Accounting cycle

Accounting cycle;

The process of recording and processing  the accounting events  of  the a company.

There are various steps in the accounting cycle which are as follows.

1.Collecting and analyzing  the data from transactions.

2. Putting the transaction into the general journal.

3. Posting entries  to the general ledger.

4. Preparing an unadjusted trail balance.

5. Adjusting entries.

6. Preparing an adjusted trail balance.

7. Organizing the accounts into financial statement.

8. Closing the book of accounts.

9. Preparing the post closing trail balance to check the accounts

Collecting and analyzing the data from transaction;

As a transaction related to financial resources occur. The are analyzed with respect to their effect  on the financial position of the company. Which accounts are affected (increase or decrease).

Journalize the transaction;

After collecting and analyze the transaction obtained in the first step entry . Record the transaction in the journal as both a debit and credit .which is called the book of original entry. Transaction may be done continually. Journal may include  sale journal, purchase journal, cash receipt journal. And  cash payment journal.

3  post to general ledger;

The journal entries are posted to the general ledger. Which is organized by the accounts. all the transaction for  the same account are collected and summarized. Ledger account may be T-account form or include balances.

4 prepare an unadjusted trail balance;

At the end of the  period double accounting system  require that all debit and credit recorded in the general ledger be equal. Debit and credit merely signify position left and right respectively. Some accounts normally have debit balance( asset and expenses) and the other account have credit balance. (liabilities and owner equity and revenue)

5 prepare adjustments/adjusting entries;

In accrual accounting system revenue is recorded when it is earned and expenses which are incurred. Thus an entry may be required at the end of the period to record revenue that has been earned and yet not to be recorded. And  the expenses which are incurred but yet not have be recorded for making adjustments.

6.prepare an adjusted trail balance;

In this step it would make sure the debit will equal with credit after making adjustment. If there is unequal amounts of debit and credit or the account appear as a incorrect balances. than there should be an error or discrepancy which is investigated .

7. prepare financial statement.;

Financial statement are prepared by using the correct balances from adjusted trail balance. Which include income stamen shows(revenue minus expenses ) balance sheet which show  ( asset  liabilities and owner equity)  statement of retained earning  and statement of cash flow.

8.close the accounts./ closing entries;

revenue and expenses are accumulated and reported by the period, to prevent their  not being added to or comingled  with revenue and expenses of another period the  need to be closed. That’s give zero balance. at the each period the net balances . which represent the income or loss for the period are  transferred into owner equity. Once revenue and expense account are closed, the only accounts that have the balances are the  ASSEST, LAIBILITY.& OWNEREQUITY  accounts. their balances are carried forward  to the next accounting period.

9. prepare a post/after  closing  trail balance;

The purpose of this final step is to determine that all the revenue and expense accounts has been closed properly. And  make sure the balances of debit and credit should equal such as balance sheet that is asset. Liabilities. And the owner equity.

                        THE STATEMENT OF CASH FLOW

CASH FLOW STATEMENT,

the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement capture both current operating result and accompanying changes in  the balance sheet and it is useful to determining the short term viability of a company.

Balance sheet, income statement and the cash flow statement are the three generally accepted financial statement used by most businesses for financial reporting. All the three statement are prepared from the same accounting data. But each statement has its own purpose. The purpose of the cash flow statement is to report the sources and uses of cash during the reporting period

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STRUCTURE OF THE CASH FLOW STATEMENT.  

The cash flow statement are broken down into three section.

·         Cash flow from operating activity.

·         Cash flow from investing activity.

·         Cash flow from operating activity.

CASH FLOW FROM OPERATING ACTIVITY

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Cash flow from operating represent changes in the working capital accounts.The operating component of a cash flow reflect how much cash is generated from company products and the services. Generally changes made in cash, account receivable, depreciation , inventory and account payable are reflected in the operating activity.

Cash flow is calculated by making certain adjustment to net income by adding and subtracting differences in revenue ,expenses and credit transaction that occur from accounting period to next period. The adjustment are made because noncash items are calculated into net income and the total asset and the liabilities, all the transaction not involved actual cash item many item are re-evaluated when calculated cash flow statement it included the following.

·         payment of rent.

·         Cash receipt from sale and performance of services.

·         Payment of tax.

·         Payment to supplier and contractors.

CASH FLOW FROM INVESTING ACTIVITY.

 Cash flow from investing represent the purchase and sale of productive asset. Investing activity are the activity in which owner invested in business. Its include capital expenditure  changes in equipment asset or investment which are related to investing activity.

cash change from investing activity are’ cash out’ item because it is used to buy a new building new equipment. and short term asset such as  marketable securities when a company divests of an asset the transaction is consider ‘cash in’ for calculating cash from investing activity. Investing activities also include investments (other than cash equivalents as indicated below) that are not part of your normal line of business.  These cash flows could include:

• Purchases of property, plant and equipment
• Proceeds from the sale of property, plant and equipment
• Purchases of stock or other securities (other than cash equivalents)
• Proceeds from the sale or redemption of investments

CASH FLOW FROM FINANCING ACTIVITY.

