3. FIFO (assumes that the items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced).

Balance sheet: purpose and structure.

The purpose of the balance sheet is to show the financial position of a company on a certain date. For this reason, it is often called the statement of financial position and is dated as of a certain date. The balance sheet presents a view of the company as the holder of resources, or assets, that are equal to the sources of, or claims against, those assets. The sources consist of the company’s liabilities and the owners’ equity in the company.

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