GOLDEN STARS COLLEGE
Accounting 2012 1stentry Group-1 &2
3rd Semester Weekend
By: DEREJE MATHEWOS
Unit of Competence:Evaluate and Authorize Payment Requests
Module Title:Evaluating and Authorizing Payment Requests
LG Code:
BUF ACB407 0812
TTLM Code: BUF ACB4M07 0812
Summary of Learning Outcomes
After completing this learning guide, you should
be able to:
• Lo1:- Verify validity and accuracy of payment
request
• Lo2:- Prepare payment documentation
• Lo3:- Authorized payment
LO1:VERIFY VALIDITY AND ACCURECY OF PAYMENT ENQUES
Information Sheet One
• 1.1. Recognition of Expenses and Losses
• Expenses are outflows of cash or other using up of assets
or incurrence’s of liabilities during an accounting period
from the sale of goods or rendering of services.
• Initially, costs are incurred to acquire assets, and as the
assets are consumed, they become expenses with the
passage of time.
• incidental transactions and other events except those that
result from expenses or distributions to owners.
• Losses result when assets are consumed, costs are expired
or liabilities are incurred without producing any benefit for
either the current or any future accounting period; this
losses are not deferred because they have not future
service potential.
• Expenses and losses generally are recognized in
the accounting records when a business
enterprise economic benefits are consumed in
revenue-earning activities or if it becomes more
evident that previously recognized future
economic benefits of assets have been reduced
or eliminated or that liabilities have been
incurred without associated economic benefits.
• In the measurement of net income, the principles
recognized the recognition of expenses and
losses are as important as the principles for the
recognition of revenues and gains.
2.1. Principles of expense recognition
• The expenses incurred by a business enterprise during an
accounting period may be classified in the following three
groups.
• Costs directly associated with revenue recognized in the
period.
• Costs associated with the period on the period other than a
direct relationship with the revenue.
• Cost that cannot reasonable be associated with any other
period.
• The principles that provide accountants with guidelines
with the recognition of expenses are:
• a) Associating cause and effect,
• b) Systematic and rational allocation, and
• c) Immediate recognition,
3.2.2. Associating cases and effect
• Cost may be recognized as expenses based on a
direct association with specific revenues. Costs
that appear to be related to specific revenue are
recognized as expense with the recognition of
the related revenue.
• Examples of costs related to specific revenue
include the direct costs of goods sold or services
provided, sales commission and direct cost
incurred in relation to construction type
contracts.
3.2.3. Systematic and rational allocation
• If a direct means is not available to associate cause and effect, costs
may be recognized as expenses based on an orderly allocation to the
accounting periods in which the costs appear to expire and a provide
benefits.
• This approach involves assumptions as to the pattern of benefits and
as to the relationship between costs and benefits received.
• Examples of costs that are recognized as expenses under this principle
are depreciation of plant assets, amortization of intangible assets, and
allocated amounts of property taxes and insurances.
• 3.2.4 Immediate recognition
• Expenses are recognized in the current accounting period when
• Costs incurred in the current period are not expected to provide any
future benefits
• Costs deferred as assets in earlier periods no longer provide benefits
and
• Allocation of costs to revenues or to accounting periods is impractical
or is considered to serve no useful purpose.
• This principle requires research and development cost, general and
administrative costs and amounts paid to settle litigation to be
recognized as expenses in the period they are incurred.
• Costs deferred in earlier periods that have lost their service
potential are written-off as soon as the loss becomes evident and
measurable.
• Application of these expense recognition principles require costs to
be associated, if possible, with revenue on the basis of cause and
effect; if such an association is not practical, a systematic and
rational allocation of the cost is attempted; if neither of these two
procedures is feasible, costs are expensed as incurred or as soon as
expiration of the service potential of the costs becomes evident.
• Under the accrual basis of accounting losses recognized in the
accounting period in which they occur. Losses resulting from the
disposal of assets or the retirement of debt are readily
recognizable and measurable.
• The standards for recognition of losses are less sever than the
standards for the recognition of gains.
LO2: PREPARE PAYMENT DOCUMENT
INFORMATION SHEET TWO
• Alternative forms of the income statement
•
There are two alternative forms of an income statement. These
are:
– the multiple-step, and
– the single-step.
• The choice between the multiple step and the single step form of
income statements is an unsettled question in the income reporting.
• Multiple-step income statement:
• In the multiple-step form of income statement, various intermediate
balances such as gross profit on sales, income from operations, income
before income taxes, income after income taxes and net income are
computed and leveled in the statement.
• Some components referred to as sections and subsections with in the
multiple-step form of the income statement are stated below.
• i) Operating sections:
• This section is a report of the revenues and expenses of the company’s
principal (major) operations and it includes the following subsections
a) The sales revenue section. This section includes the following items:
•
Gross sales ----------------------------------------------------------xxxxxxxx
• Less: sales returns and allowances -------------xxx
•
Sales discounts -----------------------------xxx ----------------( xxxx)
• Net sales ---------------------------------------------------===--------- xxxxxx
b) The cost of goods sold section: This section includes the following items.