Cash flow from financing represents acquiring and dispensing ownership funds and borrowing financing cash flow in long term debt and equity.

Example include cash flow from additional debt and equity financing are.

·         Debt financing include both short and long term financing.

·         Dividend paid are the financing cash flow because dividends flow  through the retained earning statement

.METHOD OF CASH FLOW STATEMENT

There are two methods for preparing the cash flow statement – the direct method and the indirect method.  Both methods give  the same result, but different procedures are used to arrive at the cash flows.

DIRECT METHOD.

Under the direct method, we are basically analyzing our cash and bank accounts to identify cash flows during the period.  we could use a detailed general ledger report showing all the entries to the cash and bank accounts, or we could use the cash receipts and disbursement journals. we would then determine the offsetting entry for each cash entry in order to determine where each cash movement should be reported on the cash flow statement.

Another way to determine cash flows under the direct method is to prepare a worksheet for each major line item, and eliminate the effects of accrual basis accounting in order to arrive at the net cash effect for that particular line item for the period.  Some examples for the operating activities section include:

Cash receipts from customers:

• Net sales per the income statement
• Plus beginning balance in accounts receivable
• Minus ending balance in accounts receivable
• Equals cash receipts from customers

Cash payments for inventory:

• Ending inventory
• Minus beginning inventory
• Plus beginning balance in accounts payable to vendors
• Minus ending balance in accounts payable to vendors
• Equals cash payments for inventory

Cash paid to employees:

• Salaries and wages per the income statement
• Plus beginning balance in salaries and wages payable
• Minus ending balance in salaries and wages payable
• Equals cash paid to employees

Cash paid for operating expenses:

• Operating expenses per the income statement
• Minus depreciation expenses
• Plus increase or minus decrease in prepaid expenses
• Plus decrease or minus increase in accrued expenses
• Equals cash paid for operating expenses

Taxes paid:

• Tax expense per the income statement
• Plus beginning balance in taxes payable
• Minus ending balance in taxes payable
• Equals taxes paid

Interest paid:

• Interest expense per the income statement
• Plus beginning balance in interest payable
• Minus ending balance in interest payable
• Equals interest paid

Under the direct method, for this example, you would then report the following in the cash flows from operating activities section of the cash flow statement:

• Cash receipts from customers
• Cash payments for inventory
• Cash paid to employees
• Cash paid for operating expenses
• Taxes paid
• Interest paid
• Equals net cash provided by (used in) operating activities

Similar types of calculations can be made of the balance sheet accounts to eliminate the effects of accrual accounting and determine the cash flows to be reported in the investing activities and financing activities sections

INDIRECT METHOD

In preparing the cash flows from operating activities section under the indirect method,we start with net income per the income statement, reverse out entries to income and expense accounts that do not involve a cash movement, and show the change in net working capital.  Entries that affect net income but do not represent cash flows could include income we have earned but not yet received, amortization of prepaid expenses, accrued expenses, and depreciation or amortization.  Under this method we are basically analyzing our income and expense accounts, and working capital.  The following is an example of how the indirect method would be presented on the cash flow statement:

• Net income per the income statement
• Minus entries to income accounts that do not represent cash flows
• Plus entries to expense accounts that do not represent cash flows
• Equals cash flows before movements in working capital
• Plus or minus the change in working capital, as follows:
• An increase in current assets (excluding cash and cash equivalents) would be shown as a negative figure because cash was spent or converted into other current assets, thereby reducing the cash balance.
• A decrease in current assets would be shown as a positive figure, because other current assets were converted into cash.
• An increase in current liabilities (excluding short-term debt which would be reported in the financing activities section) would be shown as a positive figure since more liabilities mean that less cash was spent.
• A decrease in current liabilities would be shown as a negative figure, because cash was spent in order to reduce liabilities.

The net effect of the above would then be reported as cash provided by (used in) operating activities.

The cash flows from investing activities and financing activities would be presented the same way as under the direct method.

CONCLUSION

A company can use a cash flow statement to predict future cash flow, which helps with matters in budgeting. For investors, the cash flow reflects a company's financial health: basically, the more cash available for business operations, the better. However, this is not a hard and fast rule. Sometimes a negative cash flow results from a company's growth strategy in the form of expanding its operations.

By adjusting earnings, revenues, assets and liabilities, the investor can get a very clear picture of what some people consider the most important aspect of a company: how much cash it generates and, particularly, how much of that cash stems from core operations.