•
Beginning merchandise inventory -----------------------------------xxxxxx
• Add: Gross purchases -----------------------------------------xxx
• Add: -fright in --------------------------------------------------xxx
•
-Delivered cost of merchandise ------------------------xxxxx
• Less:-Purchase returns and allowance -------(xxx)-------•
-Purchase discounts ------------------------(xxx)------- (xxx)
• Net purchases -------------------------------------------------------------xxxxxxx
•
Merchandise available for sale----------------------------------xxxxxxxx
• Less: Ending merchandise inventory ---------------------------------- (xxxx)
•
Cost of merchandise sold --------------------------------------- xxxxxx
c) Operating expenses section: •
This section includes the following sub-sections:
• Selling (marketing) expenses section and
• General and administrative section
• a) Selling or marketing section: In this section, all expenses
incurred in making a sales effort are reported.
•
Sales salaries expense ---------------------------------------------xxxx
•
Commissions expense ----------------------------------------------xxxx
•
Advertising and promotion expense ----------------------------xxxx
•
Fright out(transportation expense) (delivery expense)----xxxx
•
Depreciation expense of sales equipment --------------------xxxx
•
Depreciation expense of delivery truck ---------------------- -xxxx
•
Store supplies expense ---------------------------------------------xxxx
•
Other selling expense ---------------------------------------------xxxx
• Total selling/marketing/expenses ----------------------------- xxxxxxxxx
• b) General and administrative expense
•
This section includes all expense incurred in the general administration of
the company’s operations.
•
Office salaries expenses ---------------------------------------------------xxxx
•
Legal and professional services ------------------------------------------ xxxx
•
Utilities expenses ----------------------------------------------------------xxxx
•
Insurance expense-general -----------------------------------------------xxxx
•
Depreciation expense of building ----------------------------------------xxxx
•
Depreciation expense of equipment -------------------------------------- xxx
•
Uncollectible accounts expense -------------------------------------------- xxx
•
Stationery expense ---------------------------------------------------------xxx
•
Office supplies expense --------------------------------------------------- xxx
•
Postage expense ------------------------------------------------------------xxx
•
Property tax expense ------------------------------------------------------xxx
•
Other general and administrative expense -----------------------------xxx
•
Total general and administrative expense ------------------------------xxxx
•
Total selling and general and administrative expenses -------------- xxxxxxx
• ii. Non-Operating Section:•
This section reports revenues and expenses resulting from the secondary
activities of the business.
• This section has two subsections:
• Other revenues and gains section and
• Other expenses and losses section
• a) Other Revenues and gains section: this section includes a list of revenues
and gains earned from non-operating transactions. In this section the following
items are includes.
•
Interest income -------------------------------------------------------xxx
•
Dividends revenue ---------------------------------------------------xxx
•
Rental revenue ------------------------------------------------------- xxx
•
Royalty revenue ------------------------------------------------------xxx
•
Gain on disposal of plant assets ------------------------------------ xxx
•
Total other revenues and gains -------------------------------------xxxx
• b) Other expenses and losses: this section includes a list of expenses and losses
incurred from non operating transactions.
• The multiple-step form is more likely to be found in more detailed in financial
statements prepared for the use of management, bankers, and other creditors;
it is particularly appropriate when financial statements are prepared for both
internal and external users.
LO3: AUTHARIZE PAYMENT
INFORMATION SHEET THREE
Statement of retained earnings
The statement of retained earnings generally is included with every set of financial
statements, though it is not considered to be one of the major financial statements.
The typical statement of the retained earnings includes the beginning retained
earnings balance, the net income or net loss resulted from the period’s operations(if
net income addition, if net loss deduction), and the dividends as deductions and
concludes with the ending balance of retained earnings. Generally the statement of
retained earnings shows, the beginning balance on the retained earnings, the
changes made as a result of additional investments, dividends (withdrawals) net
income or net loss from operations and the end retained earnings balance.
The Single Step Form of an Income Statement
The single step form presents a grouping of revenue in one category, all expenses in
an other and drives a single net income figure. This form of income statement is
widely used by publicity owned companies. The single-step income statement
maintains that net income emerges as the over allamount by which a business
enterprise is better off after taking in to account all revenue and all expenses
incurred in producing that revenue
ABC Company
Single-Step Income Statement
For the Year Ended Dec-31-1997
•
1) Revenues:
•
•
•
•
•
•
Net sales --------------------------------------------------8,975,000
Dividends Revenue------------------------------------------50,000
Gain on sale of office equipment ---------------------------10,000
Interest income ------------------------------------------------1,500
Royalties revenues ------------------------------------------28,000
Total revenues -------------------------------------------------------------9,064,500
•
2) Costs and expenses:
•
•
•
•
•
•
•
•
•
•
Cost of merchandise sold --------------------------------5,000,000
Selling expenses -------------------------------------------1,180,000
General and administrative expenses -------------------1,442,000
Loss on sale of delivery truck -------------------------------50,000
_
Loss from written-off of obsolute inventory--------------125,000
Interest expense -----------------------------------------------7,000
Income tax expense -------------------------------------486,200
Total costs and expenses ----------------------------------------------------(8,335,200)
Net income ---------------------------------------------------------------------729,300
$729,300
 $7.293 / share
Earnings per share of common =
100,000
Thank
you