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IAS 16 property,plant&equipment

         IAS 16: Property, plant and equipment

Objective of IAS 16

The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment sothat users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognized in relation to them

Scope

 This Standard does not apply to

·         assets classified as held for sale .

·         exploration and evaluation assets .

·         biological assets related to agricultural activity .

·         mineral rights and mineral reserves such as oil, natural gas This Standard shall be applied in accounting for property, plant and equipment except when another

·         Standard requires or permits a different accounting treatment.                                                                               (a)  property, plant and equipment classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued                                                                                                                                                   (b)  biological assets related to agricultural                                                                                                              (c)  the recognition and measurement of exploration and evaluation assets or                                                            (d ) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources. However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in (b)–(d).                                                                                                                                            Other Standards may require recognition of an item of property, plant and equipment based on an approach different from that in this Standard. For example, IAS 17 Leases requires an entity to evaluate its recognition of an item of leased property, plant and equipment on the basis of the transfer of risks and rewards. However, in such cases other aspects of the accounting treatment for these assets, including depreciation, are prescribed by this Standard.                                                                                                                                                           An entity using the cost model for investment property in accordance with IAS 40 Investment Property shall use the cost model in this Standard.

Recognition.

This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it

IAS 16 recognizes that parts of some items of property, plant, and equipment may require replacement at regular intervals. The carrying amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and measurement reliability) are met.

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may require regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognized in the carrying amount of the item of property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed

Initial Measurement

An item of property, plant and equipment should initially be recorded at cost. Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognized or imputed. If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

Measurement Subsequent to Initial Recognition

IAS 16 permits two accounting models:

Cost method

 The asset is carried at cost less accumulated depreciation and impairment.

Revaluation Model.

 The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably.

The Revaluation Model

Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date.

If an item is revalued, the entire class of assets to which that asset belongs should be revalued. Revalued assets are depreciated in the same way as under the cost model .

If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognized as an expense, in which case it should be recognized as income.

A decrease arising as a result of a revaluation should be recognized as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset.

When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through the income statement .

Depreciation (Cost and Revaluation Models)

For all depreciable assets:

The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life. The residual value and the useful life of an asset should be reviewed at least at each financial year-end  The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity The depreciation method should be reviewed at least annually Depreciation should be charged to the income statement, unless it is included in the carrying amount of another asset. Depreciation begins when the asset is available for use and continues until the asset is derecognized,

Recoverability of the Carryintg Amoun

IAS 36 requires impairment testing and, if necessary, recognition for property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.

Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable.

Derecogniton (Retirements and Disposals)

An asset should be removed from the balance sheet on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognised in the income statement.If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories at their carrying amounts as they become held for sale in the ordinary course of business.

Disclosure

For each class of property, plant, and equipment, disclose:

·         basis for measuring carrying amount

·         depreciation method(s) used

·         useful lives or depreciation rate

·         gross carrying amount and accumulated depreciation expenditures to construct property, plant, and equipment during the period

·         contractual commitments to acquire property, plant, and equipment

·         reconciliation of the carrying amount at the beginning and the end of the period, showing:

o   additions

o   disposals

o   acquisitions through business combinations

o   revaluation increases or decreases

o   destruction losses

o   reversals of destruction losses

o   depreciation.  

Effective date

 An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies this Standard for a period beginning before 1 January 2005, it shall disclose that fact.

 An entity shall apply the amendments in paragraph 3 for annual periods beginning on or after 1 January 2006. If an entity applies IFRS 6 for an earlier period, those amendments shall be applied for that earlier period.

 IAS 1 Presentation of Financial Statements  (as revised in 2007) amended the terminology used throughout IFRSs. In addition it amended paragraphs 39, 40 and 73(e)(iv). An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. If an entity applies IAS 1 (revised 2007) for an earlier period, the amendments shall be applied for that earlier period.

IFRS 3  Business Combinations (as revised  by the International Accounting Standards Board in 2008)amended paragraph 44. An entity shall apply that amendment for annual periods beginning on or after 1 July 2009. If an entity applies IFRS 3 (revised 2008) for an earlier period, the amendment shall also be applied for that earlier period.

 Paragraphs 6 and 69 were amended and paragraph 68A was added by Improvements to IFRSs issued in May 2008. An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the amendments for an earlier period it shall disclose that fact and at the same time apply the related amendments to IAS 7 Statement of Cash Flows. 

 Paragraph 5 was amended by  Improvements to IFRSs issued in May 2008. An entity shall apply that amendment prospectively for annual periods beginning on or after 1 January 2009. Earlier application is permitted if an entity also applies the amendments to paragraphs 8, 9, 22, 48, 53, 53A, 53B, 54, 57 and 85B of IAS 40 at the same time. If an entity applies the amendment for an earlier period it shall disclose that fact